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Rethink strategy if Red Sea crisis prolongs, businesses advised

By January 23, 2024No Comments

Economists say impact on Malaysia will be minimal in the short term but an extended conflict can have economic repercussions.

Houthi raids have raised risks for shippers plying the Red Sea. (AP pic)

PETALING JAYA: Economists have called for a re-evaluation of Malaysia’s trade strategies to mitigate potential negative consequences if the Red Sea crisis extends indefinitely.

They pointed out that while the country can easily sail through the storm if it clears up quickly, a prolonged conflict can raise costs for importers and exporters, leading to higher costs.

This can have a negative impact on the economy given Malaysia’s position as one of the world’s top 25 trading nations, they pointed out.

Shankaran Nambiar of the Malaysian Institute of Economic Research (MIER) said there could be disruptions in logistics if the crisis extends indefinitely, leading to a need to re-route shipping.

“This will put pressure on costs, leading to inflationary tendencies and potential challenges for industries like semiconductor and automobile,” he told FMT Business.

Benedict Weerasena of the Bait Al-Amanah research house said there may come a time when shipping to Europe and North Africa has to be rerouted around the Cape of Good Hope.

As a result, he said, importers and exporters will experience disruptions in delivery time, inventory management challenges, increased costs of shipping and higher insurance rates.

However, he told FMT Business, the medium to long-term impact will also hinge on Malaysian manufacturers’ ability to adopt alternative routes or shift towards sourcing from regional neighbours.

The Federation of Malaysian Manufacturers (FMM) recently said sourcing from Asean could help businesses cut costs and circumvent supply chain problems caused by the conflict.

The FMM also advised manufacturers to look towards Asean given the attack on vessels in the Red Sea.

Weerasena said a stronger trade orientation towards the Eastern Hemisphere will also likely keep the overall impact on Malaysia’s economic growth and employment to a minimum unless the crisis escalates into a wider regional conflict.

He said that in the event of a prolonged and escalating Red Sea crisis, there will be greater volatility in global trade, and that will have an impact on Malaysia’s open economy.

Weerasena said there would be an increase in demand for the US dollar given its position as a favoured reserve currency in times of crisis.

This will weaken the ringgit further,” he added.

The crisis in the Middle East began with Israel’s retaliation against Hamas for the Palestinian militant group’s surprise attack on southern Israel from the Gaza strip on Oct 7 last year.

The crisis extended to the Red Sea when the Houthi militants in Yemen began targeting vessels as a retaliation to Israel’s war against Hamas.

This has resulted in disruptions to access to the Suez Canal, the shortest shipping route from Asia to Europe.