Tough road ahead

AS the Middle East war drags on into its third week, warnings that the local economy must be prepared to face a storm are getting louder.

However, the good news, at least for now, is that Malaysia is in a better position than many of its Asian peers, thanks to its net energy exporter position.

Recently, the Federation of Malaysian Manufacturing (FMM) which represents thousands of local manufacturers sounded alarm bells when it said that fuel, freight and fertiliser costs have already increased, causing a cascading effect on Malaysian goods and services.

The situation is expected to get worse, if the war prolongs.

FMM has called for fresh stimulus packages and a six-month loan moratorium for its members to aid them in their hardships.

Economists concur saying that FMM’s warning has added to multiple economist warnings to prepare for a major hit to the economy.

Sunway University economics professor Yeah Kim Leng, however, noted that the economy, which has strengthened considerably over the last three years, is a net energy exporter and therefore better positioned than many of its Asian peers to weather the global economic turbulence wrought by the conflict.

Asked on the potential impact on micro, small, and medium enterprises (MSMEs), Yeah says given their relatively small contribution, the hit on micro businesses may not have a significant impact on the country’s gross domestic product but its socio-economic effects could be pervasive due to their large numbers and dependents, he says.

“It is noteworthy that the government through the National Economic Action Council has begun meeting on a weekly basis and soliciting feedback from the public, businesses and critical sectors and industries to gauge the nature and severity of the impact of the Middle East conflict, including escalating energy prices and knock-on effects of the closure of the Strait of Hormuz.”

Yeah adds that since the fuel subsidy scheme has not been changed yet, it would be interesting to ascertain the nature of impact and transmission channels affecting the MSMEs.

“Greater clarity on the incidence and severity will allow the government to roll more targeted, timely and effective measures, including collaborating with the medium and large sized enterprises to minimise the impact on the microenterprises.”

Socio-Economic Research Centre executive director Lee Heng Guie says broader, systemic loan moratoriums are generally deemed less effective than targeted, case-by-case restructuring for those badly affected small and medium enterprises (SMEs).

“There are repayment assistance programmes, guided by Bank Negara Malaysia which offer tailored relief for individuals and SMEs facing financial hardship, including six-month moratoriums or 50% instalment reductions; and loans restructuring.

“This is an energy shock-inflicted cost and not a demand shock-inflicted cost and any form of financial assistance and reliefs must focus on on managing cost pressures, rather than a blanket loan moratorium,” Lee adds.

He suggests support for businesses could come in the form of a review of Time of Use (ToU) electricity tariffs, tax relief and specific industries support.

“We have to be clear on one thing, given the current circumstances, there is no economic fix. The problem is not economic, and therefore, there is no policy that can solve this problem,” says Center for Market Education chief executive officer Carmelo Ferlito.

He reckons a stimulus package for businesses can have very harmful consequences in terms of inflation.

“The current price pressures can be solved once the war is over and the situation gets back to normal. If fiscal and monetary policy intervene ‘to help the economy’ they are going to create permanent effects on prices, which will be shown after the crisis is over.”

Ferlito says the war will have very serious effects not only on MSMEs but on the economy in general, including big enterprises.

“The longer this lasts the heavier the consequences. But the solution is not a fiscal one, it is a diplomatic one.”

Independent economist Geoffrey Williams says oil prices have risen and will continue to raise the cost of imported inputs, components and supplies for businesses.

“But the ringgit is remaining strong and this helps keep import prices down even if they are affected by higher energy costs for a short time.”

Williams reckons domestic prices should not be impacted too much by higher oil and energy costs because the subsidy regime is being maintained and diesel for SMEs has a higher cash subsidy now, from RM200 to RM300.

“In fact, most MSMEs are in the services sector, especially micro-enterprises so these are not affected by higher prices for imported components or higher domestic fuel prices.”

He feels that the concerns of FMM should take these factors into account and the current challenges caused by the Middle East conflict should not be an excuse for companies to raise prices.

“The government should issue a warning that anti profiteering rules will be enforced.

“Customers must also be vigilant, if they see prices rise they should shop somewhere else or report profiteering to the authorities.

“There is no need for any assistance for MSMEs at the moment and ad hoc schemes do not help.”