News

• IPI growth moderated to +4.1 yoy in Jul (Jun: +5.3% yoy), lower than market expectations of a +4.5% yoy gain. The moderation was broad-based (refer to Figure #1).

• MoM basis, IPI declined by -2.2% (Jun: +2.3%) due to decrease in manufacturing and electricity sectors while mining rebounded marginally after recording a contraction in the previous month.

Comments

• The slower annual pace of IPI growth was due to broadbased moderation in all segments. Electricity production moderated for the second consecutive month following unusual hot weather conditions earlier this year (Jul: +7.1% yoy; Jun: +8.7% yoy). Manufacturing sector slowed to 3.3% yoy (Jun: +4.7% yoy) while mining sector moderated to +6.1% yoy (Jun: +6.3% yoy).

• Mining sector grew by +6.1% yoy as crude oil output improved by +13.9% yoy (Jun: +8.8% yoy). We understand that production from Gemusut Kakap oil field was increased during the month. Meanwhile, natural gas production declined by -2.8% yoy (Jun: +3.6% yoy).

• In the manufacturing sector, growth moderated as output of domestic-oriented industries recorded a rebound in July (+1.4% yoy; Jun: -1.2% yoy) while export-oriented industries grew at a slower pace of +4.0% yoy (Jun: +7.2% yoy). Export-oriented sector recorded slower growth following a broad-based moderation across all sub-sectors. Of signi ficance, E&E production rose at a slower pace of +4.1% yoy (Jun: +9.1% yoy).

• Meanwhile, domestic-oriented industries recorded a rebound (+1.4% yoy; Jun: -1.2% yoy) following lower base in the previous year amid post-GST adjustment. However, transport equipment recorded a larger pace of contraction in July (-5.2%; Jun: -2.9% yoy).

• Near-term outlook for IPI remains challenging. Forward indicators (i.e. intermediate imports, global PMIs, world chip sales, and business confidence) continued to reflect subdued global economic conditions.

• We maintain our 2016 full-year GDP growth forecast at 4.2%. We still expect GDP growth to increase in 2H 2016 as measures to boost household disposable income (EPF reduction, government salary increase, minimum wage hike) take effect while infra projects pick up momentum. An expected recovery in CPO output in 2H (fading of El-Nino effect) would also help to support GDP growth.

• We retain our forecast for BNM to maintain policy rate at 3.00% till year-end due to expectations of stronger growth in 2H 2016. However, there is still a risk that external sector would weigh on overall GDP growth leading BNM to reduce policy interest rate by another 25 bps in the November 2016 MPC meeting

Source: Hong Leong Investment Bank Research - 13 Sep 2016