Analysis: The pain of food inflation puts emerging markets between a rock and a hard place

LONDON/ISTANBUL/CAIRO: As with millions of people in developing and emerging countries around the world, buying basic foods has gone from a necessity to a luxury for Selcuk Gemici.

The 49-year-old, who works at a car repair shop in Turkey’s biggest city, Istanbul, and lives with his wife and two children in his father’s house, says fresh produce is often out of stock. reach, her family living on pasta, bulgur and beans. .

“Everything has become so expensive that we can’t buy and eat what we want – we only buy what we can afford now,” Gemici said. “My children are not properly fed.”

Global food prices have soared for two years, fueled by COVID-19-related disruptions and inclement weather. Grain and oil supply shocks caused by Russia’s invasion of Ukraine hit an all-time high in February and then again in March.

Inflation rates have soared, with rising energy prices adding to the pressure. Turkey or Argentina with annual inflation of 70% and around 60% could be outliers, but the readings are in the double digits in countries from Brazil to Hungary. This makes US inflation of 8.3% modest by comparison.

Rising food prices are a hot topic in emerging markets, raising the risk of civil unrest with echoes of the Arab Spring and putting policymakers in a bind between intervening with fiscal support to ease the pain of their population or the preservation of public finances.

Food is the largest category in inflation baskets – the selection of goods used to calculate the cost of living – in many developing countries, accounting for around half in countries like India or Pakistan and on average some 40% in low-income countries, International Monetary Fund data shows.

Food producers have become more protective: India announced a ban on wheat exports over the weekend while Indonesia halted palm oil exports to control soaring prices at home in late April.

Soaring wheat and rising food prices are fueling inflation

And with the war in Ukraine disrupting not only food but also fertilizer supplies, food inflation could last longer, Marcelo Carvalho, head of global emerging markets research at BNP Paribas, told Reuters.

“It’s here to stay,” Carvalho said. “Food is very salient – ​​when there is a change in food prices, the perception of inflation is amplified – which fuels inflation expectations which are more easily unanchored.”

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For Um Ibrahim, a 60-year-old widow who sells scarves outside a mosque in the middle-class neighborhood of Madinet Nasr in Cairo, the Egyptian capital, feeding her four children has become much more difficult.

“All prices have gone up – clothes, vegetables, poultry, eggs – what am I going to do?” she asked, spreading her dishes on a tablecloth.

Egypt, one of the world’s biggest wheat importers, saw inflation soar more than 13% in April and is expected to raise interest rates again at a meeting this week after devaluing the currency by 14% in mid-March.

Emerging market policymakers, who have raised interest rates by hundreds of basis points cumulatively since 2020 to dampen price pressures and secure a higher US bond yield premium for investors, must find a balance between controlling inflation and maintaining fragile growth at a level during periods of rising global interest rates.

Emerging economies could grow by just 4.6% this year, according to World Bank forecasts, down from an earlier forecast of 6.3%.

Emerging Markets Inflation https://fingfx.thomsonreuters.com/gfx/mkt/mopanzmmqva/EMper cent20inflationper cent20pressures.PNG

Polina Kurdyavko, head of emerging debt at BlueBay Asset Management, says governments have three options: give consumers bigger subsidies or bite the bullet to let prices rise and deal with inflation and social unrest, or do something in between.

“There are no easy solutions,” Kurdyavko said.

A series of countries have introduced measures: Turkey raised the minimum wage by 50% in December to deal with a currency crash and soaring inflation. Chile will also raise the minimum wage this year.

The South African government is debating whether to increase a social assistance grant launched in 2020 and make the program permanent.

Economists fear that emerging economies will face a new wave of unrest following the latest food price hikes. North Africa, where food inflation contributed to the Arab Spring revolts a decade ago, looked particularly vulnerable, said Beata Javorcic, chief economist at the European Bank for Reconstruction and Development.

“The irony of this war is that while everyone expected Russia to have a crisis, it is actually the countries of North Africa that are closer to having an emergency. due to high food prices,” she said.

But the pain is expected to spread further: Three-quarters of countries expected to be at high or extreme risk of civil unrest by the fourth quarter of 2022 were middle-income countries, the cabinet said last week. risk consultancy Verisk Maplecroft.

Easing inflationary pressures through spending will have a fiscal cost that could lead to problems later, BNP’s Carvalho said.

“In emerging markets, tax sins are forgiven but not forgotten,” he said. “For the past two years, everyone felt like they had a blank check…partly because rates were so low. Now that interest rates are going up, it’s getting a little more complicated .”

(Reporting by Karin Strohecker; Additional reporting by Jorgelina do Rosario; Editing by David Evans)

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