OVERVIEW

● May exports expanded by 2.5% YoY (Apr: 1.1%), remaining on an uptrend for the third successive month, but was below consensus and house estimate of 3.6% and 13.5%, respectively. On a MoM basis, it contracted by 1.2% (Apr: +1.3%). The stronger YoY performance was mainly driven by improved demand from the US, China and Philippines, and bigger export value for palm oil. Meanwhile, imports softened to 1.4% (Apr: 4.4%), below consensus and above house estimate of +2.6% and -2.3%, respectively. As exports declined and imports expanded on a MoM basis, the trade surplus narrowed to a 6-month low of RM9.1b (Apr: RM10.8b). Year-to-date, exports grew by 0.3% (2018: 6.7%), while imports dropped by 0.3% (2018: +1.6%), resulting in an enlarged trade surplus of RM56.8b (2018: RM54.5b).

● Product-wise, improvement in shipments of commodities, specifically palm oil, outpaced lower shipments of electrical & electronics (E&E). Exports of palm oil rebounded to 20.8% (Apr: -17.3), resulting in a 10-month low stockpiles of 2.4m tonnes (Apr: 2.7m tonnes), in spite of the increase in production (9.6% YoY; Apr: 5.8%). Shipments of crude petroleum also declined by less (-20.0%; Apr: -34.6%), as the average Brent crude oil price remained sustained at USD71.2/barrel, amid unfavourable development surrounding the US-China trade talks. After further deceleration in June (USD64.2/barrel), we foresee a strengthening of the crude oil price following OPEC’s decision to extend the oil output curbs by 9 months up until March 2020. The aforementioned factors offset the sharply lower E&E shipments, (0.5% YoY, Apr: 39%), weighed mainly by lower demand for thermionic valves and tubes.

● By destination, demand for Malaysia’s exports rebounded in the US and the Philippines, while dropped by less in China. Exports to the US and Philippines increased sharply by 11.7% (Apr: 3.1%) and 39.9% (-0.7%), with their contribution to export growth edged up to 1.0 percentage points (ppt) and 0.6 ppt, respectively. Charting a slight improvement, demand from China contracted, albeit at a slower rate of 2.2% (Apr: -6.6%). Demand from China may be lifted temporarily in June, amid front-loading of exports to the US ahead of the proposed tariff hike, which has primarily been put off following the G20 summit. Of note, exports to Singapore slowed to 2.6% (Apr: 10.5%) on the back of cyclical slowdown in the electronics market, with its contribution to overall growth reduced to 0.3 ppt.

● Tracking an opposite direction, imports weakened in May, led by a negative turnaround in the capital goods segment (-5.9%; Apr: 5.7%), followed by weaker purchases of intermediate (6.4%; Apr: 20.3%) and consumption goods (10.9%; Apr: 18.9%). Notably, the bulk of the lower import growth was attributable to softer retained imports (8.4%; Apr: 19.2%), suggesting weakness in domestic demand.

● Overall, we retain our view that trade performance would remain lacklustre, premising upon the looming uncertainty surrounding the US-China trade feud and faltering economic growth in major global markets, including China and the EU. Though more central banks have started to lean or fully adopt a dovish monetary policy stance, such as through benchmark rate cuts and injection of funds via the targeted medium-term lending facility, the intended positive outcome on the economy will need time to materialise. Against this backdrop, we maintain our exports forecast of 1.0%-2.0% in 2019 (2018: 6.8%). Along with an expectation of slower domestic demand, GDP growth will likely extend its slowdown into the 2Q19 to 4.3% from 4.5% in 1Q19, adding to our whole year projection of a slower growth of 4.5% (2018: 4.7%).

Source: Kenanga Research - 5 Jul 2019