OVERVIEW

● Malaysia exports growth rebounded sharply by 6.7% YoY in September (August: -0.3%), matching Bloomberg’s consensus but lower than house forecast of 3.6%. On MoM basis, exports rebounded by 1.5% (Aug: -5.0%). The month’s faster export growth was largely due to continued uptrend in electrical and electronics (E&E) as well as to a low base effect. Meanwhile, trade surplus swells sharply to RM15.3b from August’s RM1.6b, the highest in a decade. Year-to-date, trade surplus has increased to RM85.7b compared to RM71.2b in the same period of the preceding year.

● E&E and petroleum receipts remains major contributors to September’s exports growth. E&E exports growth jumped 6.5% YoY in September (Aug: +3.2%), contributing 2.6 percentage points (ppts) to overall export growth (Aug: +1.2 ppts). Similarly, exports of crude petroleum and petroleum products increased sharply by 54.5% and 20.5% YoY respectively (Aug: +70.8% and +5.4% respectively) largely due to the higher crude oil price. Reference Brent crude oil averaged USD78.9/bbl in September (Aug: USD72.5/bbl). We expect exports of crude petroleum to sustain its uptrend in October as average Brent price continue to increase to USD81.6/bbl. Overall, exports of commodities rebounded to 4.1% YoY (Aug: -6.3%) but shipments of palm oil, includes crude and processed continue to fall by 11.5% (Aug: - 22.9%).

● By destination, exports to Singapore and US in September rebounded by 8.7% and 0.1% YoY respectively (Aug: -2.2% and -2.0% respectively). Meanwhile, exports to China declined by 0.6% YoY (Aug: +4.5%). We expect exports to remain subdued in October due to trade war jitters while China’s Golden Week holiday in October may push slower imports from Malaysia.

● Imports slowed as Sales & Service Tax (SST) takes into effect. Imports growth for the first time in six months contracted by 2.7% YoY (Aug: +11.2%), compared to Bloomberg’s consensus and house estimate of 10.0% and 5.2% respectively. On MoM basis, it plunged by 15.5% (Aug: +3.0%). The decline was broad-based due to the sharp dropped in imports of capital, intermediate and consumption goods by 21.6%, 9.3% and 10.0% YoY respectively (Aug: +29.2%, +4.3%, +14.2% respectively).

● According to the latest IHS Markit report survey on manufacturing Purchasing Managers Index (PMI), new export orders from overseas particularly from the US and other countries in South East Asia increased sharply in October, highest in 9-months. We believe some US firms have started to shift their main source of imports from China to South East Asia including Malaysia to evade the higher tariffs set by the Trump’s administration on China as trade war intensifies. China's President Xi Jinping recently has pledged to lower tariffs and open market access to its economy. Hence, we expect the recent developments in the two main export destinations to benefit Malaysia in the upcoming months.

● On year-to-date, exports growth has slowed to 6.3% YoY compared to 21.3% in the same period of 2017 due to the high base effect. Hence, we maintain our projection that the 2H18 export growth to moderate between 3.0% to 5.0% (2H17: 17.0%) from 7.0% in the 1H18, backing our 2H18 GDP growth forecast of 4.8%, slightly lower compared to 4.9% recorded in the 1H18. Hence, this would result in a slower GDP growth projection of 4.8% for this year compared to 5.9% in 2017 as external factors are expected to weigh down on Malaysia’s economy.

Source: Kenanga Research - 7 Nov 2018