OVERVIEW

• Export growth momentum sustained. Exports grew by a slightly lower 20.6% (Mar: 24.1%), smack on Bloomberg’s median consensus estimate though it was slightly higher than the house estimates of 19.8%. Export growth was sustained by continued E&E upside as palm oil segment supplemented exports.
• Import moderates sharply. Imports growth moderates sharply to 24.7% (Mar: 39.4%), falling below Bloomberg’s median consensus estimates of 31.3%. The sharper moderation in imports helped widen the trade balance to RM8.8b (Mar: RM5.4b), slightly higher than February’s RM8.7b.
• Sustained external trade supportive of growth. The sustained, albeit slightly lower, exports lend further credence to the idea that the external sector may provide further support to growth. While we believe that E&E export growth may be dialled down as the technological upgrade cycle peaked, improved outlook in the global economy will help sustain real growth.
• Ringgit strength to temper import growth. On the ringgit strengthening, we believe that we may see some measure of alleviation of import cost pressures in the medium term as the pass-through effect of cheaper imports continue. This will provide some improvement in the balance of trade moving forward. Our preliminary projection places the ringgit at MYR4.1-4.3/USD on improving fundamentals.

Exports remain strong. Exports retained a double-digit growth of 20.6%, albeit weaker than March’s 24.1% growth. April’s exports were spot on the Bloomberg’s median consensus estimate (ranging from 18.2-28.0%), though it was slightly higher than the house estimates of 19.8%. April’s figures extend the export YoY growth streak to six consecutive months, starting November 2016. On a MoM basis, exports fell 10.5% (Mar: +15.1%), falling back below the RM80.0b mark which it breached in March. After seasonal adjustment, exports contracted by a more modest 3.9% MoM (Mar: -1.0%).

E&E continuously sustain growth. The robust electrical and electronics (E&E) segment, accounting for 35.5% of exports, helped sustain the strong headline export growth. E&E exports grew by 22.2% (Mar: 21.3%), contributing to 7.8 ppt to export growth. However, similar to headline exports, E&E exports declined by 10.4% MoM, in line with seasonal effects typical of April.

Support from palm oil as mineral fuels mixed growth.

The palm oil segment supplemented headline exports growth, expanding 24.1% (Mar: 25.3%) and adding a modest 1.9 ppt to growth (Mar: 2.0 ppt). Improvements in palm oil are observed in both average unit value and export volume. However, exports of mineral fuels were a mixed bag with crude petroleum seeing a 65.7% increase (Mar: 74.1%) while the export of refined petroleum products contracted 15.8% (Mar: 32.7%) due to the decrease in export volume despite higher average unit value.

Imports take a breather. Imports grew by a slower 24.7% after hitting an 84-month high of 39.4% in March, below both the consensus and house estimates of 31.3% (ranging from 23.2-38.0%) and 32.2% respectively. However, despite the contraction in imports, its YoY growth remains elevated relative to its historical data. In MoM terms, imports declined by a sharp 15.6% (Mar: +22.5%). After seasonal adjustment, the fall in imports remained double-digit at -12.5% (Mar: +4.0%).

Imports gain remain broad based. As with the previous month, the expansion in imports was largely broad-based with imports of intermediate goods at the helm. Intermediate imports YoY growth remained strong at 29.2% but slower than March’s 36.3%, adding 16.6 ppt to headline import growth. This was fuelled by a mixture of intermediate imports of processed industrial supplies, primary lubricants and imports of accessories and parts of transportation equipment (ex. Transport Equipment), which accounted for a combined 14.8 ppt to import growth. Import of capital and consumption goods, however, grew at a sharply lower pace at 14.8% and 1.0% respectively (Mar: 82.4% and 14.1% respectively), albeit avoiding a contraction.

Trade surplus rebounds to February levels. After a sharp deterioration in March, trade surplus widened again to RM8.8b (Mar: RM5.4b) as the sharp deceleration in imports exceeded that of exports. April’s surplus slightly outpaced February’s RM8.7b surplus and effectively the highest for the year thus far. Despite the deceleration in export and import growth, total trade remained elevated at RM139.2b (Mar: RM159.8b), representing a 22.5% increase in total trade (Mar: 31.0%).

Ringgit continues to advance. The ringgit continued to see broad advances against a range of major currencies during April. The ringgit appreciated against the greenback at MYR4.4072/USD (Mar: MYR4.4393/USD) while also advancing against the Euro, the Loonie, the Aussie Dollar and the Singaporean Dollar though it depreciated somewhat against the Pound (likely from the pound rally following Theresa May’s announcement of a June General Elections). Regionally, the ringgit was weaker against the Baht, the Rupee, and the Yen, though it was stronger against the Hong Kong Dollar. Based on monthly averages, the ringgit saw a relatively sharp appreciation of MYR4.314/USD in May.OUTLOOK

Moderating growth but momentum remains. Despite growing at a slower pace, the continued double-digit export (and import) growth suggests that trade momentum remains strong overall. This will sustain the case for a relatively strong 2Q17 growth though we do expect growth to be dialed down a touch at 5.4% (1Q17: 5.6%). Our projection of a mild moderation of real and export growth is underpinned by our expectation that the technological equipment upgrade cycle may have peaked in 1Q17. However, notwithstanding peaking growth, we believe that export YoY growth levels will remain elevated going forward largely due to the base effect drawn from the relatively moribund trade growth observed from 1Q16-3Q16.

External demand as a mitigating factor. External demand continues to be strong, notwithstanding early fears of protectionism weighing against trade as the global economy continues to brighten from major economies including economies in Asia, Eurozone and the United States. We believe stronger global growth will help mitigate some of the downside to Malaysia’s trade prospects.

Tempered imports on ringgit strength. The faster correction of the ringgit post-BNM’s financial market development measures is likely to further alleviate cost pressures moving into May, especially with the relatively sharp appreciation of the Ringgit in May. We expect the ringgit upside to temper the rise in imports moving forward though we expect the pass-through effect of an appreciating ringgit on import costs (and YoY imports) to be gradual, especially that the ringgit remains relatively weak compared to the same period a year ago. For now, our preliminary projection is for the ringgit to trade at the MYR4.10- 4.30/USD range in the short to medium term backed by fundamentals and improving investor sentiment.

Source: Kenanga Research - 6 Jun 2017