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There is a danger if high commodity prices prolong [11-03-2011]  
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High commodity prices may be a boon to governments and farmers in the short term as revenues and wages rise but inflation will accelerate if prices are sustained.

Economists told StarBiz that countries such as Malaysia, which were net exporters of crude oil and commodities such as crude palm oil and rubber, but have a subsidy regime, would see the positive impact from the higher prices fritter away if subsidy levels were to be sustained at current price levels.

Prime Minister Datuk Seri Najib Razak had noted that if petrol prices were to stay the same and oil prices remained high, then the Government would have to spend another RM4bil for the fuel subsidy, from the current RM10bil allocated under Budget 2011.

This excluded the RM4bil that has been allocated for other subsidies, including to keep food staples down. This year's subsidy was estimated on the basis of US$85 to US$90 per barrel of crude oil.

Oil stood at US$104.48 at 5pm yesterday and was up over 14% from the beginning of the year over concerns oil supply might be disrupted due to troubles in the oil producing regions of the Middle East and North Africa.

Economists said this would be slightly negative for the Government's revenue as for every US$10 increase in the oil price, this would mean RM4bil in revenue, which would be the amount spent on keeping petrol prices at current levels.

MIDF Research chief economist Anthony Dass said the first round of effects from higher prices would benefit everyone through windfall gains. However, he said if prices were to be sustained longer than six months, than a second round of effects would be felt through inflationary pressure.

“I expect the high prices to contribute 0.4% to gross domestic product (GDP) growth in the first round but if prices are sustained, then I estimate the economy will shave off 0.4% of growth,” Dass said.

AmResearch Sdn Bhd senior economist Manokaran Mottain said there was a possibility of the Government missing the mid-term budget deficit target of 2.8% of GDP should inflation rise.

“Right now, we think higher prices is temporary especially if the crisis in the Middle East can be resolved in the next three months. This will also keep the target for the budget deficit for this year intact,” he added.

The Government has a target to lower the deficit to 5.4% of GDP this year from 5.6% last year.

Manokaran said although there would be some benefit to smallholders of oil palm and rubber plantations, much of the benefit would go to owners of large estates.

“Over the long term, sustained prices will erode any gains smallholders will make due to inflation,” he said, adding that inflation this year was likely to rise to above 4% from 3%.

Dass said the question of how this would impact purchasing power would depend on whether wages or prices grew faster.

RHB Research Institute Sdn Bhd economist Peck Boon Soon said although inflation has not been as severe as China's, where the food price index jumped 10% compared with Malaysia's 3%, sustained prices would impact rural areas more than urban areas where wages were not rising as fast as commodity prices.

He added that another risk to high commodity prices was slackening external demand. “The impact will come from slackening demand for commodities should prices remain high,” Peck said.

Source:THE STAR
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