This article first appeared in The Edge Malaysia Weekly, on October 12 - 18, 2015.
AUGUST’S export numbers may have come in above expectations, up 4.1% year on year — the second highest growth of monthly export numbers so far this year — but economists say they need to see the pattern in the following months before turning positive.
It doesn’t help that imports fell 6.1% in the same period, underscoring the continued weakness in domestic consumption.
“Global demand continues to be sluggish. The stronger export numbers are more a result of translation gains from a weaker ringgit, rather than an increase in export volumes,” says RHB Research chief Asean economist Peck Boon Soon.
The ringgit averaged 4.0533 against the US dollar in August this year, 27.5% weaker compared with the previous year.
“Assuming the bulk of exports is transacted in US dollars, the gain in exports is only nominal. The net impact on GDP might not be positive,” says Peck, noting that the impact would be difficult to estimate since the statistics on export volumes have not been published yet.
Low commodity prices have been the drag on exports. The latest figures show a 29% fall in the value of mineral fuels exported — a result of weaker oil prices. Note that mineral fuels, which include crude oil and liquefied natural gas (LNG), used to make up about 22% of total export value.
Animal, vegetable oils and fats (AVOF) exports, which include crude palm oil, rose slightly in August, up 2% y-o-y. This is quite positive given that AVOF exports fell by 20% y-o-y in the first quarter this year.
The saving grace is that the export of manufactured goods — particularly of electrical and electronic (E&E) products — has filled the void left by mineral fuels. E&E exports grew by 16.7% y-o-y in August, up from a 12.1% y-o-y expansion in July. Their value could be boosted by the soft ringgit but export volume statistics are not available.
The segment made up 36.7% of total export value for January to August this year, compared with 32.8% for the previous corresponding period.
In terms of the trade balance, it is encouraging to see that manufacturing has been able to drive export growth so far, at a time when commodity prices are low. However, some quarters opine that mineral fuel imports would also become cheaper and offset the impact anyway.
Instead, Low crude oil prices would be a bigger concern from the government’s fiscal perspective, since that would affect petroleum revenue.
Going forward, maintaining strong export numbers would also be challenging once the exchange rate is stripped out. Last week, the International Monetary Fund (IMF) cut global economic growth by 0.2 percentage point to 3.1% for 2015 in its World Economic Outlook report.
The IMF is predicting that growth in China, the world’s second largest economy, will slow to 6.8% in 2015 and 6.3% in 2016 — the lowest in 25 years. In contrast, Beijing’s official target is around 7%. Given the circumstances, it might be a little optimistic to hope for global demand to continue supporting Malaysian GDP growth at the same pace going forward.
Furthermore, there continues to be concern over an economic slowdown in China — Malaysia’s largest trading partner with a 14.2% share of exports.
Interestingly, exports to China have been very strong over the past few months. In June, July and August, exports to China swelled 49.3%, 32.7% and 32.4%, respectively.
Sustainability is still an uncertainty, according to economists.
The sharp fall in imports, in contrast with an expansion in exports, means that the country was able to post a strong monthly trade surplus of RM10 billion — a figure that has only been surpassed twice in the past three years.
A strong trade surplus would help to support the dwindling current account surplus — an indicator that rating agencies and economists are keeping a close eye on amid the ringgit’s weakness. Nonetheless, the ballooning trade surplus, which comes in the form of mild export growth and a decline in imports, isn’t something desirable as this could be evidence of a slowdown.
“The sharp contraction in import numbers is a bigger concern, as it is reflective of weaker domestic demand. The exchange rate distortion, means that import volumes could have fallen even more,” says Peck.
Likewise, independent economist Lee Heng Guie points out that the sharp decline in imports could be indicative that the domestic economy might not be as resilient as expected.
“A sharp compression of input volumes could be indicative of a slowdown in the economy, especially if it is sustained. We saw something similar before the crisis back in 1997 and 1998,” says Lee, the former chief economist for CIMB.
The import of consumption goods rose by 13.7% y-o-y, while the import of capital goods and intermediate goods saw a 12.4% and 6.5% y-o-y decline, respectively.
The increase in consumption goods, which make up only 8.5% of total imports, was unexpected as consumers have tightened their belts. Economists say the rise could simply be due to the weak ringgit as Malaysians are paying higher prices for imported products. In terms of volume, consumption may have been stagnant or even declined.
Note that in May, June, and July, the import of consumption goods rose by 27.2%, 36.9% and 25.7% y-o-y, respectively. Hence, the 13.7% y-o-y increase can be seen as a relative slowdown. On a month-on-month basis, imports of consumption goods actually fell by 9.1% in August.
In fact, economists’ bigger concern is the decline in intermediate goods, which make up almost 58% of imports. Intermediate goods are defined as goods that are imported as inputs for goods that are ultimately for export.
Hence, the decline in intermediate goods imports is seen as weakening confidence in global demand by manufacturers as the imported inputs are meant for exports. Intermediate goods fell 11.4% m-o-m.
Imports of capital goods fell on lower demand for transport equipment, which fell by 6.9% y-o-y. Capital goods make up 13.1% of total import value
Peck says that lower intermediate and capital goods imports point to lower manufacturing productivity going forward, and ultimately, weaker exports.
However, there are bright spots on the horizon. The rebound in crude palm oil prices to over RM2,300 per tonne should be a boost to AVOF exports in the coming months if prices can be sustained. Also, the crude oil prices have begun to settle above US$50 per barrel. Likewise, LNG export prices may be starting to find a floor price, after falling from over US$15 per million British thermal units (mmbtu) to as low as US$7.6 per mmbtu in the second quarter. As at August, the monthly average spot price to import LNG into Japan had rebounded slightly to US$8.1 per mmbtu.
Combined, the settling of commodity prices should at least reduce the volatility of exports, if not boost them. That said, the trade numbers still paint a less than rosy picture, despite the export growth in August and improving trade balance.
Save by subscribing to us for your print and/or digital copy.
P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.