Exports in the month of August suffered a 4.5% YoY  decline, falling worse than the expected -1.7% forecasted by the market. Even though it is unsurprising to attribute Eurozone's decline in demand, China's dwindling demand also contributed to August's weak exports. Compared to the previous month exports suffered a 3.7% drop and year-to-date, it grew 2.3% compared to 7.4% in the same period last year. 

 Imports fared comparatively better, expanding by 2.8%. However, compared to the previous month, it fell by 10.3%, lowest monthly fall since January 2012. Despite imports doing better than exports, total exports had exceeded imports, which led to the trade surplus expanding by RM7.1b from RM3.6b. Total trade in August recorded at RM104.8b and RM868.8b year-to-date. 

 Most major export groups continued to feel the brunt of slowing demands from advanced economies.  Electrical & electronics (E&E) shipments continued to fall, this time by -5.2% YoY and -2.6% MoM, testimony of the declining situation in the Eurozone, with also relates to the slowdown in demand from China. Once again though, there was an improvement in E&E exports to the USA. There were also E&E exports expansion to Singapore and Taiwan. 

 Palm oil and palm oil based products (which make up to 10% of total exports) fell by 25.3%. Palm oil exports fell by 27.7% due to a decrease in volume as well as price. Crude petroleum exports fell by a sharp 29.8% but the exports of petroleum products expanded by 39.9%. As we had  hoped LNG exports made a rebound in August, increasing by 38.3% as both volume and price rose, by 22.4% and 13.0% respectively. 

 At RM7.61b Singapore was Malaysia's top export destination in August, which charted a 7.3% growth.  As an intermediary exporting country, they could be seen as a compass to the performance of western economies therefore we do not think that this growth is sustainable, as Singapore's own export numbers in August fell by 10.6%. Exports to the USA continued to expand, though this time at a slower pace of 4.2% from 14.6% previously. This is the result of higher shipment of E&E (+12.0%) and palm oil (+19.3%).  Japan's demand improved by 15.4% as orders for LNG  increases and is expected to expand even more so now the new power policy implemented seeks to end Japan's reliance on nuclear power by 2030.   Despite China's being Malaysia's 2^nd  export destination in August, at RM7.51b, it was a 10.6% decline giving proof to their own slowing domestic demand as well as feeling the pinch from the lack of orders for Europe and the US. Exports to the EU remain at a grim 24.2% contraction. 

 On the domestic front, imports once again exceeded  expectations.  There was a double-digit growth of 34.3% in capital imports.  This level of expansion is expected to continue as major developments under the ETP remains at full steam. Similarly,  domestic consumption remains strong at 14.1% growth. Only  intermediate imports suffered decline (-2.9 YoY), indicative that the overall global demand moving forward is not expected to be strong. 

 Looking forward, we do not expect the overall global situation to improve, not with Europe struggling to keep the Union intact and the USA not rebounding as well as hoped despite the election year. It is just as well that the government initiated the Economic Transformation Programme when it did to mitigate the negative externalities. Without the booster from  gross fixed capital formation to spur domestic economic growth, Malaysia would not have been cushioned from the weak global demand as well as it has been. Nonetheless,  given the slowing external demand, we are projecting growth of value added exports of goods and services to slow to 1.8% in 2H12 from 2.5% in 1H12. In contention with a stronger domestic demand, this would likely result in a slower GDP growth of 4.9% in the 2H12 from 5.1% in 1H12. For now, we are maintaining our GDP forecast of 5.0% for 2012.

Source: Kenanga