This article first appeared in The Edge Malaysia Weekly on December 25, 2017 - December 31, 2017

THIS has been a surprisingly good year for exports, with performance exceeding expectations due to the recovery in global trade. Most economists and research firms have had to revise their forecasts upwards several times throughout the year.

According to the Department of Statistics Malaysia, exports for the first 10 months of the year jumped 21.1% to RM772.66 billion (see table) while imports stood at RM692.51 billion, up 21.9%. As a result, a trade surplus of RM80.15 billion was recorded, 14.4% higher than in the same period in 2016.

Exports in October grew significantly, by 18.9% to RM82.41 billion, exceeding the RM80 billion mark for the third time this year. As imports totalled RM71.85 billion — 20.9% higher — the trade surplus widened to RM10.56 billion, the highest value since April last year, making it the 240th consecutive month of trade surplus since November 1997.

But euphoria aside, it has not gone unnoticed that most economic experts maintain the view that exports will moderate next year, given the now unfavourable high base effect and overall demand deceleration, coupled with the recovery of the ringgit.

When contacted, Socio-Economic Research Centre (SERC) executive director Lee Heng Guie and RHB Research Institute Sdn Bhd chief Asean economist Peck Boon Soon acknowledge that Malaysia’s stronger-than-expected export performance this year has created a steep mountain to climb in 2018.

“[Exports in] 2017 was probably our best performance in the last five years. From low single-digit to strong double-digit growth, we are constantly beating market expectations. For the full year, I expect exports to grow 17.5% to 18% this year, and we will definitely end the year on a high note,” Lee tells The Edge.

“Therefore, it will be a tall order for us to repeat such a strong performance in 2018, partly due to a high base effect. In addition, the effect of a weak ringgit on exports is likely to disappear next year, so export growth in 2018 should normalise to 7.5%.”

Peck concurs, saying that it is “almost impossible” for export growth next year to be as high as in 2017.

“China’s economic growth is expected to decelerate in 2018, while the US Federal Reserve foresees three additional interest rate hikes next year, so overall global demand should decelerate too. Moreover, the ringgit is expected to strengthen further, which could affect our export growth,” he says.

Peck expects export growth to halve to 10% next year.

Lee says export growth this year was “very healthy, broad-based and well-diversified”. More importantly, the weak ringgit effect was not the sole reason exports performed better.

“What we are seeing now is that the global economy continues to grow. It is important to note that export performance is the function of demand from our major trading partners. It is not as simple as ‘people will buy your products when your currency is cheap’, they buy when they have the demand,” he says.

Peck says he is rather surprised by export growth this year.

“Following the slowdown in 2015 and 2016, demand this year is much stronger than expected. Overall, unemployment rates in developed countries have declined. People are spending more with their rising disposable income — they buy new phones, new gadgets and new cars,” he says.

In a Dec 6 report, CIMB Research economists Michelle Chia and Lim Yee Ping raise their gross export growth forecast for 2017 to 18.9% — which would mark the highest annual growth rate since 2004 — up from 15.3% previously.

Against this high hurdle, they expect more normalised growth of 9.8% in 2018, as electrical and electronics (E&E) export performance might shine less brightly.

“Key product launches in the smartphone segment in September and October are likely to keep external demand for E&E well supported in 4Q2017. However, after a steep run-up this year, we expect the pace of E&E export growth to diminish in 2018 due to an elevated base and more moderate demand,” say Chia and Lim.

They point out that trade growth may ease next year on a reversal of the base effect.

“Exports increased 21.1% year on year in 10M2017, as healthy global demand boosted export volume, while a recovery in commodity prices improved Malaysia’s terms of trade. Both tailwinds are expected to be more muffled in 2018,” say Chia and Lim.
 

Weak ringgit effect could fade away

Considering that the ringgit has appreciated sharply in recent weeks — 4.1% against the US dollar since Nov 1 — any further strengthening of the exchange rate would translate into lower converted export revenue, Chia and Lim add.

PublicInvest Research analyst Rosnani Rasul is of the view that the impact on exports of the ringgit’s advancement will only be felt in the first quarter of next year.

“Exports are set to drive growth in 2017. Based on our assessment, net exports are set to contribute 1.4% to headline growth, better than 2016’s contribution of 1%. While we savour the moment, we think ringgit advancement will start to weigh on exports soon. It could be as early as the first quarter of 2018, if not in November or December this year,” she says in a Dec 7 report.

Rosnani adds that the landscape could change next year, especially since the ringgit is set to move higher.

“In a competitive world, where a small change in input cost can mean profit or loss, importers have to weigh the impact of further ringgit advancement. In our view, as long as the ringgit’s real effective exchange rate does not move much vis-à-vis regional peers, export numbers can remain robust. Otherwise, net exports will take a backseat in driving Malaysia’s economy,” she warns.

In a Dec 7 report, TA Securities analysts Shazma Juliana Abu Bakar and Farid Burhanuddin highlight that trade performance is expected to moderate in the coming months, mainly due to the high base effect as well as a stronger ringgit, which would translate into higher competition for Malaysian products.

“We maintain our trade numbers — export growth for 2017 is 17.4% y-o-y and imports 18% y-o-y. As such, the balance of trade will continue to register a trade surplus of RM98.6 billion for this year,” they say.

Going forward, a moderate growth performance for exports is expected next year, but it will continue to be led by E&E products and commodities such as crude oil and palm oil, say Shazma and Farid.

“With the expected moderation, we would need to do more in our export promotion,” they say.
 

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