The State of the Nation: Robust May exports exceed expectations

This article first appeared in The Edge Malaysia Weekly, on July 10, 2017 - July 16, 2017.
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MALAYSIA’s export data for May helped end last week on a high note after the early disappointment from the Nikkei-Markit manufacturing purchasing manager’s index (PMI), which saw the country’s manufacturing performance fall to a record low in June.

Exports grew 32.5% year on year in May, the highest level in seven years, and exceeding market expectations of 23.4%.

Import growth kept pace with exports, resulting in a narrower trade surplus of RM5.5 billion in May compared with RM8.7 billion in April, notes CIMB Investment Research.

Nevertheless, the growth in total trade continues to surprise on the upside at 31.5% y-o-y in May compared with 22.4% y-o-y a month ago.

According to a report by United Overseas Bank (M) Bhd economist Julia Goh, Malaysia’s exports in May even surpassed the rest of the region, ahead of countries like Indonesia (24.1%), Vietnam (20.9%), Thailand (13.2%) and Singapore (11.4%).

This was in contrast to the PMI for June, which hit its lowest in five years since data for the index was first tracked in the country, falling to 46.9 from 48.7 in May.

“Exports advanced further by 32.5% in May, marking the highest growth since March 2010. The high growth was partly due to a low base effect. On a month-on-month basis, exports rose 7.5% or RM5.5 billion, which is above the seasonal average,” says Goh.

“May exports were partly lifted by positive exchange revaluation effects amid the weaker ringgit as average USD/MYR fell 6.7% to 4.33 versus 4.04 in the same period a year ago,” she adds.

Affin Hwang Investment Bank Bhd chief economist Alan Tan says the better-than-expected export numbers were supported by strong exports to China.

“China has used up most of its inventories. It is importing E&E [electrical and electronic] related goods from Malaysia. You can say that Malaysia is benefiting from China’s replenishing cycle,” he explains.

Notably, exports to China recorded the highest y-o-y growth since February 2010, growing 51.5% to RM10.73 billion.

In fact, May was a month that saw increased trade among all trading partners, including Asean, China, the US, the European Union, India, Taiwan and Australia.

“The current swell in the trade cycle is turning out to be stronger than in recent years, and reflects the synchronous nature of a global recovery,” says CIMB Investment Research.

Economists believe exports can continue to hold up going forward, but they expect a moderation in the pace of growth moving into the second half of the year.

“The import of intermediate goods, a leading indicator, has picked up. That points to some sustainability in Malaysia’s export growth. In the months ahead, we will see sustained export growth but we would likely see growth in the low teens because of the base effect from the previous year,” says Tan.

UOB’s Goh says the export gains have surpassed her initial expectations so far, but she will continue to keep an eye on the key electronic and commodities-related sectors.

“We expect full-year exports to expand 14.2% (from 1.1% in 2016). We expect some moderation in Malaysia’s exports going into second half,” she says.

“The moderation is taking place amid ebbing momentum in global manufacturing, a slowdown in cyclical increase in semiconductors, moderating producer price inflation and lower commodity prices,” Goh adds.

The stronger-than-expected May trade numbers have led some economists to upgrade their 2017 projections.

For one, CIMB Investment Research has revised its full-year export growth forecast to 15.3% from 7.3%. However, it is keeping the 2017 gross domestic product forecast unchanged at 4.9% as it expects the increase in exports to be accompanied by higher imports of intermediate and capital goods.

Affin’s Tan believes GDP growth for the full year is likely to come in at a solid 5%.

“Any downside risk like trade protectionism, tightening of monetary policy and geopolitical risk between the US and North Korea would only be felt in 2018, in my view,” he adds.

Nomura Research, which has above-consensus 2017 GDP growth forecast of 5.3%, says the trade data has reinforced its convictions.

“In our view, the trade data reinforces our above-consensus GDP growth forecast for 2017 of 5.3%, supported by the export upcycle and higher agriculture output, particularly of palm oil. Judging from regional data for June and our leading indicators, Malaysia’s electronics-led pickup in exports is set to continue at least for the next few months,” it says in a report.

However, the robust GDP and stellar export growth numbers have yet to translate into any meaningful spillover effect among the general public.

Tan says the economic recovery looks like it is tilted towards exports of E&E and is not broad-based yet.

“I believe the economic recovery has to be sustained beyond 2017 before it can be broad-based. The economy has to be growing consistently and translate into better company earnings and in turn, higher income for workers,” he says.