The trade winds
ON the surface, Malaysia’s latest trade release shows exports growing at a faster pace in December on a year-on-year basis compared to November despite the challenges posed by the fall in crude oil prices and slower external demand overall.
For the whole of 2014, exports also posted reasonable growth considering the headwinds in the second half of the year, but a closer look into the data shows that there are more challenges ahead.
Liquefied natural gas (LNG) prices is one challenge. Typically, LNG prices lag crude oil prices by up to six months and there is reason to worry as Malaysia exports more LNG than crude oil.
AllianceDBS Research chief economist Manokaran Mottain expects more downside pressure on export growth in the coming months as LNG exports slow down. “LNG export prices lag crude oil prices by around five months,” he says in a report following the release of the December and full-year trade data by the Statistics Department on Thursday.
Compounding the LNG price woes, he says exports of crude petroleum have fallen on both year-on-year and month-on-month basis in December, reflective of the depressed global crude oil prices. Notably, the external headwinds have dragged exports sharply lower in the second half of the year although for the full year, exports grew at the much faster pace of 6.4% compared to the previous year’s 2.5% growth.
Together with crude petroleum, petroleum products and palm oil goods colletively make up about 15% of total exports for December with the bulk of export growth stemming from electrical and electronic goods (E&E) and LNG products.
After the fall in crude oil prices, LNG prices may be the next issue that energy exporters such as Malaysia, will have to manage. Citigroup Inc analysts say that as of last November, the benchmark for Malaysia-Japan LNG imports have yet to fall significantly but they expect prices to have an impact soon on exports performance.
“Looking ahead, the expected drop in LNG prices may have a significant impact on trade balance,” they say, adding that on a historic basis, turning points in LNG spot prices have lagged Brent crude by four to six months.
From the June 24 high, Brent plunged nearly 57% to US$47.55 per barrel on Jan 13 and while the global benchmark recovered to the recent high of US$57.91 on Feb 3, prices remain volatile as seen from trading in recent days.
The Citigroup analysts calculate that the impact of lower LNG prices on the trade balance will be more visible from February to April onwards but do not expect a trade deficit. Assuming an LNG to crude oil price elasticity of 0.5, they expect Malaysia to still have a current account surplus of 4% to gross domestic product (GDP).
“However, if we assume an elasticity of 1 for LNG trade surplus to crude oil prices, we would still end up with a decent current account surplus of 2.5% to 3% of GDP,” they add. On the other hand, Manokaran confirmed in a text message that instead of an earlier forecast of a trade deficit in the coming months, this year will see a sharply narrower trade surplus.
He expects a current account surplus to GDP ratio of around 2% this year compared to an estimated 5% for 2014.
Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid says in an email reply that the odds of a trade deficit happening at this point is rather remote given that imports will soon adjust due to the weak currrency.
E&E and US demand
World trade growth has been slowing since the global financial crisis of 2008/2009 and this year will not be any different. According to the International Monetary Fund, trade grew by no more than 3% in 2012 and 2013 compared with a pre-crisis average of 7.1% from 1987 to 2007.
“The current external outlook demand remains challenging. China’s January manufacturing purchasing managers index (PMI) entered a contractionary phase at 49.8 (from 50.1 in December),” Manokaran says. Most economists blame persistently low commodity prices for the country’s exports slowdown.
They expect the E&E-related industries to provide some buffer this year given semiconductor sales growth this year and next, according to data from the World Semiconductor Trade Statistic. Semiconductor sales grew 10% last year.
Afzanizam says global PMI remain above 50 points in January. “That should give us some comfort with regards to external demand, at least in the immediate term,” he says, adding that as E&E products accounted for around one-third of the country’s exports, this should be offset the decline in commodity-related exports.
Citigroup expects the final quarter of 2014 to show a current account surplus exceeding 6% of GDP while the increase in imports, especially of capital goods, may signal an increase in demand ahead. Its analysts believe that a weak ringgit will benefit manufacturing exports.