Weekly Economic Analysis by Manokaran Mottain

Adverse impact of inflationary effects is here

MARKET

Volatility continues to roil the markets as the market begins to price in the adverse impact of inflationary effects arising from the Russia-Ukraine conflict. The market experienced heavy selling pressure during the week as investor and traders took profits and raised cash as a precaution in case the conflict takes a turn for the worse and escalates further.

In addition, the world is also facing the very real possibility of significant demand destruction brought about by the sky rocketing commodity prices and the consequent slowdown in economic activities and consumer consumption. As a result, we have seen fund flows into safe haven asset classes such as gold which broke the psychological US$2,000 an ounce.

Brent oil prices continued its rally back close to its 14-year high of US$140 per barrel as the Biden administration was looking to expedite and fast track a legislation to embargo Russian oil imports.  

There-fore it was not surprising that the benchmark KLCI Index lost ground during the week along with other regional markets. It ended the week at 1,568.22 points, some 35.72 points or (-0.22%) on a weekly basis with 23 out of the 30 index stock components retreating during the week.

My view on the market near term is that it will be determined by the news flow emanating from the Russia–Ukraine conflict. The 1,600-point level will continue to be a consolidating point for the KLCI Index until a peaceful resolution is found for the conflict and the cooling off of inflationary pressures.

ECONOMY

Malaysia will be moving to implement the endemic phase for COVID-19 on 1 April 2022 which will see a reopening of its international borders and relaxation of the movement and quarantine restrictions currently in place.

Fully vaccinated individuals would no longer need to undergo quarantine and would only need to undergo a COVID-19 RT-PCR test two days before departure and an RTK-Ag test within 24-hours upon arrival.

Travelers entering Malaysia who are not vaccinated or fully vaccinated against COVID-19 must undergo a 5-day quarantine and comply with existing Covid-19 regulations such as prohibition from dining in at restaurants subsequent to their quarantine period.

The number of unemployed persons in Malaysia for January 2022 has declined to 680,400 persons from 687,600 in December 2021. The improvement helped to push the number of employed persons to 15.69 million persons and the unemployment rate currently stands at 4.2%. 

Bank Negara Malaysia’s international reserves as at the end of February 2022 remained virtually unchanged at US$115.8 billion from 15 February 2022.

The reserves position was sufficient to finance 6.1 months of imports of goods and services and was 1.2x the short-term external debt.

The main components of the reserves comprise of foreign currency reserves (US$103.0 billion), special drawing rights (US$6.0 billion), gold (US$2.3 billion), IMF reserves (US1.4 billion) and other reserve assets totaling US$3.1 billion.

The Department of Statistics Malaysia disclosed that Malaysia’s manufacturing sales grew 13.1% y-o-y in January 2022 to RM139 billion, driven by the food, beverages and tobacco sub-sector which rose 20.6% y-o-y.

The petroleum, chemical, rubber and plastic products sub-sectors also rose by 15.7% y-o-y supported by the manufacturing of coke and refined petroleum products and the electrical & electronics sub-sector edged up 10.6% y-o-y.

Malaysia’s wholesale and retail trade grew by 7.7% y-o-y to RM120.5 billion in January 2022. The growth was led by the motor vehicle sub-sector which grew by 19.4% y-o-y to RM12.9 billion, followed by the retail sub-sector which grew 7.3% y-o-y to RM49 billion while the wholesale trade sector grew 5.7% y-o-y to RM58.6 billion.  

Meanwhile, Malaysia’s Industrial Production Index (IPI) rose 4.3% y-o-y in January 2022. The expansion of the IPI was attributed to an 6.8% y-o-y increase in the manufacturing index and a 7.7% y-o-y increase in the electricity index. However, the mining index fell by 5.1% y-o-y during the period. 

China has targeted a slower GDP growth for 2022 at 5.5% as compared to 8.1% in 2021 as it faces softening domestic economic conditions. It has set a budget deficit of 2.8% of the GDP for 2022 from 3.2% last year while the consumer price index target for 2002 remains at 3.0%. Premier Li Keqiang said economic stability is the country’s main priority this year.  

CURRENCY

The Ringgit weakened as higher than expected inflationary numbers in the US stoked fears of an aggressive interest rate stance taken by the US Federal Reserve ahead of its FOMC meeting next week.

Rising energy, food and services prices arising from a combination of strong consumer demand and supply chain constraints pushed US inflation for February 2022 to 7.9% y-o-y, which is a 40-year high since January 1982 when it touched 8.4%.      

The Ringgit ended the week at RM4.1960 / USD1.00 from RM4.1760 in the previous week. We witnessed some profit taking following last week’s gains.

The Ringgit remained virtually unchanged against the Euro during the week at RM4.6050 / EUR1.00 but weakened against the Singapore Dollar at RM3.0829 / SGD1.00 and but strengthened to a 4-year high against the Japanese Yen at RM3.5840 / JPY100 and a 12-month high against the British Pound at RM5.48 / GBP1.00. 

In the coming week, the Ringgit may still be under pressure especially if the US Federal Reserve turns more aggressive and hikes interest rates by 50 basis points. On the flip side, if the increase is 25 basis points, then I would tend to be optimistic that the Ringgit may regain some strength in light of the on-going commodity plays. As such, the Ringgit is likely to trade around RM4.17 to RM4.23 for the coming week.  

POLITICS

Barisan Nasional (BN) won a decisive victory at the tightly contested Johor State Elections over the weekend. It regained the state with over two thirds majority when it won 40 out of the 56 seats in the state assembly.

It was a vastly improved performance by BN from the 16 seats it won during the General Elections in 2018.  This was the second consecutive state elections whereby the BN coalition secured a two thirds majority after the Melaka state elections last year.

Although the voter turnout was relatively low at 54.9%, post-election analysis showed that BN had significantly benefitted from a disorganized and fragmented opposition who were unable to make any headway with new voters and fence sitters despite the fact that the Johor State Elections was the first election whereby 18 year-old individuals would be eligible to vote after the gazettement of the constitutional amendment on 15 December 2021.  

It is very clear now that BN’s slogan – Stability For The Future has resonated with the rakyat as it reflects their desire to have a strong and stable government to fight for their interest and well being.

We will definitely see growing calls from the BN to push for an early General Election once the MOU with the opposition parties end in July 2022.  – DagangNews.com

Manokaran Mottain has been an economist with a number of financial institutions is now managing his own firm, Rising Success Consultancy Sdn Bhd