Currency depreciations risk intensifying the food and fuel crisis in developing economies
Rising commodity prices could prolong inflationary pressures
WASHINGTON, October 26, 2022—The decline in the value of the currencies of most developing economies is driving up food and fuel prices in ways that could worsen the food and fuel crises many of them are already facing.According to the latest World Bank report Commodity Market Outlook report.
Expressed in U.S. dollars, prices for most commodities have fallen from recent highs amid fears of a looming global recession, the report said. Since the Russian invasion of Ukraine in February 2022 until the end of last month, the price of Brent crude oil in US dollars has fallen by almost 6%. Yet, due to currency depreciations, almost 60% of oil-importing emerging and developing countries saw an increase in oil prices in national currency during this period. Nearly 90% of these economies also saw a larger increase in local currency wheat prices relative to the rising US dollar.
High prices for energy products that serve as inputs for agricultural production have pushed up food prices. In the first three quarters of 2022, food price inflation in South Asia averaged over 20%. Food price inflation in other regions, including Latin America and the Caribbean, the Middle East and North Africa, Sub-Saharan Africa, Eastern Europe and Central Asia, averaged between 12 and 15%. East Asia and the Pacific is the only region where food price inflation is low, in part due to generally stable prices for rice, the region’s staple food.
“Although many commodity prices have retreated from their highs, they are still high compared to their average level for the past five years,” said Pablo Saavedra, World Bank Vice President for Equitable Growth, Finance and Institutions. “A new spike in global food prices could prolong food insecurity problems in developing countries. A range of policies are needed to promote supply, facilitate distribution and support real incomes.
Since the outbreak of war in Ukraine, energy prices have been quite volatile, but are now expected to decline. After jumping about 60% in 2022, energy prices are expected to fall 11% in 2023. Despite this moderation, energy prices next year will still be 75% above their five-point average. last years.
The price of Brent crude oil is expected to average $92 per barrel in 2023, well above the five-year average of $60 per barrel. Natural gas and coal prices are expected to decline in 2023 from record highs in 2022. However, by 2024 Australian coal and US natural gas prices are expected to double further from the average of the past five years, while European natural gas prices could be almost four times higher. Coal production is expected to increase significantly as several major exporters ramp up production, jeopardizing climate change targets.
“The combination of high commodity prices and persistent currency depreciations is translating into higher inflation in many countries,” said Ayhan Kose, Director of the World Bank’s Outlook Group and Chief Economist of EFI, who produces the Outlook report. “Policymakers in emerging markets and developing economies have limited leeway to manage the steepest global inflation cycle in decades. They need to carefully calibrate their monetary and fiscal policies, communicate their plans clearly, and prepare for a period of even higher volatility in global financial and commodity markets.
Agricultural prices are expected to fall by 5% next year. Wheat prices in the third quarter of 2022 fell nearly 20% but remain 24% higher than a year ago. The drop in agricultural prices in 2023 reflects a better-than-expected global wheat harvest, stable supplies in the rice market and the recovery of grain exports from Ukraine. Metal prices are expected to fall 15% in 2023, mainly due to weaker global growth and concerns about a slowdown in China.
The outlook for commodity prices is subject to many risks. Energy markets are facing significant supply challenges as concerns over energy availability next winter will intensify in Europe. Higher-than-expected energy prices could spill over into non-energy prices, especially food, prolonging food insecurity issues. A more pronounced slowdown in global growth also presents a major risk, especially for crude oil and metals prices.
“The forecast of a fall in agricultural prices is subject to a series of risks,” said John Baffes, Senior Economist in the World Bank’s Prospects Group. “First, disruptions to exports by Ukraine or Russia could once again disrupt global grain supplies. Second, further increases in energy prices could put upward pressure on grain and edible oil prices. Third, adverse weather conditions can reduce yields; 2023 will likely be the third consecutive year of La Niña, potentially reducing yields of key crops in South America and southern Africa.
Special Focus: Lower copper and aluminum prices and impact on developing economies
Worries about a possible global recession next year have already contributed to a sharp decline in copper and aluminum prices. A Special focus A section of the report examines the price determinants of aluminum and copper and explores the implications for emerging markets and developing economies that export these commodities. Prices will likely remain volatile as the energy transition unfolds and demand shifts from fossil fuels to renewables, which will benefit some metal producers. Metals exporters can make the most of the resulting growth opportunities over the medium term while limiting the impact of price volatility by ensuring they have well-designed fiscal and monetary policy frameworks, the report stresses. report.