Strong Demand for Manufactured Goods But Lower Commodities Demand

Malaysia’s export growth rose by 7.6% yoy in June, after slowing down to 3.4% in May, but below market expectations of 10.3%. The improvement was partly due to lower base effect in the corresponding period of last year. On a monthon-month basis, exports contracted by 2.5% in June, its second month of contraction. By cluster, exports growth in June was supported by higher shipment of manufactured goods, which increased from 3.2% yoy in May to 12.7% in June. However, both exports of agriculture and mining goods contracted by 18.7% and 10.9% respectively in June.

In the manufactured goods cluster, strong growth was reflected across the board. In particular, exports of electrical & electronic (E&E) products rose by 6.9% yoy in June (2.1% in May). This was contributed mainly from higher demand for thermionic valves & tubes and photocells, which rose from 9.1% yoy in May to 14.8% in June, and helped to offset the contraction posted by other sub-components, including parts & accessories for office machines (-4.4%), electrical apparatus & parts (-11.9%), as well as telecommunication equipment, parts & accessories (-11.2%).

Other manufactured goods components, which also received higher demand during the month include refined petroleum product (33.9%), optical & scientific equipment (30.9%), machinery & appliances (10.4%), manufactures of metal (42.9%), as well as chemicals & chemical products (31.6%).

On exports of agriculture goods, demand for palm oil & palm-based agri products, which contributed about 4% of total exports, fell further from -24.7% in May to -26.8% in June, as reflected in the contractions of both export volumes and average unit value. Similarly, exports of mining goods also declined in June, attributed from exports of LNG, which declined from 61% yoy in May to -31.2% in June on falling export volume, partly due to weak demand from Japan. This was despite the higher average unit value showed in June. In contrast, exports of crude petroleum grew by 25.3% yoy in June, its seventh month of positive growth, albeit slightly weaker than the prior month of 45.8% expansion.

Exports to China Rebounded, Growing by 16.9% Yoy in June

In terms of destinations, performance of exports to major trading partners were mixed. Exports to China rose by a double digit from 7.4% yoy in May to 16.9% in June 2018, due to higher exports of chemicals and chemical products, manufactures of metal and LNG.

Exports to the ASEAN region also increased from -1.9% yoy in May to 7.4% in June, due to the higher exports of petroleum products. However, exports to EU slowed from 11.4% yoy in May to 5.6% in June, while exports to US and Japan contracted by -1.9% yoy and -14.5% yoy respectively in the same month. Exports to US declined due to lower demand for E&E products and palm oil and palm oil-based agriculture products, while exports to Japan was dragged down due to lower exports LNG and E&E exports. On a cumulative basis, for the first half of 2018, exports to China expanded by 8%, while exports to US was relatively flattish at 0.8% and exports to Japan contracted by 7% yoy.

Imports Rose by 14.9% Yoy in June Due to Capital Goods

Gross imports turned sharply from 0.1% yoy in May to 14.9% in June, partly due to the lower base effect from imports, distorted by performance last year, due to the Hari Raya festive season in the last week of June 2017. Imports of intermediate goods had its first positive growth in seven months at 3.1% yoy in June (-5.3% yoy in May). Imports of consumption goods also had its first positive growth in three months at 4.9% yoy in June (-10.2% in May). On the other hand, imports of capital goods rose sharply by 14.1% yoy in June (-0.5% yoy in May). However, on a month-on-month basis, imports fell by 1.9% mom, with the first half of 2018, averaging around 3.4% yoy. However, we do not expect import growth to trend higher in the months ahead if demand for capital goods and intermediate goods remaining soft.

Due to the higher imports growth as compared to exports, trade balance fell from RM8.1bn in May to RM6.0bn in June 2018, the lowest level in 13 months. For the first half of 2018, trade balance rose by 41% yoy to RM60.6bn, partly due to lower imports relative to exports. As for the annual trade projections, we expect the trade surplus to remain healthy in a range of RM95-100bn in 2018E (RM97.2bn in 2017). We expect Malaysia’s exports of goods and services (in real terms) to expand by 5.4% yoy for 2018, albeit lower than the 9.6% in 2017, partly due to the high base effect. Going into 2H2018, we believe the strength of China’s economy will remain a major factor driving Malaysia’s exports, especially when the US is still pressuring China for trade concessions, which may avoid an escalation in the trade war tensions between the two countries. There are rising downside risks to China’s economy and the possibility of lower demand for Malaysia’s manufactured goods, especially in E&E products.

Source: Affin Hwang Research - 6 Aug 2018