Malaysian exports grow thanks to favourable conditions

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Led by electrical and electronic products shipments, Malaysia’s foreign trade rebounded strongly in March after a weaker performance the month before, though exports could come under pressure later in the year as demand fluctuates.

Exports rose 2.2% year-on-year (y-o-y) in March, according to data issued by the Ministry of International Trade and Industry in early May. Total outbound shipments were valued at RM84.5bn ($21.4bn), while imports fell to RM69.8bn ($17.7bn), a decline of 9.6%.

The results increased Malaysia’s total trade to RM154.2bn ($39bn), a 17.1% increase over the previous month, though y-o-y the figure dipped by 3.5%. Rising exports drove the results, with the trade surplus jumping 172% y-o-y and 62.9% over February.

Along with electronics and electrical products, which increased by 8.7% to RM31.8bn ($8bn), the value of crude oil exports also gained strongly, up 18.4% to RM3.6bn ($911.3m) on the back of higher volumes and prices.

Imports drop off in the first quarter due to cooling demand

The significant fall in imports – stemming from declines in consumer, intermediate and capital goods, which dropped by 12.4%, 14.4% and 30.5% y-o-y, respectively – indicates a possible cooling of domestic and industrial demand, although this trend could be reversed in the second half of the year if the new government, which was elected in early May, follows through with plans to scrap the goods and service tax from June.

The March results offer a contrast to the preceding month, when RM70.3bn ($17.8bn) in outbound sales was recorded, a 2% y-o-y decline, and imports saw a more moderate 2.8% dip to RM61.3bn ($15.5bn), interrupting a 15-month run of increases dating to November 2016.

The decline was more marked month-on-month (m-o-m), with outbound shipments falling by 15.1% compared to the January total and imports retreating 16.2%, drawn down by lower purchases of intermediate, capital and consumer goods.

Lower agricultural exports could dampen trade growth

While the March export figures were strong, they underscore the increasing vulnerability of Malaysia’s foreign trade to fluctuations and demand-side pressures on some key products, including palm oil and related products, which made up just over 7% of exports in March.

The previous administration had targeted palm oil exports of 20.5m tonnes for 2018, generating revenue of RM80bn ($20.2bn), up from RM78.8bn ($19.9bn) in 2017, according to a statement issued by the Plantation Industries and Commodities Ministry in late April.

To support this aim, the authorities extended an export duty exemption on crude palm oil through to the end of April, lengthening the suspension by three weeks in an effort to moderate stockpiles and support prices. However, industry data released at the end of that month shows palm oil exports fell by as much as 5.7% m-o-m in April, in part due to lower demand from India. The news pushed down palm oil futures by 1%, with price declines for the month coming in at 2.6%, a drop that will also have an impact on trade revenue.

This fall follows the 11.2% contraction in overall agricultural exports posted in March, pressured by lower rubber shipments as well as weaker palm oil results.

Growth forecast with potential downside risks

While declines in palm oil shipments could be offset by forecasts of higher earnings from crude oil and liquefied natural gas exports, oversupply in the market and economic volatility could weigh on energy earnings this year.

In its latest report on the Malaysian economy, released in April, the World Bank forecast strong growth on the back of higher export levels fuelled by rising global demand, though it did flag some potential downside risks.

The bank projected Malaysia’s GDP would expand by 5.4% in 2018, an increase on its forecast of 5% made in October, though still down on the 5.9% recorded in 2017 and below the outgoing government’s estimates of between 5.5% and 6% for the year.

It also warned that global financial market shocks or weak exports could have disproportionately negative spillover effects on Malaysia. In particular, the lender said the report had not factored any possible fall-out from a potential trade war between the US and China.

With 66% of the Chinese products on a proposed US list that could be targeted with tariff increases having input from East-Asian suppliers, new levies and restrictions would affect Malaysia and other links in the supply chain, Sudhir Shetty, the World Bank’s chief economist for East Asia and the Pacific region, said.

China is Malaysia’s largest trade partner and accounted for 12.3% of exports in the first quarter of 2018.

Ratings agency Fitch has also warned that Malaysia – as an economy with a high degree of trade openness – remains vulnerable to negative external developments, citing the possibility of increased trade protectionism.

Despite these concerns, Malaysia’s current account surplus should be in the range of 2-3% for 2018, with the upper end of the forecast being in line with the 2017 performance, according to a Fitch note issued at the end of March. The agency further expects export growth to moderate slightly this year while remaining strong, consistent with favourable global demand conditions.

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