KUALA LUMPUR: A promise for better economic growth and ringgit in 2024 may be in jeopardy with the Red Sea shipping crisis throwing a spanner in the works of an already precarious recovery path.
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid expressed concern that the repercussions of the Red Sea crisis could be enduring.
He pointed out that the International Monetary Fund (IMF) and World Bank have already warned about geo-economic fragmentation, which is poised to affect global trade and supply chains.
"This essentially can have an impact on productivity and cost of doing business as this can result in delays of supply deliveries, raw material and rising input prices."While this would encourage companies to review their supply chain, it may take some time to materialise," he told the Business Times.
The World Bank expects global gross domestic product growth to close to 2.4 per cent in 2024, down from an anticipated 2.6 percent in 2023.
"In that sense, Malaysia's external sector will continue to remain challenging. Logistically speaking, vessels that are being rerouted to Cape of Good Hope may cause delays in delivery times."This can have an impact on the cost of doing business. If it becomes persistent, businesses might pass on the rising cost to the final consumers," he said.
Afzanizam targets a 4.3 per cent growth in GDP and the ringgit to appreciate to 4.5 to the dollar this year.
A steep fall in external demand pushed GDP growth to the lower end of Bank Negara Malaysia's 4-5 per cent grpwth target for 2023.
Economists have largely projected a better performance of between 4.5 per cent and 5.5 per cent in 2024, with an external trade recovery.
Meanwhile, CME chief executive officer Dr Carmelo Ferlito said because Malaysia is part of the global economy and as a small country, it relies abundantly on international trade as a source for economic growth.
"In this regard, I think Malaysia's economic trajectory is threatened more by the situation in China."Although the World Bank speaks of "weaker than expected" growth in China, the situation had very much to be expected after the suicidal lockdown policies," he added.
Ferlito said since China is the major trading partner for Malaysia and other SEA countries, the situation there is already posing a threat to growth in the region.
"The Red Sea crisis, impacting the world economy globally, is adding tensions and Malaysia will suffer as a consequence."Higher international prices will affect purchasing power and thus domestic demand," he told Business Times.
Ferlito suggested that genuine inflation could escalate if the Red Sea crisis prompts governments worldwide to once again adopt imprudent fiscal and monetary policies, akin to those implemented during the Covid-19 pandemic.
"Financing the war may become the real source of inflation for the countries directly involved in the conflict," he added.
Moreover, according to Ferlito, disruptions in the supply side will trigger varied price adjustments.
"The extent of these adjustments will hinge on the crisis's duration and the degree of inflation governments generate to fund the conflict and mitigate its adverse domestic effects."
However, Nusantara Academy for Strategic Research senior fellow Dr. Azmi Hassan stated that he does not foresee a significant impact of the Red Sea crisis on Malaysia.
While acknowledging potential cost increases for goods due to alternative routes, he believes the impact on inflation and economic growth will be modest.
Dr. Azmi highlighted that although exports to European countries requiring the Red Sea Suez Canal might become pricier, the overall effect on Malaysia's economic landscape is expected to be limited.
"I believe this issue and crisis will ease as we observe the strategies employed by the US and UK against the Houthis' side.
"Nevertheless, as mentioned earlier, the impact will be minimal, even for inflation. Although our exports may become more expensive, it is unlikely to significantly affect Malaysia's overall economic growth," he added.
Malaysia University of Science and Technology economist Dr Geoffrey Williams stated that while the Red Sea routes are significant, they are not decisive in disrupting Malaysia's trade.
According to Williams, the majority of Malaysian trade is oriented towards ASEAN, Asia, and the Asia Pacific Economic Cooperation (APEC), focusing on the Eastern hemisphere.
"Around 15 per cent of global trade goes through the Red Sea, which is a large amount and the current attacks by Houthi rebels is disrupting significant trade routes, which include Malaysian and ASEAN trade," he added.
Williams said the duration of the impact hinges on the crisis's duration, noting that the Royal Navy and the swift response from the US, supported by other nations, play a crucial role in managing the situation.
"The risk is whether it escalates into a wider regional conflict then the impact will be more significant.
"For now we are at an early stage but the Royal Navy is very experienced in this type of engagement and since there is a wider coalition of power the trade flows will be protected," said Williams.
On the matter of ringgit, Afzanizam told Business Times that increased geopolitical risks would lead to an elevated demand for safe-haven currencies like the US dollar.
"However, at the current juncture, the foreign exchange markets are focusing on the prospect of lower rates by the Fed.
"So the ringgit seems to be well supported as the current view is that the US dollar would weaken following the possible interest rate cut by the US central bank," he added.
Analysts have projected a strengthening in the ringgit this year, up to 4.2 to the dollar, at best, by year-end.
Ferlito said that during times of crisis, the dollar typically strengthens, as it continues to be the favoured reserve currency for storing value.
"Under this perspective, a stronger dollar will translate into a weaker ringgit," he said.
Moreover, Williams pointed out that despite geopolitical risks, the ringgit has strengthened since October of the previous year and remained stable.
While acknowledging potential effects from geopolitical factors, he emphasised that the underlying fundamentals remain unchanged.
"Hopefully it will be a short-lived event but it does add to wider geopolitical risk and uncertainty which has been affecting trade and global growth for the last few years," Williams emphasised.