Malaysia’s trade performance remained resilient in 1Q2019 despite external challenges. According to balance of payments data, the value of total trade (i.e. exports plus imports) rose 0.4% year-on-year. With exports growth (+1.1%) outpacing that of imports (-0.4%), Malaysia’s current account (CA) balance came in at a commendable 4.5% of GDP, the highest quarterly ratio since the great oil bust in 2014.

Notwithstanding the commendable first quarter performance, the CA surplus for 2019 is expected to come in at 2.1% of GDP (IMF forecast), close to the long-term trend. It had come in at 2.3% in 2018. Since the Global Financial Crisis, Malaysia’s CA surplus has fallen by more than 7 percentage points of GDP. The IMF expects the surplus to narrow to 0.5% of GDP by 2024.

A CA surplus can narrow for several reasons. In Malaysia, it is mainly attributed to the shift of growth drivers towards domestic demand. Given that the global economic environment remains difficult, the momentum of this shift is expected to strengthen, thus putting more pressure on the CA.

Malaysia faces a persistent fiscal deficit. While a CA deficit is not necessarily bad, a twin deficit – i.e. when both the fiscal and CA balances are in deficit – can be especially credit negative for an emerging market economy against the backdrop of a challenging external environment.

Going forward, stronger manufacturing trade performance could help eliminate some of the pressure on the CA. It is important to note though that Malaysia is deindustrialising. According to Khazanah Research Institute (KRI), the economy has seen a gradual decline in the share of manufacturing.

After peaking in the early 2000s, export-oriented manufacturing is being replaced by domestic-oriented services. More importantly, the structural transformation, according to KRI, is accompanied by a transition away from a structure that is skewed towards lower skilled workers rather than investment in technology. This will inevitably lead to a deterioration of Malaysia’s position in the global supply chain network.

Industry 4.0 can help reverse deindustrialisation. In October 2018, the government launched the National Policy on Industry 4.0, a four-pronged strategy to boost the manufacturing sector via higher productivity, contribution, innovation and more high-skilled workers. If successfully implemented, it could help rejuvenate the manufacturing sector and keep Malaysia’s CA in surplus territory.