Concerns over trade surplus at two-year low
ALTHOUGH the growth of imports outpacing that of exports may be a temporary phenomenon, there are concerns that this may be an ongoing trend in an uncertain global environment.
There are also concerns that the increase in consumption resulting from all the stimulus spending will increase imports but not help exports.
Over the next few months, the challenge will be to reverse this trend of higher growth in imports relative to exports.
Why is the trade surplus so closely watched?
It is the trade surplus in goods (where exports exceed imports of goods) that has supported Malaysia’s current account surplus since 1998.
A certain threshold of trade surplus is necessary to offset the deficit in the services and income accounts.
Otherwise, there is a risk that the current account could slide into deficit, which will have implications for investor confidence and the ringgit, said Julia Goh, senior economist at United Overseas Bank (M) Bhd.
Besides its net trade in goods and services, the current account records a nation’s net income from cross-border investments and net transfer payments.
Reaching six-month highs in May, export growth hit 30.5%, while imports grew faster at 37.3%.
Imports are growing faster than exports, largely due to the re-opening effect, pent-up demand and restocking of goods due to rising costs and prices.
Since the start of the year, the strongest growth has come from imports of intermediate and consumer goods.
By the first quarter of 2022, the current account surplus had already narrowed more than expected to RM3 billion or 7% of gross domestic product (GDP), which was the lowest since the second quarter of 2013.
The monthly trade surplus further narrowed to RM23.5 billion in April 2022 and RM12.6 billion in May 2022.
This brings the trade surplus since the beginning of the quarter (April to May 2022) to RM36.1 billion from RM65 billion in the first quarter of 2022.
This would weigh on the current account balance in the second quarter of 2022.
Global factors affect export growth.
Despite rising commodity prices in May, the value of exports fell for the second month in a row after hitting an all-time high of RM131.6 billion in March.
Destruction of the request
Risks of global demand destruction due to high inflation and monetary policy deviations could be in play and could increasingly dictate Malaysia’s export performance as commodity price growth could peaked, CGS-CIMB Research said in its economic update.
The United States continues to show weaker consumer purchases while in the European Union (EU), consumer confidence has barely recovered since the start of Russia-Ukraine in late February 2022.
The United States and the EU accounted for 10% and 8.1% of Malaysia’s exports respectively in May 2022.
Meanwhile, demand from China is expected to improve after its economy reopens, although the pent-up demand may be temporary.
As double-digit export growth continues unabated, the risks of spillovers from the Russian-Ukrainian war, especially on Europe, the tightening of global economic monetary policy led by the United States and the blockages of China are clouding the global economy and, therefore, the outlook for trade, Maybank Investment Bank said in a report.
The falling trade surplus is a sign that the external sector may not be as willing to contribute to overall GDP.
Supply disruptions and the Russian-Ukrainian war are expected to put further pressure on input costs and lead to delays in the completion of finished goods, said Bank Islam Malaysia Bhd’s chief economist, Afzanizam Mohamed Rashid. .
Stimulus spending contributed to faster import growth.
As long as we continue to support the economy with consumer-driven stimulus, this trend of import growth outpacing export growth may continue.
It has already manifested itself in the ringgit being relatively weaker even after the yen stabilized, said former Inter-Pacific Securities research chief Pong Teng Siew.
Stimulus spending, particularly from the various Employees Provident Fund and Bantuan Keluarga Malaysia withdrawal programs, will tend to keep consumer demand stronger than its actual underlying strength.
The trade surplus will decline to the extent that part of the demand created will have an import component without contributing to exports.
The reopening of the economy also means more consumer demand, which increases imports.
However, the increase in imports of intermediate goods may indicate that producers are increasing production, now that factories are no longer disrupted by shutdowns, said Thomas Yong, CEO of Fortress Capital Asset Management Sdn Bhd.
Imports of these intermediate goods will result in value-added exports, but the outlook is complicated by the intermediate perception of a more fragile trade balance which could affect the outlook for the ringgit and lead to further imported inflation.
To reverse this trend of higher growth of imports relative to exports, either accelerate exports or slow imports.
In terms of exports, larger gains could be capped due to multiple headwinds and high base effects.
Meanwhile, import prices would be kept high on high costs and a weaker ringgit.
For overall import growth to slow, volumes would need to be slowed. However, it could be a precursor as demand moderates, Goh said.
In addition to inventory restocking activities, the rise in imports of intermediate and consumer goods could also reflect imported inflation.
Inflationary pressure could persist amid weak ringgit and high commodity prices, and Malaysia’s trade balance could head south if these factors persist, CGS-CIMB Research said.
Exports will always fuel the trade surplus, and sustaining strong double-digit growth could be a challenge going forward.
Yap Leng Kuen is a former editor of StarBiz. The opinions expressed here are those of the author.