Exports extended a rebound for the third month in August with a 4.1% YoY increase in total receipts. As in July, exports performed better than expected on currency translation gains from a weaker ringgit, boosting the value of electrical & electronic (E&E) exports. Imports fell sharply, by 6.1% YoY on weaker demand for intermediate and capital goods, which led to a recovery in the trade balance to RM10.2b from a nine-month low of RM2.4b in July. Total trade was down 0.8% YoY on the slump in imports. On continued weakness in the ringgit, we expect trade and the current account balance to remain comfortably in surplus this year. In the coming months, trade numbers are expected to continue to improve on a low-base effect. Export growth will however face some difficulty in overcoming the 1.4% year-to-date decline, therefore we cut our full-year growth forecast from 2.2% to a more realistic 1.2%.

• August exports performed better than expectations, logging a 4.1% YoY (July: 3.5%) increase compared to consensus and house estimates for a 1.3% and 2.2% increase respectively. This was the third month of a rebound fuelled by rapid ringgit depreciation, which boosted the value of mainstay electronic & electrical (E&E) exports. On a MoM basis, exports increased by 5.2% and in seasonally adjusted terms was up 2.3%.
• In US dollar terms, exports fell 18.5% YoY (July: 13.3%), the eleventh consecutive month of negative growth. Currency translation gains to a significantly weaker ringgit more than made up for the decline. The implied USDMYR rate in August was 4.0601 compared to 3.1784 for the same month in 2014, equivalent to a 21.7% depreciation in the ringgit relative to the US dollar.
• Persistently low prices for oil & gas exports due to the commodities rout and a weaker ringgit meant E&E exports continue to increase their share of total exports to a more than four-year high of 37.7%. Export receipts for the sector rose 16.7% YoY (July: 12.1%) despite a downtrend in global semiconductor shipments.

• Oil & gas exports by value fell 34.1% YoY but on a MoM basis was up 4.5%. Given that the average unit prices of crude petroleum started to fall in September 2014 and that of LNG five months later, the YoY decline in oil & gas exports should begin to taper off from next month onwards, giving a boost to export growth numbers.
• August imports fell by 6.1% YoY after a 5.9% increase in July. Both consensus and house estimates were expecting imports to increase 1.7% YoY. The decline was due to a steep fall in intermediate and capital goods imports, which presents a worry for domestic manufacturing output.
• Intermediate and capital goods imports fell by 13.7%
• YoY and 13.9% respectively. Together they account for 70.8% of all imports in August, a share that has been on a decline as consumption goods imports increase in value. In 2014, the share of intermediate and capital goods imports combined averaged 73.8%.
• Consumption goods logged a fifth consecutive month of double-digit YoY growth but slowed from the previous month. After growing 13.7% YoY in August (July: 25.7%), consumption goods now accounts for an 8.5% share of total imports compared to the long-run average of 7.2% of total imports.
• Rapid increase in the value of consumption exports has led to imported inflation. However, imported price pressure remains mild as many of Malaysia’s main trading partners are facing deflation and global food prices remain low. The import price index was up 0.8% YoY in August while local production prices fell 8.5%.
• The trade surplus for August recovered to RM10.2b from a nine-month low of RM2.4b in July as the monthly increase in the value of imports outpaced that of exports, mostly due to depreciation of the local currency. Total trade was down 0.8% YoY after a 4.7% increase in July due to the slump in imports.

Outlook

• Export gains in 2H15 thus far indicate an end to the deterioration in export growth seen in 1H15, mostly due to a weaker local currency boosting ringgit-denominated receipts. We expect export growth in 2H15 to make up for the 3.1% YoY decline in 1H15, resulting in a small full-year gain.
• Despite weak external demand, Malaysian exporters have better pricing power compared to other regional economies from an undervalued ringgit. This is positive for export growth.
• Weak export numbers in 3Q14 and an even weaker 4Q14 would provide a low base for YoY comparisons with 3Q15 and 4Q15. As average unit prices of crude petroleum started to fall in September 2014 and that of LNG five months later, expect to see the commodities rout have less of an effect on trade data from next month onwards.
• 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 monthly trade data.
• Nevertheless, given the difficulty in overcoming the 1.4% decline in exports year to date we have decided to cut our full-year forecast from 2.2% to a more realistic 1.2%. Our forecast for the current account to narrow to 2.3% of GNI (2.2% of GDP) in 2015 from 4.4% of GNI (4.3% of GDP) in 2014 stays.

Source: Kenanga Research - 8 Oct 2015