Malaysia’s International Investment Position (IIP) recorded higher net surplus at the end of quarter one 2023, the highest since quarter four 2021.
This is attributable to a record high international reserve asset and smaller deficit in portfolio investment. It reflects the somewhat improved investor confidence post General Election and the end of COVID-19 pandemic while providing a bigger safety buffer for Malaysia in the event of external shocks, said Kenanga Research in the recent Economic Viewpoint Report.
Net assets of RM2.28 trillion expanded due to increase in portfolio investment assets of RM34 billion quarter-on-quarter, followed by direct investment assets RM11.8 billion quarter-on-quarter and reserves assets RM6.5 billion quarter-on-quarter, but was capped by
the enlarged deficit in financial derivatives assets of minus RM3.8 billion quarter-on-quarter.
Net liabilities of RM2.19 trillion expanded RM24 billion quarter-on-quarter due to expansion led by other investment liabilities at RM29.7 billion quarter-on-quarter, followed by direct investment liabilities at RM16.4 billion quarter-on-quarter amid higher foreign direct investment (FDI) inflows. This, however, was capped by larger portfolio investment liabilities at minus -RM19.5 billion quarter-on-quarter.
Direct investment recorded higher net liabilities of minus RM276.2 billion as the expansion of Foreign Direct Investment position outpaced Direct Investment Abroad (DIA).
FDI into Malaysia increased at a softer pace, RM14.1 billion quarter-on-quarter, the slowest pace since quarter four 2020. The
expansion was attributable to a higher FDI in the services sector at RM7.3 billion.
The manufacturing sector remained the largest recipient, though its share fell slightly from 43.5% in the previous quarter. This was followed by the services subsector led by financial activities and wholesale & retail trade. The sources for FDI during the quarter were mainly from Singapore, the US, and Hong Kong.
DIA position expanded slightly, leading to a deeper deficit in net direct investment. The investment was primarily channelled towards financial activities, followed by mining & quarrying and manufacturing sectors. Top destinations for investment abroad were Singapore, followed by Indonesia, and the Netherlands.
Net portfolio investment of RM9.2 billion recorded a lower deficit as total portfolio investment assets increased sharply, while portfolio investment liabilities declined for the fourth straight quarters.
Equity & Investment Fund Shares of RM304.8 billion recorded a sharp increase as portfolio investment equity assets rose, outpacing a fall in portfolio investment equity liabilities.
Other investments posted significantly higher net liabilities of RM140.7 billion, attributable to a higher increase in other investment liabilities which outpaced the expansion in other investment assets.
International reserve assets increased to RM509.8 billion, a new record high. Apart from the improved capital inflows during and prior to quarter one 2023, this could have been due to the impact of quarterly adjustment on the international reserves holdings as the bulk is held (about 60-70%) in USD.
Fed Chairman Powell’s hawkish testimony and rising US-China tensions triggered risk off and safe haven trade boosting USD value. This also explained the depreciation of other regional currencies against the USD in March.
IIP may sustain a net surplus in quarter two 2023 and onwards due to a potential rise in FDI and foreign portfolio inflows driven by a positive domestic economic outlook.
“We expect net liabilities to increase further this quarter, backed mainly by higher direct investment, particularly the FDI, amid improved domestic political stability and government effort to attract quality investment into the country via various trade and investment visits,” said Kenanga.
This will also be further boosted by the potential return of foreign investors to domestic capital markets due to a sound and resilient domestic economic outlook, with Malaysia recording the second fastest quarter one 2023 GDP growth in the region at 5.6%.
Nevertheless, the IIP’s net assets may also increase and outpace the net liabilities as DIA growth is expected to rise further, taking into account the prospect of development in the top three DIA destinations led by Singapore, Indonesia and the Netherlands. This will also be supported by the prospect of higher international reserves and portfolio investment.
