OVERVIEW

● Export growth expanded by 9.4% YoY in July (June: +7.6%), exceeding Bloomberg median consensus of 4.7% and house forecast of 5.0%. On MoM basis, it rebounded by 9.6% (June: -4.3%). The month’s higher exports growth came as a surprise despite it had surged by 30.9% in the same period a year ago as well as the impact of escalating trade war between US and China.

● Electrical & electronics (E&E) and crude oil continue to remain as major contributors to the month’s exports growth. E&E exports share rose to 40.1% of total exports, the highest in eight years, surging 23.6% YoY (June: +6.8%) on the back of a sharp 15.5% MoM (June: +2.4%) rise. Similarly, exports of crude petroleum jumped 90.1% YoY (June: 25.3%) as average Brent crude price traded around USD74.0/barrel in July.

● Meanwhile, exports of commodities fell 4.9% YoY but at a slower rate compared to -18.2% in June, mainly due to the decline in shipments of palm oil and liquefied natural gas (LNG). Exports of palm oil and LNG fell by 23.1% and 38.4% YoY respectively (June: -29.2% and -31.2% respectively). We expect commodity-based exports to recover in the following months as demand improves.

● By destinations, exports to China jumped sharply by 37.7% YoY in July (June: +16.9%) while export to the US rebounded by 6.7% YoY (June: -1.9%). The US has so far imposed tariffs on USD50.0b worth of imports from China since trade dispute escalated in July. Another round of tariffs on USD200.0b tranche of China’s goods is in pipeline. Although the impact on Malaysia remains uncertain, the latest Purchasing Manager Index performance hints an inevitable slowdown in exports as global trade slows.

● Import growth moderated to 10.3% YoY (June: +14.9%), exceeding consensus and house estimate of 5.3%. The moderate YoY growth in imports was largely due to the 0.1% YoY decline in purchase of intermediate goods. We expect that growth of imports to slow after Sales & Service Tax (SST) takes effect in September.

● As export growth far outpacing imports, the trade surplus widened to RM8.3b from June’s RM6.0b. Hence, we expect the current account surplus to improve in 2H18 after narrowing sharply to 1.1% of GDP in 2Q18 from 4.4% in 2Q18.

● We are projecting the 2H18 export growth to moderate between 3.0% to 5.0% (2H17: 17.0%) from 7.0% in the 1H18 thereby contributing to a lower 2H18 GDP growth forecasts of 4.8% versus 4.9% in the 1H18. This would result in a slower GDP growth projection of 4.8% for this year compared to 5.9% in 2017.

Source: Kenanga Research - 6 Sept 2018