Weak external demand continued to drag the manufacturing PMI

Malaysia’s manufacturing Purchasing Managers’ Index (PMI) fell further to 47.1 in November (47.2 in October). According to IHS Markit, the country’s manufacturing PMI was dragged down mainly by the sharpest decline in new orders in the series history, as well as reductions in production and stock of purchases. We believe there is a strong possibility that Malaysia’s manufacturing PMI may fall even further in December to a record low level in the series history to date (vs. previous low of 47 in November 2015), as manufacturers likely turned more cautious on the global economic outlook, which will likely dampen international demand. However, the drop in international demand may be offset partially by manufacturing production to meet the country’s domestic demand.

Nevertheless, Malaysia’s manufacturing PMI had been hovering between 47 and 49 for the last 18 months, suggesting a subdued outlook for the manufacturing industry in the country amid challenging economic environment, which has been reflected in the decline in new export orders for the six consecutive month, while production contracted for the 20th consecutive month.

While November’s PMI survey showed employment growth picked up to a 13-month high, we believe this could also be temporary and is unlikely to be sustained as manufacturers will slow their hiring in anticipation of slower external demand. In tandem with the assessment made by Markit, recent weakness in the Malaysian Ringgit vs. US$ on imported goods and rising labour costs (as a result of adjustment to minimum wage) will likely add some burden to manufacturers, where they may pass on some higher costs to end-consumers.

However, as manufacturing exports account for over 80% of Malaysia’s total exports, weakness in RM/US$ may help in terms of competitiveness for exports, but the positive impact may be limited, given that currency weakness is broad-based across the Asian region, as Trump’s Presidential victory should boost dollar strength in anticipation of a fiscal stimulus to boost growth in the US. Uncertainty in the external environment remains, especially on Trump’s decision on US trade policy with China (Malaysia’s largest trading partner) and progress on Brexit. We maintain

Source: Affin Hwang Research - 2 Dec 2016