News

• IPI growth grew at a faster pace of +6.8% yoy (Jul: +6.0% yoy), higher than consensus estimate of +5.8% yoy. The acceleration in mining (+5.4% yoy; Jul: +0.2% yoy) offset the moderation in electricity growth (+3.0% yoy; Jul: +7.9% yoy;) and manufacturing sector (+7.6% yoy; Jul: +8.0% yoy) (refer to Figure #1).

• MoM basis, IPI declined by -0.2%, the second consecutive month of contraction (Jul: -0.3%).

Comments

• The acceleration in IPI growth emanated from mining sub sector. Mining expanded by +5.4% yoy (Jul: +0.2% yoy). Manufacturing production expanded, albeit at a slower pace of +7.6% yoy (Jul: +8.0% yoy), while electricity moderated to +3.0% yoy (Jul: +7.9% yoy). The strong IPI growth was partly aided by low base effect due to weak mining activities in the corresponding period last year.

• In the manufacturing sector, growth was driven by faster expansion in the export-oriented sector (+7.2% yoy; Jul: +6.6% yoy) while domestic-oriented sector eased to (+8.8% yoy; +11.6% yoy). In the domestic-oriented sector, output of food and beverage moderated sharply to +9.4% yoy after growing double-digit in the previous month (+19.1% yoy). However, transport equipment accelerated to +9.9% yoy (Jul: +6.8% yoy), driven by repair and installation of machinery that offset the slower production growth of motor vehicles sub-sector in August (+5.4% yoy; Jul: +5.9% yoy).

• Export-oriented sector recorded a faster pace of expansion due to increase in petroleum, chemical and rubber products. Meanwhile, E&E production grew at a slower pace of +8.7% yoy (Jul: +10.5% yoy), in line with slower E&E export growth. Textiles and wood products also moderated in the month (9% yoy and 2% yoy respectively; Jul: 9.5% yoy and 4% yoy).

• Mining sector remained choppy as growth quickened to +5.4% yoy (Jul:+0.2% yoy). Crude oil output contracted further, albeit at a slower rate (-1.6% yoy; Jul: -3.8% yoy) while natural gas production accelerated to +14.6% (Jul: +5.5% yoy). Nevertheless, we expect mining sector to moderate in the fourth quarter as the base effect from commissioning of new facilities (LNG Train 9 and PETRONAS’ FLNG Satu) wanes. Crude oil output is also expected to remain volatile in the near-term following Petronas commitment to reduce 20,000bpd in line with OPEC and non-OPEC action to curtail output.

• Near-term outlook for manufacturing IPI remains favourable with continued expansion in forward indicators (i.e. global PMIs, world chip sales, and business confidence). Downside risks have diminished as global growth has become more synchronized across key economies.

• We retain our GDP growth projection of 5.4% for 2017 and unchanged OPR for the remainder of 2017.

Source: Hong Leong Investment Bank Research - 13 Oct 2017