● COVID-19 pandemic and governmentMovement Control Order (MCO) pushed Industrial Production Index (IPI) into arecord slump in April, undershooting forecast (-32.0%; house estimate and consensus: -15.4%; Mar: -4.9%).

- Attributable to the full impact of Movement Control Order (MCO) and a sharp fall in external demand.

- 3-mma: sharpest fall since June 2009 (-10.6%; Mar: 0.4%).

- MoM: steepest fall on record (-30.5%; Mar: -0.2%).

● Manufacturing index growthtumbled to a record low of -37.2% (Mar: -4.1%), in tandem with a sharp contraction in manufacturing sales (-33.0%; Mar: -3.0%)

- Broad based sharp decline, led by further contraction in production of transport equipment and other manufacturers (-69.3%; Mar: -10.1%), followed by, nonmetalic mineral, basic metal & fabricated metal product (- 62.7%; Mar: -9.8%) and electrical & electronic products (- 34.1; Mar: -4.9%).

- In addition, the slowdown is attributable to a sharp drop in the production of petroleum, chemical rubber & plastic products (-21.4%; Mar: 3.6%) and wood products, furniture, paper products and printing (-68.4%; Mar: -6.1%).

- MoM: fell for the third straight month on record low (-35.8%; Mar: -1.0%).

● Mining index fell to its lowest level since May 2011 (-19.6%; Mar: -6.5%) due to oil price volatility and full impact of MCO

- Multi-sectoral slow down led by a big fall in crude petroleum output (-20.2%; Mar: -7.1%) and extraction of crude oil and natural gas (-19.6%; Mar: -6.5%).

- Moving forward, we expect the mining output slowdown to persist albeit at a slower pace on the back of a modest price recovery as economic reopening would gradually boost demand.

- MoM: worst drop on record (-19.1; Mar: 2.6%).

● Electricity index fell significantly by -19.2% (Mar: -7.0%), bearing the full brunt of MCO

- The index is expected to rebound in the coming months reflecting a pick up in manufacturing activities as factories and businesses resumed their operations, lifting operating capacity following the implementation of Recovery MCO (RMCO).

- MoM: the weakest reading since February 1997 (-13.3%; Mar: -0.8%).

● Industrial production is expected to make a comeback in the near term following the gradual reopening of the economy

- In an effort to revive the domestic economy, the government has announced the RMCO (from 10th June until 31st August), replacing the Conditional MCO (CMCO) which lasted 37 days (4th May- 9th June). This is expected to spur higher domestic demand and businesses operate at a much higher capacity.

- It is still early to make a conclusive assessment of the economic impact of MCO on GDP growth for the 2Q20. Our basecase projects 2Q20 GDP growth to decline by 7.5% (1Q20: +0.7%) on the back of projected fall of 13.1% of real manufacturing growth in the 2Q20 (1Q20: +1.4%). We may have to downgrade our 2Q20 and 2020 growth forecast if factory output remained weaker than expected in May and June in spite of the relaxation of MCO. For now, we maintain our GDP growth projection of -2.9% for 2020 (2019: 4.3%).

Source: Kenanga Research - 12 Jun 2020