• February exports exceeded expectations, rising sharply by 26.5% (Jan: 13.6%), exceeding Bloomberg’s median consensus and the house estimate of 15.1% and 20.3% respectively.
• E&E tops contribution to export growth. Growth in electrical & electronics (E&E) exports jumped by 22.4% YoY (Jan: 11.4%) with palm oil and palm oil products providing auxiliary support to export growth.
• Wider trade surplus despite 27.7% jump in imports. Imports were likewise higher relative to January (+16.1%), largely from a spike in intermediate goods imports (39.9% v. Jan: 10.5%). This brings February’s trade surplus substantially wider at RM8.7b (Jan: RM4.7b).
• External demand on the upside. Higher export figures, and indeed, higher total trade which grew 27.1% (Jan: 14.8%) reinforces the view that external demand may help provide further support to 1Q17 growth notwithstanding cost pressures brought about by supply side pressures and the ringgit depreciation.

Exports surprise surge. Exports surprising 26.5% surge in February (January: 13.6%), exceeded Bloomberg’s median consensus and house estimate of 15.1% (ranging from 12.7-22.7%) and 20.3% respectively. February’s YoY spike was also partially amplified by low base effect during February 2016 and is the highest YoY growth rate since March 2010 where exports grew 39.8%). February’s increase also represents the fourth consecutive month of YoY growth acceleration since November. On a month-onmonth basis, exports rose 2.1% (Jan: -7.0%), defying the seasonal downturn typical of February. After seasonal adjustments, export growth stood at a higher 12.0% MoM (Jan: 0.0%).

E&E driving exports. Thanks to the surge in global demand for the latest upgrades in gadgets and consumer electronics, exports of E&E, which accounts for 34.2% of total exports, re-emerged as the key contributor of export growth. E&E exports jumped 22.4% (Jan: 11.4%), contributing to 7.9 ppt (percentage points) of total export growth. On a MoM basis, E&E exports fell 1.4%, likely from seasonal factors.

Palm oil exports pick up. Palm oil and palm oil products were also notable as the prominent contributor to headline exports growth. Exports of palm oil and palm oil products jumped by a whopping 62.8% YoY and contributing to 4.7 ppt of growth. Of this, palm oil exports contributed 2.7 ppt to headline exports growth in February on the back of a 61.1% YoY surge as well as a 41.5% increase in average unit value and 13.8% higher export volume. Growth of mineral fuels exports, meanwhile, slowed down but retained a double digit growth of 33.6% YoY (Jan: 45.0%), contributing to 4.9 ppt of export growth. Among the mineral fuel categories, export of crude petroleum grew 50.4% while exports of petroleum products rose by a slower 29.8% (Jan: 48.1% and 85.8% respectively).

Imports accelerate. Imports likewise picked up pace in YoY terms, expanding sharply by 27.7% (Jan: 16.1%), above Bloomberg’s median consensus estimate of 19.5% (ranging from 13.5-28.5%) though it was below the house estimates of 28.5%. Imports also grew at the fastest rate since June 2010 where it grew 29.9%. Similar to YoY export growth, low-base effects in February 2016 also helped amplify imports’ YoY growth. Imports fell 3.8% MoM (Jan: -2.0%) largely from seasonal factors. Seasonally adjusted, imports growth expanded 11.4% MoM (Jan: +2.8%)

Intermediate and capital imports growth driver. As in January, rising imports were largely attributable to higher intermediate and capital imports while imports of consumption growth continued to decline, albeit slightly. Intermediate imports (comprising 61.1% of total imports) rose 39.9% YoY (Jan: 10.5%) while imports of capital goods (comprising 11.6% of total imports) rose by a more subdued 5.6% (Jan: 34.9%). Similar to January, imports of consumption goods contracted though by a slower 0.6% (Jan: -1.6%).

Trade surplus higher on exports uptick. The sharper acceleration of exports relative to imports meant that the trade surplus likewise spiked to RM8.7b from RM4.7b, breaking the three consecutive months of narrowing surplus observed from November-January. Total trade likewise increased in YoY terms for the fourth consecutive month, rising 27.1%, its fastest YoY expansion since March 2010.

Ringgit upside on weaker dollar. In February, the ringgit gained slightly against the greenback and the Euro at MYR4.4460/USD and MYR4.7305/EUR respectively (Jan: MYR4.4596/USD and MYR4.7389/EUR). However, it was weaker against a broad range of currencies including the British pound, the Australian dollar and the Japanese yen. Closer to home, the ringgit was likewise weaker against the Singapore dollar and the Thai Baht. Meanwhile, the ringgit edged up against the dollar in March at MYR4.436/USD.

OUTLOOK

Competitive pressure in the region. As with our previous report, we remain cautious on the relative weakness of the ringgit. While the ringgit continued to see some upside against the US dollar, the depreciation of the ringgit as well as comparatively higher inflation in producer price relative to its regional peers suggests that there cost pressures from imported inputs (from higher intermediate and capital imports) may translate into higher output prices, hence reducing Malaysia’s competitive edge. This was supported by Markit PMI’s findings that Malaysian manufacturers are pursuing margin protection despite underwhelming demand. Based on February’s numbers, Malaysia’s producer price index (PPI) spiked 10.8%, higher than that of Philippines (2.2%), Thailand (3.9%) and Singapore (7.9%) and higher than Indonesia’s 3.3% quarterly PPI growth as at 4Q16.

Stronger exports offer upside bias to growth. However, ultimately, we believe that improved external demand is likely to outweigh concerns of Malaysia’s cost pressures. March trade number reinforces our upward bias on external demand. Indeed, we believe that pending further inflow of economic data, net exports can provide a more substantial support for Malaysia’s growth momentum. We are also somewhat heartened that growth in total trade defied fears of anti-trade sentiments. Overall, we see some room for improvement in our conservative 4.4% GDP growth estimate for 1Q17 based on our base case scenario of a 0.0% net export contribution for 1Q17’s GDP. However, the relatively poor trade balance in January implies that further confirmation of improved external demand may be required to tip the scales towards upgrading our growth forecast.

Source: Kenanga Research - 6 Apr 2017