Malaysia’s current account surplus still under pressure

• Mar 24, 2017

PETALING JAYA: Bank Negara expects the current account (CA) surplus to narrow in the years ahead, with the CA to register a surplus of between 1% and 2% of gross national income (GNI) this year.

The central bank, in its annual report 2016, said the performance of the current account would continue to be influenced by global and domestic developments in the near term.

“Malaysia’s export performance is projected to improve, in line with higher global demand and commodity prices.

“This should also support higher incomes for export-oriented firms and Malaysia’s outward foreign direct investment, particularly those in the commodity-related sectors.

“Investments are expected to continue to be channelled towards productive sectors,” it said.

While large-scale and more complex investment activities would contribute to raising demand for foreign goods and services, it noted that these investments would raise productive capacity and boost efficiency.

“These short-term trade-offs may be necessary to place Malaysia on a solid footing to tap on the opportunities in a fast-changing global environment,” it said.

It said the country’s current account performance could be broadly characterised by two distinct periods over the past 20 years.

It said the first period encompassed the years following the Asian financial crisis (AFC), when the CA surplus rose and peaked at 17.6% of GNI in 2008, supported by a widening trade surplus amid sustained deficits in the services and income accounts.

“During this period, Malaysia’s exports registered robust growth, supported by strong global demand and rising commodity prices. Conversely, import growth was more moderate, on account of subdued investment activity after the AFC,” it said.

The second period was following the global financial crisis of 2008, when the CA surplus began to narrow.

Export growth slowed due to persisting weakness in global demand and a sharp decline in commodity prices. Demand for imported goods, however, improved, supported by stronger domestic demand.

The current account surplus then settled at 2.1% of GNI in 2016.

Bank Negara noted that Malaysia’s current account movement has been influenced by three major global and domestic developments in recent years.

First, it said, was the prolonged period of slow growth in the global economy and the uneven growth momentum across the advanced and emerging market economies.

More recently, advanced economies have begun to recover gradually, while growth in the emerging market economies has moderated.

“Second, global commodity prices have declined sharply, with a low prospect for prices to return to their previous levels.

“Third, investment in the Malaysian economy, particularly by the private sector, has continued to expand,” it said.

These factors point to the five key developments in Malaysia’s current account balance since 2008 – a declining goods surplus, lower travel surplus, higher payments to foreign service providers, sustained large income deficit (foreign direct investment-direct investment abroad) and the surge in foreign worker remittances.

Source: http://www.thestar.com.my/business/business-news/2017/03/24/current-account-surplus-still-under-pressure/#1YHVEyWrEbBk2m1L.99