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Malaysia Will Face A Black Swan Event In 2023 : Food Crisis To Worsen As Fertilizer Shortage, High Price, Inflation, Interest Rate Hikes Continue

As 2023 dawns, research houses and economists are in consensus that Malaysia will likely dodge a recession this year, with a majority of them forecasting economic growth at between 4% and 4.5%.

Bank Negara Malaysia’s forecast is for the economy to expand by 4%-5% in 2023, according to its governor Nor Shamsiah Mohd Yunus.

While the consensus is that Malaysia’s economic outlook is relatively benign, it will be foolish for policymakers not to be prepared for events that could plunge the economy into a downward spiral.

Unexpected shocks that can cause catastrophic damage to economies are sometimes referred to as a “Black Swan” event. These are infrequent events, but a recent example was the Covid-19 pandemic.

In 2023, some possible Black Swans could be an escalation in the Russia-Ukraine war if Nato is somehow dragged into the conflict, or a military flare-up in the Taiwan straits between China and Taiwan, and the US.

Any such scenario would crash global stock markets, and precipitate a surge in oil and gas prices, fuelling inflation and more aggressive interest rate hikes. Or there could be the emergence of a deadly Covid variant that plunges the world into lockdowns once again.

A house of cards?

So, if a Black Swan event does occur, will the Malaysian economy show itself to be a house of cards, or built on solid foundation?

Sunway University Business School economics professor Yeah Kim Leng said while a “doomsday scenario” is possible, the probability of it happening is relatively low.

He said a worst-case scenario for the Malaysian economy would depend on whether the US encounters a severe recession and whether it can contain its high inflation with the current interest rate hikes.

“Another outcome is whether the Russia-Ukraine war will escalate or end. If there is an end, the global risk environment will improve, and that will result in a more positive outlook.

“If it doesn’t, inflation will continue due to disruption to oil and energy supplies, and that will lead to higher food and energy prices,” he added.

Policy levers available to the government

However, Yeah said there are various policy levers the government can leverage on in a worst-case scenario, with the two main ones being monetary policy and fiscal policy.

“Monetary policy will be largely related to lowering of interest rates, and loosening money supply which is akin to injecting liquidity into the economy. This may include bailouts of distressed companies and distressed assets.

“The second lever is fiscal policy, where the government can mount counter cyclical spending by increasing spending through various programmes to support the economy.

“This includes providing concessionary loans and grants, spending on infrastructure and other economic activities to boost demand,” he added.

If things turn sour, Yeah anticipates the Malaysian economy may see a “shallow recession” contracting for half a year or two consecutive quarters, resulting in a full-year GDP of less than 2%.

For comparison, he pointed out during the global financial crisis in 2009, Malaysia’s economy contracted by -1.9%, which is considered a shallow recession.

“During the 2020 Covid-19 pandemic, we contracted -5.6%. This was a fairly severe recession although the duration was relatively short,” he said.

Another factor in Malaysia’s favour is that its banking sector remains relatively robust following reforms instituted in the wake of the Asian financial crisis in the late 1990s.

BNM has reiterated that banks are well capitalised to support economic recovery and withstand potential stress, with its excess capital buffer of RM123.1 billion.

Domestic risks a factor too

For Malaysia University of Science and Technology economist Geoffrey Williams, the external risks are a sharp global recession leading to a broader financial crisis. Global political risks remain high as well.

However, risks at home are not to be under-estimated. “Domestic risks are mainly in terms of the stability of the new unity government and whether irresponsible political manoeuvres cause problems (resulting in political instability),” he added.

He said a global slowdown is “almost certain” but Malaysia can avoid recession if there is a strong focus on the domestic economy, structural reforms and fiscal responsibility to create a stable competitive business environment.

So, how should our economic custodians be preparing for a global slowdown?

Williams said Budget 2023 should start afresh with more moderate spending and better revenue management. “We need to look at tax reform holistically to make the tax system more efficient.

“I would suggest increasing spending only in line with core inflation to around RM345 billion and aiming for similar revenue as last year. This would deliver a lower deficit.

“In terms of spending, wastage must be cut. Excessive megaprojects should be reviewed, rescheduled or re-budgeted. Subsidies reform is essential,” he added.

Williams stressed there is a need to look at structural reforms in pensions, welfare and incomes because relying on government handouts will not be enough if there is a downturn and “will be expensive and wasteful”.

Austerity on the horizon?

Malaysian Institute of Economic Research senior research fellow Shankaran Nambiar noted there is much concern among analysts that the US economy will run a recession in 2023.

As such, he said the government needs to prepare for a more prudent fiscal framework. “We will need to adopt policies that lean towards greater austerity by trimming unnecessary government expenditure and reducing subsidies.

“This will give more space for the government to offer more assistance to disadvantaged groups in the face of weaker growth in 2023,” he added.

Source : FMT

Supply chain shortages and the rising cost of doing business, as well as drought and interest rate hikes are some of the factors that contributed to food crisis this year. But if you think food shortages and high prices will magically disappear next year, think again. American farmers believe 2023 could be even worse, after a difficult 2022 as the same problems continue to hit the world next year.

Climate change and the ongoing Russia-Ukraine war are just some of the reasons why food shortages will likely continue in 2023. Many thought the war was the only reason we are plagued with food crisis. On Feb 2, before the invasion, Russia banned the export of ammonium nitrate to ensure affordable supplies for domestic farmers.

Russia exports two-thirds of the world’s ammonium nitrate, which is used in fertilizers to improve yields for crops like wheat, corn and cotton. Worse, natural gas is the main ingredient of fertilizer. Therefore, farmers who could not afford the increase in costs of fertilizers have seen lower crop production, which in turn will hit global food security.

It didn’t help that Russia is one of the biggest oil and gas producers in the world. The best part is Ukraine is a critical route for oil that flows into Eastern Europe and subsequently to all the European Union countries. Like it or not, Russia’s attack on Ukraine is not only about oil and gas, but also the entire supply chain of other commodities that threaten global food prices.

But the biggest nightmare was the supply-chain disruptions that spread across the global economy. Both Russia and Ukraine are huge producers of agricultural products like wheat, barley, grains and rye that are badly needed by Europe. And because 71% of its land is agricultural, Ukraine is considered the “breadbasket” of Europe. Ukraine is the fifth largest exporter of wheat – 7% of global sales.

However, the shortage of fertilizer did not happen overnight after Russian president Vladimir Putin launched the “special military operation”. The fertilizer crisis has been steadily growing since 2021 – before the Ukraine War – when the World Bank reported a 66% increase in the price of fertilizer thanks to shortages. And the issue is likely to persist throughout 2023, according to the Food and Agriculture Organization (FAO).

The Russia-Ukraine War simply makes it more challenging to procure the agricultural commodities as fertilizers and the compounds used to make them become increasingly more expensive. This has led to inflation. In fact, food prices have been outpacing overall inflation in 2022 as November food prices showed a 10.6% increase compared to inflation of 7.1% in the same month.

Adding salt to the wound, the U.S. Federal Reserve’s aggressive interest rate hikes from as low as 0% to as high as 4.25% are hurting farmers. Because most American farmers depend on short-term loans every year to pay for basically everything, from seeds to fertilizer and from livestock to machinery, the increase in interest rates has raised the cost of farm operations.

According to the U.S. Department of Agriculture, the farming sector’s total interest expense alone is projected to hit US$26.5 billion this year – nearly 32% higher than in 2021. The higher costs of fertilizer, fuel and land cost are forcing farmers to decide whether to reduce their crops and cattle or to struggle with higher loan repayment, which again contribute to shortages of food.

China, in line with its “Covid-Zero” policy, has basically restricted its markets for exports such as the phosphate used to create fertilizer – further worsening the food crisis. Fertilizer accounts for between 35% and 36% of farmers’ costs when cultivating core crops such as wheat and corn. The price volatility obviously affects global food security.

A report released by consulting firm McKinsey said next year may be worse as it estimated that crop production in Ukraine will decline by 35% to 45% in the next harvesting season, which started in July. As a result, many bakeries and factories may struggle to obtain the necessary ingredients to make bread, leading to a potential shortage in 2023.

Essentially, this year’s food crisis is mostly due to a logistical disruption tied to issues in shipping Ukrainian and Russian grains out of the countries. Next year, however, the food supply itself could be in trouble – particularly in Ukraine. The deal brokered by the United Nations and Turkey that allows Ukraine to restart grain exports out of the Black Sea could be interrupted anytime if the conflict escalates.

The aluminium shortage, which started in 2020, and the labour shortages due to Covid-19 pandemic also mean canned food, pet food, beer and other beverages will continue to be expensive. Already, from the United Kingdom to Malaysia, some supermarkets have reported shortages of eggs as it costs more to feed and raise chickens.

Interestingly, in 2017, humanitarian organization Oxfam has predicted the world will run out of food around 2050 when a growing world population exceeds food growing capacity. According to the study, climate change, crop failures, and a rise in food prices for items like corn and rice will also contribute to the world’s population outpacing the amount of food it produces.

However, Gro Intelligence, an agricultural data technology company, said the world’s agricultural system will not produce enough food to feed everyone in the world by 2023 – that’s next year! Both studies done in 2017 did not take into account a conflict as serious as Russia-Ukraine War. The UN World Food Programme (WFP) has warned that severely hungry people around the world have jumped from 282 million to 345 million in 2022.

Source : Finance Twitter

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