Dismal External Trading

The pace of contraction in exports from the level a year ago eased at   —19.8%YoY (Jul-09: -22.9%YoY) but the pace of contraction in imports rose to a sharper —18.6%YoY (Jul-09: —16.2%YoY). Signs of a strong recovery are not yet evident. We have previously said that we shall have to wait out Sep-09 before a more significant YoY growth becomes evident. Despite exports having risen strongly on a. MoM basis in recent months (Jul-09: +8.3% MoM), exports fell 2.0%MoM in Aug-09. The least partially be attributable to a pause after a seasonal mid-year rise in electronics and other manufactured goods exports ahead of the Christmas shipments, augmented by the beneficial effects of restocking by those businesses that realized they over-pared their inventories of goods during the most severe Jan-09 to Mar-09 phase of the global downturn. This semblance of a V-shaped recovery in the initial phases will give way to a flatter appearance due to the inability of some export sectors to fully recover all lost markets. Some lost markets for industries like furniture will never fully recover. Malaysia’s export economy has lost 4-5 years of growth in value and the headwinds have increased in many export sectors on which Malaysia s dependent.

Malaysia Export and Imports Chart

Malaysia Export and Imports Chart

We previously warned that whilst there will be some sporadic spurts of stronger exports, they may not signal a meaningful recovery yet. Our view is that exports may not recover to levels seen in mid-2008 for another 2-3 years.

The YoY fall in Aug-09 exports computed continued to be led by a collapse of manufactured goods exports, weakness in commodity prices and a lower volume of commodity exports.

US workers facing record periods of unemployment, negative personal income growth in 4 of the last 6 quarters, and a sharp fall in wealth, will cut spending on the so many discretionary spending items that have formed the core of Asian exports, cannot anchor a global recovery. Restocking by businesses and

public sector spending can only provide a temporary bounce in output that must be rejoined by a consumer spending revival. A revival with conviction of investment spending by businesses is also out of the picture at this juncture with low capacity utilization globally at this juncture.

Weakening of exports accelerated in major markets. ASEAN exports accounting for 25.7% of total, fell a steeper 24.4%YoY (Jul-09: -20.1%YoY) on lower exports of electronics products, refined petroleum products and transport equipment.

Asia Export Growth League Table

Asia Export Growth League Table

Exports to China rose +0.9% YoY (Jul-09: -16.9% MoM), the first increase YoY in 10 months on gains in exports of electronics and crude oil. Exports to China were also 10.3% higher MoM. The positive YoY growth was due to a lower statistical base in Aug-08, the month when severe drops in exports to China began to be recorded in 2008. Exports to the US dropped (-26.7% YoY vs -29.0%YoY in Jul-09), also falling 7.8%MoM on lower electronics exports. The pace of drop in exports to Japan slowed (-25.0% YoY in Aug-09 vs -32.7% YoY in Jul-09) on gains in LNG and crude oil exports. The pace of drop for exports to the EU at -25.9% YoY was however, steeper compared to Jul-09’s -23.9%YoY due to palm oil as well as chemicals and chemical products exports letting up as the recession in major Euro zone economies particularly Germany.

Exports of Electronics were a shade lower MoM at RM20.57b in Aug-09 after rising for the 6th month in a row to RM20.63b in Jul-09 from RM18.6b in Jun-09 and constituted 43% (Jul-09: 42.2%) of exports although still down -13.1%YoY vs -15.6% YoY in Jul-09. Palm Oil exports making up 6.2% of exports (Jul-09: 8.1%) were down a sharper -35.3%YoY (Jun-09: -33.5% YoY) after a major MoM drop. Oil and Gas exports making up 12.5% of exports (Jun-1 09: 12.0%) fell 50% YoY, still amongst the most affected of export categories.

export growth

Chemicals and Chemical Products which contributed 6.1% of exports (Jul-09: 6.2%) fell -19.0%YoY (Jul-09: -26.3% YoY). Machinery and Appliances which made up 3.1% of exports (Jul-09: 3.6%) fell at a faster clip of -12.3%YoY (Jul-09: 10.2%YoY) and Timber Products adding up to 2.6% of exports(Jul-09:2.6%) fell

15.1%YoY(Jun-09:-16.0% YoY).

Imports at RM38.26b (Ju-09: RM40.98b) dropped by 6.6%MoM and were sharply off by 18.6%YoY (Jul-09: -16.0%YoY). Jan-09’s -30.4%YoY remains the fastest pace of annual contractions ever on record. Imports of intermediate goods made up 69.4% (Jul-09: 68.7%) of imports, and its fall on a percentage change YoY basis dampens somewhat hopes of a strong recovery, thus continuing the strong trend in preceding months that reflect the recovery in imports of raw material needs for goods to be processed for re-export. On the other hand, capital goods imported amounted to 14.3% (Jun-09: 14.8%) of imports, reflecting weaker capacity-boosting investment plans by domestic corporations that support future growth. Consumption goods made up 7.1% of imports (Jul-09: 7.2%), reflecting lower consumer spending. Consumption accounted for 65.3% of Malaysia’s real GDP in 2Q-09.

The Trade Surplus expanded again to RM9.58b (Jul-09: RM7.8b), a 22.2% jump MoM despite the MoM drop in exports. The widening of the trade gap left Aug-09’s surplus at exactly the mean YTD monthly surplus of RM9.58b. whilst it is still sharply off a peak at RM15.5b achieved in Jun-08 it is a healthy level. Whilst the trade balance dropped in Jul-09, it was read as a sign of some strength rather than weakness.

The Aug-09 data thankfully continues to hint at a V-shaped rebound after the exports slump hit a trough (see charts below). The current scenario does not yet rule out an L-shaped recovery for Malaysia although the possibility of a W-shaped recovery or a double-dip recession in the West appears small. The anchor for Malaysia’s export recovery appears to be China, but the sustainability of this source of exports recovery is thought unreliable whilst it is rising under conditions of a massive stimulus. The global economic turmoil may continue to drive further deterioration in the domestic environment.

Domestic sources of demand remain the key and steady implementation of the Stimulus Spending package is key. Our chief worry is the possibility the economy will fail to respond in a sustained manner and dismal private sector growth is observed way past the phase of aggressive public sector stimulus spending at a time when US consumers appear to be veering towards permanent frugality and Asian consumers are not ready to fill the void.

Dismal External Trading
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