OVERVIEW

• January exports expands but below expectation. January’s export growth expanded by 13.6% to RM70.2b December: 10.7%) but fell below consensus estimates of 15.0%. It was, however, roughly in line with the house estimate of 13.8%.
• Mineral fuels, E&E driving exports growth. The sharp increase in the exports of mineral fuels along with sustained E&E shipments supported January’s total exports growth. Exports of E&E expanded by 11.4% YoY (December: 9.0%) while the 45.2% surge in mineral exports (December: 27.2%) contributed 6.1 percentage points (ppt) of the headline export growth.
• Rising imports narrow trade surplus. Imports growth jumped 16.1% to RM65.5b above consensus estimates of 10.2% from rising intermediate and capital imports. This crimped the trade surplus to RM4.7b from RM8.7b previously.
• Ringgit’s weakness bearing against competitiveness. The weaker ringgit provided less-than-expected support to the trade surplus as import costs of capital and intermediate exports outweigh the gains on competitiveness from cheaper Malaysian exports.

Exports improve but below estimates. January’s exports grew by 13.6% (December: 10.7%) below consensus (Bloomberg) estimates of 15.0% though roughly within our estimates of 13.8%. On a month-on-month basis, exports fell to 7.0% (December: +3.7%), largely on seasonal factors. Seasonally adjusted, exports were unchanged from the previous month.

Exports of mineral fuel surges. Accounting for 17.1% of total exports, mineral fuels were a key ingredient of January’s export growth. Mineral fuel exports surged 45.2% YoY (December: +27.2%), contributing to 6.1 ppts of total export growth. This came about as refined petroleum exports surged 85.8% YoY and crude petroleum rose 48.1% YoY, though growth in these exports may be partially attributed to low base effect.

E&E exports sustained. Exports of electrical and electronic products (E&E) continued to play a major role in the overall export growth equation (35.4% of exports). E&E exports grew 11.4%, (December: 9.0%) contributing to 4.1 ppts of overall export growth. On a MoM basis, E&E exports fell 7.9% (December: +3.2%), likely from seasonal factors.

Imports rising. Imports rose at a faster rate of 16.1% YoY (December: 11.5%), above consensus (Bloomberg) estimates of 10.2% but was close to our 16.5% estimates. Imports fell by a marginal 2.0% MoM, again from seasonal factors. Seasonally adjusted, imports rose by a more modest 2.8%.

Higher intermediate and capital imports. Intermediate and capital imports picked up pace, expanding by 10.4% and 35.2% respectively (December: 9.8% and 12.5% respectively). Meanwhile, imports of consumption goods dropped 1.6% after a 1.7% increase in December.

Trade surplus narrows further. Faster expansion in imports, notwithstanding higher exports, meant that the trade surplus continued to narrow to RM4.7b for the third consecutive month (December: RM8.7b).

Mixed ringgit performance. The ringgit saw mixed performance against major currencies remaining weak overall. The ringgit averaged MYR4.4596/USD in January (December: MYR4.4615/USD) and likewise appreciated against the British pound, Indian rupee and the Hong Kong Dollar. However, it was weaker against the Euro, Canadian Dollar, Australian Dollar, Singaporean Dollar, and the Japanese Yen. The ringgit has continued to plateau in February at MYR4.440/USD.

OUTLOOK

External demand on the rise. We maintain our outlook of an upward bias on the overall strength of external demand with general recovery observed in the advanced and emerging market economies. This will provide some upside to Malaysia’s recovery momentum, relieving some pressure off domestic demand. This would support our slightly higher GDP growth projection of 4.5% this year (2016: 4.2%).

However, ringgit weakness a concern. While the relative weakness in the ringgit suggests some support for Malaysia’s external competitiveness, we are cautious given February PMI’s findings that the weak ringgit have resulted in higher input costs. This, in turn, bumped output costs at its fastest pace in the PMI survey’s four and a half year history, weighing against competitiveness.

Tempered optimism. Our optimism is further capped by continued policy risks by other economies, in particular, anti-trade sentiments. While US President Donald Trump has projected a softer tone during his address to the joint session of Congress, we remain cautious on further anti-trade sentiments arising from both the US and the rest of the world. Indeed, Trump’s rhetoric against the World Trade Organisation will continue to temper our optimism pending further clarity.

Source: Kenanga Research - 6 Mar 2017