• Malaysia’s exports maintained positive growth for the second consecutive month at 3.1% yoy in July (8% in June) led by higher manufactured and agriculture exports.
• In the first seven months of 2020, the trade surplus amounted to RM89.7bn compared to RM89bn in Jan-Jul 2019.
• We project gross export growth to decline by 5.0% for 2020 (-0.8% in 2019), with gross imports contracting by 6.0% in 2020 (-3.5% in 2019).

Sustained growth in exports led by manufacturing and agriculture exports

Malaysia’s exports maintained positive growth for the second consecutive month, albeit at a slower pace of 3.1% yoy in July from an expansion of 8% in June, better than market expectations of a decline of 1.4%. The sustained positive exports growth was underpinned by growth in manufactured exports, which expanded by 4.7% yoy in July (15.9% in June) and agriculture exports, which rose by 30.4% yoy (30% in June). This was also attributed partly to the new phase of the Recovery Movement Control Order (RMCO) from 10th June 2020, with the re-opening of the economy. In contrast, growth in mining exports declined but at a slower pace of 30.2% yoy in July (-45.6% in June).

Positive growth in manufactured goods in July was underpinned by sustained demand for E&E products (9.2%), as reflected in telecommunications equipment, parts and accessories (20.9%) and thermionic valves, tubes and photocells (5.8%). Further, exports of other manufactured goods also rose during the month, such as rubber products (93.9%), optical and scientific equipment (9.9%) and iron and steel products (9.1%). However, exports of machinery, equipment and parts (-4.4%), chemical and chemical products (-23.2%) and manufactures of metal (-5.9%) contracted in July. Besides, a rise in exports of agriculture products was supported mainly by palm oil and palm-oil based agriculture products, which increased by 52% yoy in July. Decline in exports of mining goods was dragged by lower exports of liquefied natural gas (LNG), which fell by 47.6% yoy during the month.

Higher Exports to All Major Trading Partners in July, Except Japan

Malaysia’s exports to almost all its major trading partners expanded in July. In particular, exports to the US rose by 28.6% yoy (+27.6% in June) due to higher exports of manufactured goods. As for China, exports expanded by 13.9% yoy in July (+46.8% in June) led by higher demand for exports of iron and steel products, other manufactures, palm oil and palm oil-based agriculture products as well as manufactures of metal.

Meanwhile, exports to the EU rose by 3.4% yoy in July (+3.3% in June) supported by increases in exports of rubber products and palm oil and palm oil-based agriculture products. Besides that, exports to ASEAN countries increased slightly by 0.1% yoy compared to an expansion of 1.3% in June, underpinned mainly by higher exports of E&E products.

In contrast, exports to Japan fell in July by 2.8% following its rebound of 9.8% in June, as reflected in lower exports of LNG, but some of the contraction was offset by the higher demand for manufactured and agriculture goods.

Gross imports declined by 8.7% yoy due to intermediate and capital goods

Gross imports contracted for the fifth consecutive month by 8.7% yoy in July from 5.6% in June, weighed down by imports of intermediate goods and capital goods. Imports of intermediate goods, which are used as an indicator of export performance in the months ahead, declined by 17.3% yoy in July (-10.7% in June) due to lower imports of processed industrial supplies. Meanwhile, imports of capital goods fell by 19.7% (+2.6% in June), due to lower imports of parts of machinery and mechanical appliances. In contrast, in tandem with recovery in domestic demand, imports of consumption goods rose for the second straight month, but at a slower pace of 0.1% yoy in July (+9.1% in June), as reflected in higher imports of durables, especially for machinery and mechanical appliances. With growth in exports exceeding the decline in imports, the monthly trade surplus widened to RM25.1bn in July (RM20.9bn in June). In the first seven months of 2020, the trade surplus amounted to RM89.7bn (RM89bn in Jan-Jul 2019).

In the months ahead, with the ongoing RMCO, which enabled almost all factory operations in the country to operate, we expect the country’s exports growth to trend in tandem with demand from overseas, with minimal business disruption. The recovery in external demand was supported by expansion in Malaysia’s manufacturing Purchasing Managers’ Index (PMI), which rose by 50 in July (from 51 in June) with output and new orders maintained at similar expansion pace in July. Besides that, the fifth consecutive month of increase in global sales of semiconductors by 5.1% yoy in June (5.8% in May) also bode well for Malaysia’s exports of E&E products. The sustained rebound in China’s economic activity amid stimulus measures and containment of the virus will also bode well for Malaysia’s trade performance.

However, we believe there are still downside risks to the sustainability of a rebound in growth of exports, especially in terms of a possibility of a second wave in Malaysia and other countries, which could lead to re-imposition of containment measures. Furthermore, external demand may also be weighed down by slower global growth, prolonged global supply chain disruptions and weak sentiment due to Covid-19 related uncertainties. The concern of renewed escalation of trade tensions between the US and China will also pose a downside risk to the country’s trade performance. We believe exports growth will remain in positive territory on a yearly comparison in 3Q20 and 4Q20, indicating the sharp contraction in exports growth bottomed out in 2Q20. Overall, we project gross export growth to decline by 5.0% for 2020 (-0.8% in 2019), with gross imports contracting by 6.0% in 2020 (-3.5% in 2019).

Source: Affin Hwang Research - 1 Sept 2020