BNM Report 2014: Diversification to mitigate lower commodity prices

KUALA LUMPUR: Bank Negara Malaysia (BNM) expects the country’s diversified exports in terms of products and markets to mitigate part of the impact from the lower commodity prices and the weaker growth in several major economies.

It said on Wednesday Malaysia, being a highly open economy and a commodity exporter, would sustain some impact from slower growth in the international markets and as oil prices continue to be at low levels. Crude oil prices fell from US$110 in July to around US$50.

“In 2015, the growth of gross exports is projected to moderate to 1.5% (2014: 6.4%) due mainly to lower commodity exports. Commodity exports, which constitute 23% of Malaysia’s total exports, will be weighed down by lower prices of crude oil, liquefied natural gas (LNG) and crude palm oil (CPO),” it said. 

BNM explained gross exports of manfactures were expected to be higher at 8.4% (2014: 7.3%), agriculture declining -10.8% (2014: 0.6%) while minerals are expected to see a sharper pullback of -30.4% (2014: 7.3%).

The central bank pointed out the decline in CPO prices was not expected to be as severe as the decline in oil prices, given the projected lower supply of CPO following the dry weather conditions in first half of 2014, and the higher demand arising from the mandatory palm oil-based blending of biodiesel in several countries. In addition, LNG prices will be supported by continued demand from regional economies. 

Malaysia’s manufactured products could benefit from improving economic activity in several of the advanced economies and the sustained growth in Asia. 

“These manufactured exports, which comprise 77% of Malaysia’s total exports, are diverse in terms of products and markets, and are expected to remain resilient in this challenging external environment.

“The expected improvement in manufactured exports in 2015 will be driven mainly by the E&E sector. E&E exports will be supported by an improvement in private sector activity in the US, in particular continued investment growth amid high capacity utilisation rates,” it said. 

BNM pointed out the semiconductor industry is expected to remain resilient with the global semiconductor sales continuing to record steady growth, driven by sustained demand for smart devices. 

“These positive trends augur well for semiconductor exports as Malaysia’s E&E firms have ventured into industries with fast growing global demand, such as mobile devices, tablets and automotive sensors. 

“Non-E&E exports will continue to expand, albeit at a more moderate pace, supported by sustained regional demand. The moderate growth of non-E&E exports is expected to emanate mainly from the resource-based products, particularly chemicals, petroleum and rubber products,” it said.

BNM said gross import growth is projected to increase at 6.0% in 2015 (2014: 5.3%), driven by the continued growth in intermediate imports and domestic demand. 

Intermediate imports, which form the bulk of Malaysia’s gross imports, are expected to expand further, as manufacturing activity picks up to meet the improved global demand. 

In addition, capital imports are expected to rebound and grow at 10% (2014: -2.1%), driven mainly by the ongoing investment projects, a steady inflow of new large private sector projects, and the continued implementation of key infrastructure projects.   

Intermediate goods are expected to see a slower increase of 6.8% (2014: 7.6%).

The slightly higher growth of consumption imports to 6.8% (2014: 5.7%) reflects the continued growth in food and beverages imports, which account for the largest share of consumption imports, and are relatively inelastic in demand.  

The trade balance in 2015 is expected to narrow to RM53.6bil (2014: RM83.1bil) but remain in a surplus position, supported by the improvement in manufactured exports and a continued surplus in the commodity trade balance. 

While crude oil exports will be affected by lower crude oil prices, the impact on the trade balance will be partially mitigated by the lower cost of imported petroleum products. Given that Malaysia is a large net exporter of LNG and CPO, the projected lower prices of these two commodities will weigh on the commodity trade surplus. 

BNM said based on past trends, the price decline of LNG and CPO will not be as significant as the decline in crude oil prices. Furthermore, exports of these two commodities have minimal corresponding imports, lending support to Malaysia’s position as a net commodity exporter. At the same time, net exports of E&E will be supported by the continued expansion in global demand.

In the services account, the projected narrower deficit will be mainly supported by the recovery in tourist arrivals and higher tourist spending amid “Malaysia - Year of Festivals 2015” promotion and the intensification of other tourism promotional activities. 

Nevertheless, growth in services imports will be driven by continued payments for transportation and other services, in line with the expansion in trade and investment activity during the year.

As for the income account, profits from Malaysian companies investing abroad are expected to be sustained. 

BNM said the lower income from oil and gas companies, which constituted more than a third of Malaysia’s investment income abroad, will be partially offset by an improvement in profits from other overseas investments by Malaysian companies, amid a modest improvement in global demand and lower costs of oil-related inputs. 

This will likely be surpassed by the higher profits and dividends accrued to multinational corporations operating in Malaysia in line with the expected improvements in manufactured exports. As a result, net outflows in the primary income account are likely to increase in 2015. The continued deficit in the secondary income account is expected to be driven by lower inward remittances amid sustained outward remittances.

“Overall, given a more moderate growth of exports and robust imports, net exports of goods and services will turn around to register a small negative contribution to real GDP growth in 2015. 

“Alongside a wider income deficit, the current account surplus of the balance of payments in 2015 is projected to be lower at RM21.4bil or 2%-3% of GNI (2014: 4.8%). This lower current account surplus also reflects a narrowing of the savings-investment gap,” it said.