Turning Strategy Into Outcomes 30 FGV HOLDINGS BERHAD OPERATING LANDSCAPE The market environment under which FGV operated in 2022 was one characterised by volatility and uncertainty as a result of a host of factors, including a surge in commodity prices, supply chain disruptions and the normalisation of interest rates. Fuelled by strong demand as the pandemic loosened its grip on the world, prices of energy and food increased to record levels, exacerbated by the Russia-Ukraine conflict and its impact on the agriculture sector and supply chains. Global economic growth slowed to 3.2% in 2022 from 6% in 2021, while in Malaysia, Gross Domestic Product growth hit 8.7% in 2022 compared to the 3.1% recorded in 20211. Nevertheless, inflationary pressures were felt, albeit mildly in comparison to other developed and developing nations worldwide. This was primarily due to Malaysia’s strong macroeconomic policies and resource management, which enabled Malaysia to effectively manage inflationary pressures. On the other hand, Bank Negara Malaysia raised its interest rates to be pari passu with the United States’ (US) interest rates to minimise the impact on the Malaysian currency, which brought the Overnight Policy Rate back to its initial level. Inflationary pressures resulting from higher input costs not only impacted consumers but also affected businesses. For example, FGV’s plantation business was impacted by the rise in fertiliser prices, mainly due to the Russia-Ukraine conflict, which crippled the supply of key fertiliser ingredients. We discuss the main macroeconomic trends that affected the world in 2022 in further detail below: The Surge in Commodity Prices Commodity prices remained elevated throughout the first half of 2022 but lost some ground towards the end of the year. The average fertiliser price increased by more than double in 2022 as compared to 2021 due to the soaring input costs and reduced production. However, Crude Palm Oil (CPO) prices normalised from record highs, falling from RM8,077 per MT in March 2022 to RM3,808 per MT in December 2022 due to the reversal of Indonesia’s palm oil export ban and the easing of the migrant worker shortage2. Cumulatively, this meant that FGV’s higher earnings were affected by the spike in fertiliser prices resulting in a 21% increase in CPO production cost in 2022 compared to the prior year. Global Trade Disruptions Pre-existing supply disruptions due to the pandemic were exacerbated by the prolonged Russia-Ukraine conflict, leading to severe physical and logistical bottlenecks. Global trade hit a record of USD32 trillion in 2022, but the 2023 outlook is expected to worsen due to tight financial conditions along with high transport costs amid the disruption of the global value chain3. Fortunately, the trade disruption is expected to ease over time as movement restrictions are lifted and borders are reopened. Widespread Food Security Concerns In 2022, many governments responded to supply disruptions by imposing temporary export bans or restrictions on critical agricultural products as a means to prevent food shortages in their respective countries. For example, India curbed the export of wheat and sugar, while Indonesia banned the export of palm oil and imposed a domestic market obligation on palm oil. Malaysia also banned the export of chickens following shortages caused by a lack of chicken feed. To put this in context, Malaysia’s food import bill has accumulated to RM482.8 billion over the last decade6. With the government looking into strengthening its food security, future opportunities may emerge that can be gradually capitalised on. High Inflation amid Challenging Fiscal and Monetary Policy Conditions The global inflation rate in 2022 accelerated to 8.8% compared to 4.7% in 2021, while in Malaysia, it rose to 3.3% in 2022 compared to 2.5% in 20214. The inflation in Malaysia was mainly driven by higher prices of agriproducts, supply chain disruptions and the weakening of the Malaysian Ringgit against the US Dollar (USD), similar to other currencies in most parts of the world as a result of the increase in interest rates by the US to curb inflation. Inflation prompted aggressive monetary tightening measure where the US Federal Reserve increased interest rates seven times in 2022 from a near 0% to 4.5%5. The aggressive tightening measures, although well-intended, will likely impact economic growth, with experts forecasting a recession in 2023. Overall, the available fiscal space to manoeuvre remains tight, especially in developing countries, as governments face high debt burdens following their unprecedented response to managing the COVID-19 pandemic. 1 World Economic Outlook - International Monetary Fund, October 2022, and Ministry of Finance, February 2023 2 Malaysian Palm Oil Board (MPOB), December 2022 3 United Nations Conference on Trade and Development, December 2022 4 World Economic Outlook - International Monetary Fund, October 2022, and Department of Statistics Malaysia, March 2023 5 US Federal Reserve, December 2022 6 Department of Statistics Malaysia, January 2023
RkJQdWJsaXNoZXIy NDgzMzc=