Exports extended a rebound for the second month in July with a 3.5% YoY increase in total receipts thanks to a double-digit improvement in the Electrical & Electronic (E&E) category helped by rapid ringgit depreciation. Exports growth bettered the consensus and house estimate for a 3.2% YoY gain. When compared in US dollar terms however, exports remain firmly in negative growth territory. Total trade was up a healthy 4.6% YoY but the trade balance suffered from a surprise increase in imports, in particular consumption and intermediate goods. The RM2.4b trade surplus was the smallest in nine months and well below the 1H15 monthly average of RM6.9b. Imports jumped 5.9% YoY against expectations for a 0.8% decrease. Going forward, trade numbers are expected to improve significantly on a low-base effect and better external conditions later in the year. Exports are expected to return to positive growth in 2H15 after a 3.1% YoY decline in 1H15. On continued weakness in the ringgit, we expect trade and the current account balance to remain in surplus this year. Our forecast for full-year 2015 export growth remains at 2.2% with a downside bias.

• July exports performed slightly better than expectations, building on a 5.0% YoY rebound in June with a 3.5% YoY gain. Consensus and house estimates were expecting a smaller 3.2% YoY increase. As in June, export numbers improved in July on double-digit growth in E&E exports and rapid depreciation of the local currency against the US dollar. On MoM-basis, exports contracted 1.6% while in seasonally adjusted terms, it fell 2.3%.
• While ringgit-denominated export numbers have begun to rebound after declining 3.1% in 1H15, in US dollar terms, exports continue to remain in negative growth territory. Total exports in US dollar terms was down 13.3% YoY in July, the tenth consecutive month of negative YoY growth. The divergence in growth trend is due to the rapid pace of deprecation in the local currency. The USDMYR rate as reported by the Department of Statistics rose to 3.8011 in July compared to 3.7391 in June and 3.1842 in July the year before.
• Persistently low prices for oil & gas exports due to the commodities rout meant E&E exports continue to increase their share of total exports in July to a four-year high of 36.5%. It jumped 12.1% YoY but fell 0.2% MoM.
• Oil & gas exports fell 35.9% YoY but on a MoM basis remained stable, down just 1.6%. Between June and July, exports of crude petroleum and refined petroleum declined but LNG exports increased to compensate.
• July imports grew 5.9% YoY, the fastest pace in nine-months. Consensus and house estimates were expecting a 0.8% and 1.1% YoY decrease respectively.
• Consumption goods led growth among the three major import categories, posting a fourth consecutive month of double-digit YoY growth. July consumption goods imports surged 25.7% YoY and now accounts for a significant share of 8.7% of total imports compared to the long-run average of 7.2% of total imports. The rapid increase in the value of consumption exports from ringgit depreciation has a direct effect on local prices, manifesting as imported inflation.
• Both intermediate goods and capital goods imports have returned to growth after three consecutive months of contraction, which is positive for industrial production. Intermediate goods imports, accounting for 60.3% total imports was up 5.7% YoY while capital goods imports was up 3.2% YoY. In seasonally adjusted terms, imports increased 4.5% MoM.
• The trade surplus in July narrowed to RM2.4b from RM8.0b in May as the monthly increase in the value of imports outpaced that of exports, mostly due to depreciation of the local currency. Total trade was up a healthy 4.6% YoY in July from 1.9% in June.

Outlook

• July trade data lends further support to expectation of an end to the deterioration in exports growth seen in 1H15, mostly on the basis that local currency depreciation boosts ringgit-denominated export numbers and that 2H14 represents a lower base for YoY comparisons.
• Going forward, we remain confident that demand for Malaysia’s manufactured goods should pick up in the coming months despite poor PMI data. This is based on the assumption that the US will lead growth among developed economies this year and eventually spur demand in other developed and EM markets. Thus, exports are expected to return to growth in 2H15 after a 3.1% YoY decline in 1H15.
• On continued weakness in the ringgit, we expect trade and current account balance to remain a surplus this year albeit a smaller one. A much dreaded trade deficit remains unlikely at this stage given that the full extent of the decline in oil & gas prices has been fully reflected in the data. Our forecast for full-year 2015 export growth remains at 2.2% with a downside bias.

Source: Kenanga Research - 7 Sep 2015