Thursday April 12, 2012
Strong exports, factory output
By HSBC Global Research
EXPORTS in February accelerated 14.5% year-on-year, compared with 0.4% in January. This was broadly in line with consensus (Bloomberg: 15.3%) but higher than our bearish call of 6.9%. Sequentially, shipments jumped by a massive 17.2% month-on-month -1% in January).
Likewise, imports expanded by 18% in annual terms (3.3% year-on-year in January) and 8.4% month-on-month (-5.5% in January). Consequently, the trade surplus rose to RM10.58bil (RM8.75bil in January).
By products, the recovery in exports was broad based. However, it was led by electrical and electronics products (7.8% year-on-year vs -5.5% in January) after an extended period with negative prints. Sequentially, the sector saw output jump 26.4% month-on-month (-7.3% in January). Shipments of crude petroleum (48.3% year-on-year vs -6.4% in January), chemicals (10.2% year-on-year vs 2.8% in January), palm oil (7.9% year-on-year vs -1.0% in January) and machinery (35.9% year-on-year vs -4.3% in January) were also fairly robust.
By destination, exports to all major trading partners improved considerably: China (18.2% year-on-year vs -12.2% in January), Singapore (24.4% year-on-year vs -7.3% in January), the United States (14.5% year-on-year vs 1% in January), Thailand (21.2% year-on-year vs 4.5% in January) and Australia (57.7% year-on-year vs 22.3% in January).
However, exports to Japan grew at a slower clip, although growth remained quite strong (13.2% year-on-year vs 26.6% in January).
February industrial production index (IPI), which also was released on Tuesday, surprised on the upside as well (7.5% year-on-year vs 0.3% in January; consensus: 5%). Sequentially, production rose 4.2% month-on-month(-2.% in January).
The expansion was led by the index heavyweight manufacturing (9.4% year-on-year vs 1.2% in January). However, mining (2% year-on-year vs -2.6% in January) and electricity (11.4% year-on-year vs 2.7% in January) output also accelerated.
Following a week of disappointing data out of the United States, Europe, and China, Tuesday's numbers were a nice surprise and suggest that the smaller and more nimble Asian economies have benefited from the improvement in the global trade cycle in recently months.
Of course, we shouldn't get ahead of ourselves and forget that the timing of the Chinese New Year yet again distorted the data.
Looking at the average for January-February, exports grew by 7.5% year-on-year, which is below the average growth rate of 9.8% year-on-year in the fourth quarter of 2011. However, industrial production accelerated in January-February (3.9% year-on-year vs 2.7% in fourth quarter of 2011).
Having said that, there are some genuine bright spots in Tuesday's data. First, the rebound in shipments of electrical and electronics was a positive surprise in light of the extended period of contraction and its significant share in total exports (33%).
That being said, the sector could face headwinds as the recent improvement, at least partly, may reflect inventory restocking. Moreover, final demand in the West remains weak.
Another bright spot was the production and exports of crude oil, which no doubt has benefited, in value terms, from the current high level of prices due to geopolitical tensions. Volumes may also have received a boost from the substitution away from Iranian produced oil.
For Bank Negara, Tuesday's data is likely to encourage it to keep rates on hold for an extended period of time. The external backdrop has improved since late last year, domestic demand remains solid, and inflation pressures are still bubbling under the surface. External risks are still elevated, but monetary policy settings are still accommodative.
The bottom line is February's trade and IPI accelerated on the back of a recovery of production after the Chinese New Year celebrations in January and stabilisation in global economic conditions. While March numbers will throw a better light on the underlying trend, Tuesday's numbers should persuade Bank Negara to extend its pre-emptive pause.
By CIMB Research
IN tandem with regional trends, Malaysia's exports charged to a strong 14.5% year-on-year growth in February (0.4% in January) as the seasonal effects normalised and exports of electrical and electronics (E&E) products bounced back. It also received a boost from robust commodity prices.
The four-month high export growth for February matched our expectations but was higher than consensus estimates of 12.1%. For the two months of 2012, exports grew 7.1%, compared with 5.4% during the previous corresponding period.
Commodity exports were still calling the shots. Exports of non-E&E products expanded strongly by 18.1% (3.3% in January), thanks to a significant 14.4% year-on-year surge in crude oil prices, which offset the slump in crude palm oil prices (-16.6%).
E&E exports staged a rebound to 7.8% growth (-5.5% in January).
Nevertheless, we remain cautious about whether the growth will sustain given the still-nascent recovery in advanced economies. High-base effects will come into play. We caution that the annual growth of exports will face obstacles: the uneven pace of electronics demand in the first half of 2012 before it firms up in the second half of 2012 and the fading commodity price effect as the high base kicks in. Commodities exports were consistently higher in the second to third quarter of last year. Thus, we keep our estimate of 3%-4% export growth for this year (8.7% in 2011).
By CIMB Research
MOVING in tandem with exports growth, the industrial production index (IPI) gained traction to grow strongly by 7.5% year-on-year in February, after growing 0.3% in January.
It marked the highest growth rate since June 2010, reflecting the normalisation of production as the shorter working month ended and also thanks to a strong rebound in electrical and electronics (E&E) output. It also exceeded ours (3.5%) and consensus estimates (6.1%).
In the first two months of the year, factory output rose 3.8%, compared with 2.3% in the previous corresponding period.
There were broad-based increases in overall factory output. Firstly, the manufacturing sector clawed its way back to higher growth of 9.4% in 20 months (1.3% in January), largely led by domestic-oriented industries amid a pick-up in electronics output.
Secondly, the mining sector turned around to grow by 1.9% in February (-2.7% in January), ending 19 months of contraction; and thirdly, the electricity output surged 11.3% (2.7% in January), backed by resilient commercial demand.
We still expect the IPI to grow unevenly, weighed down by the manufacturing sector, especially electronics-based output. We, therefore, maintain this year's IPI growth estimate of 1% to 2% (1.4% in 2011).
Gross domestic product (GDP) for the first quarter of 2012 may surprise on the upside. We believe the domestic demand-led expansion will continue to drive this year's economic growth, as net trade contribution remains weak.
Given the large consumption boost coming from generous government handouts, we think the first-quarter GDP growth may surprise on the upside from our current estimate of 3.8%. At this juncture, our full-year GDP growth estimate is maintained at 3.8% and we may revisit the estimate when the first-quarter GDP is released in May.
EUROPE'S economic slowdown is not expected to result in rating changes for most Asian corporates.
Although many Asian countries rely on Europe for exports, most of our Asian rated issuers are less exposed to conditions in the euro area due to the domestic or regional focus of their businesses.
Our assessment is based on a scenario in which the European economy entered recession, with its gross domestic product (GDP) declining by about 1%, this year. A more severe outcome in Europe would result in a reassessment of the impact on Asian companies.
Under our base case scenario of a mild euro-area contraction of up to 1% in GDP for 2012, exposure won't impact the ratings and outlooks of most rated Asian firms, based on their European revenues and assets, as well as borrowing from European banks.
The European Central Bank (ECB) had earlier projected that the eurozone economic activity would range between a contraction of 0.5% to a growth 0.3% in 2012. The International Monetary Fund has a more pessimistic view, projecting the eurozone GDP to contract 0.5% this year.
The sectors that are more likely to be adversely impacted by trends in Europe are consumer-electronics, semiconductors, shipping, port operators, palm oil producers, steel makers and chemical manufacturers. The more domestic or regionally-focused sectors, with limited exposure to a euro-area recession such as utilities, property, telecommunications, consumer/retail, construction, building materials and media, would likely be more resilient.
Of the 217 issuers in Asia (excluding Japan) that are rated by Moody's, only 13, or 6% of the total, reported 15% or more of their revenue as being derived from Europe, while eight, or 4% of the issuers, reported over 25% of their revenues as being derived from the European market.
Reported revenues might understate the degree of exposure of revenues to Europe. For example, reported sales to Europe would not include sales of raw materials and intermediate goods to non-European companies that become components of finished goods sold to Europe.
Among the 13 issuers with reported revenues to Europe exceeding 15%, a few were facing increased rating pressure. Although exposure to Europe was not the sole source of rating pressure, the slowdown in Europe had exacerbated concerns for these firms, particularly, BW Shipping (Ba1 negative) and LG Electronics (Baa2 negative).
In terms of funding, many Asian issuers had improved their liquidity since the last financial crisis of 2008/09, and most of them are well-positioned to manage potential disruptions from the deleveraging of European banks.
Our survey of rated issuers indicates that only 17 of them have more than 10% of their outstanding debt with European banks, excluding Hong Kong Shanghai Bank Corp and Standard Chartered Bank. Of these, 10 have cash on balance sheet that is over 100% of debt maturing in the next 12 months.