More challenges ahead

External trade performance for July would likely show some weaknesses from preceding months

THE week ahead will be an eventful one for Malaysia, with more data for investors to chew on.

The Department of Statistics will release the country's industrial production and external trade data for July 2011. At the same time, Bank Negara's Monetary Policy Committee will meet to decide on the interest rate direction of the country over the next couple of months.

The industrial production index (IPI) a gauge of the manufacturing, mining and electricity output of the country and the external trade data which gauges the net income from import and export activities will provide a glimpse on the impact of the ongoing uncertainties surrounding the global economy on the country's economic growth for the second half of the year.

Indications so far have been less than encouraging. While there is a likelihood that Malaysia's industrial production could expand at a marginal pace, external trade performance for July would likely show further weaknesses compared with the preceding months. The consensus view is that their contributions to the country's gross domestic product (GDP) or the total value of goods and services produced, would likely narrow as we enter the second half of the year.

It is interesting to recall that Malaysia's IPI for June surprisingly grew 1% year-on-year (y-o-y) when most economists and the market were expecting another round of contraction. The surprise June IPI rebound, after a sharp contraction of 5.6% y-o-y in May, was mainly attributable to domestic-oriented manufacturing activities, which seemed to have benefited from the rollout of the Economic Transformation Programme projects.
Contributions from commodity exports expected to be moderate compared with the first half.

If such momentum could be sustained, some economists say, the industrial production figures would likely spring another surprise.

CIMB Research in its previous report explained that while it maintained its cautious outlook on the global economy, especially in the United States and eurozone, there were still factors supporting a continued expansion of Malaysia's industrial output over the short term even though the pace would not be brisk. The research house pointed to the restoration of the global supply chain as one factor that could boost the production of transport equipment as manufacturers start to rebuild inventory, and the ongoing and new infrastructure development projects as the other factor that would underpin domestic-oriented industries.

As for Malaysia's external trade, further weakness is only to be expected due to the sluggish recovery of western developed economies. Although intra-regional trade with other Asian countries, such as China and those in Asean, would likely remain resilient over the medium term, it would unlikely be sufficient to compensate for the general slowdown in global demand for products and services. And with global commodity prices softening in recent months, contributions from commodity exports would likely be moderate compared with the first half of the year.

Gross exports in June rose 8.6% y-o-y, compared with 5.4% y-o-y in May, driven largely by commodity-based products, which had more than compensated for the decline in the electrical and electronics (E&E) sector. Nevertheless, Malaysia's trade balance for June narrowed to RM7.6bil from RM8.5bil in the preceding month as imports had also accelerated at the same time.

TA Research notes that the challenges ahead for Malaysia's overall trade would stem from several factors, including the general slowdown in worldwide demand for manufactured products; the recessionary impulse and moderating growth in Asia, including China; as well as the stronger ringgit which would probably encourage more imports, while making the country's exports more expensive.

CIMB Research further points out that besides the uneven global demand, Malaysia's E&E sector also faced loss of competitiveness in terms of product specialisation. For instance, the rising demand for tablet PCs and smartphones in the global market represented an opportunity lost for Malaysian E&E manufacturers as they were not specialised in the product segment.

This underscores the importance of R&D (research and development) and innovation to a country's economy in order to keep pace with the fast-changing global trends and consumption pattern. Otherwise, one could easily lose competitiveness over time.

In the meantime, internally-generated demand will likely be Malaysia's main source of growth. The good news is domestic consumption will likely be sustained, spurred by private spending, and accelerated private investments resulting from the roll-out of ETP projects over the next six months.

Bank Negara, on the other hand, is expected to keep the benchmark overnight policy rate unchanged at 3% for two more months to create an environment that is supportive of the country's economic growth amid the ongoing challenges in the external environment.