WHILE the economic outlook for exports remain positive, the escalation of war in Ukraine is likely to negatively impact the world economy, supply chains as well as prices and inflation.
Russia and Ukraine are important producers and exporters of oil and gas as well as grains; Ukraine has half of the world’s neon gas, which is required in the manufacture of semiconductor chips.
The prices of agricultural products such as wheat, barley and edible oils are rising as fast as the conflict is escalating.
A prolonged conflict will lead to an imbalance in demand and supply, resulting in elevated commodity prices and continued rise in inflation.
Even worse would be a wider conflict that spirals to involve the North Atlantic Treaty Organisation (Nato), a group of 30 North American and European nations, and other former Eastern Bloc states.
In the longer term, the slower pace of global growth will negatively impact the demand for Malaysia’s commodities and exports.
In essence, palm oil supply is quite inelastic in the medium term, in response to price movements, said former Inter-Pacific Securities head of research Pong Teng Siew.
This is especially considering the impact of higher inflation and the United States Federal Reserve’s (Fed) dilemma on how to tighten its monetary policy while balancing the risks to growth, especially as the Fed is already behind the curve, said RHB Investment Bank head of regional equity research Alexander Chia.
US inflation recently hit a 40-year-high at 7.5%, prompting expectations of aggressive US interest hikes, a scenario which is now made complicated by the Russia-Ukraine conflict.
Malaysia’s exports will do well in the near to mid-term but the risk of continued inflation might lead to tightening policies, which will slow down world growth, said Fortress Capital Asset Management Sdn Bhd CEO Thomas Yong.
The risk of stagflation from higher-for-longer inflation, caused by energy and food commodity supply shocks, is a dampener.
As concerns in Europe mount on the crisis, there is also the downside risk to the European economy that makes up 15% of world’s gross domestic product, said Maybank Investment Bank chief economist Suhaimi Illias.
Malaysia’s status as a key hub for the testing and packaging of chips is positive.
But the potential shortage of neon gas that is crucial in the semiconductor etching process may result in some production shortfall, said OCBC Bank (M) Bhd economist Wellian Wiranto.
With Russia producing 10% of the global oil supply, this conflict can lead to a potential break-up of the pact in the Organisation of Petroleum Exporting Countries and its allies (Opec+), in which Russia is an instrumental player.
A break-up similar to that in 2020 will worsen the situation, said Maybank Investment Bank regional co-head, oil and gas research, T.J. Liaw.
Opec+ is a group of 23 countries led by Saudi Arabia and includes Russia; in the midst of the pandemic, a break-up had occurred in the dialogue over proposed oil production cuts, and Russia had walked out of the pact.
In terms of palm oil, the medium-term outlook is positive.
Amid high palm oil prices, two events have coincided with the low crop season for palm oil and dimming prospects for South American oilseeds due to drought.
Export restrictions in Indonesia and the Russia-Ukraine crisis, have boosted the demand for palm oil, for which Malaysia’s palm oil exports for February is estimated to be 7% to 9% higher month-on-month, said Maybank Investment Bank regional plantation analyst Ong Chee Ting, citing independent cargo surveyors.
Commodities are going through a supercycle which will exacerbate the strong price pressures from the lack of available undeveloped land for new oil palm cultivation.
The pressures from environmental groups had also curtailed development of new plantations in Indonesia, the world’s largest producer of palm oil.
In essence, palm oil supply is quite inelastic in the medium term, in response to price movements, said former Inter-Pacific Securities head of research Pong Teng Siew.
But in terms of high tech industries, Malaysia may not be able to take full advantage of the opportunities available.
To cut dependence on China, the restructuring of global supply chains – especially in sensitive high-tech products – benefits Malaysia.
However, Malaysia may be limited in its ability to take full advantage of this opportunity, said Pong.
This is partly due to:
> Lack of skills in large swathes of precision engineering
> Limited supply of engineering expertise
> Truncated nature of the abilities of our support industries of the type required by the high-tech industry
Unlike China, Malaysia had, hitherto, focused on test and assembly and a range of products and services, but not the entire spectrum of skill sets required by the industry.
The labour force is also limited, being very dependent on migrant workers in the past.
Consequently, we only benefit sporadically when a few major investments are clinched, due to our inability to move truly high value-added, or remain truly competitive in the lower value-added.
Slowly being eroded are staples such as cheap power, excellent transport and infrastructure links, an English speaking workforce and stable political environment.
This is as neighbouring countries catch up in each of these areas.
In the short to medium term, we may think that wars, floods and the pandemic are some of the factors that wreak damage on our export industries.
But over the long term, it is our competitiveness, skill sets and other higher value-added aspects that will propel us higher on the value chain.
Yap Leng Kuen is a former StarBiz editor. The views expressed here are the writer’s own.