Overview

? Exports growth moderates. Exports expanded at a slower pace of 14.4% (Oct: 18.7%), a touch lower than Bloomberg’s median consensus estimate of 14.5% growth and below the house estimate of 17.2%.

? Commodity growth weakens; E&E growth strengthens. Slower export growth was partly due to weaknesses in commodity exports. Meanwhile, electrical and electronics (E&E) jumped to a four-month high of 21.0% YoY (Oct: 16.9%).

? Imports growth softens; intermediate import slows. Imports grew 15.2% (Oct: 20.9%), compared to Bloomberg’s median estimate of 14.8% (Kenanga: 15.9%). Likewise, intermediate goods imports moderated to 13.8% (Oct: 14.8%).

? Trade surplus narrows slightly. The trade surplus narrowed somewhat to RM9.9b (Oct: RM10.4b). Similarly, total trade growth moderated to 14.8% YoY from 19.7% in October.

? Resilient trade supportive of GDP growth. We see Malaysia’s trade to sustain positive growth momentum throughout 2018, supported by a steadier global economy, higher oil price and buoyant global semiconductor demand. Along with resilient domestic demand, we maintain our GDP forecast of 5.1% in 2018 (2017F: 5.8%), well within reasonable range of its potential growth trend.

Exports growth softens. Exports retained a double-digit growth albeit at a slower pace of 14.4% YoY in November (Oct: 18.7%). November’s growth was a tad lower than Bloomberg’s median estimates of 14.5% and below the house estimate of 17.2%. On a MoM basis, exports rose 1.5% (Oct: +5.2%). Post-seasonal adjustments, exports increased 2.8% MoM (Oct: +4.9%).

E&E growth strengthens. The November electrical and electronic goods (E&E) exports rebounded strongly to a four-month high of 21.0% (Oct: 16.9%). It is worth noting that the E&E segment has sustained double-digit growth since the beginning of the year, in line with the robust global semiconductor sales performance published by the Semiconductor Industry Association (SIA), which grew at a commendable 21.5% YoY in November. Hence, E&E segment contributed a higher 7.5 percentage points (ppts) to headline export figures (Oct: 6.5 ppts). On a MoM-basis, it grew by 1.8% to RM31.7b, a record high.

Commodities export slows sharply. The slower November exports were partly attributable to weaknesses in commodities exports, which grew at a significantly slower pace of 1.5% YoY from 17.6% in the preceding month. It fell 1.7% MoM (Oct: +15.3%). Exports of crude petroleum contracted 3.1% YoY (Oct: +62.9%) due to lower exports volume while exports of refined petroleum product grew at a meagre pace of 0.2% (Oct: 13.4%). On the other hand, liquefied natural gas observed faster growth of 7.5% (Oct: 6.3%). Among agriculture-based commodities, exports of palm oil and palm oil based product moderated to 2.7% (Oct: 11.3%) while exports in the palm oil segment declined 2.1% (Oct: +9.2%).

Import grows at modest pace. Import rose at a steady but slower pace of 15.2% compared with 20.9% in October. This was slightly higher than Bloomberg’s median consensus of 14.8% but below house forecast of 15.9% growth. On a MoM basis, imports rose modestly at 2.4% (Oct: +3.2%). On seasonally adjusted terms, imports expanded strongly at 13.6% MoM (Oct: -1.7%).

Slowdown in intermediate and consumption goods. The weaker import performance was in part driven by the moderating intermediate and consumption goods segment. In particular, intermediate goods imports moderated to 13.8% from 14.8% in October, contributing a lower 7.6 percentage points to headline growth in November (Oct: 8.4 ppts). Similarly, imports of consumption goods grew slower at 6.6% (Oct: 11.1%). On a positive note, capital imports jumped to a seven-month high of 12.2% (Oct: 5.0%), reflecting a likely positive momentum in business investments and foreign direct investment flows.

Surplus remains elevated. Overall, the trade surplus remained elevated though narrowing slightly to RM9.9b from the 19-month high of RM10.4b in October. Likewise, total trade growth moderated to 14.8% YoY from 19.7% in October. Nevertheless, we expect the trade balance to still remain large in 4Q17, matching or exceeding 3Q17’s RM26.7b. This would be positive for the current account of the balance of payments as we expect it to remain large in the 4Q17 up till at least 1H18. Hence, this would provide the underlying support for the value of the ringgit which has already appreciated by about 11.0% in 2017. As of last Friday, the USDMYR has broken the 4.0000-level again to over 16-month high for the ringgit.

Ringgit strength seen in November. The ringgit mostly appreciated against currencies of its major trading partners in November. The ringgit strengthened against the US Dollar at USDMYR4.1725 (Oct: USDMYR4.2289); the Euro at EURMYR4.8958 (Oct: EURMYR4.9729) and the Pound Sterling at GBPMYR5.5168 (Oct: 5.5857). Closer to home, the ringgit appreciated against a broad basket of currencies including the Singapore Dollar, the Thai Baht, the Indian Rupee, the Hong Kong Dollar and Japanese Yen.

Outlook

Trade flows likely to taper in 4Q17. Despite growth momentum in trade easing somewhat in the first two months of 4Q17, it largely remains resilient and stays at an elevated level of double digit growth. We expect exports to grow at a more modest pace in December in view of moderating trend in global semiconductor demand, with overall exports growth tapering off in 4Q17. In consideration of the respectable year-to-date growth of 20.4%, we maintain our full year gross exports forecast for 2017 at 21.6% (2016: 1.2%).

Watch out for risks in 2018. Going into 2018, while we maintain optimistic outlook for the year, it is important to note that the market is still facing considerable risks that could weigh on the upward momentum in exports. We identify several downside risks on exports growth, including unfavourable high base effect, stronger ringgit, downward oil price movements, softening demand from China induced by tighter credit, increased geopolitical tensions, and monetary policy uncertainty in major economies. Nonetheless, we continue to believe that the extent of a possible slower growth trend would be modest at best. For 2018, our preliminary assessment projects total exports growth to likely moderate to 7.0% - 10.0%.

Positive trade supportive of GDP growth. Similar to our previous view, despite the impending risk to growth in 2018, we see sustained strength in Malaysia trade growth momentum albeit moderating, supported by a steadier global economy, higher oil price and positive global semiconductor demand at least for the next six months. Furthermore, we expect domestic demand, benefitting from the trickle-down effect of the solid exports performance last year, would continue to support Malaysia’s GDP growth this year. Hence, we maintain our GDP forecast of 5.1% in 2018 (2017: 5.8%), well within reasonable range of its potential growth trend.

Source: Kenanga Research - 8 Jan 2018