December 2, 2020 House of Trust

Weekly Economic Update (Week 2 of January 2020)

*Source: Fair Observer

India restricts imports of palm oil from Malaysia 

  • On the 8th of January 2020, India imposed curbs on refined palm oil and palm olein imports in retaliation against top supplier Malaysia due to criticism of Indian actions in Kashmir and its new citizenship law. 
  • In October 2019, Prime Minister Tun Dr Mahathir Mohamad maintained that he would not retract comments he made about India’s handling of the Kashmir and Jammu region conflict despite of boycott on Malaysian palm oil.
  • In 2020, Indian Ministry of Commerce and Industry issued a notification declaring the import of refined palm oil “is amended from Free to Restricted” which implies an effective ban on imports of refined palm oil, meaning India can now only import crude palm oil from Malaysia.
  • Earlier in the week, an informal request was made to palm oil refiners and traders to avoid buying Malaysian palm oil to boost business for Indian refiners. This caused Indian crude palm oil, soya oil, soya bean and rapeseed prices to rise. 
  • Palm oil is crucial for the Malaysian economy as it accounts for 2.8% of gross domestic product and 4.5% of total exports. State-owned and private Malaysian refineries will likely have to scramble to find new buyers for their refined product as India has been Malaysia’s biggest palm oil buyer since 2014

Source: ReutersThe StarStraits Times

Bait Al-Amanah Economic Analysis

Main Impact of restriction of palm oil import from Malaysia: 

  • Higher stockpiles in Malaysia as demand has fallen, weakening Malaysian exports of Palm oil (as of November 2019, India occupied 25.9% of the export market for Malaysian palm oil).
  • Price of Crude Palm Oil (CPO) in Malaysia will fall (due to gap between supply and demand). Prices tend to be more volatile too due to instability of demand.
  • Indian downstream producers purchase more from Indonesia instead causing loss of market share for Malaysia.
  • This effect may last for the long term if normalization fails. As evidence, stronger demand from China and Pakistan for Malaysian palm oil in November 2019 failed to fully offset the earlier decline in demand from India.

Impact on planters and workers in downstream sectors : 

  • In the short term, workers in this industry will suffer and struggle to make ends meet due to reduced demand worsened by falling and volatile prices.
  • This may become a long term struggle depending on how successful this boycott is (whether Indian refiners abide by this order). Also, this depends on the ability of trade diversion to offset the reduced demand by India. 

Singaporean Economic Growth (Year 2019) 

  • Based on flash estimates released by the Ministry of Trade and Industry, Singapore’s economy grew by 0.7% year-on-year in 2019, better than the 0.6% growth forecast by analysts, although far below the 3.1% expansion in 2018. 
  • This economic growth is Singapore’s slowest economic growth since 2009.
  • Singapore economy bottomed in Q2 of 2019, recording a year-on-year growth of 0.2% and month-on-month growth of -2.6%. 
  • However, Singapore managed to avoid a technical recession[1] and a worst-case scenario of a full-year recession. 
  • The manufacturing sector contracted by 2.1% in Q4, continuing the 0.9% decline in Q3, due to output declines in the electronics, chemicals and transport engineering clusters, which more than offset expansions in the precision engineering, biomedical manufacturing and general manufacturing clusters. 
  • 2020 growth prognosis remains attendant on the external risks and global economic environment, but signs are pointing towards a more supportive recovery story with the US-China phase one trade deal and recent policy measures announced by China to address its economic slowdown. 

     Source: Straits Times

Bait Al-Amanah Economic Analysis

Main Impact of Slowdown in Singaporean Economy on Johor & Malaysia: 

  • Potential Retrenchment of Lower-Skilled Malaysians whose contribution is not indispensable due to downsizing
  • Retrenched workers may not be able to service ongoing housing and car loans (effect is bad because they were previously earning in SGD) 
  • Property Market (especially High-end) in Johor will suffer, due to lower demand
  • Tourism in Johor likely to suffer as less Singaporeans willing to spend, affecting success of Visit Johor Year 2020
  • Malaysia’s trade with Singapore likely to fall (especially in E&E products)

[1] Two consecutive quarters of quarter-on-quarter economic contraction

For the PDF version of the full update, refer to the attachment below:

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