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Malaysia's March IPI Suffers First Drop Since February 2013, Downtrend to Continue

Updated: Jun 16, 2020

Malaysia's industrial production index (IPI) in March, which saw its first contraction since February 2013 and the steepest since September 2009, is expected to continue its downtrend in the coming months, say economists.

IPI in March fell 4.9% from a year earlier due to the decrease in all three components of the index, revealed the Department of Statistics Malaysia today. This follows a 6.2% year-on-year (y-o-y) growth in February.

The plunge was very much expected due to the disruption in overall supply and demand chain domestically and globally due to the Covid-19 outbreak. Malaysia also began its Movement Control Order (MCO) in March,” said MIDF Research in a note to investors today.

The research firm is anticipating IPI performance to contract in the second quarter of 2020 (2Q20), owing to the extension of the MCO and fluctuating commodity prices. The government has extended the conditional MCO to June 9.

Still, MIDF pointed out that this is in line with IPI performances across major and emerging economies that remain sluggish, except Singapore.

Malaysia's total exports fell 4.7% y-o-y in March, no thanks to the exports of electrical and electronics products in particular, which hold the largest share of total exports.

MIDF sees export-oriented sectors to continue on a weaker note in 2Q20 due to the Covid-19 fear effect, oil price war impact and off-peak cycle for the semiconductor industry.

Lockdowns in major economies globally will lower demand, hence drag down Malaysia’s exports performance in 2Q20. As of 2H20, we expect to see improvement underpinned by betterment in commodity prices, subsiding Covid-19 fear effects and gradual rebound in global demand,” it added.

On manufacturing sales, the research house expects it to continue recording negative growth, especially in April.

We may see improvement in 2H20 as fears from Covid-19 wane and the sentiments improve. Global containment would also play a vital role in the recovery expected. Based on the latest developments, more countries started to ease their restrictions as of May 2020, which may contribute positively to production,” said MIDF.

For full year 2020, MIDF is projecting IPI to decline 2.8% y-o-y due to the challenging domestic and external environment.

Covid-19 and slowdown in global demand thus affecting Malaysia’s industrial output and exports while oil price war causes the average global oil price to decline,” said MIDF, adding that its in-house average Brent crude oil price for this year is US$41 per barrel.

Nevertheless, lower overnight policy rate (OPR) and the government stimulus package, which includes loan moratorium, additional financial aids to companies and wage subsidy, would provide some support to the continuous production, it added.

Affin Hwang Investment Bank Bhd chief economist Alan Tan concurs, noting that the IPI will likely weaken sharply in 2Q20 as Malaysia’s manufacturing Purchasing Managers’ Index (PMI) fell to a record survey low of 31.3 in April (from 48.4 in March), and due to the MCO being in place throughout April.

With most economic sectors allowed to operate now, but with companies/manufacturers having to follow strict standard operating procedures (SOPs), Tan opined that economic losses to businesses and households may be larger and broader during the MCO in 2Q20, rather than in 1Q20.

For 2020, Affin Hwang expects the real gross domestic product (GDP) growth to contract 3.5% for 2020 versus a 4.3% growth in 2019.

RHB Economic Research also sees production data contracting even further in April, with the MCO in place throughout the month.

The impact of the first two weeks of the MCO is significantly disruptive to production as can be seen from the March data,” said its economist Ahmad Nazmi Idrus said in a note today.

However, with the easing of the MCO restrictions in May, production should slowly be crawling back from its deep contraction going forward, he added.

As a result, he anticipates 1Q20 GDP, which will be released tomorrow, to weaken in tandem, but a sharper contraction should come in 2Q20.

The research firm is maintaining its GDP growth forecast of -4% y-o-y for 2020, noting that despite the easing of MCO restrictions, recovery would likely be slow and sluggish.

Consumers are expected to remain wary, while the ongoing infection spread globally would keep external demand mute,” Nazmi added.

Source: The Edge Markets

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