OVERVIEW

Both exports and imports contracted in January from the previous year below consensus and our estimates. Exports fell 0.6%, well below consensus’ 3.0% increase while imports fell by a larger proportion of 5.3% (consensus: +2.0%). On a MoM basis, exports and imports declined by 6.0% and 6.7% respectively, resulting in a trade surplus of RM9.0b, just under the RM9.2b achieved in December. The weak January export data was largely attributed to low commodity prices and poor demand from buyers in China. The relatively weak ringgit did not boost imports as expected. Instead, the value of intermediate goods, accounting for 60.6% of all imports, fell 3.0% YoY, suggesting weaker demand for manufactured goods going forward. Overall, imports fell 5.3%, the lowest since December 2012.

· January exports were valued at RM63.6b, a slight decrease from the year before (-0.6%, Dec: +2.7%). This was unexpectedly lower than the consensus estimate of a 3.0% increase. Our own estimate was for a 2.9% increase. Exports fell by an even larger amount on a MoM-basis (-6.0%), reversing almost all of the previous month’s gains (Dec: +6.2%). Adjusted for seasonal factors, exports declined 1.2% MoM.

· The poor performance of Malaysian exports was due to weak commodity prices and an unseasonal fall in exports to China. In commodity exports, Refined Petroleum Products fell by RM2.5b or 41.8% YoY, Palm Oil & Palm-based Products fell by RM825m or 15.3% and Natural Rubber by RM171m or 31.2%.

· By export destination, the value of goods shipped to China in January declined by RM1.9b or 22.7% YoY. Data from the Chinese government released last week showed February imports contracted further to 20.5% from 19.9% in January. Combined January-February Chinese imports as lower by 20.2%, suggesting the deterioration in Malaysian exports to China will continue into February. We expect to see similar but perhaps less drastic declines in Chinese imports and consequently Malaysian exports to China over the next several months on poor domestic demand in Asia’s largest economy. We note that the Chinese government last week lowered its 2015 GDP growth forecast to a slower and more reasonable pace of expansion of around 7%. China remains Malaysia’s largest trading partner but is now only the third largest export destination after Singapore and Japan.

· January imports were valued at RM54.6b after the largest YoY contraction since December 2012 (-5.3%, Dec: +4.2%). Consensus and our estimates expected imports to increase by 2.0% and 4.0% respectively on the low value of the ringgit against the US dollar, Chinese yuan and other currencies. Imports fell instead, led by a RM1.0b or 3.0% YoY decline in intermediate goods, which accounted for 60.6% of all imports. Imports of capital goods and consumption goods increased by 2.1% and 2.0% respectively.

· Comparing consecutive months, imports were significantly weaker in January after strong MoM growth the month before (-6.7%, Dec: +11.2%). All three categories of intermediate, capital and consumption goods saw sharp MoM decreases of 1.5%, 14.9% and 4.3% respectively. Seasonally adjusted, total imports fell by 2.1% MoM.

· Total trade during January was valued at RM118.2b (YoY: -2.8%, MoM: -6.3%), below the monthly average of RM120.8b for 2014 as both export and import activity slowed consistent with expectations of slower economic growth (our forecast: 5.1%, official: 4.5% - 5.5%).

· The trade surplus narrowed to RM9.0b from RM9.2b in December but was still well above the 2014 monthly average of RM6.9b and consensus estimates. Market polls were expecting a lower trade surplus of RM6.9b with a range between RM4.0b and RM8.9b. · Exports of commodities suffered steep declines by average unit value of 25.9% for Refined Petroleum Products, 44.0% for Crude Petroleum and 9.1% for Palm Oil & Palm-based Products with Liquefied Natural Gas largely unaffected. For Crude Petroleum, an 83% increase in export volume have more than compensated for low prices. However, export volumes for Refined Petroleum Products and Palm Oil & Palm-based Products fell by 21.5% and 13.3% respectively.

· Electronics & Electronics Products, which has a 30.8% share of exports, experienced what appears to be a temporary setback during January as the value of E&E exports fell RM1.5b or 6.6% from the previous month but is still as much as RM1.3b or 6.0% higher than a year ago. Weak global demand is likely to cap exports in this vital sector of the Malaysian economy for the next few months.

Outlook

· It is still too early to tell whether January’s performance would set the growth trajectory for the rest of the year. Nonetheless we have already factored in the weakness in external demand in our projection with a high proportion of it to occur in 1H15. We maintain our forecast of a 2015 current account balance of 3.5% of GDP on exports growth of 3.2%, which is a little over three percentage points below 6.4% achieved in 2014. We continue to watch for early signs of growth in the advanced economies mainly the U.S., Eurozone and Japan. Meanwhile, we expect growth in emerging markets in the region, led by China, to be relatively uneven. However, the current commodity fallout would favour major EM commodity-importing countries especially China, India, Indonesia and Taiwan.

· It is also too early to tell if we have been spared the worst of the global commodities rout. At this point, we expect global crude prices to gradually stabilise and remain above US$50/barrel for the rest of the year. Nonetheless, the trade balance could see further narrowing as low oil & gas prices show up on the current account over the next few months. A trade deficit is unlikely at this point as exports are sufficiently diversified. Furthermore, we expect the global economy to perform better in the 2H15. 

Source: Kenanga