• Exports in July contracted 13.1% YoY mainly due to the decrease in shipments to ASEAN markets

• Imports sustained double-digit decline for the second month

• Trade surplus narrowed to RM17.1bn

• Export weakness to continue

Summary

Malaysia's total trade continued to fall, declining by 14.4% YoY to RM216.4bn, affected by softer global demand and lower commodity prices. Subsequently, exports recorded a decrease of 13.1% YoY to RM116.8bn, while imports declined by 15.9% YoY to RM99.7bn. Malaysia’s trade surplus in July 2023 increased by 7.9% YoY to RM17.1bn and was the 39th consecutive month of trade surplus since May 2020. Meanwhile, on a month-on-month basis, exports reversed course and fell by 5.8% or RM7.2bn, imports rebounded by 1.3% or RM1.3bn, the total trade reduced 2.7% or RM5.9bn, while trade surplus tapered off by 33.1% or RM8.5bn. Exports, imports, total trade and trade surplus posted a negative growth for the period of January to July 2023 as compared to the same period of the preceding year. Exports dropped by 5.9% to RM820bn, imports fell by 6.5% to RM684.65bn, trade was down by 6.1% to RM1.505tn and trade surplus shrank by 2.5% to RM135.35bn. We continue to see downside risks to the external trade sector as the year progresses. Global headwinds will remain while year-ago high base effects become more prominent, in addition to softer readings of Malaysia’s leading indicators such as imports of intermediate goods and manufacturing PMI. We maintain our view that the export contraction trend will likely persist for the greater part of 2H23 as a result of the unfavorable base effects, subdued global demand and easing global commodity prices. Tighter international financial conditions, volatile currency and escalating geopolitical risks add further downside risks to the near-term trade outlook.

Exports contracted for the fifth straight month in July. Exports maintained a double-digit contraction of 13.1% YoY in July, corresponded with the decline in both domestic exports and re-exports. Domestic exports accounted for 76.3% of total exports, declined 13.0% YoY from RM102.4bn to RM89.1bn. In addition, re-exports valued at RM27.6bn constituted 23.7% of total exports, decreased 13.5% YoY from RM32.0bn in the previous year. Meanwhile, on a monthly basis, exports contracted 5.8% or RM7.2bn whilst on the seasonally adjusted terms, exports weighed up marginally at 0.1% MoM or RM170.0mn to RM118.1bn.

In July, exports of manufactured goods which made up 86.7% or RM101.3bn of total exports reduced by 9.8% YoY (Jun: -12.7%) or RM11.0bn, primarily due to falling demand for commodity-based products including refined petroleum (Jul: -48.7%, Jun: -35.4%), chemicals & chemical products (Jul: -9.1%, Jun: -19.0%), manufactures of metal (Jul: -12.3%, Jun: -15.9%), and palm oil-based manufactured products (Jul: -35.2%, Jun: -36.3%). This fully offset a larger gain in exports of electrical & electronic (E&E) products (Jul: +7.3%, Jun: +3.3%).

Exports of agriculture goods (6.5% share) totaled RM7.6bn, slipped for a 10th straight month by 28.1% YoY (Jun: -42.3%), on the back of lower exports of palm oil and palm oil-based agriculture products (Jul: -34.4%, Jun: -49.3%) from RM8.5bn to RM5.6bn, affected significantly by weaker export prices of palm oil (-37.9%).

Exports of mining goods (6.3% share) declined by 33.6% YoY to RM7.3bn from RM11.1bn on slower exports liquefied natural gas (LNG) and crude petroleum which recorded a further decline of 39.7% and 20.6% respectively (Jun: -40.8% and -43.7%). LNG’s export volume fell 18.5% and its average unit value contracted by 26.0% in July. This compared to crude petroleum’s 29.1% decline in average unit value versus an increase of 12.0% in export volume.

On a month-on-month basis, exports of agriculture and mining goods expanded by 1.8% and 6.2%, respectively while exports of manufactured goods were lower by 6.9%.

In January to July 2023, exports of manufactured goods edged down by 4.0% YoY to RM702.1bn, owing mainly to slower exports of palm oil-based manufactured products, manufactures of metal and rubber products. However, strong exports of E&E products and petroleum products cushioned the impact of the decline. Exports of mining goods shrank by 6.7% YoY to RM59.8bn on the back of lower shipments of crude petroleum as well as petroleum condensates and other petroleum oil. Exports of agriculture goods declined by 25.6% to RM53.2bn, dragged down mainly by lower exports of palm oil and palm oilbased agriculture products following decrease in export prices of palm oil.

In terms of destinations, exports to ASEAN shrank by 18.8% (Jun: -9.3%) to RM34.5bn, led by Singapore (-19.7%), Indonesia (-18.3%) and Thailand (17.7%), mainly due to lower exports of petroleum products. The reduced exports of petroleum products and palm oil also translated into continued decline in exports to the European Union (EU) as exports to the EU dropped for six months in a row by 5.8% YoY (Jun: -23.7%). Shipments to Japan slid at a double-digit pace for the second month (Jul: -26.9%, Jun: -21.1%), mainly attributed to lower exports of LNG. There was a rebound in shipments to China and US, however the recovery was more than offset by reduced exports to other major destinations. Exports to China turned around to grow by 6.1% (Jun: -8.5%), boosted by strong exports of E&E products and petroleum products, while exports to the US also rebounded marginally by 2.2% (Jun: -19.0%) following strong demand for E&E products.

Imports sustained double-digit decline for the second month. Imports also kept a double-digit decline at 15.9% YoY (Jun: -18.7%) to RM99.7bn from RM118.5bn. It also marked the fifth straight month of negative growth, largely due to a continued decline in imports of intermediate goods and capital goods.

Imports of intermediate goods, stood at RM48.9bn or 49.1% of total imports, contracted by 20.9% (Jun: -25.3%). Imports of capital goods contributed 10.6% to total imports, decreased by 3.6% (Jun: -12.6%) to RM10.5bn, due to lower imports of industrial transport equipment (-56.8%). On the other hand, imports of consumption goods (9.0% of total imports) recovered by 5.9% (Jun: -11.9%) to RM9.0bn following higher imports of processed food & beverages that were mainly for household consumption (+16.7%).

Manufactured products continued to decline with 14.5% YoY to RM83.2bn from RM97.3bn, and thus constituted 83.5% of total imports. The decrease was affected by lower imports of petroleum products (-34.4%), E&E products (- 15.9%), chemicals & chemicals products (-12.8%) and other manufactures (- 28.1%). Imports of mining products which contributed 9.8% of total imports posted a decline of 21.3% to RM9.8bn, following lower imports of other mining (-46.0%), liquified natural gas (-38.7%) and metalliferous ores & metal scrap (- 13.1%). Imports of agriculture products contracted by 13.6% to RM5.4bn in line with lower imports of palm oil & palm oil-based agricultural products (-41.2%), other vegetables oil (-62.4%) and natural rubber (-24.9%). The relatively lower commodity prices could dampen imports growth, and this would add into the reduced cost pressures as shown in downward trend in PPI and the declines in import prices.

Imports showed an improvement on monthly basis, rebounded by 1.3% (Jun: - 5.2%). However, on seasonal adjustment terms, imports fell 1.4% MoM.

During the period of January to July 2023, imports shrank by 6.5% YoY to RM684.65bn. Imports of intermediate goods contracted by 14.5%, and consumption goods declined 0.2%. On the other hand, imports of capital goods increased 0.6%.

July trade surplus narrowed. As exports dropped at a faster pace than imports in July, trade surplus narrowed to RM17.1bn from RM25.5bn in June. This was the 39th consecutive month of trade surplus since May 2020. This brought YTD trade surplus to RM135.4bn in the first seven months of 2023, 2.5% lower than the RM138.8bn recorded in the corresponding period of 2022.

It was a challenging month for global exports. Available data showed that exports from Japan dropped by 0.3% YoY in July 2023, marking the first decline since February 2021, underscoring weak foreign demand from key markets. The contraction in China’s external deepened in July. In USD terms, exports contracted by -14.5% YoY (Jun: -12.4%) and imports by -12.4% YoY (Jun: -6.8%). Weakening external demand further dims the prospects of China’s recovery in 2H23. In the ASEAN region, all countries saw a fall in exports. Singapore’s nonoil domestic exports (NODX) deteriorated further on a year-on-year basis as the NODX plunged by -20.2% YoY in July from -15.6% YoY in Jun. Indonesia’s Total exports in July grew by 1.3% MoM, but compared to a year ago, it contracted by 18% YoY, lower than previous month’s contraction at 21.2% YoY. Vietnam’s exports fell for a fifth consecutive month in July in their longest slump in 14 years as exports dropped 3.5% YoY.

ASEAN’s trade-reliant economy is also taking a hit as tighter monetary policies globally dampen demand for goods, mirroring a trend of sagging sales in Asian export powerhouses, including South Korea and Taiwan. South Korea's exports fell for the tenth consecutive month in July due mainly to weak demand for semiconductors Exports fell 16.5% YoY in July from -5.5% in June as exports of semiconductors, the country's key export item, sank 34% on falling demand and a drop in chip prices. Taiwan’s exports fell for the 11th straight month in July due to weak demand from mainland China and Hong Kong and a nagging lull in global consumption of hi-tech equipment. Exports from Taiwan declined 10.4% YoY in July, easing from a 23.4% drop in the previous month as exports of electronic components, including semiconductors, fell by 7.9% YoY. The fall in exports in July points towards ongoing softness in semiconductor demand amid a fall in global demand for consumer electronics.

Global trade is now slowing sharply after a rapid post-pandemic recovery in 2021 and 2022. Monetary tightening, fading fiscal support and services sector reopening are now weighing on global goods demand, which leapt extraordinarily during the pandemic. Global trade growth in 2023 is still expected to be subpar. According to the World Trade Organization (WTO) the volume of world merchandise trade is expected to grow by 1.7% this year, following 2.7% growth in 2022, weighed down by the effects of the war in Ukraine, stubbornly high inflation, tighter monetary policy and financial market uncertainty. Still, the 1.7% forecast for trade growth in 2023, is up from the previous estimate of 1.0% from last October. A key factor here is the relaxation of COVID-19 pandemic controls in China, which is expected to unleash pent-up consumer demand in the country, in turn boosting international trade. Trade growth should rebound to 3.2% in 2024. Fitch forecasts global trade growth of 1.9% in 2023. Trade growth is expected to bounce back to 3.3% in 2024

OUTLOOK

Exports maintained a double-digit contraction of 13.1% YoY in July. However, the decline was expected with PMI surveys highlighting sluggishness in overseas demand. Malaysia’s Manufacturing PMI remained subdued in July (Jul: 47.8; Jun: 47.7), indicating a weak start for the 3Q23. While we are heartened by the slight improvement seen in the manufacturing PMI, it remained in contraction level for the eleventh consecutive month or since September 2022 and the sub-50 print still correlates with our view that Malaysia continues to experience headwinds in the manufacturing sector. The weakness in the manufacturing industry is primarily attributed to weak global demand conditions. Meanwhile, the global manufacturing sector remained mired in contraction at the start of the second half of the year. The J.P.Morgan Global Manufacturing PMI held steady at 48.7 in July, to stay below the critical 50.0 no-change mark for the eleventh month in a row. The July PMIs signal continued momentum loss in global manufacturing. The weaker PMI reading in July is in line with our expectation that the manufacturing condition will remain weak in the 3Q23 and would potentially spill over towards the end of the year due to the global economic slowdown and the waning lower base effect recorded last year. As Malaysia’s exports fell further entering in the first month of 2H23, we believed that the subdued external trade may continue with commodity exports to remain as a downward drag in the coming months, partly because of the lower price effect. Imports also sustained double-digit decline for the second month, decreasing by -15.9% YoY due to reduced purchases of intermediate and capital goods and this continue to suggest cautious approach by local producers in their production and investment plans, in response to slowing demand particularly on the external front. We maintain our view that the export contraction trend will likely persist for the greater part of 2H23 as a result of the unfavorable base effects, subdued global demand and easing global commodity prices. Global demand has yet to show signs of rebounding as the pent-up demand in consumer spending continues to normalize post pandemic amid elevated living costs. Demand from the advanced economies particularly the US and Europe slowed due to tighter monetary conditions, while China’s reopening has yet to provide desired spillover effects to regional peers, including Malaysia.

Source: BIMB Securities Research - 21 Aug 2023