Exports reversed into a decline of -0.8% YoY (Jul: +1.7% YoY) which came in below the consensus estimate of +2.7% YoY. Meanwhile, imports recorded the largest contraction since September 2009 (-12.5% YoY; Jul: -5.9% YoY). The contraction in exports was mainly due to deterioration in E&E and crude oil exports. Imports fell across the board. Trade surplus narrowed to RM10.9bn (Aug: RM14.3bn).

DATA HIGHLIGHTS

Exports reversed into a contraction in August (-0.8% YoY; Jul: +1.7% YoY) which came in below market expectations of +2.7% YoY. Imports declined by larger magnitude of -12.5% YoY (Jul: -5.9% YoY). Following the larger decline in exports on monthly terms, trade surplus narrowed to RM10.9bn (Jul: RM14.3bn).

Exports to China (-2.8% YoY; Jul: +3.8% YoY) and ASEAN (-1.2% YoY; Jul: +2.4% YoY) declined after rebounding in the previous month. Meanwhile, exports to the US moderated for the third consecutive month (+6.8% YoY; Jul: +7.9% YoY). On the other hand, exports to Japan picked up (+3.6% YoY; Jul: -6.3% YoY) due to higher exports of manufacturers of metal, E&E product and transport equipment. Similarly, exports to the EU rebounded (+5.3% YoY; Jul: -2.8% YoY) following higher exports of E&E, palm oil based manufactured product, transport equipment and processed food.

Commodity-related exports continued to contract, albeit at a slower pace of -3.6% YoY (Jul: -7.8% YoY). The decline was driven by contraction in LNG (-11.2% YoY; Jul: +31.3% YoY) and crude petroleum (-40.0% YoY; Jun: -45.7% YoY). The fall in crude petroleum was due to decline in export volume (-33.5% YoY; Jul: -45.0% YoY) and average unit value (-9.8% YoY; Jul: -1.2% YoY). The fall in LNG was accounted by shortfall in average unit value (-9.9% YoY; Jul: -2.8% YoY) while export volume continued to grow.

Exports of manufactured products was flat (0%; Jul: +4.3% YoY) on account of a contraction in E&E (-7.4% YoY; Jul: +4.5% YoY), chemical (-4.5% YoY; Jul: +1.9% YoY), optical (-12.3% YoY; Jul: -2.3% YoY) that offset the growth in machinery (+7.6% YoY; Jul: +6.0% YoY), metal (+19.2% YoY; Jul: -4.1% YoY).

Imports fell by larger magnitude of -12.5% YoY (Jul: -5.9% YoY), recording the biggest decline since September 2009 following contraction across sectors. Capital imports declined (-31.0% YoY; Jul: -13.9% YoY) due mainly to lower imports of parts of machinery and mechanical appliances. Intermediate imports fell by -13.9% YoY (Jul: -3.4% YoY) following lower imports of processed industrial supplies. Consumption imports contracted by -12.8% YoY (Jul: -5.0% YoY) following lower imports of semi-durables, mainly apparel and clothing.

HLIB’s VIEW

Trade surplus amounted to RM92.5bn in Jan-Aug 2019, higher than trade surplus recorded in Jan-Aug 2018 (RM70.1bn) which suggests external trade continued to contribute to economic growth. Nevertheless, worsening global trade outlook is expected to weaken trade activity further. In line with this, global manufacturing PMI remained in contractionary territory in September (49.7; Aug: 49.5) as new orders and new export orders continued to weaken. Domestically, the decline in capital and consumption imports also point to continued sluggishness in investment and renewed weakness in consumption activity. Consequently, we maintain our forecast for BNM to reduce the OPR by 25bps within the next 5 months.

Source: Hong Leong Investment Bank Research - 7 Oct 2019