Global trade outlook still faces headwinds


Last year, Malaysia’s trade expanded 24.8% after contracting 3.3% in 2020. So far, our trade performance has been remarkable, where exports grew by 23.9% in January 2022 and 18.3% in February 2022.

THE year 2021 was an exceptional year for the global trade market after overcoming the Covid-19 pandemic.

During the year, on average, trade grew to US$28.5 trillion (RM125.13 trillion), based on the United Nation’s estimate.

Entering 2022, the prospect was promising despite some shortfall due to the ongoing supply chain-related situation. But as more economies reopened, putting Covid-19 behind, the trade market was projected to grow robustly this year.

Last year, Malaysia’s trade expanded 24.8% after contracting 3.3% in 2020. So far, our trade performance has been remarkable, where exports grew by 23.9% in January 2022 and 18.3% in February 2022.

At the same time, regional peers were also rebounding. Singapore’s exports in the first two months rose by 21.9% on average, Indonesia 29.8%, Thailand 24.5% and the Philippines by 12.4%. There were several reasons why exports were growing by double digits, among them are the low-base and higher price effect.

Then in late February, Russia invaded Ukraine, dampening prospects of the global economy recovery and the trade market. Sanctions against the Russians are expected to have severe consequences, especially on the oil and gas sector, given the fact that the Russians supply natural gas to most part of Europe.

Furthermore, global food production will also feel the brunt from the conflict. Russia is a major supplier for fertiliser, exporting around 19% of global exports of potassium, 15% of nitrogen and 14% of phosphorus.

All of these are crucial for food production such as corn, wheat, soy and rice. Prices for fertiliser skyrocketed, forcing farmers to readjust their production.

The risk lies on the inability of food supply catching up with demand. There is a possibility of food shortage as farmers can’t produce their crops fast enough. Extreme weather is another contributing factor.

Some economies imposed bans on their own exports such as India (wheat exports), Turkey (cooking oils and several meat products) and Argentina (soybean). Recently, Indonesia also stopped exporting palm oil and related products for about a month due to a potential shortage at home.

Based on the Statistics Department’s findings, Malaysia is importing more than exporting its food products. In 2020, Malaysia imported around RM55.5bil of food products, while exports stood at RM33.8bil.

Currently, Malaysia is mostly dependent on imports for major food products including mutton, beef, rice and poultry.

Nonetheless, Malaysia’s trade exposure to Russia and Ukraine is not directly significant. As of 2021, only 0.3% of overall exports were to Russia, where the top exported items were electrical machinery and equipment and rubber products.

On the other hand, exports to Ukraine were only 0.1% of overall exports with top items included animal and vegetable fats, and rubber products.

Hence Malaysia’s trade will not be severely affected due to the low exposure. The concern is, however, if the situation escalates further to a nuclear tension, as this will have a unprecedented downside consequences on every sector of the economy, not just exports.

Apart from the situation in the West, China’s management of the Covid-19 outbreak is also dampening prospects on trade.

In the early stages of the Omicron outbreak, China’s stringent zero-Covid policy forced businesses to close while consumer sentiment was heavily constrained as they were put under lockdowns.

Foxconn was allowed to reopen its operations only if its employees remained in the premises throughout the lockout period. Some other businesses were also allowed to operate under strict surveillance by the government, on the condition that their workers remained in the premises throughout the lockdown, also known as “closed loop”.

The most concerning part was the closure of Shanghai, home of is one of the busiest ports in the world. Anecdotal evidence showed that during the lockdown, ships were not allowed to port on the deck due to the strict policies. Some truck drivers were too afraid to enter as they might be forced to quarantine if they’re Covid positive.

The situation in China needs to be watched closely since it will affect Malaysia in some way. Based on data, around 14.5% of Malaysia’s overall exports go to China. Goods shipped include electrical machinery, mineral fuels, iron, steel, plastics and others worth around RM192bil.

Meanwhile, recent production numbers in China contracted with manufacturing Purchasing Managers’ Index still below the expansion threshold, suggesting the worst has yet to come.

Despite this, as of April 2022, Malaysia’s exports to China were still growing by 12.4% year-on-year (y-o-y), slightly lower relative to the first quarter’s growth of 19.9% y-o-y.

Overall, the outlook for our exports remains promising. Our trade is poised to benefit from firm commodity prices as opposed to volume growth.

We expect the sharp rise in oil prices to be contained in the medium term once spare capacity in other countries and the release of petroleum reserves take place.

But the relatively inflexible infrastructure needed to transport gas (pipelines are more important for gas than for oil, for example) means that there is less room for global supply to adjust, raising the prospect of higher prices for longer.

Commodity prices are expected to stay firm also due to climate changes. War-related interruptions to production, sanctions and strongly impaired access to cross-border payment systems will disrupt trade flows, with China’s zero-Covid policy forcing us to lower global trade volume by 1% to 4.8% for 2022.

As for 2023, we have reduced global trade volume by 0.5% to 4.5%.

Thus, on the back of a high base comparison (26% export growth in 2021), we would still maintain our current exports projection of 8% and 10% in 2022. We may review our projections in the coming months.

For forex enquiries, contact: ambank-fx-research@ambankgroup.com. For fixed income enquiries, contact: bond-research@ambankgroup.com.

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