Malaysia’s sector analysis during the Red Sea crisis

It is imperative for Malaysia to carefully navigate these turbulent waters to safeguard its economic interests

THE threat to maritime security has been growing over the past few years and the recent Hamas-Israel war has magnified these concerns. In fact, as a response to the Zionist regime’s brutal actions against the Palestinian people and condemns the violation of international law and humanitarian principles, Prime Minister (PM) Datuk Seri Anwar Ibrahim banned Israeli-flagged or associated ships from Malaysian ports.

The crisis extended to the Red Sea on Nov 14, 2023, when the movement’s leader, Abdul-Malik al-Houthi, issued a warning that all Israeli-linked ships in the Red Sea and Gulf of Aden would be targeted. The current wave of attacks is more focused on ships with Israeli connections.

The Red Sea crisis has disrupted maritime trade routes, leading to heightened shipping costs, delays in goods transportation, increased security measures and higher insurance expenses for shipping companies. In response to the crisis, two of the world’s largest shipping firms, Maersk AS and CMA CGM, have decided to impose a surcharge on shipments.

The companies decided to reroute ships following the closure of the Bab el-Mandeb Strait, causing significant disruptions in trade flows. Subsequently, the surcharges are designed to cover the additional costs incurred by the rerouting of ships and the longer transit times around Africa compared to routes via the Suez Canal.

Ships are being guided around the Cape of Good Hope at the southernmost point of Africa, extending the journey by approximately 10 days. This adds to a voyage that would typically last about 27 days from China to northern Europe.

Amid the escalating tensions in the Red Sea region, Malaysia finds itself at a critical juncture in terms of trade and economic stability. The Red Sea, facilitating 12% of global maritime trade and 20% of cargo transportation, including vital resources such as oil and gas (O&G), holds significant implications for Malaysia’s trade heavily reliant on this critical route.

Thus, the shadow casted by the Red Sea crisis over global trade routes has impacted Malaysia’s import and export activities. As the situation unfolds, it is imperative for Malaysia to carefully navigate these turbulent waters to safeguard its economic interests.

The country heavily relies on maritime trade for both imports and exports, with a large portion of its trade passing through the Red Sea. As a result of the crisis, Malaysian exporters are facing difficulties in reaching their markets and importers are experiencing delays in receiving much-needed goods and raw materials. These delays are translated into tangible economic impacts, with these added cost potentially being transferred to Malaysian businesses, hence leading to an overall increase in the cost of both imported and exported goods.

Furthermore, the economic repercussions of the crisis have also impacted Malaysia’s trade relationships with countries in the Red Sea region. Fluctuations in currency values, changes in demand for specific goods and disruptions in supply chains have all contributed to the complexity of Malaysia’s trade landscape, thus hindering the competitiveness of Malaysian industries.

Malaysia, as the second-largest oil producer in South-East Asia and the world’s third-largest exporter of liquefied natural gas (LNG), also faces potential vulnerability to fluctuations in energy prices arising from the Red Sea crisis. The instability in that region has the potential to influence global oil prices, thereby impacting Malaysia’s trade dynamics in energy-related exports and imports.

Sector Analysis: Affected Industries in Malaysia’s Economy

The Red Sea crisis has had a significant impact on various sectors of Malaysia’s economy. Figure 2 shows the value of partnership trade between Malaysia with the Red Sea region and Northern Europe in 2023. The dataset illustrates a substantial leap in trade percentages with Egypt, Sweden, Ireland, the UK and Saudi Arabia, emphasising the importance of these nations in Malaysia’s global trade portfolio.

Saudi Arabia, in particular, stood out with a trade percentage of 1.92%, reflecting a substantial economic partnership. While moving towards countries such as Yemen and Djibouti, which are located in the strategic Red Sea region, it is observed that their trade impact on Malaysia becomes more significant, although still below 0.1%.

Notably, Denmark, Finland and Norway each contribute around 0.09% to Malaysia’s total trade, indicating moderate economic ties.

One of the sectors that has been heavily affected is the shipping and logistics industry services. With the disruption of traditional trade routes through the Red Sea, Malaysian shipping companies are facing challenges in ensuring timely and cost-effective delivery of goods.

The Federation of Malaysian Manufacturers (FMM) has released a statement for Malaysian shippers to brace prolonged disruptions in the Red Sea route and adopt contingency plans in mitigating the impact on supply chains.

Another sector adversely impacted is the manufacturing industry, particularly those reliant on timely imports of raw materials. Table 1 shows the total trade sectors with the Red Sea region and Northern Europe in 2023. Delays in receiving goods and raw materials from suppliers in the Red Sea region have led to production setbacks and increased inventory holding costs for Malaysian manufacturers.

In addition, fluctuations in currency values and changes in demand for specific goods have added further complexity to the manufacturing sector, as it strives to adapt to the changing trade dynamics.

Nevertheless, the agricultural sector in Malaysia is less affected by the Red Sea crisis. According to the Agriculture and Food Industries minister, Malaysia has been able to maintain stable agricultural production as it is less reliant on imports from the Red Sea region for key agricultural commodities.

This can be seen in Table 1 as there is less than 1% impact on the agriculture sector in Malaysia due to the Red Sea crisis.

Exploring Opportunities for Economic Resilience

Amid the challenges posed by the Red Sea crisis, Malaysia can leverage this situation to explore new opportunities for strategic partnerships with countries unaffected by the crisis, thus strengthening its economic resilience.

Diversifying trade routes beyond the traditional Red Sea passage, for instance, could open doors to new markets and reduce dependency on specific shipping lanes. The government can also focus on promoting local production and sourcing of raw materials to reduce reliance on imports from the affected regions, thereby enhancing economic self-sufficiency.

Furthermore, Malaysia can capitalise on its strategic geographical location and invest in developing alternative transportation infrastructure, such as improving connectivity for air and sea cargo, to facilitate smoother trade flows.

Through employment of proactive economic diplomacy, strengthening ties with pivotal trading partners and active participation in international economic forums, Malaysia can also heighten its influence in global trade negotiations. This proactive approach will not only enhance Malaysia’s trade resilience in the face of crises but also position the country as a resilient and adaptable player in the global trade landscape.

Despite the formidable challenges presented by the Red Sea crisis, Malaysia stands poised to fortify its resilience by adopting proactive measures that directly confront the impact on its trade and economy.

  • Muhammad Khalid Ahmad Kamal is a researcher at The Maritime Institute of Malaysia (Mima), while Assoc Prof Ir Dr Syuhaida Ismail is a research director at Mima, a maritime research policy agency of the Ministry of Transport (MoT).

  • This article first appeared in The Malaysian Reserve weekly print edition