Higher energy prices to fuel higher inflation

Malaysia is taking a much bigger hit on subsidies and applying more pressure on the fiscal side, says economist 


MALAYSIA’S inflation rate could rise by some 2% from the current level this year due to the impact of higher crude oil and gas prices amid fears of a global economic shock from Russia’s invasion of Ukraine. 

CLSA Ltd senior economist Anthony Nafte said Malaysia hasn’t adjusted domestic fuel prices despite undertaking a review of domestic fuel prices from time to time in response to global prices. 

“That means now Malaysia is taking a much bigger hit on subsidies and applying more pressure on the fiscal side. It does risk fiscal position in terms of infrastructure spending to support growth. 

“The external condition should remain favourable to Malaysia because they are still benefitting from the semiconductor supercycle which is expected to last for a number of months,” he told reporters at the 18th Annual CITIC CLSA Asean Forum media webinar yesterday. 

Petrol and diesel prices are subsidised in Malaysia with the RON95 fixed at RM2.05 a litre and diesel at RM2.15, while the price of RON97 is floating at RM3.45 a litre at present. 

The Brent crude oil contract for May delivery was last trading at US$128 (RM536.32) a barrel, with prices of commodities rallying on bullish demand-supply fundamentals in the past few months and further boosted by the Russia-Ukraine war. 

According to the Department of Statistics Malaysia, the Consumer Price Index increased 2.3% to 124.9 in January 2022 from 122.1 in 2021. The increase surpassed the coun- try’s average inflation for the period of 2011 to January 2022 (1.9%). 

Rising energy prices will reinforce the growth slowdowns in developed economies, pressuring Asian export growth this year. The impact of slowing world trade growth is greatest on exporting economies like Hong Kong, Singapore; Taiwan, Malaysia, Japan and Thailand. 

Nafte said tight labour markets in the US and the European Union will see nominal wage rises offset real wage compression and cause inflation to gain breadth and motivate central banks to tighten. 

“We expect the Federal Reserve to tighten six times in 2022 from March and one time in mid-2023,” he said. 

He added in general, Asean central banks will try to resist raising interest rates until the countries strengthen their domestic demand but they will face increasing pressure as inflation arises. 

He added that Asian central banks generally see food and fuel price rises as outside the realm of monetary policy.

Nafte opined that Malaysia is not going to see a big revival in tourist arrivals this year despite its move to reopen international borders on April 1. 

For context, he said Thailand tourism revenue from inbound travellers before the Covid-19 pandemic accounted for 11% of its GDP, way above other countries in the region and Malaysia is second with tourism revenue inflows 5.5% of GDP. 

“Thailand is really struggling to get tourists again despite doing everything they can. I would say we are not going to see a big tourism revival this year but hopefully the sector will recover more strongly in 2023,” he added.