Overview

Malaysia produced stronger exports in October, driven by better shipments of manufacturing and commodity goods. Trade surplus widened to RM10.5bn (September: RM8.6bn), above consensus expectation of RM9.8bn. Trade surplus jumped 6.9% YoY, pushing cumulative trade surplus to RM80bn, on course to reach our full year target. YTD export growth has touched 21.3% after the 18.9% YoY growth in October. On a MoM and seasonally-adjusted basis, exports increased 5.3%, though imports dropped 1.7%.

A few factors drove exports in October. For one, there was a lagged impact of the Ringgit given that it had moved noticeably higher only in November. Ringgit averaged at RM4.22 per dollar in October against November’s RM4.16 per dollar. We are of the view that impact of the Ringgit advancement to exports will only be felt in the first quarter of 2018. Secondly, the sharp rise in exports is consistent with the turnaround in key countries’ manufacturing PMI.

US, Eurozone and China registered promising PMI readings in 2017 with the month of October turning out to be their best particularly for the US and Eurozone. Finally, receding volatility of the Ringgit which averaged at 0.17% daily in 2017 against 0.59% daily in 2016 has endeared to importers, pushing for greater certainty of input cost, hence, the motivation to import more from Malaysia as a result. Exports are set to drive growth in 2017. Based on our assessment, net exports are set to contribute 1.4% to headline growth, better than 2016’s contribution of 1.0%. While we savour the moment, we think that Ringgit advancement will start to weigh on exports soon. It could be as early as the first quarter of 2018 if not in November or December this year.

Analysis

October 2017 exports. Malaysia’s exports growth accelerated in October to 18.9% YoY (September: 14.8%). Equally impressive is the export value that touched RM82.4bn, the second highest of the year. There was a consistent rise in almost all shipments particularly for the manufacturing and commodity goods including electrical and electronics (E&E) (+16.9% YoY), crude petroleum (+62.9% YoY), palm oil and palm oil-based products (+11.3% YoY), refined petroleum (+13.4% YoY), LNG (+6.3% YoY) and timber and timber based products (+6.7%). Only natural rubber saw a disappointing performance for the month (-5.7% YoY).

China remained Malaysia’s most important trade partner with YTD share of 16.2% ahead of Singapore at 12.9%, E.U’s 9.7%, US’ 9.1% and Japan at 7.8%. As for exports, Singapore is our biggest export destination or at 14.6% share whilst for import, China is our largest source at 19.4% share, far surpassing the second place, Singapore at 11% share. As mentioned before, a sizeable amount of Malaysia’s import from China is made up of intermediate goods for re-export (i.e. electrical and electronics goods). This is supported by October’s exports of which 18% or RM14.9bn of goods were made for re exports.

October 2017 imports. Total imports for the month jumped 20.9% YoY to RM71.8bn. On a monthly seasonally-adjusted basis, import dropped 1.7% from -3.7% the month before due to the slowdown in the importation of capital andintermediate goods. There was a consistent rise in all import categories with capital, intermediate and consumption goods growth expanding by 5.0%, 14.7%, 11.1% YoY respectively. It made up 13%, 54% 8% of imports share for the month. The largely stable consumption goods share, within the range of 7%-9% since the last few months, suggests small risks of cost-driven inflation.

Trade Outlook

2017 is set to become a good year for Malaysia’s trade. The landscape could change in 2018 especially when the Ringgit is set to move higher. In a competitive world where a small change in input cost can mean profit or loss, importers have to weigh the impact of further Ringgit advancements. In our view, as long as the Ringgit’s real effective exchange rate does not move much vis-à-vis regional peers, export numbers can remain robust. Otherwise, net exports will take a backseat in driving Malaysia’s economy.

Source: PublicInvest Research - 7 Dec 2017