Trade Surplus Rose by RM15.3bn in September, Due to Weak Imports

Malaysia’s export growth turned around sharply from -0.3% yoy in August to 6.7% in September, in line with market expectations. The sharp improvement in exports growth was due to higher demand for both manufactured goods and mining goods, which expanded by 7.9% yoy and 17% respectively in September (3.2% yoy and 5.5% respectively in August). In contrast, exports of agriculture goods declined by 10.7% yoy in the same month, due to lower demand for palm oil and palm oil-based agriculture products.

In manufactured goods, exports of electrical & electronic (E&E) products, which has the largest share in the sector, rose sharply 6.5% yoy in September (3.2% in August). Higher demand was reflected in exports of thermionic valves & tubes and photocells (15.1%), part & accessories for office machines (4.1%), as well as telecommunications equipment, parts and accessories (3.1%). Higher E&E exports helped to offset lower demand for electrical apparatus and parts (-1.9%) during the month. This was also in tandem with the steady growth in global semiconductor sales, which expanded by 13.8% yoy in September, albeit slightly lower than 14.9% in August. According to the Semiconductor Industry Association (SIA), sales from the US rose marginally to 15.1% yoy in September, while sales from China remained high at 26.3%.

Likewise, other manufactured goods that contributed to higher growth during the month included exports of optical & scientific equipment (16.9%), machinery & appliances (1.8%), and chemicals and chemical products (31.7%) as well as refined petroleum products (6.8%). In contrast, demand for manufactures of metal fell further by 2.2% yoy in September.

Meanwhile, exports of mining goods improved in September on the back of healthy demand for crude petroleum, which increased by 54.5% yoy (64.9% in August). Similarly, demand for liquefied natural gas (LNG) also improved significantly, turning around from -22.5% yoy in August to 1.8% in September.

Sharp Declines in Exports to the US, EU and Japan

In terms of exports by destination, exports to Singapore, the US and India experienced a turnaround after posting negative growth in August. Exports to the US rebounded from -2% yoy in August to a marginal 0.1% in September, led by higher exports of optical and scientific equipment, rubber products and chemicals and chemical products. However, exports to China fell on a yearly basis, from 4.5% yoy in August to -0.6% in September, attributed to lower exports of E&E products, palm oil and palm-oil based agricultural products.

Concerns on the trade disputes between the US and China, and uncertainty on the growth outlook, has led to some slowdown in China’s manufacturing activity, particularly the E&E sector, which was also reflected in China’s Caixin manufacturing PMI, which fell to the 50 level in September and a relatively flattish at 50.1 in October, against its peak for this year at 51.6 in February 2018. As for the Asean region, exports improved from 1.7% yoy in August to 3% in September, mainly supported by higher exports to Singapore, which turned around from -2.2% yoy in August to 8.7% in September.

Gross Imports Contracted by 2.7% Yoy in September

Gross imports fell 2.7% yoy in September after rising by 11.2% in August. This was the first negative growth since March this year, and below market expectations of a 10% rise. The unexpected drop in imports was reflected across the board. In particular, imports of intermediate goods fell 9.3% yoy in September (4.3% yoy in August) due to lower imports of parts & accessories of capital goods, mainly for electrical, machinery and equipment. Similarly, imports of capital goods dropped by 25.2% yoy in September (29.2% in August), while imports of consumption goods fell 10% (14.2% in August), partly due to the reintroduction of the sales-and-services tax (SST), which began in September after 3 months of a tax holiday period from June-August 2018. Due to the sharp fall in imports, the trade balance improved significantly from RM1.6bn in August to RM15.3bn in September. For 9M18, the country’s trade surplus widened to RM85.7bn, vs. RM71.2bn in 9M17. With the YTD trade surplus still high, at 88% of our earlier full-year forecast already (RM98.5bn in 2017), we are revising up our full-year forecast to c.RM103bn for 2018.

Going forward we believe imports will stabilise and Malaysia’s trade balance will show a stable monthly trade balance of between RM6-9bn in 4Q18. We continue to expect Malaysia’s exports of goods and services (in real terms) to grow by 4.2% yoy for 2018, albeit below the 9.6% in 2017, partly due to the high base effect. Imports of goods and services are also forecast to slow from 11% in 2017 to 5.2% in 2018. Malaysia’s manufacturing Purchasing Managers’ Index (PMI) fell 2.3 points to 49.2 in October, after staying above the expansion level of 50 for 2 consecutive months since August 2018. Despite some uncertainty from the external environment, we expect the country’s real GDP growth to improve from 4.5% yoy in 2Q18 to c.5.0% estimated in 3Q18, partly led by tax holidays.

Source: Affin Hwang Research - 7 Nov 2018