OVERVIEW

• Total export receipts for October fell 8.6% YoY, the steepest decline in 1.5-year, below consensus’ estimates of a 5.8% contraction. Similarly, imports declined 6.6% YoY against consensus estimate of a 0.2% fall. As a result, the trade balance widened to RM9.8b in October.
• The soft exports performance was largely due to a high base effect and weak commodities exports. Commodity exports plunged 21.0% YoY, led by a fall in oil & gas exports. Meanwhile, electrical and electronics (E&E) exports in October grew at a moderate pace of 1.2% YoY.
• By import category, imports of capital goods fell 2.0% YoY in October (September: -5.4%), while consumption imports shrank 8.0% YoY. Imports of intermediate goods declined 8.9% YoY after a 6.2% growth in September.
• We expect exports to continue its downside bias in the remaining months of the year mainly due to the high base effect from last year. Weakness in commodities would further add to the downward pressure on exports. The weak ringgit, however, would partly mitigate this in the coming months.
• Judging by the weak October exports performance, we expect similar negative outcome would beset the Industrial Production Index (IPI) in October.
• We believe Malaysia’s terms of trade to improve next year on the back of better global growth prospect as demand recovery picks up momentum.

Exports contracted 8.6% YoY in October (Sept: -3.0%), far below consensus and house estimates of a 5.8% decline and 4.8% decline respectively. On a monthly basis, exports rose 1.7% but fell 1.1% after seasonal adjustment. Year-todate, exports declined 0.6% compared to a 1.1% growth in the previous year.

The published USDMYR rate in October averaged 4.1776 compared with 4.2681 in the corresponding month of last year. This implies a certain degree of reduced price competitiveness for the exporters. In U.S. dollar term, exports fell at a softer pace of 6.7% YoY for the month.

By category, E&E exports in October improved to 1.2% YoY from 0.5% in September. On a monthly basis, however, E&E exports growth slowed for the second month to 1.3% in October from 1.5% in September. The E&E category is most likely to stay on moderating trend in 4Q16 following the pre-festivities peak in demand in the previous quarter. Meanwhile, the share of E&E exports stayed stable at 38.4% (September: 38.6%).

Commodity exports suffered a sharper decline of 21.0% YoY in October (September: -13.8%). This is largely due to the sharp fall in exports receipts of crude petroleum and liquefied natural gas by 27.9% YoY and 40.2% YoY respectively, as the average unit value and exports volume of both the commodities fell in October.

October imports decreased at a higher rate of 6.6% YoY from a 0.1% decline in September. The weak imports performance compares with the consensus and house estimates of a smaller 0.2% decline in October. On a monthly basis, imports contracted 1.7% after growing 2.4% in September. In seasonally adjusted terms, imports fell 5.8% MoM.

Imports of capital goods declined at a softer pace of 2.0% YoY from -5.4% in September. Adjusting for the currency translation effect, capital goods actually registered a 0.1% yearly growth in USD term. On a MoM basis, it rose to 6.5% from 4.0% in September. The year-to-date growth was 3.6% YoY compared with 1.0% last year, likely a reflection of a more robust infrastructure investment for the year.

Imports of consumption goods declined 8.0% YoY after a 4.8% drop in September. On a monthly basis, it was down 1.2% after a 2.4% growth in September. The share of consumption goods imports remained steady at 9.0%.

Imports of intermediate goods shrank 8.9% YoY following two consecutive months of expansion. On a monthly basis, it fell 3.0% following a 1.0% growth in September. Its share to total imports moderated to 56.7% in October from 57.5% in September.

The trade surplus for October widened to a healthy level of RM9.8b from RM7.6b in September. The year-to-date trade surplus was RM69.5b and lower than the RM73.0b surplus recorded in the corresponding period of last year. Total trade fell at a steeper rate of 7.7% YoY after a 1.6% decline in September.

By major export destination, shipments to Japan declined 29.1% YoY in October (7.1% share), to the United States was down 3.5% YoY (10.2% share) and to ASEAN was down 2.6% YoY (28.9% share). On a positive note, exports to China rose 3.4% YoY (13.7% share).

OUTLOOK

Gloomy outlook for the year. We expect exports to continue its downside bias in the remaining months of the year mainly due to the high base effect from last year. Furthermore, weakness in commodities is likely to provide further downward pressure on the exports. Malaysia palm oil exports in November would likely take a hit from a fall in India’s demand after the country’s demonetization move disrupted its economic activities. However, the steep depreciation of the ringgit in November and the resulted revaluation effects will help underpin the overall exports growth in the coming months. The USDMYR rate averaged around 4.34 in November compared to 4.18 in October.

Downside risk for Industrial Production. Judging by the October exports performance, we believe the upcoming October Industrial Production Index (IPI) released later in the week may reflect similar weakening bias. The contraction in intermediate goods imports and weak exports in October could signal a reduced demand for manufactured goods from abroad going forward.

Brighter outlook next year. Barring unforeseen circumstances, we believe Malaysia’s terms of trade may experience a better prospect next year as demand recovery picks up momentum. The U.S. and European economies have thus shown some early signs of growth recovery. Meanwhile, we remain hopeful for the Trans Pacific Partnership Agreement trade agreement (TPPA) to be implemented despite a Trump presidency next year. However, Malaysia is also ready to engage in other forms of trade agreements such as the China-led Regional Comprehensive Economic Partnership (RCEP) and bilateral trade agreements with individual countries should the TPPA encounter a hiccup. We thus remain optimistic for an improved trade outlook for Malaysia next year.

Source: Kenanga Research - 8 Dec 2016