• IPI growth eased to 3.0% in December versus 4.8% in November

• Manufacturing component slipped to 3.0% against 4.8% the month before

• Mining component moderated as well

• Outlook for 2023 remains intact, however.

Malaysia’s Industrial Production Index (IPI) growth moderated markedly in  December in tandem with sluggish growth across all components including  manufacturing, mining and electricity. In December, Malaysia IPI growth pulled  back to 3.0% YoY, versus 4.8% in November, pushing a full year average to 6.9%,  just a tad higher against our full year 2022 forecast of 6.8%. Subdued operating  conditions was weighed down by broad moderation across all components  namely manufacturing (+3.0%; November: +4.8%) and mining (+4.1%;  November: +6.1%) components, key components in IPI (combined: 90% share in  IPI). The month’s form was also dampened by electricity component following a  YoY contraction of 1.1% compared to +0.7% in November 2022. On a MoM and  seasonally-adjusted basis, IPI disappoints, down by 1.1%, against November numbers (2.6%). We reiterate our 2023 IPI forecast in this report, projected to  expand by +4.5% YoY, a moderation against +6.9% in 2022.

ANALYSIS BY SECTOR

Manufacturing. Manufacturing component growth eased materially for the month or to 3.0% compared to 4.8% in November as output was knocked by a  few components namely (i) textile, wearing App. and others (down by -0.5%),  (ii) woods products and others (decreased by -4.3%) as well as (iii) petroleum,  chemical and others(fell by -0.9%). The moderation in manufacturing figure was also in tandem with our lackluster manufacturing PMI numbers since the last few months. Note that Malaysia’s Manufacturing PMI form slipped further to  46.5 in January compared to 47.8 in December 2022, our five straight months contraction, pushing Malaysia as one of the regions worse performer. Though uninspiring but we foresee our manufacturing PMI could be close to inflection point given the surprise full economic re-openings in China, our biggest trade partner. This may underpin a turnaround in our manufacturing activity and by extension, our manufacturing PMI form in the near term.

On specifics, manufacturing IP that moderated to +3.0% YoY in December was also partially supported by (i) transport equipment and others(December: 8.5%)  and (ii) E&E (December: +7.2%) thanks to the turnaround in economic activity post COVID-19 (i.e., North America, Europe, ASEAN). As for consumer-related products, we note that this component produced a sustained recovery thanks to full economic openings and therefore, uninterrupted economic and social activities (F&B sub-component: December: +3.4%). Consumer related products may continue to record growth though at a slower rate, in tandem with improvement in supply side condition as the Malaysian government has removed the administrative impediments for the hiring of foreign workers. On a MoM and seasonally-adjusted (SA) basis, manufacturing output decreased by  2.2%, a deterioration compared to +3.4% in November.

We opine the resumption of China's outbound travel could improve the global economy and eventually lead to stabilization in output. Taking into account the expected stronger growth in China following the full economic re-openings, we anticipate an improvement in supply condition particularly for manufacturing goods and hence, the E&E sub-component form in the near and short-term. However, we think that the improvement might be capped by ongoing global semiconductor challenges primarily with the on-going conflict in Europe between Ukraine and Russia along with elevated level of inflation which may lead to a slowdown in Malaysia’s semiconductor activity.

Mining: Mining output continued to record growth though at a moderate rate,  up by +4.1% compared to +6.1% in the previous month. The positive growth was driven by solid petroleum oils and condensate performance (December: +5.1%) and another steady form by natural gas output (December: +3.3%). This is in tandem with the ramp-up in output post production outage including the full contribution of a new oil field (East Malaysia; Pegaga) and new gas pipelines (e.g., Jerun, Rumi, Kasawari). On a MoM basis, mining output remained uninspiring following a drop of 1.3% compared to -2.1% in November.

We remain bullish on the mining component in-line with the start-up of offshore fields (East Malaysia; Pegaga). Other factor that might propel mining activities are the full year impact of post outage production - a ramp up in output to fill a  shortfall in OPEC+ quota and the operational of new natural gas pipelines in  Sarawak (e.g., Jerun, Rumi, Kasawari). On top of that, we also expect Petronas to accelerate its development of offshore gas fields which is intended for oil and gas production.

Electricity: Electricity component delivered a negative figure in December following a decline of 1.1% YoY against +0.7% in November. This was dragged by weaker energy demand in tandem with sluggish performance in semiconductor sector despite uninterrupted economic and social activities. In line with that, output shrank on a MoM and SA-adjusted basis or to -0.4% in December compared to 0.4% in November. Output is expected to remain steady in the near term thanks a full year impact of economic re-openings as well as base effect advantage.

OUTLOOK

While we note that Malaysia was the only country to record a gloomy PMI  number in ASEAN, we expect IPI numbers to remain convincing going into 2023.  This will be backed by a few government aids that we believe will be introduced during the re-tabling of Budget 2023 (24th of February). On top of that, in-line with full economic re-openings since early last year, we foresee manufacturing component to record positive figure in 2023 though at a slower rate. In regards with the development from China, we believe that the full economic re-opening will trigger a spillover effect to our local economy particularly manufacturing component. Aside to that, Ringgit is expected to remain steady in 2023 amidst a slowdown in US rate hike though it remains competitive vis-à-vis its regional peers. As for electricity output, we opine the base effect advantage and a full year impact of full economic re-openings to be among its major drivers. We are also bullish on the mining components in-line with the start-up of offshore fields  (East Malaysia; Pegaga) and the operational of new gas pipelines in Sarawak. On top of that, we also expect Petronas to accelerate its development of offshore gas fields which is intended for oil and gas production. Despite the bullish outlook on our economy, we remain concern on a few brewing headwinds namely (i) inflationary pressures and (ii) global supply chain disruption which may take time to normalise. This will also be added by the still on-going conflict in Europe which shows no sign of truce. We reiterate our IPI forecast for 2023 in this report, which is projected to expand by 4.5%, a moderation against 6.9% in  2022.

Source: BIMB Securities Research - 8 Feb 2023