OVERVIEW

● January export growth slowed to 3.1% YoY (Dec: 5.1%), exceeding Bloomberg’s consensus and house estimate of -0.6%. On a MoM basis, it expanded by 2.2% (Dec: -1.6%), reversing the declines observed in the two preceding months. Export growth was tempered by slowdown in exports to the US and regional peers, particularly for electrical and electronic goods (E&E), as well as metal and minerals. As growth in exports outpaced those of imports, the trade surplus widened to RM11.5b (Dec: RM10.7b), for the third successive month.

● By product, lower shipments of E&E and metal and minerals have more than offset improvement in shipments of palm oil and palm oil-based products. Exports of E&E eased to 8.2% YoY after rebounding to 14.2% in the previous month, slashing its contribution to the overall export growth from 5.1 percentage points (ppt) to 3.1 ppt, propelled by lower shipments of thermionic valves & tubes, photocells and integrated circuits. Similarly, shipments of metal and minerals, in particular petroleum products, dwindled to a 37-month low (-29.9%; Dec: -1.4%), dragging overall export growth by 1.9 ppt, reflecting sharper drops in the average Brent crude oil price (-14.0%; Dec: -12.1%). Meanwhile, exports of palm oil and palm oil-based products reduced its decline to -17.3% from -24.4% in December, resulting in lower stockpiles for the first time since the past eight months.

● By destination of goods, demand for Malaysia’s exports weakened mainly in the US and across the regional economies. Hong Kong led the slowdown, with its contribution to export growth easing to -0.6 ppt, followed by Singapore (0.8 ppt) and the US (0.8 ppt). Bucking the trend, exports to China rebounded sharply by 9.1% YoY (Dec: - 0.5%), as factories expedited shipments and replenished their inventories of raw materials ahead of the week-long Lunar New Year public holiday. This upbeat data on China’s demand is, however, temporary in nature, and likely will edge down mirroring an expected slowdown in the global economy as well as domestic economic activity.

● On the other hand, imports retained an expansion of 1.0% YoY, coming in below Bloomberg’s consensus and house estimate of 1.2% and 6.1% respectively. The growth was sustained as lower imports of consumption and intermediate goods were zeroed out by smaller contraction in capital imports. Of note, retained imports turned positive during the month (1.2%; Dec: -2.5%), while imports for re-exports purposes subsided to a 19-month low of 0.4% (Dec: 8.7%), reiterating our less sanguine outlook on export activities in the coming months.

● We maintain our view that trade performance would remain subdued going forward. This is partly based on the IHS Markit PMI Report in February that the manufacturing sector contracted for the fifth straight month, owing to lower production and lacklustre demand. New export orders experienced a decline, particularly as orders from the Asian regions slowed.

● Overall, we foresee 2019 would be a challenging year for Malaysia’s exports primarily weighed by the on-going trade tension between US and China, prospect of cooling global growth, China’s slowing economy, a weak EU economy and sluggish demand for commodities. While China has been agressively supporting its domestic economy through increase liquidity injections to prevent a hard landing, we remain cautiously optimistic on the outcome of the ongoing US-China trade negotiations. For 2019, we forecast exports to grow between 4.0%-6.0% (2018: 6.8%). This is in line with an expectation of a downtrend in GDP growth for this year (4.5%; 2018: 4.7%), given growing signs of waning global demand and commodity prices.

Source: Kenanga Research - 5 Mar 2019