News

• IPI growth accelerated to +4.2 yoy in Oct (Sep: +3.1% yoy), exceeding consensus forecast of +3.4% yoy. The increase in IPI reflected a rebound in the mining sector and faster expansion in manufacturing sector (refer to Figure #1).

• MoM basis, IPI grew by +4.0% (Sep: +1.9%) following a broad-based improvement in the sectors.

Comments

• The faster pace of IPI growth was due to rebound in mining production (+3.6% yoy; Sep:-0.3% yoy) and increase in manufacturing sector (+4.2% yoy; Sep: +4.0% yoy). Meanwhile, electricity production moderated to +6.9% yoy (Sep: +7.0% yoy).

• In the manufacturing sector, growth accelerated as the domestic-oriented sector recorded a faster rate of expansion (+1.4% yoy; Sep: +1.0% yoy). This was due to rebound in food and beverage sector (+2.5% yoy; Sep: -0.8% yoy), that offset the decline in transport equipment (-5.4% yoy; Sep: +0.3% yoy). The larger weightage of food and beverage sector led to the overall increase in domestic-oriented sector.

• Meanwhile, export-oriented sector recorded a marginal improvement in October (+5.3% yoy; Sep: +5.2% yoy) due mainly to E&E sector. Production in the export-oriented sector rose at a faster pace of +8.0% yoy (Sep: +6.5% yoy). This is also consistent with faster expansion in September’s E&E export performance as global demand improved. Of significance, global chip sales advanced for the third consecutive month in October (+5.1% yoy; Sep: +3.6% yoy). However, exports of petroleum, chemical, rubber and plastic products moderated slightly to +3.7% yoy (Sep: +4.4% yoy).

• Mining sector remained choppy and increased by +3.6% yoy in October as crude oil output rebounded by +2.7% yoy, erasing the decline in the previous month while natural gas production continued to advance (+4.5% yoy; Sep: +2.7% yoy). Electricity production moderated for the third consecutive month following cool weather conditions.

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

• The improvement of IPI in October indicates slight pick-up in growth momentum in early 4Q 2016. 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% next year due to expectations of stronger growth in 2017.

Source: Hong Leong Investment Bank Research - 13 Dec 2016