? Robust exports on E&E strength. Exports surged in May, hitting a seven-year high growth of 32.5% YoY (Apr: 20.4%) or just a tad short of the house estimate of 32.6% though outperforming Bloomberg’s median consensus estimates of 23.4%. Exports growth continued to be driven by strengthening electrical and electronics (E&E) exports with palm oil and petroleum products providing further support.

? Imports beat expectations. Imports grew 30.4% (Apr: 20.7%), the fastest since May 2010, exceeding Bloomberg’s median consensus estimates and the house estimates of 19.4% and 20.0% respectively. This led to a narrowing of the trade surplus to RM5.5b (Apr: RM8.7b).

? Bullish on external trade. We believe that May’s trade number is largely indicative of continued synchronous global growth rubbing on Malaysia. While global outlook remains fluid, we are overall positive that external demand will continue to be supportive of Malaysia’s trade. Our 2017 full year forecast puts export growth at 21.6%.

? Supporting aggregate demand. With external demand on the rise, we believe that the E&E and commodity sector will help provide some support for the economy in the event that domestic growth tapers in 2H17. For now, we are maintaining our 2Q17 forecast at 5.4% with some room for upside on further evidence of the external demand driven growth.

Exports outperforms consensus. May’s exports reached a seven-year high growth of 32.5% after a breather in April where exports grew by a slower 20.4% (Mar: 24.1%). May’s export growth surpassed the median consensus of 23.4% (ranging from 18.0-32.6%). However, it was well within the house estimates of 32.6% growth. May’s figures further extend exports YoY growth streak to seven consecutive months, starting November 2016. It is worth noting, however, that May’s YoY export growth may also be attributed to as well as inflated by the low base effect of May 2016 (from sharply lower non-E&E and non-commodity exports). Nonetheless, on a MoM basis, exports were likewise strong, rebounding by 7.5% (Mar: -10.6%) though it remained just under the RM80.0b-mark. The last time it breached the record breaking level was in March.

E&E sees faster growth. The E&E segment, which accounted for 36.0% of total exports, clocked a 31.3% YoY growth, its highest since Apr 2010. This translates to an 11.3 percentage point (ppt) contribution to total exports YoY growth, the biggest growth contribution among major export segments. On a MoM basis, E&E rebounded sharply by 8.7%, after slipping 10.4% during the previous month.

Mineral and palm oil fuelling growth. Export growth was further buoyed by a quicker expansion in both the palm oil segment and petroleum product. Crude and processed palm oil grew by a combined 26.8% (Apr: 24.1%), adding 2.4 ppt to export growth (Apr: 1.9 ppt growth). Separately, the mineral oil segment saw broad based exports expansion with the exports of petroleum products growing 4.7%, more than reversing April’s contraction (Apr: -1.1%). The expansion in these export segments were driven by an increase in both export value and volume.

Imports exceed expectations. Import growth was likewise strong, growing at a faster-than-expected clip of 30.4% (Apr: 24.7%), it’s fastest since May 2010. This easily surpassed the median consensus expectation of 19.4% (ranging from 11.6-28.4%) and was likewise above the house expectation of 20.0%. Imports likewise recorded a sharp turnaround on a MoM basis, up 13.3% (Apr: -15.6%). Post-seasonal adjustments, import growth remained relatively high at 10.4% (Apr: -12.5%).

Continued growth in retained imports. Import growth continued to be broad-based as exports of intermediate goods continue to account for the bulk of total exports. Intermediate imports grew at a faster clip of 33.8% (Apr: 29.2%), the highest since May 2010. As with April, intermediate imports were fuelled by a mixture of processed industrial supplies and accessories and parts of capital goods (ex. Transport Equipment). Import of capital goods, however, slowed to 6.6% (Apr: 14.8%) as imports of consumption goods accelerated to 8.3% (Apr: 1.1%).

Re-exports fuelling import expansion. Notwithstanding broad-based expansion in the retained import categories, May’s acceleration in imports was only marginally attributable to retained imports. Combined, the retained import components – including intermediate, capital, consumption imports and dual use goods – contributed 21.7 ppts to import growth, little changed from April’s 21.5 ppt contribution. Instead, import growth was fuelled by faster growth in “imports for re-exports” which grew sharply by 58.8% (Apr: 18.0%), adding to the remaining 8.7 ppts to import growth (Apr: 3.2ppt).

Trade surplus narrows on sharper imports. With imports seeing higher MoM growth, the trade surplus narrowed to RM5.5b (Apr: RM8.7b). With both exports and imports expanding, total trade amounted to RM153.3b (Apr: RM139.21), expanding at an 86 month high of 31.5%.

Ringgit strengthens further in May. The ringgit remained somewhat strong in May, advancing 2.2% against the greenback at MYR4.3138/USD (Apr: MYR4.4072/USD). Likewise it appreciated against the loonie, Aussie Dollar and the Singaporean dollar. However, it continued to weaken against the Euro and the British pound (likely from the “afterglow” effect in the run-up to the UK General Elections in June). Regionally, the ringgit was stronger against major currencies including the Thai Baht, Indian Rupee, Hong Kong Dollar and the Japanese Yen. Based on monthly averages, the ringgit continued to strengthen by 0.9% to MYR4.277/USD in June.

Surprising E&E resilience. Continued strength in export growth suggests that external demand remains strong, in line with synchronous global growth. While low base effect in non-E&E and non-commodity exports could have largely contributed to May’s sharp YoY export growth, the continued strength of the E&E sector (the largest component of export growth) suggests that the technological equipment upgrade cycle remained somewhat robust. Indeed, the Semiconductor Industry Association (SIA) announced worldwide sale of semiconductors hitting a record high USD31.93b during May 2017. Together with a global commodity rally, we expect strong export numbers to support growth moving forward. For June, we expect the high base effect of June 2016 to moderate YoY export growth somewhat though exports is likely to remain elevated, with possible boost from re-exports. For the full year, we are forecasting exports to grow by a sharp 21.6% YoY growth (2016: 1.6%), riding on synchronous global growth and receding risks of trade protectionism.

Higher imports a net positive. While higher imports will weigh against net export contribution, we believe that heightened imports are overall benign in the context of spurring growth. With the bulk of imports growth arising from intermediate imports, we believe that this likely implies improvements in purchasing activities, possibly leading to growth upside in the medium-to-long term. Furthermore, pickup in imports of consumption goods suggests that domestic purchasing power may be on the rise after a relatively unimpressive showing late 2Q16-1Q17. We also note that May’s import growth may be somewhat skewed by higher “imports for re-exports”; this component is likely to normalise in the near-to-medium term as reexports occur.

External demand to provide some upside to growth. May’s trade numbers provide further confirmation to our narrative of the external sector providing a welcome shot-in-the arm as domestic growth tapers somewhat starting mid 2Q17. For now, we are maintaining our 2Q17 forecast at 5.4% (1Q17: 5.6%) with some room for upside on further evidence of the external demand driven growth. While we believe that domestic growth will likely remain elevated (at least relative to 2016), a stronger external sector will help extend Malaysia’s growth upside, particularly for 2H17. Hence, we are maintaining a relatively conservative expectation of a 5.0% GDP growth for 2H17 from an estimated 5.5% in the 1H17, though further signs of expansion in external demand may justify an upward revision in the growth trajectory.

Source: Kenanga Research - 10 Jul 2017