MISC BERHAD 54 INTEGRATED ANNUAL REPORT 2023 55 www.miscgroup.com STRATEGIC REVIEW SECTION 6 Our Operating Environment The Economy What Happened in 2023? How We Were Impacted MISC implemented various strategic financial management strategies, including maintaining a high fixed-to-floating rate borrowings ratio, which has been instrumental in navigating the market volatility. Additionally, the Group has tactically deployed excess cash to support projects under construction, thereby optimising financing cost while maintaining our liquidity position. Fundamentally, MISC’s long-term charters and other sources of secured revenue with strong counterparties have enabled us to generate sustainable and recurring income over the years. Additionally, the Group’s diversified portfolio of businesses protects us against market volatility. Throughout the year, MISC prioritised the efficient execution of existing projects while being selective in pursuing investment opportunities. This involved a deliberate focus on pursuing long-term contracts with strategic and reputable clients. Although risks remain, MISC is well-positioned for growth based on the visibility of our cash flows from operations. This allows us to plan our growth to meet our strategic goals, even in challenging economic circumstances. Our Operating Environment Geopolitics What Happened in 2023? The Russia-Ukraine war and conflicts in the Middle East, will continue to cast a shadow over global economic recovery. While the uncertainties remain due to sanctions and trade shifts, these geopolitical conflicts across regions could possibly shift the power balance among countries and potentially reshape the global economy in the short-term. Moreover, 2024 is set to be the biggest election year in history with more than 50 countries to hold national elections. Post elections, a broad range of policy outcomes are expected to influence governments’ spending, tax and foreign policies, among others. The growing realignment of geopolitical allies, which arises from the ongoing tensions, is contributing to the risk of larger and broader conflicts. This indicates a trend towards the emergence of a more polarised world. The post-globalisation era will give rise to a new political order, characterised by power competition amidst geopolitical tensions and trade wars. This may result in potential supply chain repositioning. How We Were Impacted The geopolitical conflicts have exposed the shipping sector to operational safety and security risks. The impact is also seen in longer tonne-miles due to rerouting of vessels, as well as an increase in protection and indemnity (P&I) insurance premium. Our long-term charters and secured revenue with strong counterparties have enabled the Group to generate sustainable and recurring income over the years. Additionally, our diversified portfolio of businesses protect us against market volatility. The Group closely monitored the developments of major geopolitical conflicts and took necessary measures to ensure the safety of our seafarers. Heightened geopolitical tensions in 2023, including the ongoing Russia-Ukraine war and escalating conflicts in the Middle East during the fourth quarter, exacerbated disruptions to global stability and trade, particularly in the energy sector. Meanwhile, the BRICS organisation, which originally consists of Brazil, Russia, India, China and South Africa, invited more countries to join the alliance. At the same time, more countries are exploring currencies other than the US dollar for international trade. SHORT TO MEDIUM-TERM As uncertainties are expected to remain, global GDP is forecasted to grow between 2% to 3%. High inflation rates are expected to stabilise post 2025, primarily attributed to the intervention by central banks that resulted in interest rates and monetary policies nearing cyclical peaks. By the end of the decade, China is expected to be the largest economy, followed by the US and India. Over the next 10 years, the Asia Pacific region will grow to account for approximately 40% of the global GDP. Outlook The global economic landscape in 2023 witnessed a moderate recovery, despite the high interest rates environment. According to International Monetary Fund (IMF)’s World Economic Outlook, January 2024 issue, global GDP growth in 2023 is estimated at 3.1%, a decline from 3.5% recorded in 2022. The US Federal funds rate climbed to the highest level since 2007, before stabilising at 5.33% in the fourth quarter of 2023. Similarly, the US 1-year and 10-year treasury notes touched the 5% mark, also the highest levels since 2008, resulting in elevated borrowing costs worldwide for both, businesses and households. Source: The US Federal Reserve US Federal Funds Rate Jan-24 Jan-23 Jan-22 Jan-21 Jan-20 Jan-19 Jan-18 Jan-17 Jan-16 Jan-15 Jan-14 Jan-13 Jan-12 Jan-11 Jan-10 Jan-09 Jan-08 Jan-07 5.33% 6.00 5.00 4.00 3.00 2.00 1.00 0.00 % Material Matters Key Capitals Risks Financial Performance Geopolitical Instability Project Management F Financial Capital Material Matters Risks Financial Performance Geopolitical Instability Project Management Health and Safety Governance and Integrity Health and Safety Security Key Capitals F Financial Capital P Physical Capital Outlook
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