Following two consecutive months of positive growth in June and July that helped lift the economy from the lockdown, exports in August fell by 2.9% y/y while m/m, it shrank by 14.8%, which partially reduced the 48% gains over June and July.

All major export products reported m/m drop with large declines in electronics and petroleum products. And without a favourable base effect, it could have been even worse. There was also an across-the-board fall in shipments to the main destinations. Meanwhile, weak domestic demand continued to weigh down on imports in August. As with exports, electronics and petroleum products were the weak spots in imports.

Against all odds – a record GDP plunge, narrowing current surplus, modest global oil prices and domestic political uncertainty – the Malaysian ringgit has been performing well in a broad emerging market rally since June.

However, the rally lost a little steam in September, dented by a strong USD sentiment so far this month. The MYR was a little disturbed last week by political risk in the run-up to the Sabah state election over the weekend, and FTSE Russell's decision on whether to exclude the Malaysian government securities from its global bond index. Both events turned favourable. However, the return of negative export growth is a setback for the currency.

• Following two consecutive months of positive growth in June and July that helped lift the economy from the lockdown, exports in August fell by 2.9% y/y. On a m/m basis, it shrank by 14.8%, which partially reduced the 48% gains over June and July. This brings the first eight-month average to -5.2% y/y.

• All major export products reported m/m drop. But large declines in electronics and petroleum products, by 19% m/m and 24%, respectively, were glaring. And without a favourable base effect, it could have been even worse. There was also an across-the-board fall in shipments to the main destinations.

• Weak domestic demand continued to weigh down on imports in August, which were down 2.2% from July and 6.5% from a year ago. As with exports, electronics and petroleum products were the weak spots in imports.

• Hence, imports slipped for the sixth consecutive month, by 6.5% y/y from -8.7% y/y in July. Both capital and intermediate imports shrank by 15.6% y/y and 5.6% y/y from -19.8% y/y and -17.3% y/y, respectively. Meanwhile, consumption goods climbed by 2.9% y/y in August from 0.1% y/y in July.

• Trade surplus narrowed sharply to RM13.2 billion from RM25.2 billion in July. The RM103 billion cumulative surplus in the first eight months of 2020, is RM3 billion wider on the year.

• Despite a steady goods surplus, continued net outflows on the service account, resulting from standstill tourism, should keep the overall current account surplus on a narrowing trend over the remainder of the year. The current surplus almost halved to RM17.1 billion in 1H 2020 from RM31.3 billion a year ago. Our forecast for the full-year 2020 current surplus as a proportion of GDP is 1.5%, down from 3.4% in 2019.

• Against all odds – a record GDP plunge, narrowing current surplus, modest global oil prices, and domestic political uncertainty – the Malaysian ringgit has been performing well in a broad emerging market rally since June.

• However, the rally lost a little steam in September, dented by a strong USD sentiment so far this month. The MYR was a little disturbed last week by political risk in the run-up to the Sabah state election over the weekend. A clear win for the state coalition (Gabungan Rakyat Sabah) backed by Prime Minister Tan Sri Muhyiddin Yassin was a relief for markets as this further strengthened an otherwise shaky ruling coalition at the national level.

• Another overhang was FTSE Russell's decision on whether to exclude the Malaysian government securities from its global bond index, which in the end passed as a non-event last week.

• However, the return of negative export growth is a setback for the currency.

Source: AmInvest Research - 29 Sept 2020