MUFG: Examining the impact of higher food prices in EMs

April 4, 2022

Inflation risks remain front and centre. Whilst there appears to be an over-appreciation of risks stemming from the energy inflation channel, there equally seems to be an under-appreciation of the impact of what’s to come in terms of food inflation across EMs.

High global food prices, exacerbated by Russia's invasion of Ukraine, will have significant negative implications for consumption, government finances and the balance of payments. We believe most EM central banks are unlikely to respond to largely supply-driven higher food prices unless they see a significant risk of inflation expectations feeding into core, and rather non-monetary policies through fiscal-induced subsidies as the more preferred approach to mitigate the food inflation shock.

FX views

EM FX have continued to rebound over the past week resulting in our EM FX index rising closer to levels that were in place prior to the Ukraine conflict – the bullish trends for commodity-related EM currencies have continued over the past week with bearish forces such as fresh China lockdowns not proving sufficient to trigger reversals in commodity-related FX.

Week in review

In a first sign of how corporate activity has performed since the Ukraine war, Russia’s PMI collapsed in March (down 4.5ppt to 44.1), though the rest of EM EMEA has held up surprisingly well. Egypt has received USD12bn in support from GCC neighbours which offers immediate balance of payments support. Czech Republic hiked rates by 50bp with prospects of utilising FX tools to lower inflation. Poland’s inflation surged to 10.9% y/y in March on higher food and energy prices. Finally, Saudi Arabia’s current account ended 2021 at a robust 6.7% of GDP.

Week ahead and calendar

In the week ahead, Russia’s CPI reading for March will offer the first glance ramifications of the war on prices (MUFG: 17.1% y/y; consensus 17.0% y/y), whilst we also have rates decisions in Poland (MUFG: +50bp to 4.00%) and Romania (MUFG: +25bp to 2.75%).

Forecasts at a glance

We continue to expect the easing of pandemic effects to supporting recoveries, although the going will get tougher in EMs – key risks stem from a tightening in global financial conditions and a lower gear in China.

Core indicators

EMs witnessed the fifth consecutive week of outflows (USD-1.4bn), owing to a continuation of broad contagion from the geopolitical crisis as well as an ongoing tightening in global liquidity conditions.