FITCH Solutions Country Risk & Industry Research has maintained Malaysia’s 2021 current account balance forecast at 5.5% of gross domestic product (GDP) amid the very weak prospects for imports over the remainder of the year and the support that exports have had so far from elevated commodity prices.
Nevertheless, the forecast is still wider than the average current account surplus of 2.9% of GDP over the past five years.
“Although this boost is unlikely to last through 2H 2021, the blow to both consumption and investment from the restrictive lockdown measures is likely to weigh on imports significantly,” Fitch Solutions pointed out in a balance of payments note.
“We also still see a subdued outlook for the financial account in 2021 as investor sentiment is likely to continue being weighed down by elevated political risks as well as a resurgence of the COVID-19 outbreak in Malaysia.”
Although the current account balance for 1Q 2021 stood at 4.5% of GDP (1Q 2020: 2.9%), Fitch Solutions said this was largely the result of an improving goods balance, driven by a resurgence in exports which prompted the category too grow by 12% year-on-year (yoy).
“This surge is set to continue in 2Q 2021 in our view, mostly given the low base effects in 2Q 2021 due to the disruption caused by the pandemic in 2Q 2020 even if the boost is likely to be dented by the lockdown measures taken in 2Q 2021 to stem the third wave of COVID-19 infections,” projected Fitch Solutions.
“However, there are limits to the exports rally which is why our current account surplus forecast remains somewhat conservative at 5.5% of GDP.”
Moving forward, Fitch Solutions does not expect palm oil price surge that has benefitted Malaysia’s exports for much of 1H 2021 to last through 2H 2021 given its agribusiness team has projected recovering production and reduced demand from key importer India due to the severity of the COVID-19 outbreak there.
Meanwhile, its oil & gas (O&G) team has maintained Brent price forecast to average US$66/barrel for 2021 despite spot prices of around US$75/barrel as of June 23 in light of demand risks arising from the resurgence of COVID-19 in Asia.
Palm oil and O&G exports have made up an average of 9.3% of total exports since 2020, a still significant figure despite the decline from 11.3% during the period between 2018 and 2019 before the pandemic, according to the research house.
“We remain pessimistic about the financial account amid the significant increase in risks associated with both the COVID-19 third wave and the political situation which will likely continue to discourage foreign investors.
To be sure, the financial account balance has been negative since 1Q 2019 and came in at -3.3% of GDP in 1Q 2021.
“As we have noted in our recent analysis, a change in government is likely amid rising dissatisfaction with its performance during the pandemic. Over the short-term the country faces significant uncertainty over whether there will indeed be elections in a few months given the risks of holding them amid the high daily caseloads,” projected Fitch Solutions.
“Even if not, we do not rule out a different government being installed by King Abdullah of Pahang. Over the longer-term, a more competitive electoral landscape bodes ill for reform and the business environment.
“These dynamics will be compounded by the lingering impact of the pandemic around the world, with a greater proportion of capital likely to be directed towards domestic needs first.” – June 24, 2021
