PP 7767/09/2011(028730)

Malaysia
Economic Highlights
ïMARKET DATELINE

8 October 2010

Exports Weakened In August, In Tandem With A

Slowdown In Global Demand

◆ Exports weakened to 10.6% yoy in August, from +13.5% in July and a high of +36.4% in March. This was
the fifth consecutive month of slowing down and the weakest growth in nine months, suggesting that exports are
slowing down, on the back of a more moderate expansion in global demand. A sharp appreciation of the ringgit
also contributed to a slowdown in exports during the month. The slowdown in August’s exports was broad-based,
from the exports of electronic & electrical (E&E) products to non-E&E manufactured goods and major commodity
products.

◆ The slowdown in exports was due to a weakening in exports to the US, European Union (EU) and China.
These were made worse by a decline in exports to Hong Kong. These were, however, mitigated by a pick-up in
exports to Japan and Asean during the month.

◆ Going forward, the slowdown in the world’s major economies, from the US to Japan and China, has become more
widespread since the 2Q and the slowing growth in these economies will likely soften further in the 2H of the year
and extend into 1H 2011. As a whole, we expect the country’s exports to slow down in 2011, after recording
a strong pick-up in 2010.

◆ Total imports also grew at a slower pace of 16.5% yoy in August, compared with +18.1% in July and a
high of +45.3% in March, indicating that domestic demand will likely moderate in the months ahead. The moderation
in imports was due to a slowdown in the imports of capital and consumption goods. These were, however, mitigated
by a pick-up in the imports of intermediate inputs during the month.

◆ The trade surplus widened to RM8.3bn in August, from a surplus of RM7.0bn in July. In the first eight months
of 2010, trade surplus rose by 1.4% yoy to RM77.7bn. Going forward, we expect the current account surplus
of the balance of payments to widen marginally to around RM98.6bn or 12.4% of GNI in 2011, from a surplus
of RM97.1bn or 13.0% of GNI estimated for 2010.

Exports weakened to 10.6% yoy in August, from +13.5% in July and a high of +36.4% in March. This was the
fifth consecutive month of slowing down and the weakest growth in nine months, suggesting that exports are slowing
down, on the back of a more moderate expansion in global demand. A sharp appreciation of the ringgit also contributed
to a slowdown in exports during the month. Stripping out the currency factor, we estimate that exports could have slowed
down to 23.4% yoy in August, from +25.6% in July. The slowdown in August’s exports was broad-based, from the exports
of electronic & electrical (E&E) products to non-E&E manufactured goods and major commodity products. Stripping out
seasonal factors and measured on a 3-month moving average basis, exports weakened to 13.7% yoy in August, the
slowest pace of growth in eight months and from +17.3% in July, suggesting that export growth is losing momentum.

The exports of E&E products grew at a slower pace of 3.8% yoy in August, compared with +8.7% in July and
a high of +55.6% recorded in January, suggesting that global demand for these products is softening. This was due to
a decline in the exports of electronic components & parts (largely semiconductor products), which fell by 1.1% yoy in
August, after softening to +12.2% in July. A slowdown in the exports of telecommunications equipment, which eased

Peck Boon Soon

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

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 8 October 2010

to 16.9% yoy in August, from +23.0% in July, worsened the

situation. These were, however, mitigated by a pick-up in Table 1 External Trade

the exports of office automation & data processing machines

Exports Imports Trade
(largely computers), which rose by 5.5% yoy in August,
Balance
compared with -3.8% in July.
(%, yoy) (RMm)

Similarly, the exports of non-E&E manufactured products 2007 2.6 5.0 +102,255.0
weakened to an estimate of 12.4% yoy in August, 2008 9.7 3.5 +143,209.2
from +13.7% in July and a high of +41.3% in March. This 2009 -16.5 -16.3 +118,354.9
was the fifth straight month of slowing down, on account of 2009 Q 3 -22.3 -18.3 +26,725.1
a slowdown in the exports of chemical & chemical products Q4 5.1 6.7 +32,444.0
and refined petroleum products, which grew at a slower pace
2010 Q1 30.8 35.1 +38,952.2
of 10.7% and 26.9% yoy respectively in August, compared
with the corresponding rates of +13.4% and +35.3% in July. Q2 21.7 30.4 +23,409.8

This was made worse by a slowdown in the exports of optical 2 0 1 0 Jun 17.2 30.1 +6,043.2
& scientific equipment and manufactures of metals. These Jul 13.5 18.1 +7,012.9
were, however, mitigated by a pick-up in the exports of Aug 10.6 16.5 +8,320.0
machinery & appliances (+18.3% yoy in August versus +7.0%
2 0 0 9 (Jan-Aug) -22.8 -23.9 +76,647.6
in July).
2 0 1 0 (Jan-Aug) 22.2 28.1 +77,694.9

In the same vein, the exports of

major commodity products Table 2 External Trade
slackened to 24.2% yoy in August,
% mom % mom, 3-m moving average
from +26.7% in July and a high of
+52.3% in May. This was the third Exports Imports Exports Imports

consecutive month of easing due to ‘10 Jun 1.0 6.0 -4.0 1.3
slower increases in the exports of palm
Jul 4.9 3.5 2.2 4.2
oil and crude petroleum, which eased to
Aug -4.6 -8.0 0.3 0.3
7.3% and 2.2% yoy respectively in
% yoy, 3-m moving average
August, from the corresponding rates of
+12.1% and +17.7% in July. These Exports Imports Imports of Imports of Imports of
were, however, mitigated by a pick-up capital gds. inputs consumption
in the exports of liquefied natural gas gds
(LNG), which strengthened to 88.4% yoy
‘10 Jun 21.7 30.4 26.5 30.5 13.2
in August, from +59.8% in July.
Jul 17.3 26.9 28.6 26.3 11.7
Aug 13.7 21.3 22.5 20.6 8.2
In terms of markets, the slowdown in
exports was due to a weakening in
exports to the US, European Union
(EU) and China, which eased to 0.5%, 12.6% and 2.4% yoy respectively in August, from the corresponding rates of
+1.7%, +18.7% and +12.6% in July. These were made worse by a decline in exports to Hong Kong, which fell by 8.0%
yoy in August, compared with +1.0% in July. These were, however, mitigated by a pick-up in exports to Japan and Asean,
which rose by 28.4% and 5.7% yoy respectively in August, faster than the corresponding rates of +27.6% and +3.6%
in July.

Mom, exports fell by 4.6% in August, after picking up to +4.9% in July. This was attributed to declines in the exports
of E&E products, non-E&E manufactured goods and major commodity products. The exports of E&E products slipped into
a contraction of 4.8% mom in August, after easing to +5.5% in July. This was dragged by declines in the exports of
semiconductors, computers and telecommunications equipment during the month. Similarly, the exports of non-E&E
manufactured goods fell by 5.6% mom in August, compared with +7.1% in July. This was due mainly to declines in the
exports of chemical & chemical products, refined petroleum products, optical & scientific equipment and manufactures of
metals during the month. Also, the exports of major commodity products fell by a larger magnitude of 1.8% mom in
August, compared with -1.6% in July, on the back of decreases in the exports of palm oil and LNG, which were mitigated
by a pick-up in the exports of crude oil. In terms of country, a decline in exports to the US, EU, Hong Kong and Asean
contributed to the decline in overall exports. These were, however, mitigated by a pick-up in exports to Japan and China.

Going forward, the slowdown in the world’s major economies, from the US to Japan and China, has become more
widespread since the 2Q, after a strong rebound from the worst recession since the world war II. The latest economic
data releases suggest that the growth in these countries, including the Euroland, will likely soften further in the 2H

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 8 October 2010
of the year and extend into 1H 2011.
Also, effect of the dissipating global Table 3 Breakdown Of Exports
stimulus spending will likely be felt in the
2H. Already, global manufacturing activities Percent 2010 2010 2009 2010

have slowed down for the fifth straight of total

month and it grew at the slowest pace in Aug 10 Jul Aug Jul Aug (Jan-Aug)

14 months in September. In particular, ByProducts: % %,yoy %mom %,yoy

manufacturing new orders weakened to
Total electronics prod. 40.4 8.7 3.8 5.5 -4.8 -19.3 19.7
the slowest pace of growth in 15 months
- Electronics comp & prts 20.8 12.2 -1.1 4.7 -7.4 -10.9 20.5
and since it turned around to expand in
- Office machines & auto 12.2 -3.8 5.5 0.4 -1.2 -24.2 15.6
July 2009, indicating that global
data processing equipt.
manufacturing activities are likely to - Audio-visual equipt. 7.4 23.0 16.9 18.0 -3.4 -31.5 26.0
moderate further in the months ahead.
In the same vein, global services activities Chemical Products 6.3 13.4 10.7 2.0 -2.4 -25.4 28.6

slowed down for the fifth consecutive LNG 6.0 59.8 88.4 6.3 -1.2 -9.1 21.8

month in September. Similarly, the OECD Crude Petroleum 5.1 17.7 2.2 -8.0 24.6 -49.6 47.3
Palm oil 6.1 12.1 7.3 -3.9 -17.2 -28.8 23.5
composite leading indicator’s 12-month rate
of change moderated for the fourth Country :
consecutive month to 5.3% in July, from USA 9.7 1.7 0.5 4.8 -8.9 -31.8 6.1
+6.8% in June and after reaching a high EU 10.7 18.7 12.6 3.8 -7.3 -26.5 23.1
of +10.3% in March, indicating that OECD Japan 10.9 27.6 28.4 3.0 9.5 -22.8 24.1

countries’ economies are likely to expand Singapore 13.0 4.2 5.4 6.3 -6.6 -28.1 16.0

at a slower pace in the months ahead. China 12.7 12.6 2.4 0.2 0.3 -9.7 33.8
Asean 24.6 3.6 5.7 2.6 -2.4 -24.5 20.9

Sensing the renewed weakness in the

economy, the US Federal Reserve has shifted its policy towards a loosening bias on 10 August and is moving closer
to implement a new round of quantitative easing. This will likely prevent the US economy from falling back into
a recession, in our view, even though it is slowing down. Similarly, the Bank of Japan (BOJ) stepped up its monetary
easing on 5 October by lowering its benchmark interest rate to a range of 0-0.1% and expanding its balance sheet to
buy government bonds and other assets, after expanding a bank-loan programme to a total of ¥30 trn on 30 August and
intervening in the foreign exchange markets for the first time in six years on 15 September to curb the sharp rise in
yen. The European Central Bank (ECB), however, said that policymakers are in the same mood as a month ago and
committed to phase out their unlimited lending programme, after extending the liquidity support into early 2011 on 2
September. In Asia, we believe most central banks in the region are likely to slow down their policy tightening or pause
in view of the risk of a sharper slowdown in the global economy and a sharp appreciation in currencies due to inflow
of foreign capital. As a whole, we believe the global economy is unlikely to fall back into a recession even though there
is a risk of a sharper-than-expected slowdown.

Meanwhile, the US personal consumption expenditure (PCE) slowed down to an annualised rate of 1.7% in August, from
+1.9% in July and the peak of +2.6% in May. This was the third consecutive month of easing and the slowest pace
of increase in seven months, suggesting that consumer spending is slowing down but will likely remain resilient. Similarly,
manufacturing activities weakened to the slowest pace in 10 months in September, although services activities rebounded
during the month. Furthermore, consumer confidence has fallen to the lowest level since February on the back of a high
level of unemployment, while housing sector experienced a renewed weakness following the end of the government’s
incentive in April. As a whole, the US economy is projected to moderate to 2.5% in 2011, from +2.7% estimated for
2010.

Similarly, Japan’s manufacturing activities contracted in September, the first in 15 months, and exports eased for the sixth
straight month in August, suggesting that the export-dependent Japanese economy will likely turn weaker in the months
ahead. In the same vein, the Euroland’s economic growth is likely to have peaked in the 2Q, as its export engine,
which powered the 2Q’s GDP growth, has started to moderate. As a result, manufacturing activities expanded at the
slowest pace in 8 months in September, while services activities softened during the month.

China’s Purchasing Managers Index (PMI) for the manufacturing sector rose to 53.8 in September, from 51.7 in August
and a 17-month low of 51.2 in July. This was the third straight month of picking up, suggesting that manufacturing
activities expanded at a faster pace during the month. Retail sales, however, moderated for the second consecutive
month to 17.9% yoy in July and fixed-asset investment in urban areas slowed down to 24.9% yoy in January-July, from
the corresponding period of +32.9% in 2009. Similarly, industrial production headed south for the fourth straight month
to 13.4% yoy in July, while growth of money supply has been easing since December last year. As a whole, the readings
suggest that economic activities in China have stabilised somewhat in the 3Q, after easing to +10.3% yoy in the 2Q.

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 8 October 2010

In tandem with a more moderate growth in the global economy, demand for electrical & electronic (E&E) products,
which accounts for about 45% of Malaysia’s total exports in 2009, and other non-E&E manufactured goods is likely to
soften in 2011. Already, worldwide semiconductor sales eased to 32.6% yoy in August, from +37.0% in July and after
reaching a high of +59.9% in March. Also, the Semiconductor Industry Association expects chip sales to grow at a slower
pace of 6.3% in 2011, compared with +28.4% in 2010. As a whole, in tandem with a slowdown in the global demand,
we expect the country’s exports to slow down to 10.0% in 2011, after a rebound to +15.0% estimated for 2010.

Total imports also grew at a slower pace of 16.5% yoy in August, compared with +18.1% in July and a high
of +45.3% in March, indicating that domestic demand will likely moderate in the months ahead. The moderation in
imports was due to a slowdown in the imports of capital and consumption goods, which softened to 14.1% and 3.6%
yoy respectively in August, from the corresponding rates of +20.6% and +5.5% in July. These were, however, mitigated
by a pick-up in the imports of intermediate inputs, which grew at a faster pace of 17.3% yoy in August, compared with
+16.5% in July. Mom, total imports contracted by 8.0% in August, after slowing down to +3.5% in July. This was due
to declines in the imports of capital and consumption goods as well as intermediate inputs during the month.

Meanwhile, the trade surplus widened to RM8.3bn in August, from a surplus of RM7.0bn in July. In the first eight
months of 2010, trade surplus rose by 1.4% yoy to RM77.7bn. Going forward, in tandem with a slowdown in the
economy, we expect merchandise trade balance to record a larger surplus during the year. At the same time, we
envisage deficit in the services account to narrow due to lower payment for transportation charges as imports slow down.
These, however, will likely be offset partially by a widening deficit in the income account during the year, as repatriation
of profits by non-resident controlled companies is likely to remain large, while Malaysian corporations will likely bring
back less profits into the country. Repatriation of salaries and wages by foreign workers, on the other hand, is likely
to remain stable during the year. As a whole, we expect the current account surplus of the balance of payments
to widen marginally to around RM98.6bn or 12.4% of GNI in 2011, from a surplus of RM97.1bn or 13.0% of GNI
estimated for 2010. This will help to build up the country’s foreign exchange reserves and fuel domestic liquidity in the
financial system.

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