Trade expansion to continue in June, but face rising headwinds ahead

Malaysia’s exports has been projected by RAM Ratings to continue expanding in June, albeit at a more moderate pace of 1.1 per cent, compared to 2.5 per cent in May.

This is partly attributable to the Hari Raya festive holidays in June and generally more subdued global trade. In line with its sustained export performance, imports are anticipated to increase 1.6 per cent in June, up from 1.4 per cent in May. This will bring Malaysia’s overall trade surplus to RM5.7 billion at month-end.

Looking ahead, the JapanSouth Korea trade row is envisaged to exert further downside pressure on weak regional trade momentum, particularly for the electrical and electronics (E&E) supply chain. This follows Japan’s decision to impose restrictions on exports of high-technology chemicals to South Korea (effective July 4).

These items are vital to the production of semiconductors and display screens on smart devices - components of South Korea’s prominent E&E sector. Given Japan’s dominance in the supply of these high-technology materials (accounting for a reported 90 per cent of global supply), this will likely exacerbate the already sluggish outlook on South Korea’s E&E exports.

The direct impact on Malaysia’s exports from a potential shortfall in supply as well as a potential loss in demand from South Korea appears limited, as the former does not rely heavily on the latter’s E&E sector. That said, Malaysia could be indirectly affected via a disrupted global E&E production chain.

“The latest escalation in trade tensions between Japan and South Korea poses key downside risks to the global supply chain for E&E products, especially given the latter’s dominance in the supply of memory chips. South Korea accounted for 37.6 per cent of global memory chip exports in 2018.

“Although first-degree effects may not be significant for Malaysia, the potential overarching supply bottlenecks for key inputs (such as these chips) in the short term may further stifle the tech cycle and retard the growth of the global E&E industry,” RAM’s head of research Kristina Fong observed.

That said, there may still be some room for trade-diversion benefits for Malaysia, in a bid to manage bottlenecks in the supply chain for inputs arising from export restrictions. Demand may be diverted to Malaysian firms.

Global E&E players could also capitalise on the existing infrastructure and scale up their output capacity in Malaysia if they decide to diversify their production away from South Korea.