News

• IPI growth accelerated to +4.9 yoy in Aug (Jul: +4.1% yoy), lower than market expectations of a +5.4% yoy gain. The improvement follows further gain in manufacturing and electricity production (refer to Figure #1).

• MoM basis, IPI declined by -1.0% (Jul: -2.2%) due to decrease in mining sector which offset the rebound in manufacturing and electricity production.

Comments

• The faster annual pace of IPI growth was due to increase in electricity and manufacturing production. Electricity production expanded sharply by +11.4% yoy (Jul: +7.2% yoy). Manufacturing sector grew by 4.7% yoy (Jul: +3.2% yoy) while mining sector slowed to +4.3% yoy (Jul: +6.0% yoy).

• Mining sector remained choppy and grew by slower pace of +4.3% yoy in August as crude oil output moderated to +6.4% yoy (Jul: +13.9% yoy). Meanwhile, natural gas production rebounded by +1.5% yoy (Jul: -2.8% yoy).

• In the manufacturing sector, growth improved as export oriented sector recorded an improvement of +6.2% yoy in August (Jul: +4.0% yoy). Of significance, E&E production rose at a faster pace of +7.8% yoy (Jul: +4.1% yoy). This is also consistent with rebound in E&E export performance in August (+3.0% yoy; Jul: -6.0% yoy) as global demand rose. In particular, global chip sales rose for the first time in August (+0.5% yoy), after registering thirteen consecutive months of decline.

• Meanwhile, domestic-sector continued to record an expansion (+1.0% yoy; Jul: +1.4% yoy) as the deterioration in food and beverages offset the improvement in transport equipment and non-metallic products. Food and beverage component recorded an annual decline due to high base effect as it recorded the highest level of output in August 2015 (Aug: -1.7% yoy; Jul: +2.6% yoy).

• Near-term outlook for IPI remains subdued. Despite the uptick in some of the forward indicators (i.e. intermediate imports, global PMIs, world chip sales, and business confidence), it remains below pre-crisis average indicating moderate global economic conditions.

• We maintain our 2016 full-year GDP growth forecast at 4.2%. Judging from the stronger Jul-Aug IPI growth of +4.5% yoy (2Q16: +3.7% yoy), we reiterate our view that GDP growth will stage a rebound to +4.2% in 3Q16 (2Q16: +4.0%). Measures to boost household disposable income (EPF reduction, government salary increase, minimum wage hike), implementation of infra projects, and gradual recovery in CPO output would support growth momentum.

• We retain our forecast for BNM to maintain policy rate at 3.00% in Nov MPC meeting due to expectations of stronger growth in 2H 2016. We see a higher probability of a 50bps SRR cut in Nov MPC meeting in view of the persistent downtrend in excess liquidity in the banking system (i.e. loan-deposit gap of RM182.5bn, the lowest since Nov 2006)

Source: Hong Leong Investment Bank Research - 13 Oct 2016