Adverse weather threatens to drive Southeast Asian food inflation

The effects of fires in Sumatra is having an impact on Kuala Lumpur

Analysts have been predicting price rises and a slowing of economic growth in Southeast Asia as the drought that has gripped the region since the start of the year continues to disrupt water supplies, and Indonesian fires rage.

Authorities in Malaysia’s capital, Kuala Lumpur, imposed water restrictions on residents this month, while neighbouring Singapore has been without rain since January 13—a record. And Indonesian officials in Sumatra’s Riau province have been forced to call a state of emergency as forest fires caused by dry conditions have spread a fog over wide swaths of the region.

Palm oil

While watching the cost of palm oil, his country’s biggest crop, shoot up, Malaysian international trade minister Mustapa Mohamed said the drought may bring slower economic growth solely from “discomfort” if it continues much longer.

Malaysia and Indonesia account for 86% of the world’s palm oil output, according to figures released by the US Agriculture Department. With the commodity’s prices already at their highest levels in almost five months due to dry weather hampering output, there is a chance they will continue to surge beyond the RM3,000 (US$915) mark per tonne before the year reaches its midpoint—the highest since 2012. 

The impact will be on growth and inflation,” said Wai Ho Leong, a Singapore-based senior regional economist at Barclays Plc, told Bloomberg.

The rise in vegetable and cooking oil prices will add to inflation concerns in Malaysia, which is already trying to contain a jump in inflation expectations.”

Water the issue

Malaysia’s government is preparing funding to help the state of Selangor nationalise water assets in the region surrounding Kuala Lumpur. Water rationing began in parts of Selangor this week after the drought drained reservoirs, The Star newspaper reported Malaysia’s water services commission as saying.

Meanwhile, Indonesia’s coffee shipments may decline by almost one-fifth this year, making 2014 the least productive in three years, this time because of a deluge of rain in the West Madura and Mudi fields in East Java. 

Weather-related price increases may be particularly unfavourable for legislators running for office this year in Indonesia, Leong of Barclays said. “Any rise in food prices on the street will be an election issue,” he told Bloomberg.

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