Malaysia's exports suffer 0.9% drop in May

They were weaker than expected.

Exports came in weaker than expected in Malaysia, declining 0.9% y/y in May (+1.6% in April) marking the first drop in four months.

According to a research note from UOB, this came in below its (+1.7%) and market estimates for 2.0% growth. 

Compared to the previous month exports fell 1.6% seasonally adjusted (-1.0% in April). Year-to-date exports rose 0.8% y/y in Jan-May. Given looming global challenges and a higher export base in second half of last year, UOB expects stagnant export growth in 2H16.

Here's more from UOB:

Exports declined 0.9% y/y in May (+1.6% in April) contrary to expectations for marginal growth. This was due to sharper decline in the non-electrical and electronic segments which fell 3.1% y/y in May (vs. +1.3% in April). Segments that fell include LNG (-29.3%; share 3.1%), palm oil (-5%; share 6.3%), and petroleum products (-13.8%; share 7.0%).

Shipments of machinery and appliances rose 7.3% (share 5.4%) albeit slower than 16.9% in the previous month. Meanwhile segments that recorded higher growth include electrical and electronics (3.2%; share 36.3%), chemicals (11.8%; share 7.9%), optical and scientific equipment (19.6%; share 3.7%), manufacture of metal (7%; share 4.5%), and processed food (15.3%; share 2.7%).

By country, overall exports to G3 rose 4.5% thanks to higher exports to US (+18.7%; share 10.7%) and EU (+0.9%; share 10.3%) while exports to Japan fell 7.3% (share 7.1%). Exports to China fell 12.2% (share 11.8%) and exports to Asia excluding China declined 1.5%.

Exports to ASEAN grew at a slower rate of 0.5% (share 30%) amid decline in exports to Singapore (-4.1%; share 14.1%), Indonesia (-5.7%; share 3.8%), and Thailand (-5.9%; share 5.8%), while exports to Vietnam grew 52.6% (share 3.7%) and Philippines (6.8%; share 1.8%).Imports rose 3.1% on account of higher capital imports (+17.2%; share 16.4%) and consumption imports (+13.6%; share 10.8%). Imports of intermediate goods, a forward looking indicator of exports, fell at marginal rate of 0.2% (share 55.8%). To watch is potentially higher lumpy capital imports for transportation in the second half.

Given lingering concerns over the Brexit outcome, we assessed that Malaysia’s exposure would be largely confined to financial channels while the effects via trade and investment channels would be limited given that exposure to UK is small (1% of total trade, 1.7% of tourist arrivals, 4.3% of FDI stock). However crucial is to watch for broader effects on rest of EU which Malaysia has a larger exposure (10% of total trade, 2.6% of tourist arrivals, 27% of FDI stock).

The biggest risk is a reversal of capital flows, particularly given that foreigners hold 48.7% of total outstanding Malaysian government bonds as at May 2016. UK accounted for close to 48% of cumulative net portfolio inflows since 2010.

In the event of capital outflows, there will be pressure on foreign reserves but the mitigating factors include large holdings of external assets, a flexible currency, and relatively stable and sticky holders of government bonds (44% held by asset managers, 29% by central banks and governments, 13% by pensions funds, 10% by banks, 2% by insurance companies, 1% by nominees/custodians, and 1% by others).