Malaysia: Corruption highly correlated to inflation

KUALA LUMPUR: The heavy emphasis on environmental, social and governance (ESG) standing of countries implies that corruption levels have a high correlation to a country’s inflation and exchange rates today, say analysts.

This is more pertinent and obvious especially for a trading nation such as Malaysia.

Exchange rates are influenced by financial flows, which are in turn increasingly being affected by a country’s overall ESG standings internationally, analysts opined.

“Increasingly, international finance companies have an ESG overlay when determining investments.

“This means that they cannot invest in countries that have a poor ESG rating or record. They just can’t do it,” said Malaysia Institute of Economic Research senior fellow Prof Geoffrey Williams.

He said this at UOB Kay Hian’s economic webinar on “Inflation: Drivers and Policy Implication” yesterday.

“Case in point is that although we have recently seen a big spike in foreign direct investments (FDIs), we have also seen a decline in net inflows from 2016 – this means more money is going out than it is coming in (over time),” he added.

In a related matter, Williams noted that public perception on a country’s ESG ratings such as corruption or modern day slavery are important.

These are rising in importance with the heavy emphasis placed on ESG and many countries are competing for such FDI inflows, he said.

“Eight Malaysian companies have their products banned for accusation of slavery. There have also been instances of supply chain companies being banned by multinational companies for slavery,” he said.

Williams said this meant that when there is a buying opportunity, despite good valuations in these companies (some of which are public-listed), they would just be overlooked.

“Whatever we feel about it in Malaysia, these are the things and matters that investors in London, New York and Tokyo will look at and just walk away.

“They will also not get involved in a debate on whether it is true or not or whether the criteria is fair or not.

“This is because investors have plenty of options in plenty of other places or companies and these are very, very important,” he added.

Meanwhile, country economist at the World Bank, Shakira Teh Sharifuddin, said there have been suggestions for a relook at the basket of items that constitute the weightings of consumer price index (CPI), which is the main indicator of inflation levels.

“It’s not about whether the CPI is accurate or not. The CPI measures what it is intended to measure. But is it meaningful or is it useful?

“It needs to be more representative of the overall consumption patterns of Malaysians, bearing in mind that how people consume differs from person to person.

“How CPI is an actual representation of consumption patterns is also influenced by factors such as location,” she added.

Shakira said those who lived in Kota Baru, Kelantan, for example would experience a different price increase compared with those who lived in the Klang Valley.

Meanwhile, Williams believes it is quite unlikely that there would be an actual cut in government spending, given the upcoming general elections.

“With the Budget announcement coming up, we may well see a bigger allocation by the government this year.

“This is why I am very much in favour of supply side reforms. Not to slash federal or state government budgets but to do it in a better way that would allow consumers and companies to keep more of their own money; to spend the money as they choose and reduce the overall tax burden,” he said.

Source: https://www.thestar.com.my/business/business-news/2022/08/24/corruption-highly-correlated-to-inflation