By Wong Chen
In this article, I would like to touch on the latest state of the economy. But first, the source or trigger of the current global economic problems that we are facing.
Since the start of the Russian invasion of Ukraine, three months ago, I have consistently taken an anti-war stance. In early March 2022, when civilian casualties started to increase, I raised the question on possible sanctions in Parliament. I am also aware that many Malaysians are pro-Russia, or more accurately, anti-Western hypocrisy on the conflict. My view is simpler; the conflating of these sentiments cannot ever be used to justify any war. As a Buddhist and a pacifist, I believe we must consistently seek diplomatic solutions and during war, ensure that international humanitarian laws are enforced to protect civilians.
In early March 2022, I too have cautioned that there will be an economic cost for the world arising from this invasion. For the past few decades, Russia has been the biggest supplier of gas to Europe; the real and threatened disruption of this supply by Russia, pushed oil prices higher to an average price of USD$ 100 per barrel. While the invasion may be 8,000 km away, Malaysia is not immune to this spike in overall fuel costs. The invasion has also disrupted and reduced global food supply, in particular that of wheat and sunflower cooking oil as both Russia and Ukraine are big producers and exporters. In addition, Russia is also the world’s biggest exporter of fertilisers, real and threatened disruptions of this have also sent the cost of fertilisers sky high, this in turn is pushing up global food production costs.
The oil and gas spikes in particular have driven logistical and electricity costs higher and these have in turn, driven inflation of all goods globally. With no corresponding and proportionate economic or productivity growth to inflation, the world is facing the prospect of stagflation, like that in the late 1970s. Some optimists have pointed out that Western central banks today are unlike the late 1970s and that in the worst-case scenario, they can intervene and apply aggressive monetary policies, such as quantitative easing (QE). However, there is no consensus on that optimism. After more than a decade of QE (post the financial crash of 2008) during which period, economic inequality actually expanded, many are questioning the effectiveness of QE. What we know is that if there is no political will to address inequality, unsustainable consumption and climate change, any innovative monetary policy will have the limited result of just kicking the can down the road. Therefore, in the absence of the needed political will, my best guess is that the deployment of the QE-like options will continue to produce limited results. With severe draught in India also impacting food supply, and China, the second largest economy and the factory of the world, going through another round of strict Covid-19 lockdown, that stagflation threat is building momentum. Thus, global stagflation seems inevitable in the near term.
Now, let us ponder the state of the Malaysian economy. Being geographically situated in the world’s busiest shipping lane, the Straits of Malacca and good access to the South China Sea, we are in the centre of international trade. So when the world economies sneeze, we too risk catching a cold.
Malaysia is an export driven nation and a significant exporter of oil and gas. Logic dictates that with current high oil and gas prices, Malaysia should be making more money. We are also a big exporter of palm oil, and that too has hit all-time record high prices. With this twin earnings boost, Malaysia should be in an enviable economic state. But are we?
The Q1 2022 economic numbers recently released by the authorities, show that inflation is under control at 2.3% with projections of 2.5% to 3.5% for the year. As comparison, Western economies are experiencing inflation at 7% to 10%. Even our richer neighbour, Singapore is registering 4% inflation. So how are we succeeding in keeping inflation under check?
The answer lies in our heavily subsidised Ron 95 petrol and also cooking oil. Petronas is also doing some additional heavy lifting on gas subsidies to the IPPs too. That gas subsidy to super rich IPPs is a legacy issue of crony capitalism. With fuel, electricity and cooking oil subsidised, Malaysia has managed to reduce some inflationary pressure. Yet, these subsidies come with a heavy fiscal cost. The finance minister has recently disclosed that petrol subsidy for the year is expected to cost RM30 billion. Assuming petroleum income tax (PITA) contributes an additional RM8 billion to the government this year, will Petronas be able to find an additional RM22billion in dividend pay-out for the 2022 subsidies? That is a very difficult fiscal challenge and only Petronas can provide an answer. And guess what? Petronas is only answerable to the prime minister! As such, we will probably only get full clarity on the matter, later in October when Budget 2023 is tabled.
So why then are prices of food, including chicken, continuing to rise in Malaysia? The fundamental issue is here is we have a large food import bill and while domestic transport cost is subsidised, international fuel costs is not. Our normal import bill for food is RM50 billion a year, this could go up to RM70 billion for 2022 on higher global fuel costs and a weaker ringgit. Yes, the ringgit has been steadily weakening against the US dollar in the last two months.
The main reason for a weaker ringgit is a simple matter of “supply and demand” of the ringgit vis a vis the US dollar. Another reason is the possibility of speculative attacks; of which is unlikely since we have decent enough reserves to support 6 months of imports. A third reason, could be the harbouring of dollars overseas by Malaysian entities; a question of lack of economic patriotism. Whatever the reasons, the government has to be fully transparent with whatever financial data they have. Only with full transparency, can we try to help design more effective measures.
So, will chicken prices fall in the coming weeks? The government has suspended chicken APs, banned chicken exports, and set ceiling prices. With high chicken feed (primarily corn), the market suppliers have responded with a shortage of chicken. So obviously, these slew of government policies are not really working. The big question is when will the ministers in the current bloated cabinet step up and do something? How long will the public continue to tolerate being led by, seemingly headless chickens in charge?
