Export growth in January disappointed even the most pessimistic of all estimates, contracting 2.8% YoY after growth of 1.4% YoY in the previous month. The market consensus was expecting a gain of 2.5% YoY. Accounting for most of the decline in exports was a sharp fall in the value of commodity exports (-31.0% YoY) which now makes up a 14.1% and declining share of total exports. Imports increased at a higher rate of 3.3% YoY in January from 2.7% YoY in December but less than expected by the market. Consumption imports continued to post double-digit growth while capital imports remained weak. As a result of shrinking exports and growing imports, the trade surplus for the first month of the year narrowed to RM5.4b from December’s RM8.2b (revised from RM8.0b). The weakness in exports and narrow trade balance is likely to be replicated in February. Thereafter, export growth should gradually recover to perform better this year compared to 2015. A global recovery in demand in 2H16 combined with the competitive advantage of a weak ringgit would support our export growth forecast of 4.3% in 2016.

• January exports contracted by 2.8% YoY, against consensus and house expectations of a 2.5% and 1.0% gain respectively. The decline compares with growth of 1.4% YoY in December and 6.3% in November.
• On a MoM basis, the total value of exports decreased by 9.4%. While it is not unusual to see MoM decreases in exports in January and February due to fewer working days, the decline in January was more than seen in the same month in past years. After adjustment for seasonal factors, the MoM change was a 7.4% contraction.
• Currency translation gains from a weak ringgit, which has powered much of the improvement in export growth in 2H15, had less of an influence in January despite ringgit depreciation. This was due to a base effect on the YoY comparison. The local currency was 17.5% YoY lower against the dollar in January compared to 18.7% YoY lower in December even as the published USDMYR rate averaged 4.3481 in January compared to 4.2811 in December.
• By category, Electrical & Electronics (E&E) exports were up 2.6% YoY in January while commodity exports were down by a huge 31.0% YoY. Commodity exports were affected by lower oil and natural gas prices on a YoY basis and lower palm oil prices on a MoM basis. Brent crude oil averaged US$31.93 per barrel in January, the lowest in more than a decade.
• Worldwide semiconductor shipments as reported by Semiconductor Industry Association fell 5.8% YoY in January, the seventh consecutive month of contraction. The Malaysian E&E sector has however managed to maintain enviable growth through a combination of a favourable exchange rate and an intrinsic position in the global supply chain. E&E exports made up a 36.1% share of total exports in January, but this might not hold up in the coming months on the risk of a larger downtrend in the global market for E&E products.
• Commodities exports took a big hit in January, declining 31.0% YoY, which resulted in a share of total exports of just 14.1%, the smallest in over nine years. This compares with a December decline of 21.8% YoY and November fall of 8.6% YoY.
• January imports were up 3.3% YoY in January, less than expected by the consensus and house estimates (4.9% and 4.1% respectively). The rate of increase was higher than in December, which saw a 2.7% YoY increase in imports (revised from 3.2%).
• On a MoM basis, imports decreased by 6.0% in January after an increase of 4.6% in November. After seasonal adjustment the MoM change was a 3.2% contraction.
• The growth in consumption imports remained stubbornly high at 33.1% in January, although the rate of expansion is less than the 37.4% rate in December (revised from 37.8% YoY). This made it the tenth consecutive month of double-digit growth for the category. Imports of finished goods have been the most susceptible to ringgit depreciation and as a result, consumption imports now account for a 10.3% share of total exports, compared to just 8.0% in January 2015 and 7.5% in January 2014.
• Imports of intermediate goods were up 5.1% YoY in January compared to 5.3% in December (revised from 5.9%). The YoY increase in January is encouraging as it is compares with an average decrease of 2.3% in 2015.
• Imports of capital goods were down 13.2% YoY, the second month in a row where imports in this category declined (December: -15.5% YoY, revised from -15.2%)
• The trade surplus for January of RM5.4b was considerably smaller than in previous months (Dec: RM8.2b, revised from RM8.0b) owing to quicker growth in imports compared to exports.
• Total trade in January was almost unchanged on an annual basis, up just 0.1% YoY compared to 2.0% YoY in December (revised from 2.2%).
• By major exports destinations shipments to EU was up 6.4% (10.6% share of total exports) and to US gained 7.9% (10.2% share). Meanwhile exports to Japan fell sharply by 26.0% (8.9% share). Export to China rebounded by 1.0% (share: 10.5% share). Exports to ASEAN rose 4.8% (29.7% share) mainly supported by higher exports to Singapore (+3.5%; 14.6% share), to Thailand (+6.0%; 6.5% share), and to the Philippines (+19.1%; 1.8% share).

OUTLOOK

• January exhibited a seasonal weakness in export growth, which is expected to extend into February due to the seasonal effect of the Lunar New Year holiday.
• Currency translation gains from a weaker local currency will continue to boost ringgit-denominated receipts in 1H16.
• 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 taper off further in December and 1Q16.
• While growth will be modest at best in the 1H16 even though the full effect of the commodities rout has mostly passed due to growing downside risk to global growth we expect demand recovery would start to emerge in the 2H16. Coupled with a competitive advantage of a weak ringgit and to a lesser extent the low base effect we maintain our export growth forecast of 4.3% in 2016 (2015: +1.9%).

Source: Kenanga Research - 7 Mar 2016