● Exports swung into contraction in January after a surprise rebound in December last year, beating house forecast but below market expectation (-1.5% YoY; consensus: -1.6%; KIBB: 0.8%; Dec: 2.7%)

- MoM: exports fell even sharper at -2.7% (Dec: 6.8%).

● Product-wise, sharp drop in palm oil & palm-oil based products shipments as well as further contraction in E&E exports (38.6% share of exports) outweighed the surge in rubber gloves exports

- Palm oil & palm oil-based products (1.2%; Dec: 20.9%): slowed after expanding at its fastest pace since May 2017 last month amid a palm oil dispute between Malaysia and India. It fell 5.5% MoM (Dec: +7.7%).

- E&E (-5.5%; Dec: -5.4%): continued its downtrend for the sixth straight month, mainly due to an extended drop in shipments of thermionic valves & tubes (-1.9%; Dec: -0.9%) and electronic integrated circuits (-1.2%; Dec: - 5.5%).

- Rubber gloves (12.8%; Dec: 7.4%): surged to a 13-month high on sustained global demand growth and is expected to ticked higher in the succeeding months due mainly to demand for surgical gloves to be used for COVID-19 treatment.

● By destination, the fall in exports was attributable to sluggish demand from China and EA-7

- CN (-5.7%; Dec: 17.8%): contracted to a 3-month low as COVID-19 ripple effect begins to hit demand.

- EA-7 (-3.9%; Dec: -0.2%): larger contraction as a result of weak export to Thailand (-19.8%; Dec: -7.3%), fastest deceleration since August 2012. In addition, exports to HK extended its drop on the negative impact of the prodemocracy rally.

- US (9.5%; Oct: 15.1%): softer growth after posting notable gains in the previous month.

● Meanwhile, imports fell by 2.4% (consensus: -1.4%; KIBB: -1.8%; Dec: 1.0%)

- Due to decrement in imports of intermediate goods (3.7%; Dec: 6.2%) coupled with continuous drop in imports of capital goods (-15.0%; Dec: -11.0%). Furthermore, imports of consumption goods shrank to a 3-month low (- 1.0%; Dec: 3.2%) attributable to significant deflated demand of household food and beverages.

- Meanwhile, re-exports fell sharply by 6.7% (Dec: -0.3%).

● Trade surplus slightly narrowed to RM12.0b (consensus: RM10.7b; KIBB: RM13.5b; Dec: RM12.5b) as imports declined at a much faster pace than imports

● January’s trade performance is expected to be a precursor to an overall slowdown of exports in 1Q20 which is in line with our projection of slower GDP growth forecast of 3.2% (4Q19: 3.7%)

● Following an expected slowdown of exports in the 1H20, it is expected to gradually recover in the 2H20, bringing the whole of 2020 exports to chart a single-digit growth of between 1.0-4.0% (2019: -1.7%) on the assumption that the impact of COVID-19 is brought under control

- In the short term, the outlook remains negative amid heightened external risks, in particular, the unceasing spread of the new coronavirus which is spreading outside of its ground zero rapidly, eliciting panic and dragging global economy to a possible recession. Besides, it is magnified by heighten geopolitical tension, growth slowdown in a key trading partner and US-China trade uncertainty.

- Nonetheless, we expect the RM20.0b economic stimulus package to cushion the growth slowdown, apart from the back-to-back interest rate cuts by BNM and a potential upturn in the tech sector. Hence, we maintain our baseline GDP growth forecast of 4.0% in 2020 (2019: 4.3%).

Source: Kenanga Research - 5 Mar 2020