• Ripple effects of the widening trade rifts

Malaysia takes a hit as investments sway

For Malaysia, while the global trade tensions continue to escalate, its trade remains stable as can be seen by its recent external trade numbers.

According to Malaysia’s Department of Statistics, both imports and exports from Malaysia achieved new record highs in July 2018 with values of RM77.8 billion and RM86.1 billion, respectively.

It also noted that Malaysia’s total trade which was valued at RM164 billion, an expansion of RM14.6 billion or 9.8 per cent from a year ago while trade surplus for July 2018 was at RM8.3 billion, advancing by RM138.8 million (1.7 per cent) from a year ago.

“The expansion was primarily driven by continuous growth in manufactured goods ( 12.6 per cent y-o-y vs 12.7 per cent y-o-y in Jun-18) and rebound in mining goods (7.1 per cent y-o-y vs -10.9 per cent y-o-y).

“In addition, lesser drop in agriculture goods (down 14.5 per cent y-o-y compared with down18.7 per cent y-o-y) also contributed to the performance. Meanwhile, imports growth moderated to 10.3

per cent y-o-y in Jul-18 from 14.9 per cent y-o-y registered in the prior month however still outperformed exports. Trade surplus recorded at RM8.3 billion, higher than RM6 billion posted in June 2018,” said MIDF Amanah Investment Bank Bhd’s research arm (MIDF Research).

However, it pointed out that while it anticipate Malaysia’s exports to remain optimistic on the back of tax holiday period and stable retail fuel price, concerns on global trade spat remained.

Phillip Futures Sdn Bhd senior directives analyst David Ng meanwhile believed that for now, China will continue to emphasise negotiations as a way to resolve the current trade dispute.

“But even if talks resume, they could easily stretch beyond November, with US tariffs on US$ 200 billion of Chinese imports being introduced before a resolution has been reached.

“Amid weaker global trade expectations, Fed and ECB minutes show some concern with trade tensions. The latest world trade volumes data for 2Q18 show only a small effect of the protectionist policies discussed and implemented since the beginning of the year. But this is a backward-looking indicator and front-loading of trade, to avoid tariffs, could support volumes in short run.”

He further highlighted that recent minutes of the July FOMC meeting mentioned the latest staff economic outlook which showed that trade policies could have a significant adverse effect on US growth.

“Trade tensions were also recognised as a notable driver of recent market moves in EM and currencies. With this regard, Malaysia may face external pressure amid the ongoing trade tension as both countries (China and Malaysia) represent a large bloc of Malaysia trading partner,” he pointed out.

Wary investors

Aside from Malaysia’s trade, its equity markets also took a hit, with the Bursa Malaysia recording multiple dives which seem to coincide with trade or policy developments in the US or any of the global economic juggernauts.

Spook by events in the global trade, foreign investors have pulled out from Malaysia’s equity markets for safer havens.

“Fears on global trade outlook will continue haunt equities. If risk appetite shy away, the stock markets, not only Malaysia but also at the global stage, will be under pressure again,” a dealer was reported as saying by Bernama, recently.

Sensitivity around trade would cause an imbalance in the foreign exchange (forex) market, thus elevating US dollar and other safehaven currencies, he added.

Meanwhile, Bank Islam chief economist Dr Mohd Afzanizam Abdul Rashid recently stated that generally speaking, the Malaysian equities markets was still marred by the external uncertainties. With US’ economy continued to exhibit a healthy trend, he pointed out: “Obviously, the prevailing inflation rate is above the two per cent target of the US Federal Reserve ( Fed) which implies that the US central bank is on track to raise its federal fund rate at the upcoming meeting in September.

“On one hand, we have a situation where we have a higher interest rate environment in advanced countries and on the other, anxiety over policy direction domestically.

“Perhaps, this could explain why the net foreign fund flow trend was uneven although intermittently we saw net inflows.”

According to MIDF Research, on a year-to-date basis as of August, the total foreign net outflow from Malaysia stood at approximately RM8.6 billion or US$2.2 billion, making it the second lowest outflow (behind the Philippines) amongst the four Asean markets it tracked.

Malaysia en route to lower GDP

With domestic policy changes brought on by the shift the political landscape as well as jitters on the external front triggered by trade tensions between economic powerhouses, analysts and experts generally believe that Malaysia could see a lower gross domestic product ( GDP) recording this year.

MIDF Research noted that already, Malaysia’s 4.5 per cent y-o-y GDP in 2Q18 came below its and the market’s forecast of 4.9 per cent y-o-y and 5.2 per cent y-o-y, respectively.

“It is the weakest growth in 6quarters and less than previous year’s average of 5.4 per cent. Among others, domestic demand contributes about 4.3 per cent of the total growth during the quarter,” it added.

“We opine the slowdown in GDP growth was in tandem with moderating performances of industrial production, manufacturing sales, distributive trade and external trade during the quarter.

“Moderating inflationary pressure, strengthening domestic demand and accommodative economic policies as well as strong exports growth are expected to be major drivers for GDP performance in the second half 2018,” it commented.

Meanwhile, Standard Chartered Bank lowered its forecast for Malaysia’s GDP in 2018 to 4.8 per cent from its earlier estimate of 5.3 per cent due to the US-China trade war and weaker-than-expected economic growth in the first half of the year.

According to chief economist for Asean and South Asia, Edward Lee, the impact could be cushioned by investors’ confidence in Malaysia, with a stream of new investments committed by businesses who were seeking an alternative production base.

“Malaysia’s growth will be affected directly and indirectly, but I am not sure whether this will be by the end of the year. Probably we will see a clearer picture in early 2019,” he told reporters after a global research briefing for the second half of 2018.

“I think that (the trade war) has affected especially investment sentiment in Asia. This is quite clear on two things.

One is it seems really to be targeted against China and second, and more worrying for me, is this may be more of a longterm issue. Trade is just one of the factors that we are looking at,” he was reported as saying by Bernama.

Nevertheless, he pointed out that while investments seemed slightly weak while exports face a very high base compared with last year. Bank Negara Malaysia would likely keep its policy rate at the current level.

Malaysia’s economic growth was expected to rise to five per cent next year, he added.

Looking East, Asia’s growing trade liberalisation

As US creates trade frictions with nearly half the world, there is a silver lining to this ordeal as countries within regions look to each other to help boost their trade ties and subsequently; their economies.

Regional free trade agreements such as the Comprehensive and Progressive Agreement for Trans- Pacific Partnership ( CPTPP) are in the works to lower trade barriers and open up opportunities for countries in Asia to trade with countries such as Canada, Chile, Peru, Mexico and others.

For now, while focus still remains on quelling rising trade tensions between economies and not much progress has been made in finalising the CPTPP before its February 2019 deadline, regional free trade agreements such as the CPTPP offer a glimmer of hope in the current global trade scene.

“China’s economic and political relationship with the US is the most important one in the world today. We believe that both sides want a ‘win-win’ solution to the trade dispute, which will result in even more trade and investment between the two economic powers,” Standard Chartered Global chief economist David Mann said in his ‘ The three main risks facing the global economy’ post.

“The tariff impact would hurt other Asian countries in China’s supply chain; we estimate that 1.8 per cent of Taiwan’s exports could be affected by a US-China trade war, 1.2 per cent for Malaysia and Singapore, one per cent for Vietnam and 0.9 per cent for Korea.

“However, some of these same countries might benefit from the US-China trade dispute by displacing China’s exports to the US,” he highlighted.

Meanwhile, the research team at iFAST Capital Sdn Bhd (iFast Capital) pointed out that despite the Sino-US trade tensions, the tone is much more upbeat from a fundamental perspective.

“Many other EM countries, especially in Asia, appear healthier with improving current account balances as well as lower external debt to GDP ratio. And structural reforms in countries such as China and India are likely to put economies on the path to a more sustainable long-term growth.

“According to the data released by the International Monetary Fund (IMF) by end-June 2018, the annual growth rate for emerging market over the next five years will remain at high level, while the growth rate of GDP for the developed markets will be declining. T

“his is a very compelling reason to take a harder look at the emerging region of the world, and position portfolios for this coming shift,” it explained.

MIDF Research also pointed out that US’ beef with other countries as well as Malaysia, could help the country reduce its trade surplus, especially with US which has been its biggest contributor to its trade surplus.

It noted: “Over 95 per cent of Malaysia-US total trade being dominated by manufactured goods, especially electrical and electronic (E&E) products. Other than E&E, exports of optical & scientific equipment, rubbers products, transport equipment and manufactures of metals are among key manufactured goods shipped to US.”

In 2017, it said, Malaysia had trade surplus with Asean, EU and US amounted to RM58.2 billion, RM15.5 billion and RM19.4 billion respectively. Comparatively, it noted, Malaysia had a trade deficit with China worth RM38.4 billion.

“US has been one of the strong trade surplus contributors to Malaysia. Hence, in the event of slower demand by US on Malaysia’s products, it will reduce the size of Malaysia trade surpluses,” it added.

On a technical point of view, MIDF Research opined, “With imposition of tariff hikes since early this year, we view the demand on manufactured goods especially products relating to washers, solar panels, aluminum and steel will drag down Malaysia’s exports to US.

“We forecast Malaysia’s exports growth to US will decelerate to three to five per cent this year as compared to 10.5 per cent in 2017. Since 2017, exports growth to US had been lower than outbound shipments to EU, China and Asean. As for 1H18, exports to US grew by 0.8 per cent y-o-y and inbound shipments shrank sharply by 19.6 per cent y-o-y.”

Nevertheless, the research team highlighted that trade with Asean remains on steady path, constituting 27.5 per cent of total trade last year.

“Due to the structural change, slower demand by US does not deter overall Malaysia’s trade performance. However, the impacts of slower demand by US will affect Malaysia via indirect channels especially thru tepid pace in global trade growth,” it commented.

Overall, MIDF Research pegged a positive outlook for the trade landscape in Malaysia as well as generally, Asia, in the third quarter of 2018 (3Q18).

“Looking at our regional partner’s, exports of Vietnam and South Korea in August 2018 continued to expand by 5.5 per cent y-o-y and 8.7 per cent y-o-y respectively. This could provide similar waves to Malaysia’s upcoming trade numbers for August 2018.

“Based on manufacturing condition and activity, both global and emerging economies manufacturing PMI still maintain on expansionary trend at 52.5 points and 50.8 points in August 2018.

“For instance, PMI of US went down to 54.7 points in August 2018 which pointed to the slowest expansions in factory activity since November 2018 as output and new order growth rate eased although remained solid. Similarly, PMI of China inched down to 50.6 points while edged up to 52.5 points for Japan during the same month.