? Export growth eases sharply. Exports grew at a significantly slower clip of 10.0% YoY (May: 32.5%), below both consensus and the house estimates of 18.3% and 13.2% respectively. Export growth continues to be driven by the electrical and electronic (E&E) along with additional support from exports of liquefied natural gas (LNG) and palm oil.

? Import growth moves to single-digit range. Import growth plunged to a mere 3.7% YoY growth (May: 30.4%), sharply below both the consensus and house forecast of 19.8% and 20.0% respectively. With imports growing at a sharply slower pace, the trade surplus ballooned to a 15-month high of RM9.8b (May: RM5.5b).

? Weaker trade numbers likely transitory. While June’s numbers suggest poorer prospects for external demand, at this juncture, it may be too early to interpret this as a precursor to external demand sputtering out on Malaysia. This caution is grounded on modest signs of growth among Malaysia’s regional peers.

? External demand supportive of growth. While we believe that external demand contribution to headline growth remains somewhat flat, we believe that stronger external demand will have some positive spill over benefits to stimulating Malaysia’s economic sectors, particularly its manufacturing and services sector. Hence, we maintain our 2Q17 GDP growth estimate of 5.4% (1Q17: 5.6%).

Sharp moderation in exports. June’s export growth decelerated to a mere 10.0%, coming off from May’s seven-year record high growth of 32.5%. Export growth was sharply below the consensus estimates of 18.3% (ranging from 10.0-30.0%) and the house estimate of 13.2%. However, notwithstanding the slowdown in growth, exports extended its growth streak to the eighth consecutive month starting November 2016. June’s numbers also brought 2Q17 export YoY growth to a modest 20.6%, just under 1Q17’s 21.3%. However, the relatively elevated 2Q17 growth should be evaluated in the context of low base export numbers during 2016 – 1H17’s export growth was likewise higher at 21.0% YoY (1H16: 2.0%; 2H16: 0.3%). On a MoM basis, exports fell 8.0% (May: +7.5%); after seasonal adjustments, exports deteriorated by an even sharper 9.2% (+9.0%). With the deterioration in MoM exports close to that of its seasonally adjusted values, seasonal factors may have played a limited role in June’s export numbers.

E&E exports take a step back. With E&E being the key driver of export growth (38.3% of total exports), the slower export growth could be traced to a more modest pace of E&E growth which rose by just 15.1%, coming off a record high growth (since April 2010) of 31.3% YoY in May. Notwithstanding the slowdown in E&E exports, it contributed 5.5 percentage points (ppts) or more than half to headline export growth.

LNG and palm oil support. Elsewhere, the moderation in export subcomponents was largely broad-based with some of these components seeing a contraction in exports instead. However, the LNG exports notably bucked the trend, and instead grew by 97.3% (May: 3.8%), contributing to 3.0 ppts to headline export growth (May: 0.1%). Separately, palm oil (including crude and processed) grew by a more modest 15.8% (May: 26.8%) though due to its scale (8.5% of total exports) contributed to 1.3 ppts to headline export growth (May: 2.4 ppts).

Sharp deterioration in import growth. Import growth moved into single-digit territories at a mere 3.7% growth (May: 30.4%), easily missing both the consensus expectation for 19.8% growth (ranging from 4.6-32.5%) and the house expectation of a 20.0% growth. Slower import growth was particularly striking after it hit its highest level since May 2010 during the previous month. June’s sharp import growth moderation rounded off 2Q17 growth to 19.1% YoY (1Q17: 27.7%) though this was still elevated in the context of single-digit quarterly import growth rates from 2014-2016. In MoM terms, imports declined by 14.5% (May: +13.3%), close to the seasonally adjusted MoM decline of 14.4% (May: +10.4%). Given that MoM import decline were similar to its seasonally adjusted numbers, the decline in import growth is, at most, only marginally attributable to seasonal factors.

Broad-based slowdown. Slower imports growth came with most import categories, particularly intermediate imports, slowed significantly to 10.3% YoY (May: 33.8%). Growth in capital goods was flattish at a mere 0.6% growth (May: 6.6%). Consumption imports meanwhile fell 5.2% (May: +8.3%), ending its three month growth streak starting March. Including dual use and other goods, retained imports collectively contributed to 5.3 ppts to headline import growth.

Reversal in imports for re-exports. As we anticipated in our previous report, the “imports for re-exports” subcomponent shrank by 9.2% after a 58.8% surge in May. The reversal in this component shaved off 1.6 ppts of growth from the headline import numbers.

Trade surplus widens to 15-month high. With imports sinking to single-digit growth rates, the trade surplus ballooned to MYR9.9b (May: MYR5.5b) though this, along with slower growth in exports, also resulted in total trade growing at a slower 7.0% (May: 31.5%, its 86-month high) to MYR136.3b.

Ringgit strengthened against USD overall. The ringgit remained somewhat stronger against the USD in June, advancing 0.9% at MYR4.2765/USD (May: MYR4.3138/USD). It was also stronger against the British Pound (especially as the Pound weakened on its hung parliament) and several regional currencies, including the Hong Kong Dollar, the Indonesian Rupiah, the Korean Won, and the Singaporean dollar though it was weaker against the Aussie dollar, Euro, Loonie, and the Japanese Yen. Moving forward though, the ringgit pared down its gains against the Dollar to MYR4.2903/USD in July, likely from the impact of the June FOMC meeting (which saw a 25bp Fed Fund Rate hike).

OUTLOOK

Trade likely taking a breather. Despite the sharp deterioration in both exports and imports, a quick assessment of demand among both major advanced and emerging market economies suggest that June’s numbers are likely to be an aberration rather than a sign of trade flows drying up. Indeed, at 15.1% growth in E&E exports remains high by historical standards. Furthermore, MIER’s business condition index stood at 114.1 as at 2Q17, its strongest performance for 16 consecutive quarters, suggesting that June’s numbers represent just a small setback on Malaysia’s export growth momentum. While the MIER’s Consumer Sentiment Index remain below its 100-point threshold at 80.7 as at 2Q17 for the twelfth consecutive quarters, it is worth noting that 2Q17’s numbers stood at a 10-quarter high, pointing to a possible resurgence in imports, particularly for consumption imports. As such, we believe that it would be prudent to reserve judgment on the implication of June’s weaker number in favour of awaiting further signs of external demand weaknesses.

Wider trade surplus likely to feed to headline growth. Notwithstanding June’s slower growth in trade, with quarterly trade surplus at MYR24.1b for 2Q17 (1Q17: MYR18.8b; 2Q16: MYR17.9b), we expect this to translate into an uptick in net export numbers, albeit resulting in a slightly positive-to-flat contribution to headline GDP growth; net exports shaved off 1.2 ppts off 1Q17 headline GDP growth. More germane to Malaysia’s growth narrative is that the uptick in external demand will help reinvigorate Malaysia’s economic sectors, particularly for manufacturing and services. However, due to the expected moderating growth trend in domestic demand we could expect a slower GDP growth in the 2Q17 despite a slightly better export growth in 2Q17. Hence, we reiterate our 2Q17 GDP estimate of 5.4% (1Q17: 5.6%). This places our 1H17 GDP target to 5.5% before tapering off to 5.0% in 2H17, bringing about our full year growth forecast of 5.2% (2016: 4.2%).

Source: Kenanga Research - 7 Aug 2017