Looming global food crisis marks another shock

The war in Ukraine is sending yet another shockwave globally and will hit emerging markets at a challenging time. Over our forecast horizon, tighter global financial conditions and weaker external demand combined with high inflation all weigh on the EM economic outlook. In longer-term, demographic dividend and technological ‘leapfrogging’ continue to support the case for investing in emerging markets, but ramifications from the pandemic and the war in Ukraine could hamper such investments if western businesses resort to broad-based near-sourcing of production and supply chains.

Economic activity in EM Europe is expected to contract this year while growth in EM Asia will slow down markedly. Same time, a growth rate at around 4% in Sub- Saharan Africa is insufficient to produce better living standards for an average African. Considering the recent weakness in the Chinese economy, we see downside risks to IMF’s forecast of 5.4% growth for Asia this year. Weaker momentum in the Chinese manufacturing sector will also weigh on Latin American commodity exporters, and while the region still benefits from economic strength in the US, historically, economic downturns tend to spill over with a one-quarter lag.

The war in Ukraine has severely disrupted supply chains of agricultural products. Russia and Ukraine combined have a substantial market share in several cereals such as wheat and barley, and a dominating market share in the global sunflower oil market. Resulting both from weather-related shocks as well as from sanctions and warrelated disruptions in logistics in and around Ukraine, the FAO food price index has risen to all-time highs driven by higher oils and cereals prices. Concerning signals continue to mount as food-producing countries have recently started to implement export bans to ensure domestic food security and prevent price increases in the homeland.

The situation has similarities to 2008-09 when the world last grappled with a food crisis. Most EM and developing economies rely on food imports to feed their growing population. As the global food crisis looms, food-importing low-income countries in Africa and Asia are the most exposed to high prices and disruptions in trade. However, as most of Ukraine’s wheat exports targets countries in Middle East and North Africa, countries like Egypt, Turkey and Lebanon are also vulnerable.

The continuous need to support the most vulnerable populations in the context of a protracted pandemic, and now, in the context of rising costs of living, will challenge EM public finances at a time when overall debt levels are at all-time highs and financing costs are rising on the back of tighter global financing conditions. The risk of further capital outflows raises the risk of debt rollover problems and local currency depreciation particularly for economies with unsustainable debt levels and twin deficits.

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