Oct 2009 Industrial Production

Unfortunately, a week off almost always means pulling double time for a week just to catch up on the work piling up. Hence, I've only had the chance to look at the IPI numbers released last week, today.

Not that it hasn't been anything but good news. All the growth numbers have turned up on a year to year basis (log annual changes):



...as well as on a monthly basis, except for electricity output (log monthly changes):



But this data is highly coloured by a pretty strong "base" effect, first from Ramadhan being a month later last year, as well as the after effects of Ramadhan this year. In any case, I'm dubious of assigning too much weight on growth statistics around turning points of a business cycle, much less a sharp recession such as we have just witnessed. It's far more important to focus on the levels, as those will give you a better idea of real changes in activity:



But even on that basis, things are looking good. Mining output has stagnated - but then, it was never a threat to increase anyway. Electricity output has more or less been back on its long term trend since more than six months ago (around Apr-May), which heralded recovery in other indicators by at least a full quarter. Manufacturing is still (just) in the recovery phase, but close to the output levels last seen in 2007-2008.

So I'd say industrial production is essentially almost fully recovered from the downturn. The key question here is - are we going to see further growth (in levels, mind, not ratios)? I don't have any answers. The "base" effect means that there's going to be good news in term of growth numbers for some time to come (up to at least Feb-Mar 2010), but that doesn't mean Malaysia is making any real progress. The prognosis depends a great deal on external demand - so far, it's domestic manufacturing output that has been propping up the manufacturing index:



Technical Notes
IPI Report sourced from DOS.

October 2009 Trade

I've been off for a few days on holiday, hence the lack of posts and the late update on Malaysia's October trade performance.

As I thought it might, October exports blew past consensus estimates, but was right in line with where I felt it would be, at the upper end of the forecast range:


Seasonally adjusted model


Seasonal difference model



Growth was pretty spectacular, with a return to postive growth on an annual basis (log annual difference):



...and hefty gains in a month on month comparison (log monthly difference):



There's two scenarios we could be looking at here - first is that this is just a bounce to compensate for the reduction in output during fasting month and Hari Raya, in which case November numbers might disappoint. Second, and I think this is more likely, we are seeing a true recovery in levels which might be sustained:

1. The first scenario implies a running down of inventories, which isn't corroborated by sustained imports of intermediate goods in October (log monthly changes):



2. Capital goods imports have also spiked, suggesting expansion in capacity (log monthly changes):



3. With the holiday season around the corner, we would expect exports of electricals and electronic products to remain sustained for the November-December timeframe.

That doesn't mean we're going to see the same pace of growth in November however. E&E exports (for that matter exports as a whole) have largely regained ground lost during the downturn, and are now back to 2007 levels (RM Millions):



Prospects for further trade growth hinge greatly on a sustained recovery in Malaysia's major trade partners. Our regional partners appear to be doing well, but the West is another matter entirely.

As per last month's post, I fully expect the November forecasts to underperform actual realization, so take the upper bound as having a greater likelihood of ocurring.


Seasonally adjusted model

Point forecast:RM47,401m, Range forecast:RM53,288m-RM41,513m

Seasonal difference model

Point forecast:RM49,652m, Range forecast:RM56,605m-RM42,700m


Technical Notes:
Trade data from MATRADE

October 2009 Monetary Policy Update

As expected, M1 growth fell down in October compared to September - the Raya effect in full force (log monthly changes):



Year-on-year however, we get the base effect, with growth ticking up to more normal levels (log annual changes):



With 3Q GDP numbers now up, I got the chance to update my velocity estimates (details here), which are still falling despite economic activity picking up:



However, the implied velocity growth (from changes in money supply, output and inflation) is still higher than actual (-10.8% versus -19.6% for 3Q 2009), which suggests the monetary policy stance is appropriately looser than strictly required for a growth-neutral stance.

Loan growth is within the norms of the last few years, so excess money supply growth is being channeled through into the economy (log annual changes):



...even if banks are still keeping a lot of money aside (reserve deposits of FIs with BNM, RM millions):



On the interest rate front, average lending rates have settled at about 2.9% over interbank overnight, which seems a bit excesive to me given the continued downtrend in NPLs:



That kind of spread would be justified if defaults were rising, but since they're not, we're still looking at some "fear" in the banking system, and possibly caution among consumers and businesses - in other words, money demand is still high in the system.

There's also been a lot of movement in the MGS market:



Yields have gone up for all maturities, despite net redemptions in October (RM millions):



...and November trading has added a further 10bp-40bp to yields. That's bad news - prices falling despite a reduction in total supply implies an even sharper reduction in demand. This would be understandable if we're looking at year-end window dressing, but it's a little premature for that to happen now. I can't think of any recent news that would justify this movement (Dubai was too recent, as was Prof Ariff's call for a third stimulus), except that possibly investor perception of the government's underlying risk premium has changed. While this won't much crimp the government's ability to borrow, it is a signal that the market's capacity is not unlimited.