• Exports and imports expanded 9.4% and 10.3% respectively in July

• Trade surplus widened amid stronger exports over imports

• Estimate exports growth of 5.5% - 6.0% and GDP growth of 4.8% in 2018

• Meanwhile, BNM kept OPR unchanged at 3.25%, as expected

Highlights

In July, Malaysia’s exports grew 9.4% y-o-y (June: +7.6%) and imports rose by 10.3% y-o-y (June: +14.9%). As a result, trade surplus surged to RM8.3bn (June: RM6.04bn).

During the month, exports growth was mainly supported by E&E products (+23.6%) and crude petroleum (+90.1%). On the contrary, exports of palm oil and palm oil-based products fell 13.6%, followed by refined petroleum products (-12.3%) and LNG (-38.4%).

Meanwhile, July’s imports was driven by capital goods (+4.7%) and consumption goods (+11.1%). Concurrently, intermediate goods declined by 0.1%.

YTD-July, exports and imports average y-o-y growth came in at +7.4% and +5.2% respectively.

Our comments

In July, y-o-y exports growth came in higher than Bloomberg’s consensus estimates of 4.7%.

On m-o-m basis, exports rebounded to 9.6% (June: -4.3%), after three consecutive months of contraction. The growth was attributed to stronger exports of E&E products, crude petroleum, refined petroleum products, palm oil and palm oil-based products. The sequential growth was also due to a low base effect in June as a result of the Eid festive holidays.

Furthermore, E&E exports to US rebounded to 0.3% y-o-y growth (June: -10.6%) after seven consecutive months of contraction. Positive E&E exports growth was also recorded for major trading partners such as China and Singapore (60.6% and 9.8% y-o-y respectively), except for Japan which registered a fall of 8.2% y-o-y.

Meanwhile, Nikkei Malaysia Manufacturing PMI for August has turned into expansionary territory for the first time since Jan 18, registering an index of 51.2 (July: 49.7) after staying below the 50- point threshold for seven consecutive months. The Malaysian manufacturing sector reflected higher new orders for the first time and registering higher output during the month. On the price side, input cost inflation on the manufacturing sector eased to the slowest since Feb 15 following the zero-rating of GST since June.

As an export dependent economy, the ongoing trade war between US and its major trading partners will adversely impact Malaysia due to spillover effect from disruption to global trade flows. Note that US and China make up 9.0% and 13.6% of Malaysian exports for the first seven months of 2018. While we believe the ongoing trade tensions will unlikely to escalate into a fullblown trade war, it remains a key risk to global economy. That said, there is a silver lining for Malaysia’s export-oriented manufacturing sector over the medium term as multinational corporations may diversify their supply chain from countries directly implicated in the trade war to neutral countries such as Malaysia. According to the International Trade and Industry Ministry (MITI), foreign investors had started showing interest on setting up manufacturing facilities in Malaysia recently.

On a side note, Monetary Policy Committee (MPC) has maintained the Overnight Policy Rate (OPR) at 3.25% in today’s meeting. BNM’s decision was in line with Bloomberg consensus and our expectations. We believe the MPC will maintain OPR at current rate for the rest of the year.

We maintain our exports growth projection to 5.5% - 6.0% y-o-y in 2018, and 2018 GDP forecast at 4.8% y-o-y.

Source: Alliance Research - 5 Sept 2018