Monday, November 18

Trade tensions will put a drag on Malaysia’s external demand

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The ongoing squabbles between both countries are expected to impact Malaysia’s export performance as demand from China and the US account for close to one quarter of Malaysia’s total exports. — Reuters photo

KUCHING: The unresolved global trade tensions between the US and China continuing, along with other factors will likely result in Malaysia’s external demand remaining soft, analysts opine.

According to the research team at Affin Hwang Investment Bank Bhd (Affin Hwang Capital), the impact of the global trade war and slowdown in global economies have impacted the performance of the US manufacturing sector, where the purchasing manager’s index (PMI) fell to 47.8 in September, its lowest level in over a decade and marking the second consecutive month of contraction.

“Similarly, the global manufacturing PMI posted a contraction to 49.7 in September. Global semiconductor sales contracted sharply by 15.9 per cent year on year (y-o-y) in August, following a decline of 15.5 per cent in July,” Affin Hwang Capital said.

“With the unresolved global trade tensions between the US and China continuing, and uncertainty in the external environment, we believe Malaysia’s external demand will remain soft.

“The ongoing squabbles between both countries are expected to impact Malaysia’s export performance as demand from China and the US account for close to one quarter of Malaysia’s total exports.”

The research firm recapped that in the first eight months of 2019, Malaysia’s export growth averaged -0.5 per cent y-o-y, sharply lower than the corresponding period of last year, which registered an increase of 6.9 per cent.

As Malaysia might benefit from the trade diversion due to the tariff hike imposed by the US on China goods, as well as sustained demand for some commodity products, Affin Hwang Capital maintain its gross export growth of one per cent y-o-y for 2019E (versus 6.8 per cent in 2018) and gross import growth at 1.8 per cent y-o-y in 2019E (4.9 per cent in 2018) with a trade surplus of RM115 billion in 2019E (RM120.5 billion in 2018).

“However, we note some downside risks to our projections.”

Meanwhile, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) also highlighted that global headwinds, arising from the growth slowdown in major markets namely China and the European Union (EU), as well as the impact of a prolonged
US-China trade feud, are factors that would weigh on Malaysia’s trade performance in the near term.

Hence, Kenanga Research revised exports growth to contract by 0.3 per cent y-o-y in 2019 (2018: 7.3 per cent) from its initial projection of positive one per cent to two per cent.

“This would likely weigh on gross domestic product (GDP) growth in the second half of 2019 (2H19) which is projected to moderate to 4.2 per cent from 4.7 per cent in 1H19, bringing our full-year growth projection to 4.5 per cent, from 4.7 per cent in 2018,” the research arm said.

“As the outlook on external sector remains bleak, this may prompt Bank Negara Malaysia to embark on another 25-basis point rate cut in its last policy meeting this year in November.

“Furthermore, we expect the government to pump prime the domestic economy via Budget 2020 this coming Friday.”