KUALA LUMPUR (Feb 24): The escalating Russia-Ukraine conflict may drag Malaysia's nascent export-led recovery, said economists on Thursday.
Sunway University Business School professor of economics Dr Yeah Kim Leng said the European and other industrialised economies will likely take a big hit if there is an outbreak of war, and the ensuing global downturn, financial market turmoil and disruptions to oil markets and supply chains will nip Malaysia's nascent export-led recovery.
"The adverse impact has already been felt in the form of higher oil prices and major stock market beatings where Malaysia's investment funds have large exposure.
"Of concern is the risk of escalation into open warfare or armed conflict which will cause panic and flight to safety among investors, likely causing capital outflows from emerging markets amid global risk aversion," he told The Edge.
Meanwhile, UOB Malaysia senior economist Julia Goh said risk is centred around escalating oil prices that have breached US$100 per barrel and the impact on the global economy.
"Inflation pressures faced by many parts of the world could be further complicated if escalating tensions and sanctions result in energy supply disruptions and potentially worsen already burdened shipping/supply chains.
"Malaysia would be affected if weaker global growth prospects ensue," she told The Edge.
On the impact of higher oil, she said this would be a double-edged sword for Malaysia's fiscal position as higher oil prices are countered by rising fuel subsidies.
"Higher oil also extends across to other commodities that exacerbates costs of raw materials and other inputs that weigh on profit margins, unless the costs can be passed on to consumers," she added.
OCBC Bank economist Wellian Wiranto, on the other hand, said the relative good news is that direct trade links that Malaysia has with Russia and Ukraine are limited, hence any disruption in trade flow is unlikely to move the needle much for Malaysia's trade and balance of payment numbers.
"Still, the escalation in tensions comes at a time when global market risk sentiment already feels battered by the prospect of a more hawkish Federal Reserve, hence Malaysian assets may feel the bite too, at least in the near term," he told The Edge.
He also noted that Russia and Ukraine are considerable players in the commodity exports space, which means that commodity prices are going to go up.
"For a net commodity exporter like Malaysia, the price uptick may deliver some benefits. However, there is no such thing as free lunch, and any sustained uptick in commodity prices may end up denting global demand and prove to be a bane for Malaysia at the end of the day, especially if coupled with rising food and energy prices domestically," he added.
KAF Research Vincent Loo said the intensification of the Russia-Ukraine conflict threatens to worsen the global oil and gas supply shortage over the near term and push the Brent crude price past US$100 per barrel, and that this will likely further stoke the already high global inflationary pressure. At press time, Brent already surged past US$105 per barrel.
"That said, Malaysia remains relatively insulated due to its policy of providing fuel price subsidies, which sets the price ceiling on RON 95 at RM2.05/litre and diesel at RM2.15/litre, as well as administrative price controls on essential goods that will keep domestic inflationary pressure in check.
"Nevertheless, these price imbalances will likely be reflected in the government finances with the ballooning of fuel subsidies and potential supply shortages of other administered goods," he told The Edge.
Reuters reported that Russia launched a full-scale invasion of Ukraine by land, air and sea on Thursday, the biggest attack by one state against another in Europe since World War Two.
"Russian missiles rained down on Ukrainian cities. Ukraine reported columns of troops pouring across its borders into the eastern Chernihiv, Kharkiv and Luhansk regions, and landing by sea at the cities of Odessa and Mariupol in the south," Reuters reported.
Source: https://www.theedgemarkets.com/article/russiaukraine-conflict-may-drag-malaysias-nascent-exportled-recovery-say-economists