Larger contractions in exports of manufactured and mining goods

Malaysia’s gross export growth contracted sharply by 8.6% yoy in October (-3% in September), declining for the second straight month and lower than the market expectation of a 5.6% decline. This was also the sharpest yoy contraction since April 2015. Apart from exports of electrical & electronic products (E&E) and palm oil and palm-based agriculture products, the sharp contraction during the month was reflected across the board, with steepest yoy declines in both exports of manufactures of metal and liquefied natural gas (LNG), see Fig 1.

Outward shipments of E&E products rose from 0.3% yoy in September to 1.2% in October, which was consistent with stronger global semiconductor sales, where growth rose from 3.6% yoy to 5.1% during the same period, as reported by Semiconductor Industry Association (SIA). Growth was also at its highest level since March 2015, supported by strong global semiconductor sales in Asian countries and the Americas

However, exports of manufactures of metal (-43.8%), machinery and appliances (-19.8%), optical and scientific equipment (-5%), chemical and chemical products (-4.7%) as well as refined petroleum products (-7.4%) all registered sharp declines in October; the large contraction in these manufactured products was attributed partly to higher base effects in the corresponding period of 2015.

Exports of palm oil and palm-based agricultural products rose by 3.7% yoy in October (3.2% in September), as the higher average unit value of palm oil (+25.6%) mitigated the declines in export volume (-19.7%) during the month.

Sharp declines in exports to the US, EU, Japan and Asean region

By export destination, exports to the US, EU, Japan and Asean countries contracted significantly. After registering positive growth since May 2015, exports to the US unexpectedly fell into negative territory for the first time in October, from +5% yoy in September to -3.5% in October, due to lower exports of E&E products, palm oil and palm-based agriculture products, and rubber products. Exports to Asean contracted for the first time in 15 months due to lower demand from Singapore and Thailand. Meanwhile, exports of Japan declined further by 29.1% yoy in October, as a result of lower LNG, while exports to the EU contracted further (-12% yoy vs -8.4% in September). However, consistent with the improvement in China’s economic indicators, such as the monthly PMI, Malaysia’s exports to China turned around to positive growth, from -1.0% yoy in September to 3.4% in October, the first positive increase in eight months, supported by demand for E&E products.

Across-the-board declines in gross imports

Similarly, gross imports fell more than expected by 6.6% yoy in October, the steepest decline since May 2015 and compared to market expectation of a 0.1% decline. Imports of intermediate goods fell into negative territory of 8.9% yoy after two months of expansion. Meanwhile, imports of consumption goods declined at a faster rate of 8% (-4.8% in September), but contraction in the imports of capital goods moderated to -2% (-5.4% in September)

Outlook for Malaysia’s export growth trends hinges on demand for E&E

In October, the monthly trade surplus widened to RM9.8bn in October (RM7.6bn in September), as the differential in the pace of contraction in imports relative to exports narrowed. For the first ten months of 2016, the trade balance amounted to RM69.5bn, compared to RM73bn in 10M15 and accounted for 84% of our full-year forecast of RM82.7bn for 2016 and possibly trending higher to the RM83.4bn projected for 2017. We maintain our export growth forecast of 0.1% (-0.6% yoy in 10M16) and import growth forecast of 1.4% (-0.1% in 10M16) for 2016. Going into 2017, we project Malaysia’s export growth to improve to 2.5%, with import growth of 2.7%. According to SIA, growth in global semiconductor sales will remain healthy in 2017, where the industry forecast has been revised to increase by 3.3% to US$346.1bn for 2017, higher than June projection of an increase of 2% to US$333.7bn. While we expect demand for Malaysia E&E products to continue to support export growth, continued economic uncertainty in China (possibly from US trade policy) will remain a major downside risk for Malaysia, mainly through the trade channel into 2017.

Source: Affin Hwang Research - 8 Dec 2016