OVERVIEW

● March exports declined at a much softer pace of 0.5% YoY (Feb: -5.3%), a tad above consensus and house estimate of -0.8%. On a MoM basis, it surged to 26.2% (Feb: -22.0%), marking the steepest growth in nine years. The improved performance was mainly driven by larger exports to China and increased export value for petroleum products and liquefied natural gas (LNG). Similarly, imports registered a smaller fall of 0.1% (Feb: -9.4%). As growth in exports outpaced those of imports, the trade surplus widened to a 5-month high of RM14.4b (Feb: RM11.1b). Overall, trade performance worsened in the 1Q19, with exports contracting by 0.7% (4Q18: +8.1%), while imports dropping by 2.5% (4Q18: +5.7%), resulting in enlarged trade surplus (RM36.9b; 4Q18: RM34.8b). This echoed our view that the GDP growth will moderate to 4.4% in the 1Q19 (4Q18: 4.7%).

● Product-wise, improvement in shipments of petroleum products and LNG partially mitigated lower shipments of electrical & electronics (E&E). Exports of petroleum products and LNG rebounded to 16.2% (Feb: -30.9) and 17.2% (Feb: 8.6%), respectively, mirroring the average Brent crude oil price (March USD66.14/barrel; Feb: USD63.96) which rallied to its highest in five months on the back of reports on steeper production cuts by Saudi Arabia and shutdown of Venezuela’s oil-exporting terminal amid a major power outage. With the termination of sanction waivers granted by the US for major importers of Iranian oil on 2nd May and presuming the lack of counteractive actions by the OPEC, we foresee the global oil market to be rather tight, allowing oil price to firm, and hence lending some support to our exports, on a value-basis. Meanwhile, shipments of E&E dwindled further, shrinking by 1.9% (Feb: +4.9%), its weakest in 13 months, due largely to lower shipments of integrated circuits.

● By destination, demand for Malaysia’s exports spiked up in China and dropped by less in the US. Exports to China rebounded sharply by 11.8% (Feb: -1.6%), with its contribution to export growth edging up to 1.5 percentage points (ppt). However, this upbeat figure is temporary in nature, as it has been distorted by piled up shipment activities following the Lunar New Year holidays in February. The figures will likely soften in the coming months, revealing the underlying lacklustre demand conditions. Charting a slight improvement, demand from the US lessened its decline, contracting by -3.6% (Feb -8.9%). Meanwhile, exports to Singapore deteriorated to -6.9% ( Feb: -2.9%) on the back of electronics downcycle, dragging overall export growth by 0.9 ppt.

● Imports lessened drop of 0.1% came in above consensus and house estimate of -1.4%. Improvements were evident across the board, steered by upswing in imports of intermediate (3.2%; Feb: -2.8%) and consumption goods (10.5%; Feb: -11.6%). Although by a smaller extent, imports of capital goods improved to -11.8% (Feb: -15.0%).

● Though the soft patch in the 1Q19 may have gradually started to recede, as indicated by the increase in April’s manufacturing PMI (49.4, Mar: 47.2), albeit remaining in contractionary mode, and spike in the Baltic Dry Index (1,011; Mar: 689), we retain our view that trade performance would remain relatively subdued going forward. This is premised upon the yet uncertain outcome to the extended US-China trade negotiations and ongoing economic moderation in major global markets, including China, the EU and the US. Though we could see that China has taken extensive fiscal and monetary measures, such as through tax cuts and injection of funds via the targeted medium-term lending facility, to prop up its domestic economy, the intended growth outcome has yet to be realised. Against this backdrop, we maintain our exports forecast of 4.0%-6.0% in 2019 (2018: 6.8%). Along with an expectation of slower domestic demand, GDP growth will likely extend its slowdown into the 2Q19 to 4.2% from an estimated 4.4% in 1Q19, adding to our whole projection of a slower growth of 4.5% (2018: 4.7%).

Source: Kenanga Research - 6 May 2019