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PublicInvest Research

Author: PublicInvest   |   Latest post: Mon, 25 Jan 2021, 1:29 PM

 

Economic Update - October 2020 Trade - Holding Steady

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OVERVIEW

Export growth pulled back for the month, no thanks to an unfavourable base effect following record high exports in the preceding year, though holding steady quantum-wise. October’s exports that moderated to +0.2% YoY (September: +13.6%) was nonetheless underpinned by sustained manufacturing activity (October: +2.5%) especially electronics and electrical products - E&E (October: +3.0%) thanks to the revival in global demand post economic openings. Exports could have registered higher growth if not for the sharp decline in mining (October: -47.2%) which remained affected by the large OPEC+ supply cut arrangement and softer demand from advanced and major economies amid owing strong COVID-19 headwinds. Imports remained uninspiring, decreasing by 6.0% YoY, its 8th consecutive decline since March, knocked among others by weak capital and intermediate imports as the pandemic situation soured risk appetite for capacity expansion and demand for semi-finished goods. Trade surplus remained encouraging, expanding by 25.9% to RM22.1bn, thanks to favourable trade mix especially exports that remained on a positive trajectory.

ASEAN registered another mixed trade performance, underscoring its contrasting trade coupling effects with advanced economies - AEs (Indonesia, Thailand, Singapore) and China (Vietnam, Malaysia). On this note, Vietnamese and Malaysian trade may continue to do well given a steady China economic turnaround post COVID-19 - a contrast though for the AEs no thanks to strong COVID-19 headwinds, and the likelihood of sustained trade challenges for Indonesia, Thailand and Singapore. China showed another resilient export performance after growth expanded by +11.4% YoY in October (September: +9.9%), followed by Vietnam (October: +9.9%; September: +18.0%) and Malaysia (October: +0.2%; September: +13.6%). Both countries’ export growth have been in lock-step with China in the last few months. Singapore (October: - 3.1%; September: +5.9%), Thailand (October: -6.7%; September: -3.8%) and Indonesia (October: -3.2%; September: -0.5%) bucked the regional trend, suggesting their trade coupling with the AEs. On this score, China’s manufacturing PMI that recorded another encouraging performance for the month (October: 51.4; September: 51.5; August: 51.0; July: 51.1; June: 50.9), its 8th consecutive month of expansion, is expected to benefit Malaysia and Vietnam especially.

Trade may continue to recover in the near term though its full turnaround may be weighed by several headwinds, amongst which include 1) OPEC+ steep output cut until 2Q21 2) economic challenges in advanced and major economies due to COVID-19 headwinds 3) resurgence in new domestic COVID-19 cases that may push consumers to remain cautious and continue preserving capital 4) cautious business sentiment that could affect capacity expansion and capital goods imports. Note that some governments may revert to lockdown measures, though only as a last resort, especially when COVID-19 remains a serious issue which shows no sign of abating. All these risks factors may put a drag on trade performance in the near term.

October 2020 exports. Exports that moderated to +0.2% YoY in October (September: 13.6%) was held up, among others, by steady manufacturing (October: +2.5%) and agriculture (October: +28.7%) activity thanks in large part to a revival in global demand. This was offset by lackluster mining momentum (October: -47.2%) which registered another month of decline, its 8th straight month of contraction. Liquified Natural Gas - LNG (October: -57.7%) and crude petroleum (October: -44.8%) delivered another letdown which was compounded by sharper decline in condensate and other petroleum oil (October: -95.1%). The sluggish momentum by petroleum-related products will continue until year-end and into 2021 amid OPEC+ on-going production cut (August-December 2020: 7.7mbpd; January-April 2021: 5.8mbpd). The corresponding increase in OPEC+ output beginning August and the serious COVID-19 situation in advanced and major economies may put a cap on oil prices nonetheless, already reflected in weak YTD Brent (-33.9% YoY; USD42.4pb). Oil price recovery will be further weighed by weak global growth projection for the year (2020 global GDP: -4.9%) and gradual recovery next year.

Export value that inched 0.2% higher YoY to RM91.0bn in October (September: RM88.9b) is impressive given the still-strong COVID-19 headwinds in our major trading partners like the US, India and Europe. It was a convincing achievement given the month’s achievement that is higher than YTD average of RM80.0bn, incidentally also the 2nd highest for the year. On a MoM and seasonally-adjusted basis, exports that jumped by 2.4% is a marked slowdown against +12.4% in September.

Malaysia’s re-export value decreased slightly to RM17.6bn in October (September: RM17.7bn), marking MoM and YoY decreases of 0.6% and 4.9% respectively. Re-exported goods that made up 19.3% of exports in October is a tad lower against 19.9% in September which is also above YTD average of 19.2%. Exports to China, the EU, the US and India were the main contributors to growth of exports in October.

October 2020 imports. Imports that registered a bigger decline (-6.0%; September: -3.6%) were pulled down especially by intermediate goods (October: -6.1%) and capital goods (October: -17.1%) though offset by steady consumption goods (October: +6.5%) activity. This will be intermediate goods’ 7th straight month of decline since April. This may subsequently weigh on our re-exports and therefore exports momentum especially when re-exports contribute ~19% of our exports. Capital goods imports remained affected by a large decline in transport equipment, industrial (October: -26.5%), pointing to an evidence of a delay in capacity expansion.

Intermediate goods, on the other hand, were affected by a sustained drop in fuel and lubricant - primary (October: -17.8%) and fuel and lubricant – processed (October: -21.9%). On a monthly- and seasonally-adjusted basis, imports ticked 2.9% faster and this is a rebound against +1.6% in September.

October 2020 trade surplus. Trade surplus remained impressive after rising by 25.9% YoY to RM22.1bn in October, which is also the second highest for the year. YTD surplus that jumped by 16.3% on a YoY basis to RM147.0bn could improve further driven by full economic openings across ASEAN and China.

TRADE OUTLOOK

Trade could make further recoveries thanks to the recent breakthrough in COVID-19 vaccine development. With the manufacturers set to produce up to 1.3bn doses of vaccine in 2021 covering about 17% of global population, this will be the likely catalyst that could trigger a rebound in commodity, trade and capital markets, though a full global recovery may take up to 2 years given the depth of the current crisis. Emerging Markets (Ems) are expected to drive the growth in global trade driven by recovery in demand from the AEs consistent with the improvement in labor markets amid a rebound in economic activities post COVID-19. Manufacturing goods especially E&E and agriculture products are expected to be among the first to benefit from the revival in global demand.

Source: PublicInvest Research - 30 Nov 2020

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