Page 73 - TURKRptJun22

bne June 2022
To make matters worse, a very large percentage of the above- mentioned exports go to emerging markets. Countries such as Lebanon and Egypt (the world’s largest importer of grain), as well as the entire sub-Saharan region, are highly dependent on Russian and Ukrainian exports. But also in the microchips sphere: did you know that two Ukrainian factories supplying neon for the production of lasers that make microchips were closed due to the war?
Energy supply disruption
The Ukrainian war has further reinforced tightness in oil
and gas markets, which has had a considerable effect on hydrocarbon prices globally, particularly in Europe. Given that ammonium fertiliser is made from gas, and almost 40% of global potash exports from Russia and Belarus (as shown in the graph above), the world will see a sharp reduction in their use in 2022. Many producers of ammonium, including the largest in Hungary, have stopped production altogether, due to the volatility of energy prices.
If farmers don’t use fertiliser, they will see their yields fall; if they do use fertiliser, they will have to pass through input costs. Either way, the pressure on agriculture prices will accelerate. Although the chart below shows massive rises in agricultural prices, in my opinion, this process of increasing agricultural prices still has a long way to go.
Agricultural commodity prices near record levels
Opinion 73 further complicate central banks’ efforts – to use the
expression – like taking a camel through the eye of a needle.
Chairman of the US Fed Jerome Powell has announced his intention to carry out what would amount to the most severe monetary tightening since the early 1980s. This would likely cause 10-year Treasuries rise from under 3% to well over 5%.
Whenever the US raises interest rates, emerging markets suffer greatly, as they are forced to hike interest rates by at least that much, to avoid capital outflows. Many emerging countries have already been forced to raise interest rates substantially, and once again, in my view, the trend will go further.
Debt servicing is becoming increasingly difficult. Sri Lanka has already defaulted. Pakistan and Peru, also highly indebted, have experienced outbreaks of violence or mass protests.
Emerging market banks are highly exposed to sovereign debt (usually bonds of their own national governments):
Banks' domestic sovereign debt exposure is as at 15-year high.
Government debt holdings of banks as percent of total assets.
Source: IMF, Monetary and Financial Statistics; IMF staff calculations.
As bond yields rise, government bond prices plummet, impairing banks’ Tier 1 capital. A vicious circle may ensue. Weaker banks will lend less, contributing to the contraction of the economy.
Unfortunately, the average person in emerging countries already spends a huge percentage of their income on foodstuffs and owns very few assets that might help withstand inflation. It is the average person who will feel the brunt of the phenomena discussed in this article. Remember that it was food shortages that triggered the Arab Spring roughly
a decade ago.
The butterfly effect is hard to prove, but over time, the Ukrainian war may actually cause more deaths from starvation in the world’s poorest countries than war deaths in Ukraine.
Source: World Bank
Energy price increases also have a negative effect on GDP growth and a general inflationary effect. Most post-war recessions coincided with energy price increases.
Monetary effects
The aforementioned supply chain issues and commodity price rises have all contributed to accelerating inflation. This, in turn, has mobilised several central banks towards monetary tightening. Much has been written about the difficulty central banks will have in reducing inflation without causing a recession, while they target the fabled “soft landing”. Never have current inflation levels been cured without inducing a recession. The ongoing problems of COVID (and associated lockdowns) and the Ukrainian war (and associated sanctions)
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