Rampant Food And Fuel Inflation Spells Disaster For Emerging Economies

Rampant Food And Fuel Inflation Spells Disaster For Emerging Economies

Almost 60% of oil-importing emerging-market and developing economies have seen an increase in domestic-currency oil prices since Russia invaded Ukraine.
Emerging economies must get ready for a period of even higher volatility in global financial and commodity markets.
The World Bank has predicted that energy prices will decline by 11% in 2023 after surging 60% in the current year.

The United States is currently grappling with elevated commodity prices including high fuel and food prices. Although gasoline prices have fallen off significantly from their $5+ peak, they are still 10.6% higher than a year ago; diesel is 46.5% higher while the cost of food is up 11.4% in the past year, making for the highest annual increase in 23 years. Experts say that inflation in the U.S. might have peaked in the summer and fuel prices will decline another 11% in 2023 but it will still take years for prices to come down from the highs they’ve hit this year. While that does not sound very encouraging, the problem is much worse in developing economies. According to the World Bank’s latest Commodity Markets Outlook report, the shrinking value of currencies in most developing countries is driving up food and fuel prices in ways that are likely to continue to deepen the crises that many of them already face.

Almost 60% of oil-importing emerging-market and developing economies have seen an increase in domestic-currency oil prices since Russia invaded Ukraine, courtesy of currency depreciations, according to the World Bank.  

Further, nearly 90% of these economies have recorded a larger increase in wheat prices in local-currency terms compared to the rise in U.S. dollars. 

On a regional basis, food-price inflation in South Asia averaged more than 20% during the first three quarters of 2022. Other regions including Latin America and the Caribbean, the Middle East and North Africa, Sub-Saharan Africa, and Eastern Europe and Central Asia, have seen food price inflation average between 12% and 15%. East Asia and the Pacific have fared better than most developing nations partly because of broadly stable prices of rice, the region’s key staple.

“The combination of elevated commodity prices and persistent currency depreciations translates into higher inflation in many countries,” the World Bank notes, warning that policymakers in emerging markets and developing economies “have limited room to manage the most pronounced global inflation cycle in decades”.

It’s about to get worse. These emerging economies need to “get ready for a period of even higher volatility in global financial and commodity markets,”Ayhan Kose, Director of the World Bank’s Prospects Group and EFI Chief Economist, writes. 

Lower Fuel Prices

In the U.S., the World Bank has predicted that energy prices will decline by 11% in 2023 after surging 60% in the current year following Russia’s invasion of Ukraine. The World Bank has projected that Brent crude will average $92 a barrel in 2023 before easing to $80 in 2024–still well above the five-year average of $60.

According to the bank, both natural gas and coal prices will decline in 2023 from record highs in 2022, but U.S. natural-gas prices and Australian coal are still expected to be double their average over the last five years by 2024. Meanwhile, European natural gas prices could be nearly four times higher.

The WB further predicted that Russia’s oil exports could drop by as much as 2 million barrels per day due to the EU’s sanctions on Russian oil products, coupled with restrictions on insurance and shipping, due to take effect on Dec. 5.

Those projections appear to be in-line with a recent Moody’s research report.

According to the report, industry earnings will stabilize overall in 2023, but remain below levels reached by recent peaks. The analysts note that commodity prices have declined from very high levels earlier in 2022, but have predicted that prices are likely to remain cyclically strong through 2023. This, combined with modest growth in volumes, will support strong cash flow generation for oil and gas producers.

Moody’s estimates that the U.S. energy sector’s EBITDA for 2022 will clock in at $623B but fall to $585B in 2023. The analysts say that low capex, rising uncertainty about the expansion of future supplies and high geopolitical risk premium will, however, continue to support cyclically high oil prices. Meanwhile, strong export demand for U.S. LNG will continue supporting high natural gas prices.

One particular standout from that report is how bullish the analysts are about the Oil Field Services (OFS) sector.

“Rising demand for oilfield services (OFS) amid some growth in drilling and completion activity will continue to boost pricing power and will support material growth in earnings for OFS companies,” the analysts wrote.

By Alex Kimani for Oilprice.com

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