Malaysia's export growth pegged to drop to -7.4%

Here's what to blame.

According to DBS, Malaysia's trade data for June will disappoint. Export growth is likely to have worsened to -7.4% YoY after an already poor showing of -5.8% in May. A sluggish external demand and overhanging uncertainties about the global recovery will continue to weigh on export sales. 

Here's more:

On the contrary, import growth will turn positive in the month to register a 4.8% increase. A resilient domestic demand is driving import growth, which consequently is putting significant pressure on the trade balance.

Indeed, trade balance is expected to dip slightly to MYR 2.2bn, down from MYR 2.5bn previously The trade balance has been in focused lately because ofitsimplication on the currency.

The ringgit hasrecently been undersignificant pressure due to the persistent decline in the current accountsurplus and the trade balance. Risk
ofthe balance of payment dipping into deficitremains a clear and present danger as Malaysia’s capital accountis often in deficit.

Indeed, the only factor keeping the BOP from slipping into the red isthe surplusin the goods/trade accounts alone and nothing else. So if this pillar gives way, the BOP will surely turn deficit.

Henceforth, the exchange rate hasto weaken orthe authority hasto cool the domestic engines. Asitis, it appears that the authority is happy to let the currency do the necessary adjustments and keeping the monetary policy on steady keel. The concern isthat hiking the policy rate could derail the current economic transformation and undermines growth.

The external engine has been weak and itis probably unwise to stall growth, particularly given that the monetary policy is a blunt tool. The policy rate can’t adjust on a day-to-day basis much like the exchange rate.

Hence, pressure on the ringgit will remain until external outlook picks up orsomehow domestic demand cools by itself.