OVERVIEW

● February exports unexpectedly fell by 5.3% YoY (Jan: +3.1%), far below Bloomberg’s consensus and house estimate of 2.3% and 0.4% respectively, marking its steepest decline since late 2016. On a MoM basis, exports reported a much steeper drop of 22.0% after a brief turnaround in January (+2.2%). The decline was mainly due to a sharp drop in demand from key exports’ destinations as well as declines in exports volume attributed to the shorter working month and the long Chinese New Year holidays. Meanwhile, imports registered a bigger fall of 9.4% (Jan: +1.0%). As a result, the trade surplus remained relatively high at RM11.1b but slightly lower than January’s level of RM11.5.b.

● Resilient exports of electrical & electronics (E&E) continue to offset lacklustre demand in commodities. Though E&E exports registered a slower growth of 4.9% YoY (Jan: 8.2%), its share of total exports remained relatively high at 38.8% (Jan: 40.2%). Nonetheless, we expect the downtrend in the export of E&E to continue following the impact of the US-China trade tension. Meanwhile, exports of commodities declined by 8.9% YoY (Jan: +7.1%), dragging overall export growth down by 1.1 percentage point (ppt) mainly due to fall of exports’ receipts of crude petroleum (-0.8 ppt), palm oil (-0.5 ppt) and rubber (-0.1 ppt).

● Exports fell broadly in almost all key major markets. Exports to the US, Hong Kong and Indonesia led the slowdown, each contributing a decline of 0.9 ppt to the overall YoY export growth, followed by Singapore (-0.4 ppt) and Japan (-0.2 ppt). We expect the slowdown in demand for goods to continue this year in line with the expectation of a slower global growth coupled with the impact of the trade war.

● Meanwhile, the 9.4% fall in imports was the lowest since September 2009 and far below Bloomberg’s consensus and house estimate of 0.9% and -0.6% respectively. The unexpected sharp fall in imports was mainly broad based with imports of capital goods registered the sharpest decline (-14.9% YoY; Jan: -3.2%) followed by consumption goods (- 11.6% YoY; Jan: 3.3%). Though imports of intermediate goods fell the least or -2.8% YoY (Jan: -0.8%), it reaffirmed the fact that export-oriented industries are not building up inventories as much as they should to sustain full capacity, suggesting that economic activity may slow in the months ahead.

● We maintain our view that trade performance would remain weak. This is in line with the latest Purchasing Manager's Index (PMI) performance, which pointed to weak demand from overseas market specifically from Asian region though some firms reported that there was an improvement in demand from Germany and Japan. Overall, Malaysia’s PMI continue to fall for the six straight month to 47.2 in March (Feb: 47.6), reaffirming our outlook that the export-based manufacturing sector would continue to be weak.

● The surprising decline of exports in February reinforced the narrative that the economy is weakening. Though March exports could rebound strongly it would not be enough for 1Q19 YoY exports growth to outpace the 8.1% posted in the 4Q18. This supports our view that GDP growth would slow in the 1Q19 at an estimated 4.4% from 4.7% posted in 4Q18. The economy is expected to be slower this year mainly because of the expected slowdown in global trade. The World Trade Organisation (WTO) forecast merchandise trade volume growth to slow to 2.6% this year (2018: 3.0%), as world trade will continue to face strong headwinds after moderating in 2018 due to rising trade tensions and heightened economic uncertainty. Hence, we maintain our growth forecast for exports at 4.0-6.0% for this year (2018: 6.8%).

Source: Kenanga Research - 5 Apr 2019