OVERVIEW

Total export receipts fell by 5.3% YoY in July, the biggest decrease in 15 months. The sharp decline was opposite to market expectations of a moderate increase of 1.9% YoY. For the same month, imports declined by 4.8% YoY, far more than market expectations. The trade balance, already weakened by rising imports in the previous two months, narrowed to RM1.9b, the smallest in 21 months. Exports tumbled in July alongside a rare 6.0% YoY fall in electrical & electronics (E&E) exports on reduced global appetite for semiconductor and related products. Commodity exports performed better in July, increasing 7.4% MoM but on a YoY basis remained in negative growth territory (-13.9% YoY). By import category, capital goods imports increased by a stunning 46.6% YoY, accounting for a 19.0% share of total imports. Intermediate imports fell by 11.8% YoY and consumption imports was down by 6.8% YoY. Looking forward, current trends suggest modest export growth in the coming months. The second half or 2H16 will prove challenging for export growth, due to a higher base for comparison and thus maintain our full-year 2016 export growth forecast of 1.9%, which we reduced last month from 2.9% previously.

July exports declined by 5.3% YoY, in the opposite direction to the consensus estimate of a 1.9% YoY increase and the house estimate of a 1.0% increase. The unexpected result compares with the June increase of 3.4% YoY and May decrease of 0.8% YoY.

On a MoM basis, the total value of exports fell by 9.9%. After adjustment for seasonal factors, the MoM change in exports in July was a 10.0% decrease.

During 7M16 or the first seven months of the year to July, exports expanded just 0.3% YoY on average, which compares well to the 2.2% YoY decline in the same period last year but is below house and market expectations.

The ringgit strengthened in July from the previous month. The published USDMYR rate averaged 4.0195, with the local currency 5.4% lower against the US dollar compared to 8.5% YoY lower in June and 11.0% lower in May.

By category, E&E exports in July were down 6.0% YoY compared to the 4.9% increase in June, performing poorly due to reduced global appetite for semiconductor and related products. Consequently, the share of electrical & electronics (E&E) exports to total exports declined slightly to of 36.3%.

Commodity exports in July were down 13.9% YoY (June: 20.1% YoY) as crude petroleum and natural gas export prices continue to be affected by low prices in international markets. On a MoM basis, July was the third consecutive month that commodity exports increased (7.4% MoM).

July imports unexpectedly fell by 4.8% YoY, after an 8.3% YoY increase in June. The decrease was larger than declines that consensus and house estimates were expecting of 1.5% and by 2.0% respectively. On a MoM basis, imports decreased by 4.9%. After seasonal adjustment the MoM change was a 9.2% contraction.

Imports of capital goods increased by a stunning 46.6% YoY (June: 12.8%). Consequently, its share of total imports grew to 19.0% from 13.4% in the previous month. Average growth was lifted to 14.6% YoY in 7M16, close to the 7M15 average of 14.0% YoY.

The growth in consumption imports not only slowed significantly but moved into contraction territory after 14 months of double-digit growth fuelled by ringgit depreciation ended May. July consumption imports were down by 6.8% YoY.

Imports of intermediate goods in July fell by 11.8% YoY after they rose by 5.7% YoY in June. The share of intermediate goods imports to total imports fell to 55.4%, small compared to over 60.0% in 2012.

The trade surplus for July narrowed to RM1.9b, the lowest in 21 months. However the 7M16 trade surplus was only slightly affected and remained a healthy RM43.7b, only slightly below RM44.1b in the same period last year.

Total trade in July fell by 5.1% YoY as both exports and imports suffered. For comparison, total trade was up 5.7% YoY in June

By major export destination, shipments China and Japan continue to suffer steep declines; down 22.3% YoY to China (12.2% share) and down 14.5% to Japan (8.3% share). Shipments to the United States were up 4.1% YoY (10.6% share) and to ASEAN up 4.7% YoY (30.3% share)

OUTLOOK

Continued weakness in global demand and a high-base effect present big challenges for export growth in 2H16. As the modest recovery expected in 2Q16 did not materialize, it appears there is little optimism for an uptrend in shipments of Malaysian goods. Put together with the disappointing export performance in 1H16, we anticipate only modest export growth in 2016, similar to 2015.

E&E exports were severely impacted in July and could continue to remain weak over the coming months as the global market for E&E products continues to be depressed.

We maintain our full-year 2016 export growth forecast to 1.9%, which we reduced last month from 2.9% previously.

Source: Kenanga Research - 8 Sep 2016