OVERVIEW

Total export receipts for August rebounded 1.5% YoY, beating market expectations of a 2.3% YoY decline. Similarly, imports rose 4.9% YoY against consensus’ median of -4.7%. As a result, trade balance widened to a healthy RM8.5b from RM1.9b in the preceding month. The upside surprise in exports was due to the strong rebound in electrical & electronics (E&E) and commodities exports. E&E exports in August jumped 18.8% MoM (July: -10.5%) as global demand for semiconductor increased. Commodity exports were up 5.8% MoM, supported by an increase in palm oil exports value. By import category, capital goods imports growth moderated sharply to 8.8% YoY from 46.6% in July. Meanwhile, intermediate imports rose by 6.1% YoY and consumption imports returned to a double-digit growth of 10.4% YoY in August. We expect overall exports growth to moderate in the months ahead, partly due to the cloudy prospects for commodities exports. In addition, the surging demand for E&E ahead of the year-end holiday seasons would likely peak in 3Q16 and start to taper off thereafter. We thus expect domestic exports to remain relatively subdued for the year. We maintain our full-year 2016 export growth forecast at 1.9%.

August exports performed sharply better than expected, registering a 1.5% YoY (July: -5.5%) increase compared to consensus and house estimates for a contraction of 2.3% and 3.9% respectively. On a monthly basis, exports surged 12.9%. In a similar fashion, exports rose a solid 9.0% MoM in seasonally adjusted terms. The year-to-date growth for exports was 0.9% YoY compared to -1.9% in the corresponding period a year ago.

The published average USDMYR rate in August was 4.0269 compared with 4.0601 in the corresponding month of last year. This is equivalent to a 0.82% YoY depreciation in the US dollar relative to the ringgit, which implied a slight reduction in price competitiveness for local exporters.

By category, E&E exports in August surprisingly rebounded 3.0% YoY after falling 5.9% in July. This is primarily due to rising global demand for electronics components and semiconductor ahead of the year-end holiday season. Consequently, the share E&E exports increased to a near six-year high of 38.2%.

Meanwhile, commodity exports extended its yearly contraction by falling 3.7% YoY in August (July: - 13.9%). The performance was mainly dragged down by a steep 37.3% decline in exports value of liquefied natural gas over the year. On a monthly basis, however, commodity exports rose 5.8%, supported by a rising palm oil exports.

August imports grew 4.9% YoY after a 4.7% YoY decline in July. It was higher than consensus and house estimates of 2.0% and 1.0% respectively. On a monthly basis, imports rose 1.9%. After seasonal adjustment, the imports grew at a much higher 7.2%.

Imports of capital goods moderated to 8.8% YoY after three consecutive months of double-digit growth. This is reflected in the 26.9% monthly decline. As a result, its share of total imports fell to 13.6% from 19.0% in the previous month. The yearto-date growth was 5.2% YoY compare with -3.6% in the corresponding month of last year.

Imports of consumption goods returned to double-digit growth (10.4%) after two months of weak performance. A relatively stronger ringgit compared to corresponding period of last year could underpin the recovery in consumption goods imports for the coming months.

Imports of intermediate goods rose 6.1% YoY in August after a sharp 11.8% fall in July. The recovery was in tandem with increasing global demand for semiconductor and electrical components ahead of year-end holiday seasons. The share of intermediate goods imports to total imports rose to 58.4% in August from 55.4% in the previous month.

The trade surplus for August widened to RM8.5b, the highest in four months as the rise in exports far outpaced imports. The year-to-date trade surplus was RM52.2b, larger than the RM51.3b surplus registered in the same period last year. Total trade was up 3.0% YoY after falling 5.1% in July.

By major export destination, shipments to Japan continue to experience a steep decline of 10.7% YoY in August (7.6% share). Shipments to the United States was up 5.2% YoY (10.3% share), to ASEAN was up 3.9% YoY (29.6% share), but to China was down 1.3% YoY (13.8% share)

OUTLOOK

We expect overall exports growth to moderate for the subsequent months of the year, partly due to the cloudy prospects for commodities exports. Palm oil exports volume are expected to trend lower post Chinese restocking activity and prices will likely stay weak amidst rising production. However, we believe the recent rebound in oil prices could help offset the weakness in other commodities and provide some support to the overall exports growth.

The surging demand for semiconductor and electrical components ahead of the year-end holiday seasons would likely peak in 3Q16 and start to taper off thereafter. This would raise a high bar for E&E exports to sustain its current month of strong exports performance in the months ahead.

To a certain extent, a relatively stronger ringgit in the coming months compared with last year would weaken the price competitiveness of local exporters. The ringgit suffered sharp depreciation against U.S. dollar from September to December last year with an average USDMYR rate of 4.29. Meanwhile, ringgit is expected to remain stable below USDMYR 4.20 for the remainder of the year. This could add additional challenges for a sustainable recovery in exports.

Global trades are likely to stay weak amidst sluggish global economic activities. In September, the World Trade Organization (WTO) cut its 2016 world trade volume growth forecast to 1.7% from an earlier estimate of 2.8% in April. As such, we expect domestic trade to remain subdued for the year. We maintain our full-year 2016 export growth forecast at 1.9%, which was downwardly revised in August.

Source: Kenanga Research - 10 Oct 2016