Ukraine conflict can hurt Malaysian pockets

Economists say the shortage of oil and energy, of which Russia and Ukraine are a major supplier, will add to the disruptions to the global supply chains, thus driving prices up.


Big supplier: A worker unloading fertiliser to be used on a wheat field near the village of Yakovlivka in eastern Ukraine. The country is a major producer of fertiliser. — Reuters

April 14, 2022

KUALA LUMPUR – PETALING JAYA :  The effects of the Russia-Ukraine conflict are due to be felt by the average Malaysian as the war pushes up prices of oil and energy as well as commodities such as wheat and corn.

Economists say the shortage of these items due to the heightened conflict will add to the disruptions to the global supply chains, thus driving prices up.

Russia and Ukraine are major producers of crude oil, natural gas, wheat and fertiliser.

While the size of Malaysia’s trade with Russia and Ukraine is small, accounting for just 1% of Malaysia’s total trade last year, economists say the impact from the global supply chain disruption due to the war will be felt here.

AmBank chief economist Anthony Dass said it would certainly add pressure on business cost owing to higher raw material prices, freight chargers, labour cost and transportation.

“It would be a matter of time before we witness transfer pricing to take place to the end users.

“Although we project the headline inflation in 2022 to be between 2.8% and 3%, living cost will continue to accelerate at a much faster pace primarily due to cost factors more than consumer demand,” he said.

Prof Dr Yeah Kim Leng of Sunway University said the confluence of global events such as the Russian-Ukraine war, sanctions on Russia, Covid-19 lockdowns in China and pandemic-related disruptions to global supply chains are causing global inflation, especially in the United States and Europe, to escalate.

Given Malaysia’s low trade volume with Ukraine, the impact on Malaysia would stem largely from global supply shortfalls and the resulting price hikes in global markets, he said.

“Imports from Ukraine account for less than 0.1% of Malaysia’s total imports in 2021 with oil, animal feed and cereal among the major items.

“Cereal accounted for 5.3% of Malaysia’s total cereal imports in 2020 but the share fell to 0.7% in 2021,” said Prof Yeah.

Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said the Russia-Ukraine conflict has resulted in a situation that favoured the US dollar as the world’s reserve currency.

“It saw the US Dollar Index (DXY) going up to 100.374 points from 96.213 points on Jan 3. This would be the immediate channel for military conflict in Ukraine to have an impact on our economy,” he said.

Given Malaysia’s sizeable import content, the weaker ringgit against the greenback may have aggravated the rise in general prices of goods, said Mohd Afzanizam.

“The ringgit has weakened from RM4.1727 against the US dollar on Jan 3 to currently around RM4.22,” he said.

Johor bakery, biscuit, confectionery, mee and kuay teow merchants association president Chink Poh Cheng said flour mills had informed some businesses that the supply of flour had to be cut down by 30% to 40% due to the shortage.

He said flour mills began increasing prices this month.

“It is not just flour prices – we are also dealing with increases in the price of cooking oil, petrol and more, and these are all a result of the conflict,” said Chink.

To mitigate the rising cost of goods, Prof Yeah and Mohd Afzanizam said the government should consider a targeted subsidy programme to benefit those in need, such as those in the B40 and bottom half of M40 income brackets.

“On the supply side, the government could ensure supply shortages are quickly remedied either through facilitating imports, building stock or enhancing local supply by removing impediments to production such as labour shortages and entry barriers to new players.

“It is also opportune for the government to encourage more investments in industries facing production constraints and enhance competition in those that are inefficient and dominated by a few players that exercise undue pricing power,” said Prof Yeah.

Mohd Afzanizam said the fuel subsidies would need to be relooked and rechannelled to be more targeted, adding that the government would need to send a clear message to the general public that the present fuel subsidies are not sustainable.

“The main issue is that the fuel subsidies are not targeted since it will benefit the higher income group that uses more fuel than the low income cohort,” he said.

Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz told Parliament on March 10 that if the current blanket fuel subsidy programme is continued, the government could be paying up to RM28bil in subsidies for petrol, diesel and liquefied petroleum gas (LPG) for 2022 compared to RM11bil in 2021.

The spike in crude oil prices caused the government to bear a tenfold increase in the fuel subsidy bill from RM200mil in January 2021 to over RM2bil in January this year.

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