OVERVIEW

• Seasonality causes sharply lower exports. February’s exports contracted by 2.0% YoY (Jan: +17.9%), the lowest growth recorded in 16 months. The month’s exports came in sharply below Bloomberg’s median estimates of +8.0% and the house estimate of +9.3% growth. The decline in exports was due to high base effect amid Lunar New Year holidays and seasonal shorter working days.
• Partly due to E&E fall and stronger Ringgit. Consistent with the lower global semiconductor shipments registered during the month exports of electrical and electronics (E&E) goods declined albeit marginally by 0.1% in February (Jan: +27.2%). It can also partly be attributed to the stronger Ringgit, eroding Malaysia’s competitive edge.
• … as well declining commodities exports. Declining CPO and LNG receipts dragged February’s commodities exports down by 14.8% YoY (Jan: +7.7% YoY) as average unit value and volumes decreased.
• Imports contracts on lower intermediate goods. Imports contracted by 2.8% YoY in February (Jan: +11.6%), sharply below the house and Bloomberg’s median forecast of 10.0% and 7.1% respectively. This was mainly attributed to a decline in imports of intermediate goods by 14.7% (Jan: -1.7%).
• Trade surplus narrowed by 3.3% YoY to RM9.0b (Jan: RM9.7b) while total trade declined 2.4% YoY to RM131.7b.
• GDP growth to hold up in 1Q18. Despite sharply slower export figures and slowing PMI trend we retain our view for 1Q18 GDP growth to remain elevated but moderate to 5.7% from 5.9% in 4Q17 as it still could be mainly backed by domestic demand.
• BNM to stay pat on policy rate. With Ringgit continues to see upside against major currencies in March we have yet to see significant cost pressure from imported inputs translating into higher output prices. Coupled with the moderating growth trend, this would provide enough reason for BNM to leave the OPR at 3.25% for the rest of the year.

February’s exports contracts way below forecast. Exports growth contracted sharply in February by 2.0% YoY (Jan: +17.9%), the lowest growth recorded in 16 months. February’s exports came in way below Bloomberg’s median estimates of +8.0% and the house estimate of +9.3% growth. On a MoM basis, exports fell 15.1% (Jan: +4.4%). The month’s decline in exports was primarily due to the higher base effect from last year following a dissimilar timing of the Lunar New Year. The festive season, which typically observes lower shipments, took place late-January last year against February this year. The month’s contraction in exports was also exacerbated by the shorter working month while the appreciation of the Ringgit against a broad range of currencies possibly eroded Malaysia’s trade competitive edge and hampered the performance of local exports.

E&E declines on higher base effect, lower global chip sales and strong Ringgit. Exports value of electrical and electronics declined by 0.1% YoY in February (Jan: +27.2%) following a higher base effect from last year’s surge in E&E exports. February’s “Telecommunications Equip, Parts & Accessories” exports observed a sharp fall in receipts by 25.2% (Jan: -10.3%), shaving off 0.8 percentage points (ppts) from the month’s exports growth. The month’s E&E exports were the lowest observed since July 2016 and in line with moderation in global shipments of semiconductors during the month to 20.9% YoY (Jan: 22.7%). On a MoM basis, E&E exports declined by 22.4% (Jan: +10.3%). The month’s lacklustre E&E exports performance could also be attributed to the Ringgit appreciation which possibly elevated the price levels of local produce. Ringgit has strengthened by 12.0% YoY to MYR3.912/USD (Feb 2017: MYR4.446/USD). The Department of Statistics also attributed the month’s lower exports to the lower external demand, namely exports to Japan, China, Indonesia, Singapore and Mexico.

CPO and LNG drags commodity exports. Commodity exports declined in February by 14.8% YoY (Jan: +7.7% YoY). Crude palm oil (CPO) and palm-based products, which makes up 7.9% of total exports, fell by 21.6% (Jan: +10.4%). Similarly, exports of liquefied natural gas (LNG) declined by 11.8% (Jan: +14.0%), while rubber slumped by 40.1% (Jan: - 26.0%). All three commodities observed a drop in both average unit value and export volume.

Intermediate imports contracts. Imports contracted by 2.8% YoY in February (Jan: +11.6%), sharply below the house and Bloomberg’s median forecast of 10.0% and 7.1% respectively. The month’s lower imports were due to declining imports of intermediate goods, which fell for the third consecutive month by 14.7% (Jan: -1.7%). The drop in intermediate goods could be possibly due to the lower E&E demand from key export markets. Meanwhile, imports of capital goods rebounded to 6.0% YoY (Jan: -3.1%) while imports of consumption goods edged higher to 12.6% YoY (Jan: +9. 8%). On a MoM basis, imports fell by 16.2% after rebounding by 1.5% in January.

Trade surplus narrowed to RM9.0b (Jan: RM9.7b), a decrease by 6.7% compared to the preceding month. However, on a YoY basis, trade surplus widened by 3.3% compared to February last year. Meanwhile, total trade in February 2018 declined 2.4% YoY to RM131.7b. On a MoM basis, it shrank RM24.3b or 15.6%.

Ringgit continues to accelerate, albeit at a slower pace. Ringgit continues to appreciate against major currencies in February, averaging against the USD, Australian Dollar and Singaporean Dollar at MYR3.912/USD (Jan: MYR3.958/USD), MYR3.078/AUD (Jan: MYR3.143/AUD) and MYR2.964/SGD (Jan: MYR2.992/SGD) respectively. However, the rate of Ringgit appreciation has decelerated compared to January. The Ringgit appreciated at a slower rate of 1.15% (Jan: 2.95%) against the USD and 0.97% against SGD in February (Jan: 1.19%).

OUTLOOK

GDP growth trajectory stays. With the sharply lower exports in February and a possible rebound in March we maintain our 1Q18 GDP growth estimate of 5.7% from 5.9% in 4Q17, mainly backed by domestic demand. Nonetheless, we are concern that it might continue to slip further in March as subdued demand condition continue to weigh on new orders and production as showed in the recently published Nikkei Manufacturing PMI. The index was at a 15-month low as lower order book volumes, particularly from international markets continues to weigh on new exports orders. We are also cautious on the effect of China’s retaliatory tariffs, particularly to the E&E and chemicals sectors.

Exports to hold up but tapering. Nonetheless commodity prices remain sustainable at this stage, further supporting the value of local exports. Brent crude oil averaged at USD70.27/barrel in March after averaging at USD65.78/barrel in February. Meanwhile, in-house expectation also sees CPO prices holding at RM2,400/tonne in 2Q18 following higher inventories recorded in 1Q18, suggesting that exports of CPO could still hold up in 2Q18. Maintaining that exports would continue to taper throughout the year, we retain our 2018 export growth forecast at 7.0-10.0% (2017: 18.9%).

Stronger Ringgit weighs down on input cost. As the Ringgit continues to see upside against major currencies in March, we would expect diminishing cost pressure from imported inputs to eventually translate into lower output prices, assuming prices on end products are not overly sticky on the downside. This is already reflected in February’s producer price index, which fell by 3.4% YoY from the preceding year’s corresponding period. Among the sectors which registered a decrease during the period includes manufacturing (-2.6%) and agriculture, forestry and fishing (-16.2%). Coupled with the moderating growth trend, this would provide enough reason for BNM to leave the OPR at 3.25% for the year.

Source: Kenanga Research - 6 Apr 2018