Downward Pressure On Malaysian Exports Expected

Monday November 3, 2008

Downward pressure on Malaysian exports expected
By EILEEN HEE

Growth likely to be 3% next year

MORE downward pressure on Malaysia’s export performance is expected due to the current weak global economy and slump in commodity prices, say economists.

Aseambankers Research chief economist Suhaimi Ilias said full-year gross export growth was expected to slow sharply to 3% next year from 10.5% this year.

The plunge in commodity prices, especially the 60% decline in oil and crude palm oil (CPO) prices, since their peak this year, would have a severe impact on Malaysian exports.
Light crude oil was trading at US$63.58 on Friday, down 56.7% from its peak of US$147 per barrel in July while CPO closed at RM1,515, down 66.2% from its March peak of RM4,486 per tonne.

About 75% to 80% of the (16%) export growth in January to August this year came from exports of pure commodities (petroleum, CPO, liquefied natural gas and resource-based products (refined petroleum products, wood and rubber products, chemicals, steel).
He said the impact was already being seen, especially in relation to the fall in commodity prices, as gross exports slowed to 10.6% year-on-year growth in August from the average of 22% year-on-year growth per month between April and July.

He expected import growth to be dragged as well. “With imports of intermediate goods - primarily inputs for the export-based manufacturing sector - accounting for 70%-75% of total imports, we can expect overall import growth to be affected. Moreover, the prospect of slower investment activities will also hit imports of capital goods,” he said.

Suhaimi said since exports growth was declining due to the slowdown in major economies like the US, Europe and Japan - which account for one-third of Malaysia’s exports - the Government should focus on shoring up domestic demand.

“We expect the upcoming Economic Package to address this issue with measures to boost consumer spending and the enlarged public sector spending (Federal Government and GLCs), support key growth sectors/areas like tourism, as well as raising the competitiveness and attractiveness of Malaysia as a foreign direct investment location,” he said.

Meanwhile, MARC chief economist Nor Zahidi Alias said although Malaysia had, to some extent, managed to diversify its exports to ASEAN markets, the anticipated weakness of these economies would eventually affect demand for Malaysia’s products.
Not only was the US economy likely to contract this year, the other major economies including the EU and Japan were on the brink of a recession, he said.

According to estimates by the International Monetery Fund, Malaysia’s total trade exposure, including indirect exposure to the US, measured as exports to the US as a share of Malaysia’s GDP was 31.7% in 2006, as against the direct exposure of 22.7%. For the EU market, total exposure was 25.4% as against 13.8% for direct exports share.

“This will definitely affect demand for Asian products, including Malaysia.
“It is also important to note that in the past one year or so, Malaysia’s export performance had been supported by strong commodity prices, namely from oil and CPO-related products,” he said.

He said the value of these exports might decline especially when commodity prices continue to remain soft.

Meanwhile, imports are expected to shrink as producers tend to be extra cautious about the outlook of external sector in the near-term.

“However, the good news was the falling ringgit against the USD may act as a buffer against a very sharp decline in export performance.

“With the USD expected to continue its uptrend following a continuous flight for safety, the ringgit may not experience a sharp rebound in the near-term. The weakness in ringgit will be a positive factor for exporters,” he said.

Rating Agency Malaysia economist Kristina Fong said that in the first seven months of the year, Malaysia’s gross exports expanded by 17% while imports grew by 9.3% to boost the country’s trade balance by 59% to RM82bil.

“Assuming the pace of growth drops by a quarter for the remaining months due to the more pronounced global economic slowdown, Malaysia’s gross exports for 2008 is projected to expand at a still healthy 11.2% and imports at 8.0%, yielding a sizeable trade balance of more than RM120bil,” he said.

For 2009, Fong said the anticipated downturn in several of the advanced economies, particularly the US, UK and some EU countries, would dampen growth of Malaysian exports and imports significantly, which was forecast at 2-3%.

“Akin to the export slowdown in 2007, GDP growth is expected to sustain at 6.3% due to strong domestic demand, particularly private consumption and investment,” he said.