IPI moderated to +2.2% YoY (July: +2.6% YoY), slightly below the median estimate of +2.3% YoY. The slower rise was due to moderation in manufacturing (+4.3% YoY; July: +5.2% YoY) and electricity production (+4.0% YoY; July: +4.5% YoY) alongside a slower decline in mining (-4.6% YoY; July: -5.9% YoY). We expect GDP to grow at a more moderate pace of 4.8% YoY for 2018 (2017: 5.9% YoY). We also maintain our expectation for BNM to maintain the policy rate at 3.25% for 2018.

DATA HIGHLIGHTS

IPI grew at a slower pace of +2.2% YoY (July: +2.6% YoY), slightly lower than the median estimate of +2.3% YoY, owing to a moderation in manufacturing (+4.3% YoY; July: +5.2% YoY) and electricity production (+4.0% YoY; July: +4.5% YoY) and a slower decline in mining production (-4.6% YoY; July: -5.9% YoY) (refer to Figure #1).

On a seasonally adjusted basis, IPI decreased by -0.4% MoM (July: +2.6%).

In the manufacturing sector, growth was supported by rise in domestic-oriented sector (+4.4% YoY; July: +3.9% YoY) and moderation in export-oriented sector (+4.2% YoY; July: +5.9% YoY) which was in line with the weaker export performance this month (- 0.3% YoY). The domestic-oriented sector was mainly supported by a rebound in ‘food and beverage’ production (+2.1% YoY; July: -2.9% YoY). Domestic sector was also sustained by slower growth in production of ‘non-metallic mineral products, basic metal and & fabricated metal’ products (+4.9% YoY; July: +5.6% YoY) and ‘transport equipment and other manufacturers’ (+7.4% YoY; July: +13.5% YoY). The moderation in transport equipment was in response to slower rise in vehicle car sales in the final month of tax-holiday period (Aug: +26.8% YoY; July: +41.0% YoY).

Within the export-oriented sector, E&E production slowed to +4.5% YoY (July: +8.0% YoY) in line with deceleration in E&E export growth (+3.2% YoY; July: +23.6% YoY). Moderation in production of textiles (+2.9% YoY; July: +3.6% YoY) and ‘petroleum, chemical, rubber and plastic products’ (+3.5% YoY; July: +4.0% YoY) was only slightly offset by the rise in wood production (+6.3% YoY; July: +6.0% YoY).

The mining sector recorded a smaller pace of contraction (-4.6% YoY; July: -5.9% YoY), contributed by decline in crude petroleum production (-0.6% YoY; July: +4.5% YoY) and smaller pace of contraction in natural gas production (-8.0% YoY; July: -15.2% YoY). On a MoM basis, natural gas production rebounded by +9.0% (July: -1.9%) after recording two consecutive months of decline in June and July 2018 as a result of temporary closure of natural gas supply from the Sabah Oil and Gas terminal to the Petronas LNG Complex in Bintulu.

HLIB’s VIEW

In the near term, mining sector is expected to experience a mild recovery. This is expected to be driven by modest increase in natural gas production as the Sabah Oil and Gas terminal resumes operation in a gradual manner towards the end of the year. In the manufacturing sector, global indicators point to slower rise in growth, as new orders slowed. On the domestic front, we expect motor production to moderate further as tax-holiday period comes to an end. Any potential escalation in trade tensions could negatively affect sentiment and investment activity. We retain our forecast for BNM to maintain the policy rate at 3.25% in 2018 unless GDP surprises on the downside due to significant slowdown in external and private sector spending.

Source: Hong Leong Investment Bank Research - 12 Oct 2018