Higher commodity prices a boon to Malaysia's current account balance - Fitch Sulhi Khalid theedgemarkets.com April 05, 2022 16:25 pm +08 KUALA LUMPUR (April 5): Higher commodity prices caused by the Russia and Ukraine crisis will provide a boost to Malaysia's current account balance, according to Fitch Solution Country Risk & Industry Research. In a statement on Tuesday (April 5), the international rating agency said it forecasts Malaysia's current account balance to come in at 1.9% of gross domestic product (GDP) in 2022, wider than the 1.6% recorded in the previous year. It added, Malaysia is one of the two markets in Asia to have revised their 2022 real GDP growth forecasts on the back of higher commodity prices due to the geopolitical tension. "The goods trade balance will likely improve in light of elevated prices,in particular, palm oil and petroleum, as well as their related products. "Malaysia's services balance is also likely to improve as a result of travel restrictions being lifted, in particular with Singapore, which will likely support the tourism sector. "The key reason behind our relatively strong current account balance forecast is the likely boost Malaysia's exports will receive from the high commodity prices that have resulted from the Russia- Ukraine crisis. In particular, crude palm oil and crude oil prices have seen a stellar run of price growth, averaging 59.1% year-on-year (y-o-y) and 69.1% y-o-y, respectively, between January 2021 and January 2022," it said. Fitch highlighted these two categories, as well as related products, make up more than 16% of total exports. Over the same period, exports' growth averaged 25.1% y-o-y, compared with the 5% average in the five years between 2016 and shared. "However, this boost likely be partly offset by the larger import bill that Malaysia is likely to incur over the course of 2022. "This will be exacerbated by the government implementing additional price controls for food on top of existing fuel subsidies, which support demand for these goods," Fitch observed.On the financial account, the rating agency said portfolio and other investments are likely to be subdued by an increasingly hawkish US Federal Reserve, which is likely to hike rates by five more times in 2022, making emerging-market assets, including Malaysia's, less attractive by comparison. Fitch also pointed out that Malaysia stands to benefit from being a key part of the global semiconductor supply chain, particularly lower-end chips used in smartphones and automobiles, presenting a strong incentive for greater investment in this sector given the global semiconductor shortages. "This should see foreign direct investment (FDI) growth continue to accelerate. FDI amounted to 2.1% of GDP in 2021, growing from just 0.2% of GDP in 2020," it said.

1b) Given that the Federal Reserve is likely to increase the interest rate in the U.S. in 2022, explain why the prediction of the international Fisher effect regarding the MYR/USD exchange rate is different to the prediction provided in the article? [10 marks]