Ukraine invasion and the impact on Malaysian economy

The Russia-Ukraine war has definitely changed the global economic landscape.

04 Mar 2022 02:30pm
Inflation for imported goods are expected to rise as prices of oil shoots up
Inflation for imported goods are expected to rise as prices of oil shoots up
SHAH ALAM: The Russia-Ukraine war has definitely changed the global economic landscape.

As a direct consequence, crude oil prices have risen to US$110 per barrel, its highest since 2014 and commodity prices such as palm oil have shot up through the roof to chalk an all-time high of RM8,000 a tonne.

Will Malaysia be affected by the ripples of war in Eastern Europe?

To what extent will Petronas's coffers swell amid rising government oil subsidies as well as soaring inflation?

Inflation will spike up

AIMST University vice-chancellor Datuk Dr. John Antony Xavier said as anticipated, prices of oil have shot up.

"Today it stands at US$ 110 per barrel and even the release of oil by the US of 30 billion barrels from its strategic petroleum reserve has not been able to stanch the increase in the price of oil.

The imported inflation as a result of the increased oil price will cause inflation not only in the global economy but also in the Malaysian economy.

This is because robust oil prices directly affect the prices of goods.
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Moreover, in Malaysia some two-thirds of our intermediate products are imported.

Hence, imported inflation will spike up," Xavier told Sinar Daily.

He added increases in oil prices will also depress the supply of other goods because their costs of production will also rise in tandem.

"Transport charges will significantly increase given the burgeoning oil prices," said Xavier.

Government to provide more oil subsidies

In view of the situation, transportation costs for both air and road transport will definitely increase in step with oil price increases and supply-chain disruptions due to the closure of airspaces.

As a result, material costs such as construction and other building materials will also go up leading to an increase in house prices.

All this will result in the government providing more fuel subsidies as it keeps pump prices at RM 2.05 for RON 95 to keep the cost of manufacturing and general inflation from shooting up much.

Such subsidies could well rise to more than RM24 billion at current oil prices.

"It will most certainly add to the operating costs of the government," said Xavier.

Energy prices will rise too

With the increase in demand for oil, there will be a parallel demand for gas and coal.

As Tenaga Nasional Berhad (TNB) relies on these fuels, electricity generation will become costlier and TNB will have to eventually raise electricity prices as well.

Crude palm oil prices will skyrocket too.

The Russia-Ukraine war has spooked the commodity sector on concerns that it will disrupt supplies.

Towards that end, commodity prices will increase and Malaysia shall benefit in terms of higher palm oil prices.

Crude palm oil prices reached a historical high of RM8,000 a tonne on Monday.

"However, wheat and corn prices – the feedstock for our animals and chicken – will rise as the two major exporters of these products are at war.

Hence, the prices of food will spike inevitably," said Xavier.

Bank Negara set to increase interest rates

To stanch the spike in inflation, Bank Negara Malaysia will have to increase the benchmark interest rate – the rate at which banks lend to one another.

All this will reduce economic growth because there will be lesser consumption demand given the price increase of oil and goods.

"Businesses will not be able to produce more given the reduced demand.

Additionally, as interest rates rise, investments will be curtailed as it will be more expensive to borrow funds for business expansion.

It will also become costlier for the government to borrow money for economic expansion," said Xavier.

Blessing in disguise

However, there is a blessing in disguise amid the calamity between Russia and Ukraine.

As we are an oil producing economy, the government revenues will also increase.

It is estimated that for every one US dollar rise in petrol prices, the government will earn US$300 million.

"At current oil prices of US$115 per barrel, the government will reap an additional revenue of close to RM16 billion in oil revenues.

However, it will only pay for roughly two-thirds of the fuel subsidies required at current prices," said Xavier.

Meanwhile, Dr Muhammad Iqmal Hisham Kamaruddin said it is undeniable that the Russia and Ukraine crisis is impacting the global economy, commodities prices as well as trade activities.

"Although both Russia and Ukraine are not the major export and import partners for Malaysia, the crisis will indirectly impact the Malaysian economy," Iqmal told Sinar Daily.

The senior lecturer at Universiti Sains Islam Malaysia Faculty of Economics and Muamalat said firstly, as Russia is one of the world's major oil and gas exporters, the crisis had directly impacted oil prices when it reached US$100 per barrel.

"On one side, Petronas will benefit from the rise in oil price but conversely the government will be further burdened with the increase in petrol subsidies.

Many sectors will definitely be impacted

The increase in oil prices has directly affected a number of sectors that are vulnerable to oil prices.

The affected sectors includes TNB which has to fork out more for electricity generation cost, the transportation and logistic businesses, airlines, agriculture, chemical-based industries as well as healthcare.

"Thirdly, as the second largest exporter of palm oil, Malaysia had benefitted directly when crude palm oil prices exceeded RM8,000 a tonne.

This is because Malaysia accounts for 25.8% and 34.3% of the world's palm oil production and exports respectively in 2020.

Iqmal said fourthly, an increase in commodities prices has indirectly increased the inflation rate.

"As the world has not fully recovered from the impact of COVID-19, the imbalance between supply and demand due to the crisis worsened the inflation of goods and services.

Iqmal also concurred that Bank Negara Malaysia will increase the interest rates, especially to prevent a depreciation of the ringgit as well as to control the inflation rate.

"This will indirectly impact the cost of living," said Iqmal.

And lastly, Iqmal said the disruption in global trade brought about by the crisis has also impacted the Malaysian economy.

"This is because both domestic and international companies will be less willing to invest due to precautionary sentiments.