PP 7767/09/2010(025354)

Malaysia
Economic Highlights
•
MARKET DATELINE

5 July 2010

Exports Slowed Down In May, Pointing To Weaker

Global Demand

◆ Exports weakened to 21.9% yoy in May, from +26.6% in April and a high of +36.4% in March. This was the
second consecutive month of easing and the slowest pace of growth in three months, suggesting that global demand
for the country’s exports is showing signs of weakness. The slowdown was due to slower growth in the exports
of electronic & electrical (E&E) products and non-E&E manufactured goods. These were, however, mitigated by a pick-
up in the exports of major commodity products during the month.

◆ The slowdown in exports was due to slower increases in exports to the US, European Union, Hong Kong and
Asean. These were, however, mitigated by a pick-up in exports to Japan and China.

◆ Going forward, the global economy is showing signs of expanding at a more moderate pace in 2H 2010,
as worldwide stimulus spending dissipates and austerity measures in some European countries begin to bite. This will
likely be compounded by the policy normalisation and tightening in some countries. Despite the weakness, we do
not expect the global economy to fall into a double dip. 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, however, rebounded to increase by 34.2% yoy in May, from +27.0% in April but off the peak
of +45.3% in March, indicating that domestic demand and exports will likely moderate but remain resilient in the
months ahead. Stronger growth in imports was on account of a pick-up in the imports of intermediate inputs and
consumption goods. These were aided by a faster increase in the imports of capital goods during the month.

◆ The trade surplus narrowed to RM8.1bn in May, from a surplus of RM9.2bn in April but it rose by 12.4% yoy
to RM56.3bn in the first five months of 2010. As a whole, 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.

Exports weakened to 21.9% yoy in May, from +26.6% Table 1 External Trade
in April and a high of +36.4% in March. This was the second
Exports Imports Trade
consecutive month of easing and the slowest pace of growth
Balance
in three months, suggesting that global demand for the
(%, yoy) (RMm)
country’s exports is showing signs of weakness. The
2006 9.9 10.5 +108,193.0
slowdown was due to slower growth in the exports of electronic
2007 2.6 5.0 +100,339.5
& electrical (E&E) products and non-E&E manufactured goods. 2008 9.8 3.9 +141,883.3
These were, however, mitigated by a pick-up in the exports 2009 -16.6 -16.6 +118,350.0
of major commodity products during the month. Stripping out
2009 Q 3 -22.3 -18.3 +26,725.1
seasonal factors and measured on a 3-month moving average Q4 5.1 6.7 +32,444.0
basis, exports inched up to 28.4% yoy in May, from +27.4%
2010 Q1 30.8 35.1 +38,952.2
in April but off the high of +30.8% in March, suggesting that
Mar 36.4 45.3 +14,350.7
exports are losing momentum.
Apr 26.6 27.0 +9,222.1
May 21.9 34.2 +8,140.0
The exports of E&E products grew at a slower pace of
2 0 0 9 (Jan-May) -23.5 -27.4 +50,114.4
12.8% yoy in May, compared with +21.6% in April. This
2 0 1 0 (Jan-May) 28.0 33.1 +56,340.0
was the second straight month of slowing down and the slowest
pace of growth in six months, suggesting that external demand
Peck Boon Soon
(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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 5 July 2010

for the country’s E&E products is

softening. The slowdown was on account Table 2 External Trade
of slower increases in the exports of
% mom % mom, 3-m moving average
electronic components & parts (largely
Exports Imports Exports Imports
semiconductor products) and
telecommunications equipment, which ‘10 Mar 26.9 28.2 3.1 2.1
eased to 20.0% and 17.9% yoy Apr -12.4 -5.1 -0.3 2.7
respectively in May, from the May 0.5 3.3 3.4 7.3
corresponding rates of +22.4% and
% yoy, 3-m moving average
+19.2% in April. This was made worse
by a drop in the exports of office Exports Imports Imports of Imports of Imports of
automation & data processing machines capital gds. inputs consumption
(largely computers), which contracted by gds
1.0% yoy in May, a sharp reversal from
‘10 Mar 30.8 35.1 9.6 37.9 18.5
+21.6% in April.
Apr 27.4 33.4 15.9 34.4 14.9
May 28.4 35.2 20.6 37.1 14.2
In the same vein, the exports of non-
E&E manufactured products slowed
down to an estimate of 19.6% yoy
in May, from +26.9% in April and +41.3% in March. This was due to weaker growth in the exports of chemical &
chemical products and refined petroleum products, which slowed down to 22.9% and 45.2% yoy respectively in May, from
the corresponding rates of +27.0% and +50.4% in April. These were, however, mitigated by a pick-up in the exports
of machinery & appliances, which grew at a faster pace of 33.1% yoy in May, compared with +23.2% in April. Similarly,
the exports of optical & scientific equipment and manufactures of metal picked up during the month.

The exports of major commodity products, however, strengthened to 52.4% yoy in May, from +39.1% in April
and +35.2% in March. This was the fifth consecutive month of picking up due partly to a low base effect. Stronger
growth was underpinned by higher exports of palm oil and liquefied natural gas (LNG), which picked up to 17.9% and
92.0% yoy respectively in May, from the corresponding rates of +15.0% and +33.2% in April. These were, however,
offset partially by a slowdown in the exports of crude petroleum, which eased to 71.9% yoy in May, from +98.7% in
April.

In terms of markets, the slowdown in exports was due to slower increases in demand for the country’s exports
from the US, European Union, Hong Kong and Asean, which eased to 3.7%, 14.2%, 21.1% and 16.7% yoy
respectively in May, from the corresponding rates of +6.0%, +28.3%, +26.0% and +29.6% in April. These were,
however, mitigated by a pick-up in exports to Japan and China, which strengthened to 49.6% and 28.7% yoy respectively
in May, from the corresponding rates of +38.4% and 28.0% in April.

Mom, exports edged up by 0.5% in May, a reversal from -12.4% in April. This was due to a pick-up in the exports
of major commodity products and smaller declines in the exports of E&E products and non-E&E manufactured goods. The
exports of major commodity products rebounded to increase by 17.1% mom in May, from -23.5% in April, on the back
of increases in the exports of palm oil, crude oil and LNG. Similarly, the exports of E&E products fell by a smaller
magnitude of 2.8% mom in May, compared with -7.4% in April. This was attributed to smaller drops in the exports of
semiconductors and computers, while the exports of telecommunications equipment bounced back during the month. In
the same vein, the exports of non-E&E manufactured goods fell by a smaller magnitude of 2.7% mom in May, compared
with -12.1% in April. This was due to mainly to a smaller decline in the exports of chemical & chemical products during
the month. In terms of country, a pick-up in exports to Japan and smaller declines in exports to the US, China and Asean
contributed to the increase in exports.

Going forward, the global economy is showing signs of slowing 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. Already, global manufacturing
activities moderated in May, the first easing in three months, suggesting that a rebound from the worst global recession
since World War II is beginning to soften. Similarly, global services activities slackened in May, the first moderation
in four months. In the same vein, the OECD composite leading indicator has been trending lower m-o-m for the
last few months before stabilising somewhat lately, indicating that OECD countries’ economies are likely to expand at a
slower pace in the months ahead. Indeed, the leading indicator’s 12-month rate of change moderated to 9.7% in April,
the first easing in eight months and from +10.2% in March and +10.1% in February.

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 5 July 2010

Despite the weakness, we do not expect

the global economy to fall into a Table 3 Breakdown Of Exports
double dip even though there is a risk
of a sharper-than-expected Percent 2010 2010 2009 2010

slowdown, given that policy normalisation of total

May 10 Apr May Apr May (Jan-May)
and tightening remain gradual. Also, the
global services sector has started to recruit ByProducts: % %,yoy %mom %,yoy
workers for the first time in more than
Total electronics prod. 38.4 21.6 1 2 . 8 -7.4 -2.8 -22.1 2 8 . 0
two years in May, indicating that the sector
- Electronics comp & prts 21.0 22.4 20.0 -2.5 -0.3 -13.0 2 8 . 7
will be resilient in weathering a slowdown
- Office machines & auto 11.0 21.6 -1.0 -13.3 -11.1 -28.6 2 5 . 1
in the months ahead. In Europe, we data processing equipt.
expect the sovereign debt problems to be - Audio-visual equipt. 6.4 19.2 17.9 -10.5 4.9 -32.7 31.9
manageable despite the lingering concerns,
following the announcement of an Chemical Products 6.4 27.0 22.9 -12.9 -1.0 -28.2 3 7 . 8

emergency stabilisation loan of €750bn and L N G 6.2 33.2 92.0 -35.3 2 6 . 2 13.1 4.0
Crude Petroleum 6.2 98.7 71.9 -10.4 19.8 -50.4 73.6
the €110bn rescue package for Greece.
Palm oil 6.8 15.0 17.9 -21.7 7.8 -29.3 31.3
Nonetheless, a deepening sovereign debt
crisis in Europe will likely affect Malaysia’s Country :
exports to some extent given that 10.7% USA 9.8 6.0 3.7 -10.1 -1.5 -34.0 8.2
of the country’s exports went straight to E U 1 0 . 2 2 8 . 3 1 4 . 2 -5.7 -7.4 -27.5 2 5 .8

Europe. There would be indirect impact Japan 9.9 38.4 49.6 -12.9 2.7 -19.3 23.9

as well since 13% of Malaysia’s exports Singapore 13.2 26.3 1 2 . 2 -6.4 -2.3 -29.5 2 3 . 1

go to China, and Europe is China’s largest China 12.2 28.0 28.7 -18.1 -2.5 -10.5 50.1
Asean 25.9 29.6 16.7 -14.6 -0.4 -26.6 3 2 . 0
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 real exports to slow down to 5.0%
yoy in 2H 2010, from an estimate of +18.9% in the 1H, bringing the full-year growth to +11.5% compared with -10.4%
in 2009.

In the US, the economy moderated to an annualised rate of 2.7% in 1Q 2010, after a strong growth in the 4Q of last
year. Despite a weaker growth, the economic recovery is becoming more sustainable, as its recovery which started from
the government stimulus and inventory rebuilding, has now spread to consumer spending. As it stands, real personal
consumption expenditure grew by 0.3% mom in May, after remaining unchanged for the first time in seven months in
April. This suggests that consumers continued to spend but they have turned cautious in view of rising economic
uncertainties in Europe and the policies tightening in Asia. Furthermore, unemployment rate remains high and job
creation in the non-farm private sector slowed down in May, after four consecutive months of picking up, implying that
a recovery in consumer spending will likely be gradual. Elsewhere, manufacturing activities slowed down in May, while
services activities held stable during the month. As a whole, the US economy is projected to grow at a more
moderate pace of 2.8% in 2H 2010, compared with +3.2% in the first half, bringing the full-year growth to around
+3.0%, a rebound from -2.4% in 2009.

Similarly, the Euroland’s economy is expected to sustain its slow pace of recovery in 2010, as the deepening sovereign
debt problems of late would force some countries to cut government spending sharply. Already, manufacturing activities
in the region moderated for the second consecutive month in June, while services activities eased during the month.
Although consumer confidence improved marginally in June, it remained weak. In the same vein, a slowdown in global
export demand will likely contribute to a slower growth in the Japanese economy in the 2H of the year. Already, the
country’s exports slowed down for the third consecutive month in May, while industrial production weakened for the
second straight month during the month.

In China, the country’s economy is showing signs of weakness following the introduction of measures to control the
rapid credit expansion and upward property prices. As it stands, manufacturing activities slowed down to the slowest
pace in three months in May, while fixed-asset investment in urban areas and loans slowed down from growth of more
than 30% to 25.9% and 23.2% respectively in May. Similarly, retail sales were off the peak in February though exports
remained resilient. As a whole, the key economic indicators point to a slowdown in the country’s economic growth in
the 2H of the year, though growth will likely remain resilient, after recording a stronger growth of +11.9% yoy in the
1Q.

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 5 July 2010

A sharp turnaround in demand for E&E products, which accounts for about 45% of Malaysia’s total exports in 2009,
would boost the country’s exports also, particularly in 1H 2010. Demand, however, 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 50.3% yoy in April, after reaching a high of +58.3% in March, suggesting that sales are beginning to moderate after
a spike up in demand and inventory rebuilding.

Total imports, however, rebounded to increase by 34.2% yoy in May, from +27.0% in April but off the peak
of +45.3% in March, indicating that domestic demand and exports will likely moderate but remain resilient in the months
ahead. Stronger growth in imports was on account of a pick-up in the imports of intermediate inputs and consumption
goods, which grew at a faster pace of 35.8% and 14.6% yoy respectively in May, compared with the corresponding rates
of +27.4% and +9.2% in April. These were aided by a faster increase in the imports of capital goods, which strengthened
to 32.8% yoy in May, from +14.0% in April. Mom, total imports grew by 3.3% mom in May, a rebound from -5.1% in
April. This was due to a pick-up in the imports of intermediate inputs and a smaller drop in the imports of 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 RM8.1bn in May, from a surplus of RM9.2bn in April. In the first five
months of 2010, trade surplus rose by 12.4% yoy to RM56.3bn. 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. These,
however, will likely be mitigated by an improvement in the services account, which is projected to record a larger surplus
during the year, in line with a pick-up in travel receipts. Similarly, repatriations of salaries and wages by foreign workers
are likely to drop, 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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Group as a result of using different assumptions and criteria. This report is not to be construed as an offer, invitation or solicitation to buy
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