KUALA LUMPUR (July 3): While the direct impact from US's protectionist policies and tariffs on Malaysian exports has been limited so far, the second-round effects from the escalating trade tensions between US and China will pose a bigger concern to the Malaysian economy, according to RAM Rating Services Bhd (RAM Ratings).

In a statement, RAM Ratings said the ripple effect of the second-round effects, which bears the brunt of most of the American tariffs, will be more strongly felt through the global value chain and in global trade and economic growth.

"Notably, the US tariffs announced have a more far-reaching impact beyond China and have significant spillover effects to the global value chain given the intermediate nature of the goods taxed.

"China's set of retaliatory tariffs, on the other hand, seemingly target the US specifically," said RAM Ratings' head of research Kristina Fong.

That said, the ratings agency noted that large trade gains could be derived as US substitutes its demand for imports away from China to other established technology markets, in addition to inward investment gains from American and Chinese firms seeking to bypass these trade tariffs by relocating its operations.

"However, the latter will take time to materialise as firms will require greater certainty in terms of how long and how significant this trade war will turn out to be," it added.

According to the ratings agency, to date, Malaysian exports of affected goods to the US — given the latter's blanket tariffs on solar panels, washing machines, and steel and aluminium — only constituted 0.8% of Malaysia's total exports in 2017.

In the near term, RAM Ratings said significant downside risks may arise from the widespread uncertainty and heftier production costs, primarily for the US.

"This could in turn affect the current positive global economic momentum through higher unemployment and lower investments. Moreover, greater-than-expected inflationary pressure may also spur faster-than-anticipated monetary tightening by the US Federal Reserve, which may further hurt investment and global re-stocking demand.

"For Malaysia as a small open economy, weak external demand is a clear downside risk to growth momentum," RAM Ratings said, adding this will require "very close monitoring".

May exports growth seen to have slowed to 5.5%

Meanwhile, it expects Malaysia's exports growth for May to have moderated to 5.5%, compared to 14% in April, partly due to the high base effect. Last year's May export growth jumped 32.4%.

"The continued decline in imports of intermediate goods also suggests an expectation of a corresponding moderation in external demand growth going ahead," it said.

In line with the expected exports deceleration, imports growth is anticipated to have contracted 2.5%.

"Some risk aversion in the lead-up to the 14th General Election (GE14) may also have caused some hold-back in investments, thereby contributing to the slower pace. Overall, the trade surplus is projected to come in at RM11.8 billion for the month," the ratings agency added.