Supported Mainly by Strong Demand for Manufactured Goods

Malaysia’s export growth rose from 7.6% yoy in June to 9.4% in July, which was sharply higher than market expectations of 4.7%. Exports of manufactured goods expanded strongly by 12.6% yoy in July (12.7% in June), reflecting higher demand for electrical and electronic products, which increased sharply by 23.6% yoy in July (6.8% in June). In particular, exports of thermionic valves & tubes and photocells rose sharply by 49.2% yoy in July, while exports for parts & accessories for office machines, and electrical apparatus & parts, rose by 13.4% and 6% respectively. This helped offset the sharp drop in exports of telecommunication equipment, parts & accessories (-7.7%).

Strong exports of E&E-related products trended in tandem with global semiconductor sales. According to Semiconductor Industry Association (SIA), the global semiconductor industry registered its highest monthly sales of US$39.4bn in July, with double-digit growth of 17.6% for the 20th consecutive month, led by higher sales from China (29.4%), the US (20.7%) and Europe (11.7%). Similarly, exports of other manufactured goods components, including optical & scientific equipment (9.1%), machinery & appliances (2%), manufactures of metal (23.3%), as well as chemicals & chemical products (19.3%), continued to register positive growth in July.

However, exports of refined petroleum products declined by 13% yoy in July (33% in June), as reflected in the sharp drop of export volume in the same month (-29.4%). Exports of mining goods turned around from -10.9% yoy in June to 7.1% in July, due mainly to the sharp increase in exports of crude petroleum, which rose by 90.1% yoy in July (23.5% in June). Nonetheless, exports of LNG remained a drag, declining further by 38.4% during the month (-31.2% in June), on lower demand from Japan.

As for exports of agriculture goods, demand for palm oil & palm-based agriculture products, which contributed c.4% of total exports, declined sharply by 22.2% yoy in July (-26.8% in June), its sixth month of contraction. This was reflected in the decline in both the export volume and average unit value.

Higher Exports to the US and China on Demand for Manufactured Goods

The performance of exports by major trading partner was mixed. Exports to the US turned around by 0.3% yoy in July, after two months of contraction, on higher demand for manufactured goods, including optical & scientific equipment, machinery & appliances, manufactures of metal as well as crude petroleum.

Exports to China continued to expand by 37.7% yoy in July (16.9% in June), the highest growth since May last year. This was due to higher demand for E&E products, chemicals & chemical products, manufactures of metal as well as optical & scientific equipment. This was also consistent with China’s latest manufacturing PMI, which rose from 51.2 in July to 51.3 in August.

Shipment to the EU region also rose by 2.1% yoy in July, albeit slower than in the previous month. Meanwhile, exports to the ASEAN region also slowed from 7.4% yoy in June to 1.2% in July, dragged down mainly by lower exports to Singapore, due to weaker demand for petroleum products, as well as machinery & appliances. Exports to Japan contracted further to 15.4% yoy in July, due to lower demand for LNG products.

Imports Slowed by 10.3% Yoy in July on Imports of Intermediate Goods

Malaysia’s gross imports slowed to 10.3% yoy in July (14.9% in June), due mainly to the drag from imports of intermediate goods, which declined by 0.1% yoy during the month. On the other hand, private consumption was boosted by the tax holiday, and was reflected in imports of consumption goods, which rose by 11.1% yoy in July. Due to the higher exports growth relative to imports, the country’s trade balance widened to RM8.3bn in July, from RM6bn in June. The cumulative trade balance in the first seven months amounted to RM68.8bn, significantly higher as compared to RM51bn in the same period last year.

Going forward, due to distortion from the festive season (after the Eid al-fitr festival in mid-June), we believe the country’s exports will likely be slower from August onwards. However, continued growth in global demand for Malaysia’s E&E and commodity products will likely support the exports trend, as reflected also in Malaysia’s manufacturing PMI, which expanded by 51.2 in August, above the 50-point expansion mark and its highest level since November 2017. We expect demand for manufactured goods to remain healthy in the months ahead, underpinned by demand from China and the US for E&E products.

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. We continue to expect the trade surplus to remain healthy in a range of RM95-100bn for 2018 (RM97.2bn in 2017). The downside risk remains on the external front, mainly from the heightened global trade tensions between the US & China.

Source: Affin Hwang Research - 6 Sept 2018