? Exports unexpectedly stronger. Export growth bounced back to 30.9% YoY in July after a sharp moderation in June where exports saw a single-digit growth of 9.9%. Export growth easily beat Bloomberg’s median consensus estimates of 23.0% and was just over the house estimates of 28.8%.

? E&E growth coincides with peak global semiconductor sales. Export growth were once again driven by the strong performance of the electrical and electronic (E&E) category, coinciding with the Semiconductor Industrial Association statistics indicating that semiconductor sales hitting a recent peak. Strong growth in commodities segment provided further support to export growth.

? Import growth bounces back. Import growth returned to a double-digit growth rate of 21.8% (Jun: 3.7%). This was below both the consensus and the house estimates of 11.3% and 10.8% respectively. Imports were driven by faster imports of intermediate goods though imports of capital growth declined.

? Trade balance narrows. With imports rising from an eight month low, despite exports speeding up significantly, the trade surplus shrank to RM8.0b (Jun: RM9.9b).

? Positive spill over from external demand? While stronger external demand has helped propel headline growth in 2Q17, we believe that Malaysia’s upturn can only be sustained if external demand is also translated into an improvement in overall aggregate demand. As a result, we adjust our 3Q17 GDP growth forecast slightly to 5.3% from 5.2% (2Q17: 5.8%). Similarly, we revise up slightly our full year GDP forecast to 5.4% from 5.3%.

Strong start to 3Q17. Exports kicked off the third quarter of the year with a sharply stronger growth of 30.9% (Jun: 9.9%, revised from 10.0%). While it significantly surpassed Bloomberg’s median consensus estimates of 23.0% (ranging from 18.0-28.8%), it was just out of grasp from the house estimate of 28.8%. July’s solid export growth numbers comes following June’s dip to single-digit growth prior to steady doubledigit expansion during the six prior months since December 2016. Regardless, July’s numbers extend Malaysia’s export growth streak to the ninth consecutive month starting November 2016. On a MoM basis, exports expanded by 7.6% (Jun: -8.0%); post-seasonal adjustments, exports expanded by a sharper 8.7% (Jun: -9.2%).

E&E rebound coinciding with strong global sales. Growth in the E&E export segment (comprising 35.5% of total ports) bounced back strongly with a growth of 28.4% (Jun: 15.1%), extending its double-digit growth streak to seven months. This coincides neatly with the continuously strong global semiconductor sales numbers by the Semiconductor Industry Association (SIA). Total sales rose to a recent high (since 2010) of 24.3% (Jun: 23.7%). It is also worth noting that global

semiconductor sales have seen robust double-digit growth for eight consecutive months since December. Strong E&E growth contributed a solid 10.3 percentage points (ppts) to headline export figures (Jun: 5.5 ppts), representing approximately one third of export growth.

Largely broad-based recovery. While the E&E sector was the key driver of export growth, export expansion among other export categories were likewise strong. Exports of commodities, in particular energy commodities, performed strongly during the month with exports of refined petroleum products (accounting for 8.0% of total exports) and liquefied natural gas (LNG) (accounting for 4.8% of total exports) expanded by a whopping 85.4% and 50.8% respectively (Jun -15.7% and 97.3% respectively). At the same time, exports of palm oil and palm oil based products expanded by a modest 12.0% (Jun: 15.9%), though contributing a respectable 1.1 ppts to headline exports (Jun: 1.3 ppts). However, export of crude petroleum was among the notable export item seeing negative YoY growth at -2.1% (Jun: -1.0%). However, despite the deterioration in crude petroleum exports, its average unit prices inched up during the month even as export volume declined, likely due to Malaysia’s participation in the OPEC production cut.

Import returns to double digit growth. Import growth jumped 21.8%, shrugging off June’s breather month where import growth came in a mere 3.7%. The speedy import recovery exceeded Bloomberg’s median consensus estimates of 11.3% (ranging from 9.1-22.2%) and the house estimates of 10.8%. The faster-thanexpected import number is likely consistent with exports given that these indicators tend to move in lock-step as manufacturers stock up on capital and intermediate goods. In MoM terms, imports expanded 11.7%; after seasonal adjustments, import growth remained positive albeit slightly lower at 7.7% MoM, suggesting only mild seasonal effects in play.

… driven by intermediate goods. As usual, higher imports were driven largely by the intermediate imports, which accounts for 56.5% of total imports. Imports of intermediate goods surged 24.3% YoY (Jun: 10.2%), largely due to the 29.9% growth in imports of processed industrial supplies (Jun: 6.1%).and the 28.3% growth in imports of parts and accessories of capital goods (Jun: 16.8%). These categories, by themselves, contributed to 6.3 ppts and 6.2 ppts to headline import growth; overall, intermediate goods contributed to 13.5 ppts (Jun: 5.8 ppts to import growth). Consumption goods recorded a surprising growth turnaround of 21.9% (Jun: -5.2%), largely from the spike in purchases of processed food and beverages. Meanwhile, the import of capital goods conracted by 20.4% (Jun: -0.7%), ending its eight-month expansion streak.

Import for re-export categories crops up again. After seeing a reversal in June, the “import for re-exports” subcomponent ballooned by 57.5% (Jun: -9.2%), mirroring the 58.8% upsurge observed in May. This added 7.6 ppts to headline import growth; previously, this sub-category added 8.7 ppts to imports in May before subsequently shaving off 1.6 ppts to overall import growth in June.

Trade balance slightly narrower. With imports rising from an eight month low, despite exports speeding up significantly, the trade surplus shrank to RM8.0b (Jun: RM9.9b). However, both higher exports and imports saw total trade rising again and growing at a modest 26.4% (Jun: +6.9%) to RM149.2b (Jun: RM136.3b). July’s result meant that total trade breached RM1.0t on a year-to-date basis at RM1.01t.

Weaker ringgit in July. The ringgit was largely weaker against a broad range of major currencies during July. The ringgit depreciated to USDMYR 4.2903 (Jun: 4.2765). The ringgit was also weaker against the Euro, the Pound, the Loonie, the Aussie Dollar, and the Singaporean Dollar though the ringgit gained against the Japanese Yen. The ringgit appreciated to USDMYR 4.2483 in August.

OUTLOOK

Trade back in expansion mode. As we noted in our prior report, the sharp deterioration in both exports and imports during June was likely transitory. Indeed, there have been no major indicators corroborating with the narrative of external demand drying up. If anything, recent PMI figures suggests that the global growth may have strengthened sufficiently to allow policy tightening in several countries. For now, we are shrugging off June’s unusual moderation in trade growth as a transitory aberration. While we do not necessarily anticipate trade growth to hold at a double digit growth for the rest of the year, we expect the current synchronous global growth to further support external demand moving forward.

...particularly on semiconductor strength. Given the significant influence of E&E sales, the continued ascent of semiconductor sales (based on SIA statistics) – which recently extended its double digit growth streak of the eight month while hitting a record 24.3% growth in July – introduces the possibility that the tech cycle may have yet to reach its peak and may see some continued growth moving forward.

Imports for re-exports possibly reversing again? As noted earlier, the imports for re-export components have been relatively elevated in July. As with our previous experiences, the higher imports for re-export categories has traditionally normalised relatively quickly. This would reassure that exports growth would remain elevated in the coming months.

Trickling down to domestic demand. However, notwithstanding greater external demand support, we are wary if global growth could flow into domestic demand and provide sustainable growth. While we are optimistic on improved trade being a net positive for Malaysia, in the absence of stronger domestic demand growth, we are cautious if growth can be sustained once external trade stutters slightly as major economies initiate their policy tightening, particularly the EU. Nevertheless, due to an expected better external demand growth going forward we are slightly adjusting our 3Q17 GDP forecast to 5.3% from 5.2% (2Q17: 5.8%). Hence, for the whole of this year we are revising up slightly our full year growth forecast to 5.4% from 5.3% partially backed by domestic demand.

Source: Kenanga Research - 7 Sept 2017