AmWatch - Economic Update : Balance of payment reverses to an inflow due to forex translation gains in 2Q15 (outlook), 12 Aug 2015

FOCUS OF THE DAY

Economic Update : Balance of payment reverses to an inflow due to forex translation gains in 2Q15 (outlook)

Current account surplus will persist albeit at a moderate pace, owing to the positive trade balance. Assuming that GDP grows by 5.2% in 2015, we envisage the current account to register 3.8% of GDP in 2015 (vs. 4.6% in 2014). Our full-year GDP is under review pending on the upcoming statistics for 2Q15 tomorrow. Based on our current estimate for 2015, every 0.5ppt downward revision in GDP will reduce the ratio of current account to GDP by 0.2ppt.

Ahead of tomorrow’s balance of payment statistics, we note that the overall balance had reversed to an inflow totalling RM8.4bil in 2Q15 (which is the quarterly net increase in reserves at BNM). This compares to the outflow of RM15.7bil in 1Q15. International reserves had improved by RM8.4bil QoQ in 2Q15 (or +2.2% QoQ), partly because of forex translation gains on the weak Ringgit currency. In terms of USD, reserves grew by USD394.1mil QoQ (or +0.4% QoQ). That was prior to the steep deterioration in the reserves during the month of July, which fell by a significant MYR18.8bil MoM (or -4.7% MoM) to RM364.7bil. By end-July, reserves slipped by USD8.8bil MoM (or -8.3% MoM) to USD96.7bil.

Current account and financial account are likely to post improvements in 2Q15 although trade surplus was lower compared to 1Q15. We gather that merchandise balance had probably softened. Trade statistics for 2Q15 posted a marginal decline in trade surplus of RM0.98bil QoQ totalling RM20.4bil (or -4.6% QoQ). Nevertheless, overall current account could have been supported by lower outflows in the other segments including services, as well as primary and secondary incomes. Going forward, the weak Ringgit is favourable for Malaysia’s terms of trade, which is supportive of stronger exports. Despite that, exports growth is highly dependent on global demand and improvement in the advanced economies. Mainly, stronger-than-expected economic growth in the US augurs well for global trade including Malaysia’s shipments abroad.

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