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Are we really getting over it?

• Global economic growth prospects have been affected by Russia-Ukraine conflict global production is expected to grow at a slower pace of 3.6% in 2022.

• Although Russia and Ukraine together account for less than 3% of global exports and less than 2% of global imports, the ensuing conflict and sanctions have weakened trade connectivity by disrupting transit routes, particularly for container shipping and air cargo traffic.

• Russia’s war in Ukraine has created “tremendous human suffering”, but it is also harming global trade, warns the World Trade Organization (WTO). Disruptions to food supplies could have “potentially disastrous consequences” for poor countries, he says. The WTO has revised down its forecasts for imports and exports of goods and is calling on governments and partners to facilitate trade.

Here are the implications of the conflicts:

On February 24, 2022, Russia invades Ukraine. It is important to note that this war causes food and energy crises. The war also threatens the supply of essential goods to Russia and Ukraine, including food, energy and fertilizers. Halting grain shipments through Black Sea ports could have “potentially disastrous consequences” for food security in poor countries, as the WTO warns.

Increased geopolitical risks induced by the Russian invasion of Ukraine have weighed on global economic conditions throughout 2022. Such effects are felt on the GDP of the countries concerned and significantly boost inflation, exacerbating the policy trade-offs facing central banks around the world.

Here are the implications of the conflicts

1. Increase in oil and energy prices

Analysts said the still tight supply situation caused by the Russian-Ukrainian conflict and the Organization of the Petroleum Exporting Countries (OPEC) decision to cut production by 100,000 barrels per day (bpd) this year, against their earlier commitment to raise it by 275,000 (bpd) would keep prices high for now. The price increased from 90 USD/bbl. at 105 USD/bbl. in July 2022 as shown in Figure 1.

2. Rising commodity prices

The war in Ukraine no longer shocks the wheat market. As shown in Figure 2, the decline was due to markets responding to Russia and Turkey saying they wanted to discuss safe passage to ship Ukrainian grain across the Black Sea.

Corn and soybean prices have also started to decline, largely due to favorable weather forecasts for these crops. The US Department of Agriculture will release reports on June 30 highlighting rising corn and soybean prices while wheat falls.

The wheat and corn market is expected to stabilize as other regions compensate for Ukraine’s losses, and this is happening across the board. Australia, one of the biggest wheat exporters, is set to produce another huge crop this year, while Brazil’s biggest growing region has so much maize it’s piling up outside bins.

3. Global supply chain disruptions affecting local businesses and multinationals operating in Malaysia.

To this end, the EU is helping Ukrainian exports by returning millions of tonnes of grain to world markets through other channels under the “Solidarity Lanes Action Plan”. The EU also employs various long-term strategies to deal with the negative consequences of climate change on food security, such as the degradation of fertile land, the loss of biodiversity and the increasing risk of local agricultural production.

Looking ahead, the EU aims to meet the demand for long-term investments in food value chains through sustainable agricultural and ecological innovations. Additionally, the industry needs reform in areas of land governance and must provide smallholder farmers with access to green finance. This helps to increase access to healthy food while reducing our dependence on fossil fuels. The EU will accompany Malaysia on this path of jointly developing new strategies for sustainable and safe food structures.

4. Pressure on global and domestic interest rates

The outlook for the UK and global economy has “deteriorated significantly” due to inflationary pressures largely fueled by Russia’s invasion of Ukraine, putting further pressure on UK household and business finances, according to the Bank of England (BoE). The deteriorating economic outlook has caused volatility in global markets in recent months, with more turbulence likely, the Bank said in its quarterly Health Check of Britain’s financial system.

Malaysia

BNM raised the rate again in July, lifting it off the record high it had languished in for nearly two years. The decision to increase the OPR is motivated by the positive dynamics of the performance of the national economy, as evidenced by key indicators such as the unemployment rate, distribution trade sales, industrial production and trade trends outside.

It is important for us to consider the main risks mentioned below:

1. The market can expect an increase in business failures, especially for companies and sectors that have not yet fully recovered from the pandemic. In addition, companies with high levels of debt and those with lower credit ratings may face tighter financing conditions.

1. Commodity and energy prices remained high and volatile, causing stress in the derivatives markets for these products. Despite recent adjustments, some assets remain exposed to the risk of further corrections if the growth outlook weakens further and/or if inflation turns out to be significantly higher than expected.

1. Vulnerabilities could increase due to the uncertain development of the Russian-Ukrainian war and changing expectations for policy normalization in advanced economies. Other potential global developments, such as a broader resurgence of the coronavirus (COVID-19) pandemic, weaknesses in major emerging market economies, or a sharper slowdown in Chinese economic activity, could also affect risks for growth and inflation.

Recommendations

1. It is important that people start saving and be as debt free as possible

1. We could be in a financial crisis if debt and inflation continue to rise as real purchasing power declines

1. Encourage our youth to be in agriculture field to detach from being dependent on others for food

1. Be more rational and have a longer term mind in decision-making today, be aware of the food crisis and the expected financial crisis

Charifah Azzahra

Certified Risk Management Consultant

Selangor

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