This article first appeared in The Edge Malaysia Weekly on August 26, 2024 - September 1, 2024

MALAYSIA’s trade surplus shrank to RM6.42 billion in July — the lowest in more than four years. The figure is slightly more than one-third of the RM17.31 billion recorded a year earlier and 55% lower than the RM14.28 billion in June.

The July trade surplus of RM6.42 billion is the weakest since April 2020, which saw the country’s first trade deficit in more than two decades following the Covid-19 outbreak that severely disrupted global supply chains.

For the January-to-July period, Malaysia’s imports expanded 15.5% year on year while its trade surplus narrowed almost 47%. The contraction was rather sharp on a month-on-month as well as a year-on-year basis.

However, economists are not worried. Instead, they see it as a sign of improvement in economic activity.

UOB Malaysia senior economist Julia Goh says the narrowing trade surplus is not a cause for concern. She attributes the lower surplus to higher imports, which she believes is a sign of strong domestic consumption and investments.

“The high import demand signals robust domestic demand owing to strong consumption and investments. It also presages further export recovery in the months ahead. Hence, it is not an outright concern,” Goh tells The Edge.

In view of July’s export data, UOB Global Economics and Markets Research has revised its annual export growth forecast to 7.6%, up from its previous estimate of 3.5%. The upward revision came after July’s export growth of 12.3% surpassed the research house’s expectations of 8.5%, largely driven by favourable base effects from the previous year.

Further, it says the Malaysian government’s bold and effective implementation of various national master plans, including the National Semiconductor Strategy, will provide a fillip for its trade prospects in the near term.

“The latest S&P Global manufacturing PMI (purchasing managers’ index) survey for Malaysia revealed that new export orders rose for the fourth consecutive month in July and was the joint fastest pace since April 2021,” it adds.

“Manufacturers cited this improvement in demand as a key factor behind the renewed rise in outstanding business and attributed the increase to stronger demand in Asia and Oceania. This further affirms a brighter outlook for Malaysia’s exports in the coming months.”

UOB Global’s forecast of stronger export growth takes into account the ongoing recovery in electrical and electronics (E&E) exports in the current global tech up cycle, resilient demand for commodity-based products and the continuation of favourable base effects.

Lee Heng Guie, executive director of the Associated Chinese Chambers of Commerce and Industry of Malaysia’s Socio-Economic Research Centre, too does not see any reason to worry over the latest trade surplus figures, mainly because the country’s exports are on a steady growth track. He concurs that the smaller trade surplus is an indication of rising economic activity domestically.

Lee points out that even if a trade deficit were to occur, it would not be a significant issue unless it persisted for several months.

Exports in July beat economists’ estimates to record a 12.3% y-o-y growth to RM131.15 billion from RM116.75 billion a year earlier. This brought export growth to 5.1% for the January-to-July period.

The 12.3% y-o-y growth in July is the highest since November 2022 and above the consensus estimate of Bloomberg and Reuters, both of which had forecast a growth of 9%.

For the January-to-July period, exports grew 5.1% y-o-y. Bank Negara Malaysia has projected 5% growth in 2024, following an 8% contraction in 2023.

“It is not a concern so much since the narrowing trade surplus is due to stronger import growth than export. Strong imports reflect resilient domestic demand and expanding economic activity locally,” says BIMB Securities Sdn Bhd deputy chief economist Zafri Zulkeffeli.

He says the robust expansion of intermediate and capital goods imports are positive leading indicators for the Industrial Production Index and construction activities, while the strong import of consumption goods highlights the strength of domestic demand, particularly in consumer spending.

“The higher growth in the import of capital goods is attributed to non-transport equipment, which is potentially associated with projects such as data centres, civil engineering and residentials. Expansion of intermediate goods imports also indicates continuous expansion of manufacturing and export activities in the near term,” Zafri tells The Edge.

Given the appreciation of the ringgit against the US dollar, BIMB Securities anticipates the import of consumption goods to remain high on top of a stable job market and supportive economic policies, as well as EPF Flexible Account withdrawals, he adds.

Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid says it is not the time to worry about the narrowing trade surplus, stressing that the sharp rise in the import of capital and consumption goods reflects lively domestic demand. This will boost the local economy.

“Although there could be a risk of trade deficits emerging if the strong growth in imports continues, we should not be overly worried,” he adds.

Furthermore, Mohd Afzanizam highlights that Malaysia’s deep financial and capital markets, supported by both domestic institutional investors and foreign investors, continue to bolster the country’s financial account balance of payments.

July’s trade surplus was driven by a 25.4% spike in imports to RM124.73 billion, from RM99.46 billion in the same period last year, as companies shipped in more intermediate, capital and consumption goods.

The intermediate goods imports grew 41.2% y-o-y to RM69.1 billion, while that of capital goods expanded 44.4% y-o-y to RM15.1 billion. Consumption goods imports increased 25.5% to RM11 billion.

On a m-o-m basis, exports were up 4.1% while imports were 11.6% higher.

The trade deficit in April 2020 aside, July’s trade surplus of RM6.42 billion is the lowest since August 2018, when it recorded a trade surplus of RM1.4 billion.

From January to July this year, there were three instances when the trade surplus fell below the RM10 billion mark, including the RM7.74 billion in April and RM9.95 billion in May. Apart from the three instances, the trade surplus has ranged from RM10.17 billion to RM14.28 billion so far this year — significantly lower than last year’s figures, which saw a surplus of RM11.35 billion to RM29.07 billion.

Prior to this, the last time Malaysia’s trade surplus dipped below RM10 billion was in May 2020, when it recorded RM9.86 billion.

Looking back over the past decade, a trade surplus of less than RM10 billion was more frequently recorded from 2015 to 2017, with nine months in 2015, 11 months in 2016 and 10 months in 2017.

In contrast, 2021 to 2023 saw the monthly trade surplus consistently stay above RM10 billion. The trade surplus exceeded RM30 billion in December 2021 and September 2022.

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