PublicInvest Research

February 2023 Trade - Trade Growth to Mirror GDP

Publish date: Tue, 21 Mar 2023, 09:17 AM
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In February, Malaysia's export growth increased significantly to +9.8% YoY compared to +1.4% in January, surpassing market expectations of +4.5%. The improvement was partly due to a lower base effect from the same period last year. Similarly, gross imports expanded by +12.4% YoY in February (+2.2% in January), mainly driven by intermediate and consumption goods. As a result, the country's trade surplus widened to RM19.6bn in February from RM18.1bn in January, indicating a favorable trade balance. Notwithstanding the persistent strength exhibited by certain exports and domestic-oriented industries in the previous year, our outlook posits that real export growth will stay positive, albeit decelerating to +3.3% YoY in 2023, down from last year’s high of 12.8%. Meanwhile, real import growth is predicted to register +4.8% YoY in 2023 compared to +14.2% in 2022.

February exports. The noteworthy acceleration in Malaysia's export growth to +9.8% YoY in February, up from 1.4% in January and surpassing market estimates of +4.5%, can be attributed in part to the lower base effect from the same month in the previous year. This momentum was further propelled by robust expansion in the mining and manufactured goods sectors, with the latter posting a growth of 9.5% YoY in February (-0.1% in January), buoyed by significant increases in petroleum products (+67.5%) and E&E exports (+11.7%).

Similarly, mining goods exports continued to climb vigorously by 34.8% YoY in February, albeit at a slower pace than January's 50.1%, largely supported by the resilient exports of LNG (+32.9%). However, agriculture goods exports remained in negative territory at -9% YoY in February, improving from a substantial decline of 19.8% in January. The sluggish performance was attributed to lower exports of palm oil and palm oil-based agriculture products, which plummeted by 13.8% YoY in February, as a result of downward pressure on CPO prices during the weak production season. Despite the Malaysian Palm Oil Board's (MPOB) official forecast of RM4,000-RM4,200/MT for 2023, we are maintaining our in-house assumptions for crude palm oil (CPO) at RM3,800/MT. Our stance takes into account various factors, including labor availability, geopolitical concerns that are expected to cause a decline in Ukrainian sunflower seed output, and a rise in palm oil imports by China as its economy reopens. Moreover, the adoption of the B35 biodiesel requirement by Indonesia, set to commence since January, is likely to bolster Malaysia's CPO further, as the B35 mandate would limit palm oil supply worldwide.

Mixed performance of overseas demand in key markets. Malaysia’s exports to major trading partners showed a positive growth trend in February, with the exception of China and the EU. The United States recorded a significant YoY growth of 18.7% in February (-0.7% in January), supported by strong exports of E&E products, while exports to Japan grew by 8.3% YoY in February. However, exports to the EU declined by 2.2% YoY in February, mainly due to lower exports of chemicals and chemical products, rubber products, and E&E products. Exports to China continued to decline, albeit at a slower rate of -6% YoY in February (-11.9% in January), as a result of lower exports of iron and steel products, petroleum products, and chemicals and chemical products. In contrast, ASEAN countries showed sustained positive growth of +14.8% YoY in February, primarily driven by higher demand for petroleum and E&E products.

Imports rose, supported by intermediate and consumption goods. Gross imports expanded by +12.4% YoY in February (+2.2% in January). Imports of intermediate goods, which are used as an indicator of export performance going forward, grew positively by 3.3% YoY in February, from a negative growth of 4.2% in January, following higher imports of primary fuel and lubricants. Similarly, imports of consumption goods registered a positive growth of 1.2% YoY in February (-4.8% in January). Imports of capital goods dropped by 0.3% YoY in the middle of 1Q 2023 (-1.9% in January). Meanwhile, the country's trade surplus widened to RM19.6bn in February from RM18.1bn in January, highlighting a positive trade balance.


Given the current macroeconomic environment characterised by a projected - 4.1% YoY decline in worldwide semiconductor sales in 2023 to US$556.5bn and the continued softening of overseas demand, we anticipate that Malaysia's trade performance will trend in tandem this year. Moreover, the recent -18.5% YoY decline in monthly semiconductor sales, which reflects reduced consumer spending, fluctuated semiconductor demand, and heightened macroeconomic uncertainty, adds to our cautious outlook. Despite some offsetting effects from China's full reopening in 2023, we believe that the balance of risks to Malaysia's trade performance remains tilted to the downside, owing to escalating geopolitical tensions, tightening financial conditions, and increasing probabilities of a global recession in advanced economies. Despite a reduction in its share since the onset of the Covid-19 pandemic, China remains Malaysia's foremost export destination, accounting for approximately US$47bn or 14% of the total in 2022. The country's medium-term trade prospects are expected to flourish, contingent upon the sustained influx of foreign direct investments (FDI) into Malaysia's industrial sector. As reported by MIDA, Malaysia has successfully garnered RM264.6bn in approved investments for 2022, with China taking the lead at RM55.4bn, followed by the US and the Netherlands at RM29.2bn and RM20.4bn, respectively. Furthermore, despite the semiconductor industry's cyclicality and anticipated short-term weakness, we are optimistic about its long-term potential, as it remains integral to driving major technological breakthroughs, including Artificial Intelligence, Internet of Things, and 6G. The New Industrial Master Plan 2030 is also poised to play a pivotal role in charting the course of Malaysia's industrial development by facilitating the identification and pursuit of emerging growth opportunities, streamlining the ease of doing business, and enhancing the attractiveness of the investment landscape to premium digital investors.

Despite the sustained performance of selected exports and domestic-oriented industries last year, as well as the expansion of trade financing facilities and the promotion of e-commerce, downside risks to Malaysia's trade performance in 1H 2023 remain, particularly in light of the ongoing trend in output of E&E products. However, the ratification of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is expected to enhance Malaysia's trade prospects, especially with nations with which it had no prior Free Trade Agreements, including Canada, Chile, and Mexico. Nevertheless, given the possibility of local manufacturers scaling back production in anticipation of subdued global conditions, we estimate that Malaysia's real GDP growth will moderate to 3.8% in 2023 from a robust 8.7% in 2022. In this context, we maintain our view that real export growth will remain positive, albeit moderating to 3.3% YoY in 2023 from a high of 12.8% in 2022, while real import growth is expected to stand at 4.8% YoY in 2023 compared to 14.2% in 2022.

Source: PublicInvest Research - 21 Mar 2023

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