By HARIZAH KAMEL / Pic BY MUHD AMIN NAHARUL

MALAYSIA’S current account surplus is expected to reach 3% of its GDP in 2021, according to Fitch Solutions Country Risk and Industry Research.

Fitch Solutions expects Malaysia’s recovery to mimic China’s in 2020 in terms of domestic demand being likely to lag exports significantly.

It has also revised its 2020 current account balance estimate to 2.2% of GDP from 0.6% previously, compared to 2.5% in 2019.

“While our view is that imports would fall sufficiently to ensure that Malaysia maintains a current account surplus has played out even as exports fall, it has done so to a larger extent than we had previously expected.

“Additionally, a slight recovery in exports from the third quarter of 2020, has further supported the current account balance,” it noted in a report published yesterday.

Fitch forecasts the goods balance to remain robust despite risks posed by the third wave of Covid- 19 infections with imports are likely to remain subdued even as external demands pick up as the region ramps up vaccinations.

“Imports are likely to continue lagging exports to a significant degree. While most of the region has managed to keep the Covid-19 situation under control, especially key trading partners Singapore and China, Malaysia is struggling with an aggressive third wave of infections since October 2020,” it said.

This will apply heavy downside pressure on the domestic economy, especially if greater restrictions have to be imposed later in 2021, painting a dim picture for domestic demand.

Other supportive factors include strong crude palm oil price outlook, while a strong ringgit will likely limit the extent of the goods surplus.

As for the financial account, Fitch noted a muted outlook for the country’s foreign investment in light of still-high political risks and the third Covid-19 wave.

In a separate report, Fitch revised both its 2021 and 2022 average exchange rate forecasts to RM4.05 from RM4.15 previously.

The key driving factors behind both revisions are the strong rally of the local unit against the US dollar over the course of second half of 2020 and the generally dim outlook for the greenback amid loose fiscal and monetary policy in the US, which is likely to persist for the next two years at least.

Over the long term, the ringgit is to remain on a similarly strong footing, trading slightly stronger than the mid-point of its long- term trading range between RM3.80 and RM4.50 against the greenback.

Accordingly, Fitch has revised its 2022 average ringgit forecast to RM4.10 from RM4.15 previously.

The rating’s firm added that medium-term prospects for the US dollar will remain bearish due to loose fiscal and monetary policy.

On a real effective exchange rate (REER) basis, the ringgit remains undervalued, with the spot REER trading 8.8% below its 10-year moving average in November 2020, according to data from the Bank for International Settlements.

“While the fact that the ringgit has been undervalued for more than five years as of November 2020 suggests it does not have a strong tendency to revert to mean, the 85 level for the REER appears to be a strong support level and the spot REER is already testing this support at 84.85,” it added.