Positive trade balance trend and underlying contribution to GDP

Furthermore, intermediate goods used as inputs in production account for about half of total imports. Hence, an export slowdown would result in lower imports, thereby reducing the risk of unsustainable imports in the economy.

“A healthy economy may experience short periods of current account deficits, but if it is largely due to lumpy imports of capital goods rather than consumption goods, then the economy is also not in danger.

“Imports of capital goods that are needed for capacity expansion and structural upgrading also signal strong investment-driven domestic demand. Malaysia’s capital goods imports sustained a moderate pace of 7.7% in 2023 following a strong 9.4% rise in the previous year.

“However, the country’s national savings would need to be raised to avoid a negative savings-investment gap or current account deficit should investment rise more strongly,” Yeah, who is also one of the finance advisers for the Prime Minister and Finance Minister, said.

Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said Malaysia’s trade balance has consistently been in a surplus, while its offshore borrowings is fairly stable at the moment.

In that sense, he said Malaysia does not rely on foreign capital to finance local economic activities.

The robust local banking system and deep capital markets would allow the effective channeling of funds into productive areas.

Despite that, he said the country needs to look at factors which have contributed to the decline in the current account surplus balance.

“We have seen our trade deficits in the agri-food sector continue to widen to Rm32bil in 2023 from merely Rm1bil in 1990 while compensation of employees in the primary income balance has remained net negative balance of Rm8.2bil in 2023 from just Rm535mil in 2005.

“From this information, it suggests that the country has become increasingly dependent on external sources for our food consumption and our reliance on foreign workers has resulted in higher outward remittance.

“Therefore, the domestic economy needs to be reformed to become more competitive, fair and transparent as well as inclusive.

“This is where the fiscal consolidation exercise plays a crucial role to ensure every government spending and assistance should be channelled towards capacity building that will make our economy more competitive,” Afzanizam noted.

Malaysia University of Science and Technology economics professor Geoffrey Williams is upbeat about Malaysia’s trade outlook.

Similar to total trade, the trade balance has improved since the start of the Covid19 pandemic in 2020 and although the 2023 trade balance was lower than was hoped, it was still higher than the pre-pandemic data from 2017 till now.

He said the recent downtown is purely cyclical, noting that the trend in trade balance and underlying contribution to GDP remains positive.

“The current account surplus was about the same in the first quarter of 2023 (1Q23) as in 1Q22. There was weakness in 2Q23 and 3Q23, but the real squeeze was in 4Q23 of last year, especially in December when it contracted by 58% compared to December 2022.

“For the year as a whole, the trade balance contracted by 16.4% but it remains positive, so it is still adding to the GDP.

“Of course, this has an effect on all foreign transactions including FDI, investment flows and the exchange rate, but it is cyclical and reflects external factors in export markets which are struggling, especially China, Japan and the United States, but also Asean markets which are affected by the global demand downturn too,” Williams said.

Asean economist at HSBC Yun Liu said Malaysia’s current account shrank to only 1.2% of GDP in 2023, mainly due to the shrinking trade balance, as the global trade cycle last year significantly dragged down the external sector performance.

That said, high frequency indicators in January suggest the green shoots have started to emerge, she said, adding this matters not only for growth, but would also be supportive to the current account.

As to whether she foresees Malaysia incurring twin deficits, both a budget deficit and current account deficit, in the years ahead and any repercussions if it were to take place, Liu said she does not expect a twin deficit.

“In fact, we forecast the current account to improve from 1.2% of GDP in 2023 to 2.8% in 2024, on the back of better trade prospects especially in the tech cycle.

“Moreover, the FDI prospects continue to look bright, with Malaysia topping Asean in terms of FDI applications as a percentage of GDP,” she noted.

Williams opined there is very little chance of a twin deficit. Malaysia’s trade balance has only been negative in one month in April 2020 because of the Covid19 lockdowns, he said.

Apart from that anomaly it has been positive for 26 years, he said, noting the current lower than normal trade balance is just cyclical and would rebound as global trade picks up.

OCBC’S Venkateswaran said under the bank’s baseline, she does not see the economy incurring twin deficits.

“Our baseline is for more of the same, ie, the current account surplus stabilising around 2.5% of GDP this year and next, but the fiscal deficit narrowing consistently with the government’s stated fiscal consolidation agenda,” she said.

On another note, Yeah said given the decline in current account surplus encountered in 2023 is likely to be cyclical in nature, the continuing focus of government is to facilitate export and import activities through reducing transaction costs, facilitating customs clearance, logistics and port services.

Export promotion, especially by leveraging on the regional trade agreements such as the Regional Comprehensive Economic Partnership and Comprehensive and Progressive Agreement for Trans Pacific Partnership could be intensified, he said.

“There is a great potential to push for higher exports and reversal of the deficits in key service industries such as tourism, healthcare, education, transport, insurance and business services.

“There could be short-term pain to liberalise those industries that are still closed to foreign competition, but long-term gains in competitiveness and export markets would be the carrot,” Yeah said.