News

• IPI growth decelerated to +3.2 yoy in Sep (Aug: +4.9% yoy). The moderation in IPI reflected slower pace of growth in manufacturing and electricity sector and slight decline in mining production (refer to Figure #1).

• MoM basis, IPI grew by +1.9% (Aug: -1.0%) due to increase in mining and manufacturing sector which offset the decline in electricity production.

Comments

• The slower pace of Sep IPI expansion was due to slower growth in electricity and manufacturing production. Electricity production moderated to +7.1% yoy (Aug: 11.4% yoy). Manufacturing sector grew by 4.0% yoy (Aug: +4.6% yoy) while mining sector declined by -0.1% yoy (Aug: +4.3% yoy).

• Mining sector remained choppy and declined by -0.1% yoy in September as crude oil output contracted by -2.3% yoy (Aug: +6.4% yoy). Meanwhile, natural gas production continued to grow by +2.6% yoy (Aug: +1.5% yoy).

• In the manufacturing sector, growth moderated as export oriented sector recorded slower growth in September (+5.2% yoy; Aug: +6.2% yoy). E&E production grew at a slower pace of +6.5% yoy (Aug: +7.8% yoy). This is also consistent with slower growth in in E&E export performance in September as global demand moderated. In addition, exports of petroleum, chemical and rubber products also grew at a slower pace of 4.4% yoy (Aug: +4.5% yoy).

• Meanwhile, domestic-sector recorded sustained expansion (+1.0% yoy; Aug: +1.0% yoy) as the slight rebound in transport sector and continued growth in non-metallic sector offset the decline in food & beverage component. However, food & beverage component recorded a slower pace of decline despite registering a decrease on a month on-month basis due to lower base effect in Sep 2015.

• 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), all the readings remain below pre-crisis average indicating moderate global economic conditions.

• 3Q16 GDP was stronger at 4.3% following stronger growth services, mining, and slight uptick in manufacturing activity. We maintain our 2016 full-year GDP growth forecast at 4.2%, driven by services and construction. 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 meeting targeted growth of 4.0-4.5% in 2016 (1Q-3Q 2016: 4.1% yoy) and 4.5% in 2017. However, should external sector weigh on near-term outlook following anti-protectionism measures, BNM may reduce policy rates to support growth.

Source: Hong Leong Investment Bank Research - 14 Nov 2016