Recurring food crises to worsen emerging markets' credit risks, Moody's says

Recurring food insecurity shocks will worsen emerging markets' credit risks, economic strength, public finances, inequality levels and current account deficits, Moody's Investors Service has said.

Low-rated frontier markets across Africa and the Middle East, along with parts of South Asia, will remain the most vulnerable to future food security crises due to water scarcity and their vulnerability to severe weather, the credit rating agency said in report on Tuesday. Mozambique, Rwanda, Zambia and Ethiopia are among the most exposed countries, it found. ‘’With food shocks exacerbating macroeconomic challenges and social risks, acute food insecurity will be a recurrent source of credit risk for many emerging market sovereigns, in particular, those most exposed and vulnerable to physical climate risk,” said Mickael Gondrand, an analyst at Moody’s.

“Global food price volatility has increased over the past two decades, with the current spike the third in 15 years.’’

The report is part of a growing chorus of warnings about global food insecurity and its devastating impact on the most vulnerable groups of people and less-developed economies.

Last week, the World Bank said that soaring food prices would weigh on the growth of Mena economies this year, as double-digit food inflation hits poorer households and intensifies food insecurity in the long term.

Global food prices soared after Russia’s invasion of Ukraine in February last year. While they have since fallen from the record highs reached in March 2022, food prices are expected to remain at historically high levels throughout 2023, Moody's said.

This reflects risks related to Ukraine's crop production and distribution, tight global supplies, weather volatility and disruptions to fertiliser supplies, it said.

Rising global demand for food, geopolitical disruptions and climate risks will keep global food security fragile and vulnerable to shocks, Moody's said.

Global demand for food is expected to keep increasing on the back of continued, although slowing, world population growth, as well as rising incomes and urbanisation.

Geopolitical conflict disrupts agricultural production and food trade while rising global temperatures, changing rain patterns and increasingly frequent climate shocks such as droughts, wildfires, floods and heatwaves are already making food production less reliable.

In 2022, the surge in global food prices hurt emerging and frontier markets across all regions, translating into higher domestic prices and eroding real incomes, Moody's said.

Problems arising from food supply shocks are bigger for emerging and frontier markets, where food accounts for a higher share of household spending.

The gap between overall and food price inflation as of February 2023 was highest in Lebanon, Egypt and Rwanda, according to the report. “Food insecurity and climate shocks hampering agricultural production can have long-lasting implications for economic strength,” Moody's said.

“Food scarcity and higher food prices can force low-income households to reallocate resources away from health and education, damaging human capital and, ultimately, the economy’s long-term growth potential.”

The food price surge will also affect countries' fiscal strength at a time of rising debt for many emerging market economies, Moody's said.

Government policies to offset the impact of higher food prices has weighed on public finances already weakened by the pandemic.

A higher import bill for net food and agricultural goods importers has added to pressures on these countries' current account deficits and foreign exchange reserves, increasing external vulnerability risks, Moody's said.

Food shocks can also increase sociopolitical risks as higher food prices worsen existing inequalities and potentially lead to escalating social unrest, the credit rating agency said.

“Climate shocks and food insecurity contribute to migration and population displacement, and can spark, as well as amplify cross-border conflicts over land resources and water access,” the agency warned.

“Competition for agricultural resources can be both a cause and a consequence of geopolitical rivalry, particularly when concerns about insecurity of productive land, water or nutrients are prevalent.”

While effective support measures and timely financing have helped to reduce some of the negative social and economic costs of the current crisis, they will not fully offset the negative credit impact for the most exposed countries, Moody's said.

The food price crisis will spur regional and international efforts to improve food security and supply chain resilience.

But weak governance in many of the most-affected countries, as well as the difficulty of maintaining long-term international support, will hamper these policy efforts, the report said.