OVERVIEW

Malaysia’s export growth continued to be hampered by sluggish global demand. In August, the YoY growth rate continued to contract by 18.6%, from -13.0% in July. This was in tandem with the decline in domestic exports and re-exports, amid higher base effects from last year and slower global demand. Gross imports fell by 21.2% YoY in August (-16.1% in July). Consequently, the country's trade surplus edged lower to RM17.31bn in August from RM17.35bn in July.

The confluence of a global economic slowdown, China's slower-than-expected recovery, persistent inflationary pressures, the effects of consecutive interest rate hikes by the US Federal Reserve, and diminishing prospects for future demand collectively contribute to a subdued outlook for the near term. Given these circumstances, our forecasts suggest a YoY decline of 6.3% in export growth and a contraction of 9.2% in import growth for the year 2023.

August exports. The latest data indicates a heightened deterioration in Malaysia's export growth, as reflected in the substantial YoY decrease of 18.6% in August, compared to a deep contraction of 13.0% observed in July. This trend can be attributed to the decline in domestic exports and re-exports within the manufacturing, mining and agricultural sectors. Exports of manufactured goods dominated total exports in August with a share of 85.4%, continued to fall by 17.7% YoY, attributed to a decrease in electrical & electronic (E&E) products (-15.3%) as well as petroleum products (-38.6%)

Similarly, mining goods exports contracted by 23.1% YoY in August (-33.6% in July), on account of lower exports of liquefied natural gas and crude petroleum. The agriculture goods exports also remained in negative territory at -27.1% YoY in August, from -28.1% YoY in July. The sluggish performance was attributed to lower exports of palm oil and palm oil-based agriculture products, which plummeted by 31.9% YoY in August, amid upward pressure on CPO prices. The Malaysian Palm Oil Board (MPOB) has provided a nuanced assessment, suggesting that the upcoming El-Nino phenomenon in the latter half of 2023 is less likely to exert a significant adverse impact on palm oil yields. This assertion is grounded in a reduced likelihood of a severe El-Nino event compared to earlier projections. However, in the short term, palm oil demand is anticipated to face headwinds due to diminished appetite from China, the world's second-largest importer of the commodity, stemming from its weaker economic growth. Our in-house projection for crude palm oil (CPO) prices persists unaltered at RM3,800/MT. This forward-looking assessment is founded on a thorough examination of diverse factors, including the complexities of the labour market and the broader macroeconomic environment. It occurs against the backdrop of escalating geopolitical tensions and the depreciation of ringgit.

Frail performance in overseas demand in key markets. Malaysia's exports to its major trading partners exhibited a synchronized downward trajectory in August. The United States weakened and declined by 9.7% YoY in August (+2.2% in July), driven mainly by lower exports of E&E and petroleum products, while exports to Japan fell by 19.3% YoY in August. However, exports to the EU declined by 4.6% YoY in August on account of lower shipment of petroleum products, palm oil & palm oil-based agriculture products as well as machinery, equipment and parts. Exports to China turned negative and fell by 20.3% YoY in August (-6.1% in July), weighed down by lower exports of E&E and LNG.

Imports contracted, weighed down by intermediate and consumption goods. Gross imports fell by 21.2% YoY in August (-16.1% in July). Imports of intermediate goods, which are used as an indicator of export performance going forward, contracted by 22.6% YoY in August, from -20.8% in July, following lower imports of processed fuel and lubricants. Meanwhile, imports of consumption goods contracted to -5.4% YoY in August (2.8% in July). Imports of capital goods rebounded and rose by 5.4% YoY in August (-4.3% in July). As a result, the country's trade surplus edged lower to RM17.31bn in August from RM17.35bn in July.

TRADE OUTLOOK

In the foreseeable future, we anticipate a persistently challenging economic environment, particularly when considering the GDP breakdown of real exports and imports. This scenario is poised to persist in a downward trajectory for the remainder of the year. This trend is emblematic of the overarching economic landscape marked by dwindling orders confronting businesses, both within the domestic and international spheres. A noteworthy metric, the business sentiment index, which serves as a pivotal barometer of economic confidence, has consistently remained below the crucial threshold of 100, registering at a modest 82.4 in the second quarter of 2023, in contrast to the 95.4 figure observed in the first quarter. In essence, our prognosis points toward a contraction in both export and import figures, with anticipated declines of -6.3% and -9.2% respectively for the current year. This sombre outlook is underpinned by several contributory factors, including an elevated cost of living, waning corporate appetite for inventory accumulation, and a discernible shift in consumer preferences towards increased expenditure on services in the post-Covid-19 era.

We expect Malaysia's manufacturing output to track closely with monthly global semiconductor sales, which have entered a cyclical downturn, posting a YoY negative growth rate of 11.8% in July. The World Semiconductor Trade Statistics (WSTS) forecasts a more substantial double-digit decline of -10.3% (US$515bn) in the global semiconductor market for 2023, following a modest growth of +3.3% in 2022. Nevertheless, a robust recovery is on the horizon in 2024, with an estimated growth rate of 11.8%.

The global trade outlook for the latter half of 2023 is decidedly pessimistic, with unfavorable factors outweighing the positive. Insights derived from the IMF Economic Outlook underscore this perspective, as it foresees a decline in world trade growth, dropping from +5.2% in 2022 to a meager +2.0% in 2023, followed by a modest recovery to +3.7% in 2024, well below the 2000-2019 average of +4.9%. This contraction mirrors not only the trajectory of global demand but also a significant shift towards the domestic services sector in trade composition. Moreover, the persistent effects of US dollar appreciation, which hinder trade due to widespread product invoicing in US dollars, coupled with an uptick in trade barriers, contribute to this subdued outlook. Nevertheless, we maintain the viewpoint that the enduring impacts of stringent monetary policies will continue into 2024, further intricately interweaving and exacerbating the existing contours of the global economic landscape.

Source: PublicInvest Research - 20 Sept 2023