This article first appeared in The Edge Malaysia Weekly on August 3, 2020 - August 9, 2020

AFTER recording three consecutive months of contractions, exports rebounded by 8.8% year on year in June to RM82.87 billion, leaving most economists positively surprised.

Imports fell 5.6% y-o-y, however, to RM61.98 billion, resulting in a trade surplus of RM20.89 billion in June — the highest monthly trade surplus ever recorded. Prior to this, there was concern that the country could fall into a twin deficit after a trade deficit was recorded in April, but the June trade performance seems to have put this concern to rest, at least for now.

Still, economists say the June trade numbers do not provide a convincing-enough case to boost the country’s gross domestic product (GDP), as the impact of Covid-19 on major trading partners and the risk of another round of infections, which could spur lockdowns, are still a forcible threat.

“Our trade recovery will be capped by the re-emergence of US-Sino conflicts and challenging economic conditions of our trade partners, especially the US, following an alarming number of new Covid-19 cases. There is [also] no slowing down on the number of new Covid-19 confirmed cases worldwide and [as such] we remain cautious on trade outlook,” Public Investment Bank economist Dr Rosnani Rasul wrote in a note last Wednesday.

AmBank Research echoes Rosnani’s sentiments in a July 29 note. The firm believes that the surprisingly strong trade surplus of RM20.89 billion was largely supported by two factors: a favourable base factor and the easing of the Movement Control Order, which boosts trade.

It says: “The trade strength looks transitory, however, as much depends on the sustainability of demand and the growing risk of a second wave of Covid-19 cases that can continue to weigh on exports. Besides, the base effect is poised to become unfavourable, and is likely to cause a sharply negative turn in export growth. The same can be expected for imports while domestic demand continues to take a beating from the virus.

“Although trade surplus doubled to RM20.9 billion in June from RM10.4 billion in May, the cumulative surplus in the first half of 2020 of RM64.6 billion was RM2.7 billion lower from a year ago. It implies a narrowing trend in play for the year.”

On a positive note, UOB economists Julia Goh and Loke Siew Ting believe oil exports should gradually recover in line with the Opec+ agreement to ease output restrictions from August.

“Malaysia’s diversified export base and potential new demand from reorientation of supply chains should remain supportive. As such, we are revising our full-year exports to reflect a narrower decline of 3.5% in 2020, versus a previous estimate of a 10% decline,” they said in a note last Tuesday.

Closer look at June export numbers

According to Malaysia External Trade Development Corp (Matrade), exports of manufactured goods made up 87.5% of total exports in June 2020, rising 13.7% to RM72.48 billion.

The expansion was due mainly to higher demand of electrical and electronic (E&E) products, rubber products, other manufactures, especially solid-state storage devices (SSD), optical and scientific equipment, machinery, equipment and parts, wood products, iron and steel products as well as manufactures of metal, Matrade said.

With the pandemic raising the demand for gloves, it is not surprising that the export of rubber products, which include gloves, constituted 4.3% of total exports in June 2020, from just 2.3% a year ago. The total value of rubber products exported in June rose 101% y-o-y to RM3.57 billion.

Meanwhile, exports of agriculture goods made up 7.6% of total exports and rose 30%, compared with June 2019, to RM6.27 billion, underpinned mainly by higher exports of palm oil and palm oil-based agriculture products. Exports of mining goods, which constituted 4.6% of total exports, dropped 45.6% y-o-y to RM3.79 billion, weighed down by lower exports of crude petroleum and liquefied natural gas.

Asean+3 Macroeconomic Research Office (AMRO) chief economist Dr Khor Hoe Ee says strong sales of manufactured goods and palm oil products drove Malaysia’s exports rebound in June.

He says: “The improved trade performance is in line with the pickup in the manufacturing Purchasing Manager Indices (PMIs) in June, particularly for key markets such as China and the US, where Malaysia recorded strong export revenues in June. This could be attributable to the catch-up in production and demand as movement restrictions are eased.

“That said, we are still concerned about the sustainability of this strong exports rebound, given that imports of intermediate goods — which are usually needed for the production of exports — remained in a slump in June, albeit to a lesser extent than in the preceding two months. On the other hand, the June print highlights the benefits from Malaysia’s relatively diversified export base, with exports supported by strong sales of E&E, and rubber and palm oil products. The diversity in its export products should continue to support Malaysia’s overall trade performance in the coming months.”

According to Matrade, June exports to China continued to expand for three consecutive months, registering a 46.8% increase to RM14.78 billion, led by higher exports of iron and steel products, manufactures of metal, petroleum product, and palm oil and palm oil-based agriculture, to name a few. Imports from China were up 3.4% to RM13.9 billion.

AMRO’s Khor says Malaysia has been taking efforts to diversify its palm oil markets, such as its inking of a memorandum of understanding (MoU) with China last year for the latter to increase its purchase of palm oil from Malaysia over a five-year period.

“This MoU may have helped in cushioning the drop in palm oil export volumes to India this year. In the first six months of 2020, Malaysia’s palm oil export volumes to India fell an average of 84% y-o-y, while shipments to China rose 25%. In June alone, palm oil export volumes to China more than tripled,” he says.

It should be noted, however, that while palm oil export volumes to India have fallen 84% in the first six months of the year, a total of 246,045 tonnes of palm oil were exported to India in June alone, 62% more than the total amount exported in the first five months of the year. This data coincides with recent reports that India has resumed buying Malaysian palm oil after a four-month gap, following a diplomatic row between the two countries.

Meanwhile, exports to Hong Kong increased 31% y-o-y in June to RM6.03 billion, while exports to the US rose 27.6% y-o-y to RM9.76 billion.

“The sustained rise in exports from the previous month to the world’s two largest economies (US and China) also suggests that the export growth momentum could have benefited from the US-China trade diversion,” says Sunway University Business School economics professor Dr Yeah Kim Leng.

Impact of weaker US dollar on exports

The US dollar has weakened by 4.5% y-o-y as the number of Covid-19 cases in the US surged, and with the US Federal Reserve leaving interest rates near zero in its latest policy meeting.

Sunway’s Yeah says a weakening US dollar will alter export and import price competitiveness with the US but not with Malaysia’s other trading partners, which have absorbed 90% of its total exports this year.

“Most Malaysian exporters have sufficient profit margins to cope with a stronger ringgit. Moreover, the ringgit is widely considered to be undervalued by between 10% and 15% against the US dollar,” he says.

Bank Islam chief economist Dr Mohd Afzanizam Abdul Rashid concurs.

“A weak US dollar should be positive for exports, as our products would be deemed competitive from a costing point of view. So, from the foreign buyers’ point of view, it is cheaper to import from Malaysia,” he says.

Moving to higher-value -added activities

Exports have been a major contributor to GDP growth in Malaysia since colonial days, remarks Prof Datuk Dr Rajah Rasiah, distinguished professor of economics at the Asia-Europe Institute of University of Malaya.

He says that, given the country’s small economy, Malaysia will continue to depend on exports as a major plank to stimulate GDP growth.

“However, the country needs to upgrade into higher-value-added activities through the adoption of competitive industry 4.0 technologies. Unless a structural transformation from low to high-value-added activities is achieved, the export sector will increasingly face pressure from imports.

“In fact, between 2016 and 2019, Malaysia experienced a [trade deficit], which is largely a consequence of falling competitiveness in key export-oriented industries.”

Rajah adds, however, that increasing exports would also raise the country’s dependence on foreign markets, which was what happened during the 2007/08 global financial crisis, which saw Malaysia’s exports collapse.

“The government should put in place an agile mechanism that can absorb such shocks without much stress,” he says.

With tensions once again escalating between the US and China, and with a global health crisis in hand, the government would need to ensure that it strikes an optimal trade balance, one that will not be detrimental to the economy.

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