HLBank Research Highlights

Author: HLInvest   |   Latest post: Fri, 15 Feb 2019, 05:02 PM


Economics - Moderation in IPI

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IPI grew at a slower pace of +1.1% YoY (May: +3.0% YoY), lower than consensus estimate of +3.2% YoY. The slower growth was driven by decline in mining production (-9.4% YoY; May: -0.5% YoY) that offset the increase in manufacturing (+4.5% YoY; May: +4.1% YoY) and electricity production (3.0% YoY; May: +2.6% YoY). Quarterly IPI data turned around to register a contraction of -0.3% YoY (1Q 2018: +0.4% YoY). This indicates a sharp moderation in overall GDP that will be released on 17th August 2018. We lower our 2Q 2018 GDP forecast to +4.6% YoY from +5.1% YoY (1Q 2018: +5.4% YoY).


In June, IPI grew at a slower pace of +1.1% YoY (May: +3.0% YoY), lower than consensus estimate of +3.2% YoY. The slower growth emanated from a larger decline in mining production (-9.4% YoY; May: -0.5%) that offset the acceleration in manufacturing production (+4.5% YoY; May: +4.1% YoY) and electricity production (+3.0% YoY; May: +2.6% YoY) (refer to Figure #1).

MoM on a seasonally adjusted basis, IPI declined by -1.0% (May: +0.2%).

In the manufacturing sector, growth was driven by faster increase in export-oriented sector (+4.5% YoY; May: +4.0% YoY) and marginal rise in domestic-oriented sector (+4.5% YoY; May: +4.4% YoY). In the domestic sector, production of ‘food and beverage’ product increased (+3.5% YoY; May: +3.3% YoY) as well as ‘non-metallic mineral products, basic metal and & fabricated metal’ (+5.8% Yoy; May: +5.4% YoY). This offset the slower increase in ‘transport equipment and other manufacturers’ (+4.7% YoY; May: +4.9% YoY). Slower production in ‘other transport equipment’ and ‘repair, installation of machinery and equipment’ offset the increase in production of ‘motor vehicles, trailers and semi-trailers’.

Within the export-oriented sector, E&E production grew at a faster pace of +5.5% YoY (May: +4.8% YoY) in line with faster E&E export growth (+6.9% YoY; May: +2.2% YoY). Similarly, textiles production quickened to +3.7% YoY (May: +1.7% YoY), while wood production also accelerated (+5.4% YoY; May: +2.6% YoY). This offset the deceleration seen in ‘petroleum, chemical’ products (+3.4% YoY; May: +3.8% YoY).

Mining sector remained choppy as growth registered a contraction of -9.4% YoY (May: -0.5% YoY). This was due to larger decline in natural gas production (-15.7% YoY; May: -4.8% YoY) and crude petroleum (-2.2% YoY; May: +4.7% YoY). According to industry sources, the decline in LNG production could be attributed to the temporary cut in natural gas supply from the Sabah Oil and Gas terminal to the Petronas LNG Complex in Bintulu.


In the near term, we expect mining production to recover as the natural gas pipeline issue gets resolved. In the manufacturing sector, we anticipate motor production to pick up to cater to increase car sales demand. On the global front, forward indicators such as global PMI continue to point to continued growth, albeit at a slower pace (July: 52.7; Jun: 53.0) as rates of expansion eased for both production and new orders. Hence, while we expect a pick-up in domestic activity in 3Q 2018, downside risks from global front remain high. Should trade tension escalate further, this could significantly affect sentiment and investment activity. Nevertheless, we maintain our expectation for GDP to grow at 5.2% YoY (2017: 5.9% YoY) and BNM to maintain the policy rate at 3.25% in 2018 unless GDP surprises on the downside on a sustained basis.

Source: Hong Leong Investment Bank Research - 13 Aug 2018

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