Malaysia's exports surged but largely due to valuation effect from weaker currency

Malaysia's exports surged but largely due to valuation effect from weaker currency. Export sales for October rose by a stunning 16.7% YoY. This is the fifth consecutive month of increase, the highest since April 2014 and also more than twice the 7.9% expectation from consensus forecast. Imports shrunk by 0.4% YoY, which brought about a trade surplus of 12.2bn in the month. While export performance may appear encouraging given an otherwise uncertain external environment and dicey domestic political conditions, it is largely currency effect at play. 

The ringgit has weakened sharply by about 30% against the USD compared to a year ago. And domestic trade data are cited in local currency terms while most international trade are quoted in USD terms. So, for every one dollar of exports, exporters are now getting 30% more in local currency basis. This is merely due to the steep depreciation of the ringgit. However, that doesn't imply that global demand has picked up or that the amount/volume of exports has risen. It's simply currency effect. Indeed, the picture will look very different if the trade data are converted into USD term. Specifically, exports in USD term had declined by 6.2% YoY in the month instead. 

In addition, the better export figure need not necessarily mean higher profit for manufacturers. Much depends on the amount of import to local content ratio in the manufacturing process. If the import content is high, manufacturers would have to pay more in ringgit for the same amount of imported raw material or intermediate products, and vice-versa. In short, weaker ringgit is only good for manufacturers with high local content. 

Separately, for some manufacturers who quote their products in ringgit terms, then the weaker ringgit will translate into tremendous price competitiveness since the same product will be 30% cheaper in USD basis compared to the same period last year. 

That is, while the headline export number may appear encouraging, it doesn't necessary imply that global demand is picking up. One has to take into account the currency valuation effect. In this regards, export growth has been exceptionally strong over the past few months. And this coincides with the recent sharp depreciation of the local currency.