Ins and outs: The global downturn is continuing to have an effect on trade

With its location on the Straits of Melaka and at the entrance to the South China and Java Seas historically a major reason for its wealth and international standing, Malaysia has long been a trading nation. Today it remains one of the region’s top traders, with China, Japan, the US and Europe major partners, as well as the member states of ASEAN. Yet this international exposure has presented Malaysia’s exporters with some important challenges in recent times, as global and regional economic growth has slowed. This weakening in the external sector has highlighted the need for Malaysia’s exports to maintain a competitive edge in terms of price and quality, while exporters also need to look for new markets to enter or develop.

At the same time, the country’s push to develop higher-value-added products and services should help its exports break free from the vagaries of global commodity prices. The evidence so far is that exporters are making the necessary changes – with the full encouragement of the government and sector bodies.

FACTS & FIGURES: In recent years the sector taking by far the largest slice of Malaysia’s exports has been electronics and electrical goods (E&E). These accounted for $43bn in January-July 2012, according to Ministry of Trade and Industry (MTI) figures, out of an export total of $132bn and ahead of the next-largest contributor, palm oil, at $10.6bn.

Close behind that was liquefied natural gas (LNG) at $10.3bn and refined petroleum products at $9.4bn. In fifth place was the chemicals and chemical products sector at $9bn. This ranking was roughly similar to the same period of 2011, except chemicals and refined petroleum products switched places, while in 2010 chemicals outstripped LNG for third place.

While the rankings have not substantially changed in recent years, the overall totals have, with a steady increase in exports, despite the general global gloom. Malaysia’s January-July 2012 export total of $132bn was up on the $128bn of the same period of 2011 and on the $120bn of the first seven months of 2010.

In terms of sectors, the figures for January-July 2012 showed a mixed performance. E&E had fallen from the $44.7bn recorded in the same period of 2011, while palm oil had dipped from $11.8bn. Other sectors had seen rises, however. The 2011 export total for LNG was $9.1bn and for refined petroleum products $6.7bn.

Chemical and chemical products had stood at $8.7bn.

DEPRESSED PARTNERS: The fortunes of different export destinations were a major factor behind these changes. This showed more clearly in the MTI data for August 2012, which showed exports down 4.5% on August 2011. By destination, these figures showed that exports to the EU had fallen 24.4% to $1.5bn, while those to China were down 10.6%. The EU is an important trading partner – consistently ranking in the top five, along with Singapore, China, Japan and the US. This importance has been shown recently in the ongoing negotiations over an EU-Malaysia free trade agreement.

Some 70% of Malaysia’s exports to the EU already enter duty free, according to the EU External Affairs website.

The decline in the EU’s case was largely due to the continuing troubles of eurozone countries – and indeed the wider EU – where economic growth has slumped for several years running. In the first eight months of 2012, overall trade with the EU declined 2.7%.

China’s economic deceleration, meanwhile, also had a major effect on Malaysian exporters in August, as the People’s Republic has long been their second-largest export destination. In the January-July 2012 MTI figures, China accounted for 12.6% of the total, after Singapore’s 13.6%. The August 2012 decline was largely a result of a fall in demand from China for Malaysian E&E, according to the MTI. Yet the first eight months of 2012 also showed overall growth in trade with China, of 10.5%.

PLUS POINTS: The export picture for August 2012 had some bright spots. Exports to Japan were up that month by 15.4%, mainly due to added demand for LNG as Japan moved away from nuclear energy, while continuing to rebuild after the 2011 tsunami. Japan was the third-largest export destination in January-July 2012, accounting for 12.1% of the total. Overall trade with Japan from January-August increased by 4.5%. Across the Pacific too, in August, exports to the US bucked their 2012 trend. Overall, in the first eight months of 2012, total trade with the US declined by 1.5%, yet in August it rose by 4.2%, as the US economy showed signs of improvement and demand for Malaysian E&E grew by 12%. Exports to the US in January-August 2012 expanded by 5.8% to $13bn, while imports contracted 8.9% to $11bn. The US was the fourth-largest export destination in the January-July 2012 period, accounting for 8.8% of the total. Also growing in importance is Malaysia’s trade with its ASEAN partners. From January-August 2012 trade with ASEAN expanded by 7.7%, and at $76.3bn represented 27.2% of Malaysia’s overall overseas trade. This was up on the 26.3% share from January-August 2011. Exports to ASEAN grew 9.2% in the first eight months of 2012 to $39.9bn, while imports rose 6.1% to $36.4bn.

UNDER THE MICROSCOPE: The August figures showed that E&E was up 3.6% overall, while exports of optical and scientific equipment – mainly connected with instruments for inspecting semiconductors – rose by 19%. Thus, the overall export picture is one of fluctuation, both in the size of particular export markets and in the type of products that are proving attractive. The growth in high-value-added products, such as scientific equipment, is particularly encouraging. The imports picture has also been mixed recently. In August 2012 imports declined faster than exports, leaving Malaysia with a healthy $2.3bn trade surplus that month, up from $1.2bn in July. This was widely attributed to an anticipated drop in future orders for E&E exports from Malaysian manufacturers, which use these imports to produce their goods for export. Overall though, the January-August period showed imports up 7% on the same period of 2011, reaching $130bn. Thus, Malaysia continued with its traditional trade surplus, even if at a much reduced level. For the past four years, the monthly total has tended to lie on either side of a $3.2bn mean. Indeed, in September 2008 the trade surplus hit a recent peak of $4.74bn, a figure that was not approached again until March 2010, when the surplus stood at $4.65bn. On the whole, the trend since has been for the surplus to decline in size, shrinking to its smallest size in many years in July 2012.

NUMBER CRUNCHING: While the sustained growth of exports and trade is a considerable achievement in the face of a tightened global market, the overall weakening of the external position naturally causes some concerns for the macroeconomic picture.

Yet the evidence seems to show that domestic demand is making up for any shortfalls, with predictions for 2012 GDP growth staying largely untouched among analysts and government bodies (see overview). CIMB Bank has maintained its full-year forecast of 5% GDP growth, in line with government predictions of 4. 5-5%, followed by 4.5-5.5% in 2013. Domestic demand looks likely to be assisted by the government’s 2013 budget, which sets out an income tax cut and handouts for low-income families and pensioners, who traditionally tend to spend almost all of any increase.

Of longer-term importance are the shifts in markets – with the decline of Europe the most prominent feature. Intra-ASEAN trade expansion is also a significant development, illustrating the growing ease of this as the bloc moves towards the 2015 entrance of its economic community. Japan also looks likely to keep a higher share of exports, given its shift in energy policy and the continued strength of global oil and gas prices. China remains a huge presence in Malaysian trade, despite the slowdown, while the recovery in the US completes a highly Asia-Pacific focus for Malaysia’s trade.

Meanwhile, efforts to develop fresh markets continue. Malaysia’s international trade promotion agency, MATRADE, has been hard at work on this in 2012, organising roadshows in Myanmar, West Africa and India, among other places. Government support for value-added industries and innovation should also see a gradual shift upwards in the quality and variety of Malaysian exports, with the first signs of this perhaps already apparent through the fine lens of Malaysian optics.