Sarah El Safty, Ezgi Erkoyun, Karin Strohecker

LONDON/ISTANBUL/CAIRO (Reuters) – Like for millions of people in developing and emerging market countries around the world, shopping for staple foods has turned from a necessity into a luxury for Selcuk Gemici.

He is 49 years old and works at an auto shop in Istanbul, Turkey. His wife, two children, and his mother live in the house of his father. Fresh produce can be difficult to find as his family eats pasta, bulgur, and beans.

Gemici stated, “Everything has become so costly that we can’t buy and eat whatever we like – we buy only what we have the means to afford right now.” Gemici: “My children don’t get enough nutrition.”

Two years of COVID-19 disruptions have caused global food prices to rise. The supply shocks that Russia caused to oils and grains saw them reach an all-time high in February and March.

The inflation rate has risen dramatically, and energy price increases have added to the pressure. Turkey or Argentina might have an average annual inflation rate around 70%, while Argentina is at 60%. But readings in other countries like Brazil and Hungary can be double-digits. This makes the 8.3% U.S. inflation seem modest.

Rising food costs are an emerging market hot topic, increasing the risk for civil unrest. This raises the echoes from the Arab spring. It also puts policy makers in a dilemma between providing fiscal support that will ease the suffering of their populations or preserving government finances.

According to International Monetary Fund data, food is the most important category in inflation baskets, which are the goods that determine the cost-of-living. In many developing countries, this accounts for approximately half the population in India and Pakistan, while it averages for 40 percent in low-income nations.

The food producers are becoming more vigilant: India declared a ban for wheat exports over the weekend, and Indonesia stopped exports of palm oils to stem rising home prices in late April.

Soaring wheat and rising food prices fuel inflation https://fingfx.thomsonreuters.com/gfx/mkt/klvykoeqwvg/Soaring%20wheat%20and%20rising%20food%20prices%20fuel%20inflation.PNG

Marcelo Carvalho from BNP Paribas’ global emerging markets research, stated that the Ukraine war has caused food shortages and also disrupted fertilizer supply. This could lead to longer-lasting food inflation, Reuters reported.

Carvalho said, “This will be around forever.” “Food is extremely important. When there’s a price change, inflation perceptions become more salient. This feeds into inflation expectations which are easier to unhook.

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Um Ibrahim (60-year-old widow selling headscarves at a street vendor in Cairo’s Madinet Nasr middle-class neighborhood) has found it difficult to feed her four children.

“All prices rose — clothes, vegetables and poultry, egg, etc. – what’s the best thing I can do?” She asked her, while laying out her wares on a piece of cloth.

Egypt, which is the biggest importer of wheat worldwide, saw inflation rise to over 13% in April. It will hike its interest rates this week at a meeting, after having devalued the currency 14% in March.

In order to manage inflation while maintaining fragile growth in a world of rising interest rates, emerging market policymakers have increased interest rates hundreds of basis point cumulatively from 2020.

The World Bank predicts that emerging economies will expand by 4.6% in 2015, as opposed to the earlier prediction of 6.3%.

Emerging market inflation https://fingfx.thomsonreuters.com/gfx/mkt/mopanzmmqva/EM%20inflation%20pressures.PNG

BlueBay Asset Management head for EM debt, Polina Kurdyavko, said that governments have two options. They can either provide more subsidies or let the prices rise, causing inflation or social unrest. Or they could do both.

Kurdyavko declared, “There are not easy solutions.”

A number of countries have taken measures to counter inflation and currency crashes. Turkey raised its minimum wage 50% in December. Chile will increase its minimum salary this year.

South Africa’s government debates whether to raise a social assistance grant that was launched in 2020 or make it permanent.

Economists worry that emerging economies will face a new wave of instability due to the recent increases in food costs. Beata Javorcic (CEO, European Bank for Reconstruction and Development), said that North Africa was particularly at risk because of the fact that food inflation contributed to the Arab Spring rebellions 10 years ago.

“The irony is this war, while everyone expected Russia would have a crisis due to its high food price,” she stated.

The pain won’t stop there. According to Verisk (NASDAQ;) Maplecroft, 35% of the nations at risk for civil unrest or high-risk of it by 2022’s fourth quarter were countries of middle income.

BNP’s Carvalho stated that spending to reduce inflation will result in a financial cost which could cause more problems down the track.

He said, “Financial sins can be forgiven in emerging markets but they are not forgotten.” Everybody felt that they were entitled to a free check for the last few years… partly because of low rates. This is where things get a lot trickier now that interest rates have increased.