By Khairie Hisyam
June trade data surprised economists, who attributed above-expectations performance to recent weakening of the ringgit against the greenback. The question, however, is whether the boost is too evanescent to make a difference in the larger picture.
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When the Department of Statistics Malaysia released the external trade statistics for June on Aug 5, economists were taken by surprise: exports, tipped for contraction, grew, while imports shrank at a lower rate than expected.
In part the growth spurt in exports was attributed to further weakening of the ringgit, which averaged 3.74 to the US dollar in June compared to 3.60 per in May. However, the surprise support from Malaysia’s faltering currency may not linger long enough to sustain a prolonged uptick in trade numbers.
While Bloomberg consensus estimates tipped exports to see falling 2.2% and exports fall by a further 4.5% in June, exports expanded by 5% year-on-year (y-o-y), while imports fell 1.5%.
The exports rebound was led by stronger shipments of electrical and electronics (E&E) as well as palm-oil related exports, though offset by continued weakening of oil and gas exports.
“In terms of export markets, overseas shipments to China improved tremendously to +49.3% from +5.7% in the preceding month,” said AmResearch economist Patricia Oh in a report. “As for the US and Singapore, exports had reversed from contraction to register positive growth rates at 9.5% and 3.8% respectively.”
However, demand from other markets remained weak in June with Japan shipments declining by 25.1%, Indonesia dipping 7.6%, Taiwan falling by 8%, and Australia declining by 29.9%, according to AmResearch data.
On the imports front, consumption goods expanded by more than a third – the highest since 2004 – while intermediate goods and capital goods declined. Kenanga Research noted that imports for both the capital goods and intermediate goods categories shrunk for the third consecutive month in June, by 16.5% and 2.4% y-o-y respectively.
And the boost from the faltering ringgit may stay awhile, according to AllianceDBS Research economist Manokaran Mottain. “The exchange rate is expected to weaken further, barring any exchange rate interventions from the regulators,” he said in a report on Aug 5.
The ringgit indeed weakened further this week, the latest hit being a devaluation of China’s yuan as the People’s Bank of China cut its daily reference rate by 1.9% on Aug 11, Bloomberg reported. This depressed the ringgit further, breaching 4.00 to the US dollar earlier this morning.
However, 2015 remains likely a rough year all-round for Malaysian trade.
Weakness ahead for exports?
While the faltering ringgit is a surprise boon for exports in June, and is tipped to stay weakened, the outlook for trade in 2015 remains on rough terrain.
Up to June, continued contraction in imports of capital and intermediate goods suggests that external demand will likely continue to remain weak in coming months said BIMB Securities economist Imran Nurginias Ibrahim.
This, coupled with global trade uncertainties, sets up Malaysia’s trade performance for further weakness ahead, he said.
On the other side of the equation, however, the weakened state of the ringgit will likely increase the competitiveness of Malaysian exports, in turn, providing some support for exports performance going forward. This scenario would pave the way for recovery in the second half, said Imran.
“Given the extent of the weakened ringgit, the export of manufactured products will continue to support export growth for some time yet,” said Imran in a report, adding improvements in global economic activities in the second half should firm up commodity prices. “This will likely provide some support to Malaysia’s exports as well.”
That said, not all Malaysia’s major exports had apparently been boosted by the weakening of the ringgit.
In June alone, oil and gas (O&G)-related exports posted decreases owing to price weakness in the global market and exports figures on these products “are unlikely to rebound in the short term,” said Manokaran of AllianceDBS, citing renewed weakness of Brent crude oil prices in early August, hovering around the US$50 per barrel mark.
In particular, liquefied natural gas exports decreased by 45.2% y-o-y due to lower prices as well as lower export volume. O&G exports thus remain the ball and chain on exports performance going forward even as other fronts may see boosts from faltering ringgit.
“Despite the promising numbers, low prices for O&G exports continue to be a drag on receipts,” said Kenanga Research, adding this is evident “in the sharper 3.7% y-o-y decline in exports for second quarter of 2015 (2Q15) compared with a 2.5% fall in 1Q15”.
Imports hint factory slowdown coming?
In terms of imports, the weakening of the ringgit seemed to spur a potential slowdown of manufacturing while encouraging wholesalers to stock up.
The net effect is a slower rate of contraction for imports seen in June, though the month still posted the third consecutive month of falling imports since the goods and services tax (GST) kicked in on April 1.
According to June trade data, continued contraction of capital goods and intermediate goods was offset by the increasing pace of imports of consumption goods, which rose by 36.8% in June – the highest since 2004 – and making up “an extraordinarily large 10.3% share of total imports,” said Kenanga.
“Some of the increase… can be attributed to the unfavourable foreign-exchange rate for importers,” said Kenanga. “Prices of imports as indicated by the producer price index was up 0.6% y-o-y in June; in comparison, local production prices are down 9.2% y-o-y.”
Capital goods refer to durable goods used for production of goods and services, while intermediate goods refer to semi-finished products used as inputs in manufacturing. Consumption goods refer to ready-for-consumption products.
“A sustained fall in capital and intermediate goods imports is typically associated by a future decline in factory activity,” said Kenanga. “An alternative explanation could be that businesses are choosing to exhaust inventory built up in 1Q15 before GST implementation or simply slowing down in anticipation of weak demand.”
BIMB Securities economist Imran seems to think the former scenario likely, however, noting that the fall in imports of intermediate goods – which comprised 58.2% of total Malaysian imports – suggests that “the E&E exports will likely moderate going forward”.
However, E&E exports may find support in continued expansion of export orders, Manokaran of AllianceDBS pointed out, despite the Nikkei Malaysia Manufacturing Purchasing Managers’ Index (PMI) remaining in contractionary territory since April.
“This (indicates) a dim outlook in domestic industrial production,” said Manokaran in a report, though adding “new export orders, in fact, expanded for the sixth consecutive demand” despite the Malaysia PMI report indicating that new manufacturing orders declined on the back of weak domestic demand.
“This positive development could be supportive of E&E exports in the coming months,” said Manokaran.
Trade surplus narrowing
Overall, the ringgit boost provided some momentum for Malaysia’s trade surplus in 2Q15 after a contraction seen in 1Q15. However, a narrower trade surplus for 2015 seems likely based on latest trade performance data.
In June, trade performance widened Malaysia’s trade surplus for the month to RM7.98 billion, a five-month high. This brought the 2Q15 trade surplus to RM20.4 billion, up 10.1% y-o-y, compared to an 18.9% decline y-o-y seen in 1Q15, which saw RM21.3 billion.
However, the cumulative trade surplus over first half of 2015 (1H15) comes to RM41.7 billion, lower than RM44.8 billion seen in 1H14.
Having a trade surplus essentially means Malaysia exports more than it imports and this is indicated by a positive balance of trade figure. On the other hand, a negative balance would indicate otherwise and is commonly referred to as a trade deficit.
In turn, balance of trade is the difference between the monetary value of Malaysian exports and of imports. It is one of three components making up the current account figures, which shows whether a country is a net exporter or net importer of goods and services sans financial transfers and investments.
“Despite the strong performance of June’s exports and imports, we predict net exports will continue to drag the Malaysian economy in 2Q15,” said TA Securities in a report.
For the full year, Imran of BIMB Securities expects a 2.6% exports growth alongside a 4.1% imports growth, which “looks challenging if compared to the first six months figures of -3.1% and -2.4% respectively,” said Imran. “If there is further revision to the full-year projections, it will not change the fact that the trade surplus and current account surplus will narrow.”
However, Imran expects Malaysia’s current account to remain in surplus in 2015, citing positive net trades, though he also expects that the current account will continue to maintain a surplus in 2015 owing to positive net trades.
With uncertainty still plaguing the ringgit, however, how will further swings in the currency exchange rate impact trade performance?
Tomorrow: Ringgit and trade, the road ahead
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