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Malaysia: Concerns over trade surplus hitting 2-year low
WHILE growth in imports exceeding that of exports may be a temporary phenomenon, there are concerns that this may be a continuing trend against an uncertain global outlook.
There is also concern that higher consumption from all the stimulus spending will increase imports but will not contribute to exports.
Over the next few months, the challenge will be to reverse this trend of higher growth in imports over exports.
Why is the trade surplus so closely watched?
It is the goods trade surplus (where exports exceed imports of goods) that has sustained Malaysia’s current account surplus since 1998.
A certain threshold of goods trade surplus is needed to offset the deficit in the services and income accounts.
Otherwise, there is a risk of the current account tipping into deficit, which will have implications on investor confidence and the ringgit, said United Overseas Bank (M) Bhd senior economist Julia Goh.
Besides its net trade in goods and services, the current account records a nation’s net earnings on cross-border investments and net transfer payments.
Hitting six-month highs in May, growth in exports reached 30.5%, while imports grew faster at 37.3%.
Imports are rising faster than exports largely due to the reopening effect, pent-up demand and restocking of goods based on higher costs and prices.
Since the start of the year, the highest growth is from imports of intermediate and consumption goods.
In the first quarter of 2022, the current account surplus had already narrowed more than expected to RM3bil or 7% of gross domestic product (GDP), which was the lowest since the second quarter of 2013.
The monthly trade surplus narrowed further to RM23.5bil in April, 2022, and RM12.6bil in May, 2022.
This brings quarter-to-date (April to May 2022) trade surplus to RM36.1bil compared with RM65bil in the first quarter of 2022.
This would weigh on the current account balance in the second quarter of 2022.
Global factors are impacting the growth in exports.
Despite higher commodity prices in May, export values fell for the second consecutive month after reaching a historic high of RM131.6bil in March.
Demand destruction
The risks of global demand destruction from high inflation and monetary policy discrepancies could be at play, and may increasingly dictate Malaysia’s export performance as growth in commodity prices may have peaked, said CGS-CIMB Research in its economic update.
The United States continue to post weaker consumer purchases while in the European Union (EU), consumer confidence has barely recovered since the start of the Russia-Ukraine in late February 2022.
The United States and EU accounted for 10% and 8.1%, respectively, of Malaysia’s exports in May, 2022.
Meanwhile, demand from China is expected to improve following the reopening of its economy, although the pent-up demand could be temporary.
While double-digit export growth continues unabated, the risks of fallouts from the Russia-Ukraine war, especially on Europe, the US-led global economic monetary policy tightening and China’s lockdowns are clouding the global economic, and hence, trade outlook, said Maybank Investment Bank in a report.
The fall in the trade surplus is a sign that the external sector may not be so forthcoming in contributing to the overall GDP.
Further pressure
Supply disruptions and the Russia-Ukraine war are expected to exert further pressure on input costs and result in delays in the completion of finished products, said Bank Islam Malaysia Bhd chief economist Afzanizam Mohamed Rashid.
Stimulus spending has contributed to the faster growth in imports.
As long as we continue to prop up the economy with consumption-directed stimulus, this trend of import growth exceeding growth in exports may continue.
It has already shown up in the ringgit being relatively weaker even after the yen has stabilised, said former Inter-Pacific Securities head of research Pong Teng Siew.
Stimulus spending especially from the various withdrawal schemes from the Employees Provident Fund and Bantuan Keluarga Malaysia will tend to keep consumption demand stronger than its real, underlying strength.
The trade surplus will fall to the extent that a portion of the demand created will have an import component without contributing to exports.
The reopening of the economy also means more consumption demand, which increases imports.
However, the rise in imports of intermediate goods may indicate that producers are elevating production, now that factories are no longer disrupted by lockdowns, said Fortress Capital Asset Management Sdn Bhd CEO Thomas Yong.
Imports of these intermediate goods will translate into value-added exports but prospects are complicated by the intermediate perception of a softer balance of trade which may affect the outlook on the ringgit, and lead to further imported inflation.
To reverse this trend of higher growth in imports against exports, exports need to be accelerated or imports to be slowed down.
In terms of exports, stronger gains may be capped due to multiple headwinds and high-base effects.
Meanwhile, import prices would be kept high on elevated costs and a weaker ringgit.
For the overall import growth to ease, volumes would need to be slowed down. However, this could be a precursor that demand is moderating, said Goh.
Besides restocking activities, rising imports of intermediate and consumption goods could also reflect imported inflation.
The inflationary pressure may persist amid the ringgit’s weakness and elevated commodity prices, and Malaysia’s trade balance can point south if these factors persist, said CGS-CIMB Research.
It is still exports that will drive the trade surplus, and maintaining a strong double-digit growth may be a challenge, going forward.
Yap Leng Kuen is a former StarBiz editor. The views expressed here are the writer’s own.
Source: https://www.thestar.com.my/business/business-news/2022/07/04/concerns-over-trade-surplus-hitting-2-year-low