PP 7767/09/2010(025354)

Malaysia
Economic Highlights
•
MARKET DATELINE

3 August 2010

Exports Slackened In June, As Global Demand

Softened

◆ Exports slowed down to 17.2% yoy in June, from +21.9% in May and a high of +36.4% in March. This was
the slowest pace of growth in seven months and the third consecutive month of easing, suggesting that Malaysia’s
exports are weakening, on the back of a slowdown in global demand and as high export growth due to
the low base effect normalised. The slowdown was due to slower increases in the exports of non-E&E
manufactured goods and major commodity products. These were, however, mitigated by a pick-up in the exports
of electronic & electrical (E&E) products during the month.

◆ The slowdown in exports was on account of slower increases in exports to Japan, China and Asean. These
were, however, mitigated by a pick-up in exports to US, European Union (EU) and Hong Kong.

◆ Going forward, the global economy is likely to slow down in 2H 2010, as worldwide stimulus spending
dissipates and austerity measures in some European countries to address fiscal deficit and debt problems begin to
bite. This will likely be compounded by the policy normalisation and tightening measures introduced in some
countries, particularly in Asia, that will likely slow down economic activities in these countries. As a whole, we expect
the country’s exports to slow down in 2H 2010, after a strong pick-up in the 1H.

◆ Total imports also softened to 30.1% yoy in June, from +34.2% in May and a high of +45.3% in March,
indicating that domestic demand and exports will likely moderate but remain resilient in the months ahead. The
moderation in imports was on account of a slower increase in the imports of intermediate inputs. These were,
however, mitigated by a pick-up in the imports of capital and consumption goods during the month.

◆ The trade surplus narrowed to RM6.0bn in June,

the smallest in more than three years and from a surplus Table 1 External Trade

of RM8.1bn in May. In the first half of 2010, trade

Exports Imports Trade
surplus rose by 5.3% yoy to RM62.4bn. As a whole, we
Balance
expect the current account surplus of the balance of
(%, yoy) (RMm)
payments to narrow to around RM100.8bn or 13.5%
of GNI in 2010, from a surplus of RM112.1bn or 16.9% 2007 2.6 5.0 +102,255.0
of GNI in 2009. 2008 9.7 3.5 +143,209.2
2009 -16.5 -16.3 +118,354.9

2009 Q 3 -22.3 -18.3 +26,725.1

Exports slowed down to 17.2% yoy in June, from +21.9% Q4 5.1 6.7 +32,444.0
in May and a high of +36.4% in March. This was the slowest
2010 Q1 30.8 35.1 +38,952.2
pace of growth in seven months and the third consecutive
Q2 21.7 30.4 +23,406.5
month of easing, suggesting that Malaysia’s exports are
weakening, on the back of a slowdown in global demand Apr 26.6 27.0 +9,222.1
and as high export growth due to the low base effect May 21.9 34.2 +8,144.5
normalised. The slowdown was due to slower increases in Jun 17.2 30.1 +6,040.0
the exports of non-E&E manufactured goods and major 2 0 0 9 (Jan-Jun) -23.4 -26.3 +59,236.0
commodity products. These were, however, mitigated by a
2 0 1 0 (Jan-Jun) 26.1 32.5 +62,358.8
pick-up in the exports of electronic & electrical (E&E) products
during the month. Stripping out seasonal factors and measured

Peck Boon Soon

(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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 3 August 2010

on a 3-month moving average basis,

exports weakened to 21.7% yoy in June, Table 2 External Trade
the slowest pace of growth in five months
% mom % mom, 3-m moving average
and from +28.3% in May, suggesting that
export growth is losing momentum. Exports Imports Exports Imports

‘10 Apr -12.4 -5.1 -0.3 2.7

The exports of non-E&E manufactured
May 0.5 3.3 3.4 7.3
products slowed down to an
Jun 1.1 6.0 -4.0 1.3
estimate of 15.2% yoy in June, from
% yoy, 3-m moving average
+19.9% in May and a high of +41.3% in
March. This was due to a slowdown in Exports Imports Imports of Imports of Imports of
the exports of chemical & chemical capital gds. inputs consumption
products, refined petroleum products and gds
machinery & appliances, which eased to
‘10 Apr 27.4 33.4 15.9 34.4 14.9
19.9%, 11.8% and 19.0% yoy
May 28.3 35.2 20.6 37.1 14.2
respectively in June, from the
Jun 21.7 30.4 26.5 30.5 13.2
corresponding rates of +21.0%, +45.2%
and +33.1% in May. These were made
worse by a slowdown in the exports of
optical & scientific equipment and manufactures of metals during the month.

In the same vein, the exports of major commodity products moderated to 30.6% yoy in June, from +52.3%
in May and compared with +39.1% in April. This was the first month of easing after five consecutive months of picking
up due to a slowdown in the exports of crude petroleum, which slackened to 20.2% yoy in June, from +72.8% in May
and +98.7% in April. This was made worse by slower growth in the exports of palm oil and liquefied natural gas (LNG),
which eased to 18.2% and 65.6% yoy respectively in June, from the corresponding rates of +15.9% and +92.0% in May.

The exports of E&E products, on the other hand, rebounded to 14.1% yoy in June, after slowing down to
+12.8% in May but off a high of +55.6% recorded in January. This points to a slowdown in external demand for the
country’s E&E products. The pick-up was on account of a rebound in the exports of office automation & data processing
machines (largely computers), which grew by 5.9% yoy in June, compared with -1.0% in May. This was, however, offset
partially by a slowdown in the exports of electronic components & parts (largely semiconductor products) and
telecommunications equipment, which eased to 18.8% and 15.7% yoy respectively in June, from the corresponding rates
of +20.0% and +17.9% in May.

In terms of markets, the slowdown in exports was on account of slower increases in exports to Japan, China and
Asean, which grew at a more moderate pace of 18.0%, 28.0% and 7.0% yoy respectively in June, compared with the
corresponding rates of +49.6%, +28.7% and +16.7% in May. The slowdown in exports to Asean was due mainly to
weaker exports to Singapore and Thailand. These were, however, mitigated by a pick-up in exports to the US, European
Union (EU) and Hong Kong, which rebounded to +7.2%, +26.3% and +27.4% yoy respectively in June, from the
corresponding rates of +3.7%, +14.2% and +21.1% in May.

Mom, exports edged up by 1.1% in June, slightly faster than +0.5% in May. This was attributed to a pick-up in
the exports of E&E products and a smaller decline in the exports non-E&E manufactured goods, which were offset partially
by a decline in the exports of major commodity products. The exports of E&E products rebounded to increase by 5.9%
mom in June, from -2.8% in May. This was attributed to a rebound in the exports of semiconductors and computers,
which were offset partially by a slowdown in the exports of telecommunications equipment during the month. In the same
vein, the exports of non-E&E manufactured goods fell by a smaller magnitude of 1.3% mom in June, compared with -
1.7% in May. This was due to mainly to a smaller decline in the exports of chemical & chemical products and a pick-
up in the exports of optical & scientific equipment as well as manufactures of metals during the month. The exports of
major commodity products, on the other hand, fell by 3.5% mom in June, compared with +14.5% in May, on the back
of declines in the exports of crude oil and LNG. In terms of country, a pick-up in exports to the US, EU, China and Hong
Kong contributed to the increase in exports.

Going forward, the global economy is likely to slow down in 2H 2010, as worldwide stimulus spending dissipates
and austerity measures in some European countries to address fiscal deficit and debt problems begin to bite. This will
likely be compounded by the policy normalisation and tightening measures introduced in some countries, particularly in
Asia, that will likely slow down economic activities in these countries. As it stands, signs of a slowdown in the global
economy are becoming more apparent. Indeed, global manufacturing activities softened for the third consecutive

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 3 August 2010

month in July, while global services

activities expanded at the slowest pace Table 3 Breakdown Of Exports
in four months in June. In the same vein,
the OECD composite leading indicator’s Percent 2010 2010 2009 2010

12-month rate of change is likely to have of total

peaked in March, after moderating for two Jun 10 May Jun May Jun (Jan-Jun)

consecutive months to 8.3% in May and ByProducts: % %,yoy %mom %,yoy

from +9.5% in April, indicating that OECD
Total electronics prod. 40.2 12.8 14.1 -2.8 5.9 -21.1 25.4
economies are likely to ease in the months
- Electronics comp & prts 21.5 20.0 18.8 -0.3 3.2 -13.1 26.9
ahead.
- Office machines & auto 12.3 -1.0 5.9 -11.1 13.2 -26.2 21.5
data processing equipt.
Despite the weakness, we do not expect - Audio-visual equipt. 6.5 17.9 15.7 4.9 2.0 -32.2 28.7
the global economy to fall into a
double dip even though there is a risk Chemical Products 6.3 21.0 19.9 -1.5 1.4 -26.9 3 5 . 5

of a sharper-than-expected L N G 5.7 9 2 . 0 6 5 . 6 2 6 . 2 -8.0 2.3 1 0 . 5

slowdown, given that policy normalisation Crude Petroleum 4.5 72.8 20.2 19.4 -25.7 -51.0 64.4
Palm oil 7.7 15.9 18.2 1.3 2 2.2 -27.7 29.2
and tightening remain gradual. Also, the
US economic recovery is becoming more Country :
sustainable, as its recovery which started USA 10.1 3.7 7.2 -1.1 4.5 -33.2 8.0
from the government stimulus and E U 1 1 . 1 1 4 . 2 2 6 . 3 -7.4 1 0 . 0 -27.2 2 5 .8
inventory rebuilding, has now spread to Japan 9.7 4 9 . 6 1 8 . 0 2.7 -1.2 -20.5 2 2 . 8

consumer spending. In Europe, we expect Singapore 1 3 . 1 12.5 8.4 -2.3 0.0 -30.1 2 0 . 4

the sovereign debt problems to be China 1 2 . 6 2 8 . 7 2 8 . 0 -2.5 5.0 -10.2 4 5 . 9

manageable despite the lingering concerns, Asean 24.6 16.7 7.0 -0.4 -4.1 -25.4 2 7 . 2

following the announcement of an

emergency stabilisation loan of €750bn and the €110bn rescue package for Greece. Indeed, Spain, Portugal, Ireland
and Greece have successfully sold their bonds since 13 July and the results of the stress text also helped as well.
Nonetheless, the austerity drives in Europe will likely affect Malaysia’s exports to some extent given that 10.7% of the
country’s exports went straight to Europe. There would be indirect impact as well since 13% of Malaysia’s exports go
to China, and Europe is China’s largest export market (accounting for 19.7% of its total exports). As a whole, in tandem
with a more moderate growth in the global economy, we expect the country’s exports to slow down to 10.3% yoy
in 2H 2010, from +26.1% in the 1H, bringing the full-year growth to +17.5% compared with -16.6% in 2009.

In the US, the economy is showings signs of moderating, after recording a slower annualised rate of +2.4% in the 2Q.
As it stands, retail sales fell by 0.5% mom in June, the second straight month of decline, while factory output fell by
0.4% mom during the month, the most in a year. Similarly, existing home sales declined for the second consecutive
month in June and housing starts fell to the lowest level in eight months in June, after the expiration of the tax incentive
in April. This points to a renewed weakness in the housing sector and its recovery will likely be slow in the months ahead.
Also, private employers added fewer workers to payrolls in May-June, compared with March-April, indicating that employers
have turned cautious as well. Elsewhere, manufacturing activities slowed down for the third straight month in July, while
services activities eased in June. As a whole, the US economy is projected to grow at a more moderate pace
of 2.8% in 2H 2010, compared with +3.1% in the first half, bringing the full-year growth to around +3.0%, a rebound
from -2.4% in 2009.

Similarly, the austerity drives will likely hurt some of the countries such as Spain, Portugal, Ireland and Greece in the
Euroland. Still, Germany, which could leverage on the weak euro to export, would provide some cushion. As it stands,
manufacturing and services activities in the region rebounded in July, after a slowdown in June, while business and
consumer confidence improved somewhat in July. These suggest that the Euroland economy will likely slow in the
months ahead but likely to be resilient. In the same vein, the Japanese economy will likely slow down in the 2H of
the year, on the back of a slowdown in global demand for the country’s exports. As it stands, Japan’s exports slowed
down for the fourth consecutive month in June and unemployment is trending up in recent months.

In China, manufacturing activities slowed down to the slowest pace in more than a year in July, while industrial production
headed south for the third straight month and it eased to 13.7% yoy in June, indicating industrial activities are slowing
down. Similarly, retail sales grew at the weakest pace of 18.3% in three months in June and fixed-asset investment in
urban areas slowed down to 25.5% yoy in January-June, from the corresponding period of +33.6% in 2009. This suggests
that China’s domestic demand is moderating, in tandem with the government’s tightening measures to cool down its

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 3 August 2010

property market. As a whole, China’s economy is likely to slow down further in the 2H of the year, after recording
a more moderate growth of +10.3% yoy in the 2Q.

Meanwhile, demand for E&E products, which accounts for about 45% of Malaysia’s total exports in 2009, will likely
be softer in the 2H of the year, in line with a slowdown in global economic activities. As it stands, worldwide
semiconductor sales eased to 42.6% yoy in June, from +48.6% in May and after reaching a high of +58.4% in March.
This suggests that a sharp rebound in sales due to a spike up in demand and inventory rebuilding are normalising.

Total imports also softened to 30.1% yoy in June, from +34.2% in May and a high of +45.3% in March, indicating
that domestic demand and exports will likely moderate but remain resilient in the months ahead. The moderation in
imports was on account of a slower increase in the imports of intermediate inputs, which eased to 28.6% yoy in June,
from +35.8% in May. These were, however, mitigated by a pick-up in the imports of capital and consumption goods,
which grew at a faster pace of 34.2% and 16.0% yoy respectively in June, compared with the corresponding rates of
+32.8% and +14.6% in May. Mom, total imports strengthened to 6.0% in June, from +3.3% in May. This was due to
a pick-up in the imports of intermediate inputs and consumption goods. These were, however, offset partially by a
slowdown in the imports of capital goods during the month.

Meanwhile, the trade surplus narrowed to RM6.0bn in June, the smallest in more than three years and from a
surplus of RM8.1bn in May. In the first half of 2010, trade surplus rose by 5.3% yoy to RM62.4bn. Going forward, in
tandem with a pick-up in economic activities, we expect imports to rise at a faster pace than that of exports. This will
lead to a smaller merchandise trade account surplus in 2010. At the same time, we envisage the deficit in the income
account to widen during the year, as non-resident controlled companies repatriate higher dividend on the back of
improving corporate earnings. Similarly, the surplus in the services account is envisaged to narrow during the year, in
line with a smaller travel receipts during the year. These, however, will likely be mitigated by a smaller deficit in
repatriations of salaries and wages by foreign workers, in line with the Government’s policy of reducing the employment
of foreign workers. As a result, we expect the current account surplus of the balance of payments to narrow to
around RM100.8bn or 13.5% of GNI in 2010, from a surplus of RM112.1bn or 16.9% of GNI in 2009. Still, the current
account surplus remains sizeable and will contribute to a build-up in the country’s foreign exchange reserves and fuel
domestic liquidity in the financial system.

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