Manufacturers Are Raising Output Charges to Limit Margin Loss

Malaysia’s manufacturing Purchasing Managers’ Index (PMI) fell for the second consecutive month to 48.2 in November from 49.2 in October, its lowest level since May 2018. This was also the second consecutive month where manufacturing PMI has remained below the 50 level. Malaysia’s headline PMI averaged 48.7 between October and November, lower than the average of 50.8 registered in 3Q18.

The contraction was partly due to lower production and new orders amid weaker demand pressures following the reintroduction of the Sales & Services Tax (SST) in September. According to IHS Markit, softer demand caused new orders to register its biggest decline in six months. In contrast, export sales increased from October although the improvement in new business from overseas was marginal. Meanwhile, similar to the previous month, employment continued to increase but at its weakest pace since August. Cost pressures remained strong in November due to the weaker RM against the US$, while the rise in global raw material prices led manufacturers to increase their output charges in order to limit their margin loss. Despite this, the survey showed that Malaysian manufacturers are optimistic over future production, where it is anticipated to pick up over the next 12 months amid expectations of increase in demand and introduction of new products.

We expect Malaysia’s real GDP growth to expand by 4.7% yoy estimated for 4Q18 (4.4% in 3Q18) and average around 4.8% in 2018 (5.9% in 2017). In 2019, real GDP growth is projected to be around 5%, amid higher projected global oil prices, the repayment of RM37bn for GST and income tax refunds as well as steady domestic demand supported by the 2019 Budget measures. However, with the global semiconductor sales slowing in 3Q18, which expanded by 13.8% yoy, compared to 20.5% in 2Q18, we expect some slowdown in demand for Malaysia’s E&E sector.

As for the Asean region, headline PMI rebounded from its contraction of 49.8 in October to 50.4 in November. The headline PMI was supported by Vietnam’s PMI (56.5), Philippines (54.2) and Indonesia (50.4). The global PMI remained steady at 52 in November, unchanged from October, reflecting that manufacturers are still cautiously positive on new orders and international trade, as reflected in improvement in the US, the Eurozone, Japan, China, the UK, Brazil and India.

Source: Affin Hwang Research - 4 Dec 2018