Global food price ‘shock’ magnifies risks in emerging markets

Ratings agency S&P Global said investors had underestimated the magnitude of the “global food shock” that will reshape public finances and spark social unrest in emerging market countries in the coming years.

Food prices have soared since Russia’s invasion of Ukraine blocked the flow of agricultural products in one of the world’s largest exporters of wheat and other grains, as well as sunflower oil. That, combined with the ensuing surge in oil prices, could weigh on the credibility of a range of emerging economies, S&P Global said in a report on Wednesday.

“Rising energy and food prices pose further balance of payments, fiscal and growth shocks to most emerging markets. This adds to pressure on their public finances and ratings, which are already negatively impacted by the global pandemic,” said ratings firm Europe, Inc. Frank Gill, an expert on Middle East and African sovereignty, said.

While many sovereigns most vulnerable to higher food price pressures already have low credit ratings, negative economic or political impacts of a food shock could lead to further downgrades, S&P Global said.Emerging market bonds have stabilized in recent days after their worst start to a year decades because of rising global interest rates.

Investors in emerging market bonds say the cost of food has become a looming problem in poorer countries since the war. “For emerging markets, food is an important part of your disposable income. If you’re a big importer or a poorer country, it’s a pain. It’s an issue that can bring down the government,” Legal & General Investment Management Uday Patnaik, head of emerging markets debt, said.

Bar graph of imports as a share of GDP (%) showing the top importing countries for six major food items*

Sri Lanka, of which default The incident last month about its international debt is an example of how soaring food prices have led to a reduction in foreign reserves and an increase in protests and social instability. The government is facing severe shortages of essential goods, appeal for food aid From a food bank operated by SAARC.

“Before the Ukraine conflict, Sri Lanka was already very miserable. But [the food price shock] was the straw that broke them,” Patnaik said.

Low- and lower-middle-income countries in Central Asia, the Middle East, Africa and the Caucasus will be hardest hit by direct shocks to food commodity markets, the report said. In the Caucasus, Tajikistan and Uzbekistan are highly dependent on food imports, usually buying most of their wheat from Kazakhstan, which has export restrictions. Among Arab countries, Morocco, Lebanon, Egypt and Jordan depend on Ukraine for food supplies and are vulnerable to war-induced price disruptions.

Given the limited ability of many of these countries to substitute imports with substitutes, adjustments to price shocks will reduce food supplies, increasing the risk of social unrest, the report said.

Not all emerging market debt was affected, however, with rising commodity prices benefiting raw material producers. “For Middle Eastern countries, you might pay more for agricultural products, but that’s more than offset by crude oil prices,” Patnaik said.

While local currency bonds in the JPMorgan GBI-EM index have delivered a negative 10.5% year-to-date total return in dollar terms, there is wide variation across countries, said Brett Diment, head of global emerging markets debt at Abrdn.

Brazil’s debt, for example, has risen due to Brazil’s status as a major agricultural exporter. After the invasion, Abrdn reduced investment in large food importers such as Egypt, but increased investment in agricultural producers such as Brazil and Argentina. “We’ve seen the impact of higher food prices on the market,” Diment said. “Egypt devalued its currency in March, but Argentina, Brazil and Uruguay, big food exporters, all performed very strongly.”

Movements in bond and foreign exchange markets “predict that we won’t see another rise in food prices,” he said, as the issue has risen to the top of the global political agenda, leading to optimism over possible exports of grain and vegetable oils from Ukraine manner. Without that, he added, “we could see fragile states get worse again”.

S&P Global said the rising cost of inputs such as fertilizers and machinery is creating additional costs for agricultural production. Russia, a major fertilizer exporter, is likely to continue to impose export controls, and increased competition for key agricultural inputs in 2022 and 2023 will limit production growth, prolonging the impact of high food prices.

“International markets appear to view the impact of the Ukraine war on food prices as a single-year shock,” the report said. “In contrast, we believe the shock to food supplies will persist into 2024 and beyond.”