S&P REMAINS BULLISH ON MALAYSIA

Current account surplus may recover to 3pc of GDP next year, says rating agency

MALAYSIA’S current account surplus, which has backed the economy against its long-running fiscal deficit, may recover to around three per cent of the country’s gross domestic product (GDP) next year, said S&P Global Ratings.

But before that, the surplus is expected to shrink to between 1.0 and 2.0 per cent of GDP this year.

This would be due to lower prices of oil, gas and palm oil, said Andrew Wood, S&P Global sovereign and international public finance ratings director and lead analyst for Asia Pacific.

The country’s current account balance reportedly came in at 2.9 per cent of GDP in the first quarter.

The figure was broadly steady from the average current account surplus of 2.7 per cent of GDP in the preceding five years.

Wood said Malaysia had for a long time been running a fiscal deficit but its economy was supported by an external account surplus.

“Over the past five years, Malaysia’s account surplus had averaged 2.0 to 4.0 per cent of GDP,” he said at S&P’s “Malaysia — Fiscal and debt risks reflect impact of Covid-19” webinar yesterday.

The rating agency expects oil prices to recover over the few years and this will likely lead to a gradual recovery in Malaysia’s trade volume.

“We expect the surplus to recover to above 2.0 per cent of GDP next year and perhaps approach 3.0 per cent. Over the medium term, we expect the current account surplus to average 3.0 per cent of the GDP,” Wood said.

He said there was a possibility of Malaysia’s current account slipping into deficit this year but reckoned that the country would still be in a surplus position on the back of measures imposed to contain the impact of the Covid-19 pandemic.

S&P Global economist for Asia Pacific Vishrut Rana said the economy was likely to contract by only 2.0 per cent this year, following the government’s good progress in containing the pandemic.

He said this would translate into recovery of business activities in the third quarter of the year.

“The third quarter will be critical for us in determining how 2020 will eventually play out. If there is some normalisation of activities and households are more comfortable spending, and the number of cases remains low, we could see growth coming in more towards our own forecast,” he said.

“We expect that by middle of next year, there will be a medical intervention available to soften the severity of the pandemic. If the (labour market) participation rate remains low, then we may see lower household income and spending.”

Meanwhile, Wood said a weaker commitment to fiscal consolidation and political instability would affect clarity in terms of policymaking, particularly on the fiscal side, over the next two to three years.

“Hence, we have a net change in general government’s debt above four per cent to GDP for the next extended period of time.

“If debt-servicing cost exceeds 15 per cent over the next extended period of time, that will put some downward pressure on the rating,” he added.

The third quarter will be critical for us in determining how 2020 will eventually play out.

VISHRUT RANA

S&P Global economist for Asia Pacific