OVERVIEW

Total export receipts for May again undershot market expectations, declining 0.9% YoY compared to the consensus estimate of 2.0% YoY. During the same month, imports rose by 3.1% YoY, going against market expectations for imports to fall. The result of this was a narrowing in the trade balance to RM3.3b, the lowest in 19 months and a sign of further weakening of the important external sector. The unexpected decline in exports in May was largely due to the falling value of crude petroleum and liquefied natural gas (LNG) shipments. Commodity exports were down 20.2% YoY and accounted for a severely reduced 12.4% of total exports, down from over 20.0% of total exports before the mid-2014 commodity price crash. Electrical & electronics (E&E) exports, however, held up well with a 3.2% YoY increase in May despite reduced global appetite for semiconductor and related products. Consequently the share of electrical & electronics (E&E) exports to total exports increased to a five-month high of 36.3%. By import category, capital goods imports increased 17.2% YoY in May, but for 5M16 still remained down 4.6% YoY. The fall in intermediate imports eased to a smaller decline of 0.2% YoY while consumption imports grew at a slower rate of 13.6% YoY. Looking forward, current trends suggest modest export growth in the coming months.. Exports grew just 0.8% YoY in 5M16 and at the current growth trajectory, exports will face a challenging 2H16, due to a higher base for comparison. We maintain our full-year 2016 export growth forecast of 2.9% but note that downside risks have been increasing.

May exports fell by 0.9% YoY, below the consensus estimate of a 2.0% increase and the house estimate of a 3.1% gain. The poor result compares with the April increase of 1.6% YoY and the March gain of 0.2% YoY

On a MoM basis, the total value of exports fell by 2.3%. Between January and May this year, only the Lunar New Year month of February saw a MoM increase in exports of 17.4%. All other months experienced a MoM decrease. After adjustment for seasonal factors, the MoM change was a 1.6% increase.

During 5M16 or the five-month period up to May this year, exports expanded by 0.8% YoY on average, which compares well with the 4.6% YoY decline in the period last year but is well below market expectations.

The ringgit remained weak in May compared to the same month a year ago. The published USDMYR rate averaged 4.0482, with the local currency now 11.0% YoY lower against the US dollar compared to 6.9% YoY lower in April and 9.7% YoY lower in March.

By category, Electrical & Electronics (E&E) exports in May were up 3.2% YoY (April: 2.1%), holding up well despite reduced global appetite for semiconductor and related products. Consequently, the share of electrical & electronics (E&E) exports to total exports increased to a five-month high of 36.3%.

Commodity exports in May were down 20.2% YoY (April: 17.0% YoY) and crude petroleum and natural gas export prices continue to be affected by low prices in international markets (see Graph 5), although the average unit value of crude petroleum is increasing with higher international oil prices while natural gas prices continue to fall with a five-month lag to Brent crude. As of May, commodity exports accounted for a severely reduced 12.4% of total exports, down from over 20.0% of total exports before the mid-2014 commodity price crash.

May imports were unexpectedly up 3.1% YoY, after a fall of 2.3% YoY in April. Consensus and house estimates were expecting imports to decline by 2.9% and 3.5% respectively. On a MoM basis, imports increased by 8.4%. After seasonal adjustment the MoM change was a 6.7% expansion.

The growth in consumption imports has continued to slow to 13.6% YoY in May from 15.4% YoY in April (restated from 15.3%). The category grew at double-digit rates for the fourteenth consecutive month in large part due to ringgit depreciation.

Imports of intermediate goods in May eased to a smaller decline of 0.2% YoY (April: -6.8% YoY, restated from -6.7%). However the share of intermediate goods imports to total imports fell to 55.8% of total imports from 56.8% in the previous month. Imports of capital goods increased 17.2% YoY in May, but for 5M16 still remained down by 4.6% YoY.

The trade surplus for May narrowed to a 19-month low of RM3.3b. However, due to large trade surpluses in the previous few months, the 5M16 trade surplus was a healthy RM36.3b, higher than RM33.7b in the same period last year.

Total trade in May rose 1.0% YoY after falling 0.2% YoY in April. Year to date, total trade is up 0.4% YoY compared to a contraction of 3.8% in the same period a year ago.

By major export destination, shipments to the EU was up 0.9% YoY (10.3% share of total exports) and up 18.7% YoY to the United States (10.7% share). Meanwhile, exports to Japan fell 7.3% YoY (7.1% share). Exports to ASEAN fell 0.2% YoY (30.1% share).

OUTLOOK

Export performance in the year to date has been disappointing, and the modest recovery expected in 2Q16 has not materialized. Additionally, there is little optimism for an uptrend in shipments of Malaysian goods as it would depend on a firm recovery of global demand which is unlikely as global economic prospects are swayed to the downside.

E&E exports which made up a sizable 36.3% share of total exports in May will continue to experience modest growth over the coming months as the sector has proven to be resilient to the downtrend in the global market for E&E products.

LNG prices, which accounts for a sizeable chunk of the annual trade balance, has fallen by about 60% from early-2014 and appears unlikely to recover to previous highs due to regional oversupply.

Expect crude oil export prices to increase slightly in June in line with higher international prices at the US$50 a barrel level (Brent). However, natural gas export prices have not yet bottomed out and will find a floor in June as natural gas prices often lag crude oil prices by about five months. Subsequently the recovery in LNG prices is expected to be modest.

Looking forward, current trends suggest modest export growth in the coming months. Exports grew just 0.8% YoY in 5M16 despite a low base for comparison and at the current growth trajectory; exports will face a challenging 2H16, due to a higher base for comparison.

We maintain our full-year 2016 export growth forecast of 2.9% but note that downside risks have been increasing.

Source: Kenanga Research - 4 Jul 2016