OVERVIEW

● November export growth decreased markedly to 1.6% YoY from a 9-month high of 17.7% in October, underperforming Bloomberg’s consensus and house estimate of 6.6% and 6.1% respectively. On a MoM basis, it contracted at the fastest pace in 9 months (-12.0%; Oct: 16.2%). Apart from reflecting high base effect from the previous year, export growth was mainly dragged by slowdown in exports to regional peers, particularly for palm oil and palm oil-based products, as well as electrical and electronic goods (E&E). As exports’ slowdown outpaced imports’, the trade surplus narrowed to its lowest in 3 months at RM7.6b from October’s record-breaking high of RM16.3b.

● By product, lower shipments of palm oil and palm oil-based products and E&E have more than offset larger shipments of refined petroleum products, liquefied natural gas (LNG) and crude petroleum. Exports of palm oil and palm oil-based products extended its contraction by 18.6% YoY (Oct: -11.9%), dragging overall export growth by 1.5 percentage points (ppt), underpinned by declining shipments of palm oil, amid soft demand, typically seen during winter season as palm oil solidifies in low temperature, and prices weighed down by near-two decades of high stockpiles. Exports of E&E registered its sharpest decline for the year at -1.7% YoY (Oct: 23.3%), pulling overall export growth by 0.6 ppt, driven by lower shipments of thermionic valves & tubes, photocells and integrated circuits, in part reflecting sluggish demand in key markets amid negative spillovers from US-China trade war.

● From a destination perspective, demand for Malaysia’s exports weakened across the advanced and regional economies. China led the moderation, with its contribution to export growth easing to 0.5 ppt, followed by Hong Kong (1.1 ppt) and Singapore (1.0 ppt). For the advanced economies (US, EU, Japan), demand registered a contraction, dragging export growth by 1.8 ppt collectively. This was within our expectations, as the release of November Manufacturing PMI reported only marginal rise in new business from overseas, amid the ongoing trade tension.

● Tracking a similar path, imports moderated to 5.0% YoY (Oct: 11.4%), coming in above Bloomberg’s consensus and house estimate of 4.1% and 2.5% respectively. The slowdown was largely propelled by lower imports of consumption goods and declining intermediate imports, which altogether outweighed positive rebound in capital imports.

● On a year-to-date basis, export growth has moderated to 6.9% YoY (2017: 20.3%). Our expectation for a subdued trade performance going forward remains unchanged. This is partly based on the IHS Markit PMI Report in December, which reported record-low deterioration of the manufacturing sector, owing to plateauing of both external and domestic demand. On the trade war front, we remain cautiously optimistic on the outcome following the conclusion of the 90-day trade war truce between the US and China, given efforts shown from both parties, including by withholding new tariff hikes and increasing agricultural imports. Negative impacts from the trade war observed thus far may further incentivise them to conclude the ongoing trade talks with a positive note.

● On a quarterly basis, export growth is forecasted to increase to 6.9% YoY in the 4Q18, mainly lifted by the surge in October, from 5.1% in the 3Q18. For the whole year, export growth is expected to reach 6.5% (2017: 18.8%). Hence, we maintain our view that GDP growth will edge higher in 4Q18 to 4.8% from 4.4% in the 3Q18, with whole year 2018 growth forecasted to moderate to 4.8% from 5.9% in 2017. As for 2019, GDP growth is expected to trend downward to 4.7%, given persisting signs of waning global demand and commodity prices.

Source: Kenanga Research - 7 Jan 2019