OVERVIEW

• Export growth was higher than expected in December, expanding 10.7% YoY from 7.8% in November while imports continued to accelerate to 11.5% YoY from 11.2% previously. Though export growth was higher than consensus estimate of 9.4% it was a tad lower than house expectation of 10.8%. Trade balance narrowed to RM8.7b from RM9.0b.
• E&E and commodities exports are major growth drivers. Export growth were largely driven by sustained global IT demand as well as higher crude oil and crude palm oil prices which rose during December due to supply-side considerations.
• Though stronger, imports signals tappering. Import of capital, intermediate and consumption goods all expanded on YoY-basis in December albeit at a moderating pace.
• Ringgit weakness boost competitive edge. With continued weakness in the ringgit, though recovering somewhat, we see some continued support for Malaysia’s terms of trade, extending the cyclical uptrend at least for 1Q17. This will be further reinforced as global demand is expected to improve this year.

Above consensus expectation. December exports grew 10.7% in December from 7.8% in November and more importantly outpaced consensus’ estimate of 9.4% (Reuter’s poll). However, it was a tad lower than house estimate of 10.8%. On a month-on-month basis, exports grew slower at 3.7%, or 2.4% on a seasonally adjusted basis. December’s growth brings the 2016 full year export growth to 1.1% a touch lower than our forecast of 1.2% (2015: 1.6%).

Exports by sector. Primary growth drivers for exports include the electrical and electronic (E&E) sector, palm oil and palm-based products,and refined petroleum products, accounting for 35.8%, 8.5% and 6.5% of total exports respectively. E&E exports grew by a more modest 9.0% YoY (November 13.3%) though November’s E&E figures were somewhat influenced by low base effect. E&E exports grew 3.2% MoM compared to 1.6% MoM in November. More salient, however, has been the contribution of the commodities segment to December’s exports figures. Crude petroleum and palm oil exports grew 15.9% and 14.1% respectively in December, largely from increases in average unit prices. Average unit price of crude petroleum grew 14.3% while average unit prices of palm oil grew by a higher 36.1%. Indeed, export volumes of crude petroleum has been modest (1.4%) while palm oil exports have actually declined 16.2%. Higher crude oil prices is likely reflective of the initial impact of the OPEC’s announcement of production cuts for 1H17. Similarly, higher crude palm oil prices were driven by inventory drawdown and seasonal decline in palm oil production.

Stronger imports. December imports grew 11.5% YoY (November 11.2%). Imports outpaced both the house expectation of 9.2% and the consensus estimate of 9.0%. On a month-on-month basis, imports grew by 4.8% though it declined 2.3% on a seasonally adjusted basis. This brings the 2016 full year import growth to 1.9% from 0.4% in 2015.

But signs of tapering off. However, despite higher imports, there are nascent signs of imports plateauing. While capital, intermediate and consumption imports continued to grow, growth have moderated across all three categories with imports of capital, intermediate and consumption goods at 12.2%, 9.8% and 2.0% respectively from 13.1%, 11.3% and 5.4% respectively during the previous month.

Narrower trade surplus. Despite expansion in exports, higher growth in imports saw the trade surplus narrowing further, albeit still healthy, at RM8.7b from RM9.0b in November. This brings the full year trade balance to RM87.3b, down from RM91.6b in 2015 though still above RM82.5b in 2014.

Trade in the region. December’s trade numbers were consistent with nascent recovery trend present in the region. Earlier in January, Korea, Taiwan and Japan saw similarly strong growth in their respective December’s export numbers. Given the high interconnectivity between the Asian economies, this suggests that external demand may well be picking up. However, increasing policy uncertainties over trade, particularly from the US Trump administration, may stutter recovery in external demand.

Exchange rates. The depreciating ringgit may have provided some support to exports, though this may have likewise resulted in elevated import costs. The ringgit depreciated against a broad range of major currencies, averaging MYR4.4615/USD in December (November: MYR4.3349/USD). The ringgit also depreciated against the British Pound, Singapore Dollar, Australian Dollar and Thai Baht, though it saw modest appreciation against the Japanese Yen at MYR3.8488/100JPY (November: MYR4.0144/100JPY). While the ringgit has since plateaued somewhat, trading at an average of MYR4.4450/USD for January, we believe that the relative weakness of the ringgit will continue to be a factor in supporting Malaysia’s external competitiveness.

OUTLOOK

Stronger exports extends cyclical uptrend. With continued signs of strength observed in Malaysia’s regional partners, we are increasingly bullish on prospects of a stronger growth in 1Q17, inadvertently extending the cyclical uptrend. While higher US shale oil production threatens to cap further increases in crude oil prices from OPEC’s production cut, our initial assessment suggests that present price levels remain significantly above pre-December levels – we believe that this will help sustain the recovery momentum, especially from the commodities side. Furthermore, with December-February typically associated with lower crude palm oil production, we see crude palm oil prices to be likewise sustained and likely to normalize late 1Q17 through 2Q17.

Competitive edge. At the same time, with the ringgit remaining at relatively low levels, we expect Malaysia to see a bump in competitiveness, resulting not just in improved export figures but a slightly wider trade surplus moving forward. However, on our risk radar are the rise of anti-trade sentiments, exemplified by the collapse of the Trans-Pacific Partnership Agreement, rising trade disputes and the protectionist policies of US President Donald Trump.

Improved external sector an upside for 1Q17. Notwithstanding rising policy risks, we are cautiously optimistic of a sustained recovery in external demand. This, in turn, we expect would provide some support for the overall economy as domestic demand showed some signs of weaknesses from business activities and consumer spending. Hence, we forecast GDP growth in 1Q17 to edge up to 4.4% from an estimated 4.3% in the 4Q16.

Source: Kenanga Research - 10 Feb 2017