OVERVIEW

● October export growth surged to a 9-month high of 17.7% YoY (Sep: 6.5%), outperforming Bloomberg’s consensus estimate of 5.9% and slightly above house estimate of 17.4%. On a MoM basis, it rose sharply by 16.2% (Sep: 1.4%). The steep rebound was mainly underpinned by an increase in exports to regional peers, particularly for electrical and electronic (E&E) goods. Meanwhile, trade surplus widened to a record-breaking high of RM16.3b (Sep: RM15.2b), as the growth in exports outpaced that of imports.

● By product, greater shipments of E&E and refined petroleum have outweighed moderation in shipments of palm oil and palm-oil based products. E&E export growth spiked to 23.3% YoY (Sep: 6.5%), accounting for 8.9 percentage points (ppt) of overall export growth, on the back of large shipments of electronic integrated circuits. Exports of petroleum products jumped 37.7% YoY (2.2 ppt), extending gains from the previous month (Sep: 20.5%), against the backdrop of higher crude oil price. Reference Brent crude oil averaged USD81.0/barrel in October (Sep: USD78.9/barrel). On the other hand, exports of palm oil (including crude and processed) declined at a faster pace of 11.9% (Sep: -11.5%). The trend is expected to remain unfavourable going forward, amid soft demand and high inventory levels of palm oil.

● From a destination perspective, demand for Malaysia’s exports strengthened across the board, with regional peers remaining as the key driver. China recorded the largest contribution to export growth (4.6 ppt), followed by Hong Kong (2.7 ppt) and Singapore (2.5 ppt). Similarly, demand from the advanced economies (US, EU, Japan) also improved, contributing 2.3 ppt collectively. This was in line with our expectations, as the release of October Manufacturing PMI reported the fastest pace of increase in export sales in 9 months, particularly from the US and South East Asian economies, and as we anticipated Malaysia’s exports of intermediate goods to benefit from a frontloading of imports by the US, prior to the announcement of the 90-day halt to new tariff.

● Imports recorded a sharp turnaround of 11.4% YoY (Sep: -2.8%), registering above Bloomberg’s consensus estimate of 3.1% and below house estimate of 16.5%. The swing in imports was largely across the board but more significant from stronger growth rebound from imports of capital and consumption goods.

● On a year-to-date basis, export growth has moderated to 7.5% YoY (2017: 21.0%). Despite the surge observed in October, our expectation for a subdued trade performance going forward remained unchanged. This is partly based on the IHS Markit PMI Report in November, which reported second consecutive month of contraction for the manufacturing sector, as new orders dropped significantly lower. We foresee lower export growth in the coming months as new export order were weak across regions and as Baltic Dry Index inched lower, pointing towards softer demand for raw materials. Despite the announcement of 90-day new tariff halt by President Trump, uncertainties regarding trade war are expected to remain, up until further concrete resolution are being put forward.

● Hence, we expect that the 2H18 export growth may exceed our projection of 3.0% to 5.0% (2H17: 16.8%) from 6.9% in the 1H18. This would mean that for the whole year export growth could reach 7.0% (2017: 18.8%). Nonetheless, we maintain our view that GDP growth will moderate in the 2H18 to 4.7% from 4.9% in the 1H18, resulting our whole year 2018 growth forecast to slow to 4.8% from 5.9% in 2017.

Source: Kenanga Research - 6 Dec 2018