Analysis: Pain in food inflation keeps emerging markets in limbo

LONDON/ISTANBUL/CAIRO, May 17 (Reuters) – Like millions of people in developing and emerging market countries around the world, buying staples has gone from a necessity to a luxury at Selcuk Gemici.

The 49-year-old, who works at an auto repair shop in Turkey’s largest city Istanbul and lives with his wife and two children at his father’s home, said the fresh produce is often his family’s source of pasta, bulgur and beans. Class for living. .

“Everything has become so expensive that we can’t buy and eat what we want — we only buy what we can afford right now,” Gemici said. “My child is not getting proper nutrition.”

Global food prices have climbed for the second year in a row, driven by COVID-19 disruptions and weather concerns. The supply shock to grains and oil from Russia’s invasion of Ukraine sent them to record highs again in February and March.read more

Soaring inflation and rising energy prices added to the pressure. Turkey or Argentina, with annual inflation around 70% and 60%, may be outliers, but countries from Brazil to Hungary have double-digit readings. That makes the US inflation rate of 8.3% look tame by comparison.

Rising food prices are a hot topic in emerging markets, raising the risk of civil unrest sparked by reverberations of the Arab Spring and pitting policymakers between stepping in to provide financial support to ease the suffering of their populations or protect government finances.

Food is the largest single category in the inflation basket – commodities used to calculate the cost of living – in many developing countries, about half in countries such as India or Pakistan, and about 40% on average in low-income countries, the International Monetary Fund Organizing data display.

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

Marcelo Carvalho, head of global emerging markets research at BNP Paribas, told Reuters that food inflation is likely to persist for longer as the war in Ukraine disrupts not only food supplies but also fertilizer supplies.

“It’s here to stay,” Carvalho said. “Food is very prominent – when food prices change, people’s perception of inflation is amplified – which leads to inflation expectations that are more easily broken.”

hot spot

Um Ibrahim, a 60-year-old widow who sold hijabs in front of a mosque in Madinet Nasr, a middle-class district in the Egyptian capital Cairo, made feeding her four children more difficult.

“Everything has gone up—clothes, vegetables, poultry, eggs—what should I do?” she asked, placing her cutlery on a cloth.

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

Emerging market policymakers have cumulatively raised interest rates by hundreds of basis points since 2020 to rein in price pressures and secure a rising premium for bonds to investors in U.S. yields, who must maintain a balance between reining in inflation and maintaining fragile growth. balance. A period of rising global interest rates.

The World Bank forecasts emerging economies could grow just 4.6% this year, compared with a previous forecast of 6.3%.

Polina Kurdyavko, head of emerging markets debt at BlueBay Asset Management, said the government has three options: offer consumers bigger subsidies, or bite the bullet and let prices rise and face inflation and social unrest, or do something in between.

“There is no easy solution,” Kurdiavko said.

Many countries have already taken steps: Turkey raised the minimum wage by 50% in December in response to a collapsing currency and soaring inflation. Read moreChile will also raise the minimum wage this year.read more

The South African government is debating whether to increase the social assistance grants launched in 2020 and make the scheme permanent.read more

Economists are concerned that emerging economies are facing a new wave of turmoil due to the recent rise in food prices. Food inflation was a factor in the Arab Spring uprisings a decade ago, and North Africa looks 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 a crisis in Russia, the North African country is actually closer to an emergency because of high food prices,” she said.

But the pain is expected to widen further: Risk consultancy Verisk Maplecroft said last week it expects three-quarters of countries to be at high or extreme risk of civil unrest by the fourth quarter of 2022.

BNP Paribas’ Carvalho said spending to ease inflationary pressures would have a fiscal cost that could spell trouble down the road.

“In emerging markets, fiscal sin is forgiven, but not forgotten,” he said. “Over the past few years, everyone felt like they had a blank check … in part because interest rates were so low. Now interest rates are moving Going up, it gets a little trickier.”

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

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