KUALA LUMPUR (April 23): High crude oil prices caused by tension in the Middle East will help to boost Malaysia's oil and gas exports. However, escalated fuel prices will dampen the country’s economic growth, according to the Socio-Economic Research Centre (SERC).

SERC executive director Lee Heng Guie said that higher oil prices or the “first order effect” will help expand Malaysia’s trade surplus, which stood at an average of RM39.4 billion, or 2.2% of gross domestic product, in 2022 and 2023.

On the other hand, there are concerns over the “second order effect” of oil supply shocks that is expected to cause rising energy prices and in turn inflation. This will dampen consumer spending and investment demand, explained Lee.

“The [second order effect] would temper the global economy, especially the oil importing countries. As a result, Malaysia’s exports will be impacted,” said Lee at a briefing on the SERC Quarterly Economic Tracker report on Tuesday.

He said that the second order effect will result in higher equity risk and additional downward pressure on stock prices, as investors become more uncertain about the path ahead.

“The volatility in global stock markets will generate spillovers to Malaysia’s equity market, especially the risk-adverse foreign investors who would seek shelter in safe-haven assets, such as foreign bonds, foreign currencies and gold to hedge against inflation,” he noted.

RHB Investment Bank Bhd on Monday expected that oil prices may hit as high as US$140 (RM669.62) per barrel - from the current level of US$85 to US$92 per barrel - if the Israel-Iran conflict intensifies, harking back to the onset of the Russia-Ukraine conflict.

Meanwhile, SERC said the targeted fuel subsidy rationalisation, which is expected to be rolled out in the second half of 2024, will not lead to complete floating of retail petrol prices, but rather a gradual adjustment to prices.

“The impact [of targeted fuel subsidies] on headline inflation will be manageable, though the indirect impact arising from increases in prices of other goods and services could mean a higher inflation rate,” Lee said.

Due to the soon-to-be-implemented targeted fuel subsidy rationalisation and cost-driven inflation, Lee expects Bank Negara Malaysia not to raise interest rates to address the increase in inflation.

The central bank has maintained the overnight policy rate at 3% for the fifth consecutive meeting, after it was last raised by 25 basis points in May 2023.

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