As the price action today suggests, Malaysia is no longer a straight forward bearish case and so here we look at the external sector in more detail.
As the price action today suggests, Malaysia is no longer a straight forward bearish case. On one hand, we view the country as having both economic fundamental issues and heightened political risks – akin to Turkey and Brazil. On the other hand, Malaysia is also like Mexico in the sense that it is relatively well positioned to make the transition away from commodity production to industry – an argument much harder to make for the likes of Russia, Venezuela, and the Gulf Countries.
The export numbers published today have various nuances to them.
- The trade surplus was large, MYR10.2 bln. This is the highest since late last year, and well above the 5-year average of MYR7.6 bln, which comes from the pre-oil slump period.
- The surplus happened because exports surprised on the upside (4.1% y/y), while imports unexpectedly contracted (-6.1% y/y). So the surplus is not an obvious sign of optimism about the Malaysian economy.
- However, the breakdown of exports show that the economy may be rebalancing. Exports of crude petroleum and liquefied natural gas declined by more than 40% y/y. But exports of electrical and electronic product exports rose 16.7% y/y, providing MYR 25.1 bln ($5.9 bln) in receipts, so accounting for half of the surplus.
The switch away from commodity dependence of Malaysia’s external accounts is not new. The country has been rebalancing for several years, even before the slump in oil prices. This change is not as straight forward when it comes to the dependency of the fiscal accounts, but it is for the external accounts.
The import numbers could suggest that producers are switching to local components, thus not necessarily a harbinger of a slowdown. The decline in imports was most accentuated in the intermediate good sub-category, which went from 60.3% of total imports down to 57.7%. Given the aforementioned improvement in electronic product exports, it’s possible that local suppliers are filling in for expensive imports given the huge depreciation of the ringgit.
Who does Malaysia trade with? China is by far the biggest trade partner ($91 bln total trade in 2014), followed by Singapore ($65 bln) and the US ($45 bln). Over the last twelve months, the ringgit weakened 25% against the yuan, 17% against the Singapore dollar, and 29% against the US dollar.
Unsurprisingly, Malaysia has seen a huge gain in competitiveness via its real exchange rate. Using the latest BIS data, MYR’s REER has weakened about 11% from August 2014-2015 period. This is far more than its most of its Asian peers. China has appreciated 12%, Philippines appreciated 6%, while Korea depreciated 4%.
Given the relatively comfortable and improving external position, FX reserves are not a huge issue for Malaysia, in our view. Still, it’s worth noting that reserves are now at a six-year low, reaching $93.3 bln according to the latest data. Reserves are down 33% since their peak in mid-2013. The decline comes from a combination of valuation changes and central bank smoothing operations, but we don’t think they are at concerning levels.
Lastly, it’s also worth noting that the government has called on local companies to bring back overseas investment, and some are already complying (the KWAP retirement fund, for example). Moreover, foreign investor inflows into the bond market remain positive year to date, despite the sharp drop since the middle of 2015.