Analysis: Russia-Ukraine fallout begins to topple fragile ‘frontier’ economies

Egyptian workers prepare dough before baking traditional Egyptian loaves of bread at a bakery in the Mokattam district of southeastern Cairo, as prices for basic goods in Egypt have risen since the Russian invasion of Ukraine, in Egypt, on March 16, 2022. REUTERS/Amr Abdallah Dalsh/File photo

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LONDON, April 4 (Reuters) – The fallout from the war between Russia and Ukraine has just helped plunge two of the world’s poorest countries into full crisis, and the list of those at risk – and the queue at the door of the International Monetary Fund – just get out from here.

They may be a long way from the fighting in Ukraine, but the mass resignation of Sri Lanka’s cabinet on Monday and Pakistani Prime Minister Imran Khan’s drastic moves over the weekend to prevent his impeachment show how far the impact extends. economic.

Both Sri Lanka and Pakistan have seen their longstanding public concern about economic mismanagement come to a head, but there is a double-digit list of other countries that are also in the danger zone.

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A handful were already teetering on the brink of debt crisis in the wake of the COVID pandemic, however the resulting war-driven spike in energy and food prices has undoubtedly made matters worse. Read more

Turkey, Tunisia, Egypt, Ghana, Kenya and others who also import most of their oil and gas, as well as staples like wheat and corn, which are up 25-40% this year, have also faced strong pressure

Rising import costs and subsidies for daily essentials had already convinced Cairo to devalue its currency by 15% and seek help from the IMF in recent weeks. Tunisia and Sri Lanka, which has held out for a long time, have also asked for help.

Meanwhile, Ghana, still reluctant to approach the Fund, is seeing its currency fall, while Pakistan, a country that already has 22 IMF programs to its name, will almost certainly need more now that it has plunged into turmoil. again. Read more

“This energy shock is certainly contributing to political uncertainty in Sri Lanka and Pakistan,” said Renaissance Capital Chief Economist Charlie Robertson, calling it a key factor for both Egypt and Ghana.

“I wouldn’t be surprised if more countries are affected,” he added, also citing Jordan and Morocco, where a relatively large middle class makes them sensitive to political change.


IMF Managing Director Kristalina Georgieva has issued a stark warning that “war in Ukraine means famine in Africa.”

The IMF’s sister organization, the World Bank, has also said a dozen of the world’s poorest countries can now default over the next year, in what would be “the biggest wave of debt crises in developing economies in a generation.”

Oil, gas, wheat and corn prices have skyrocketed

Over-indebted “frontier economies,” as the group of least developed countries is known, now owe $3.5 trillion, some $500 billion above pre-pandemic levels, according to estimates by the Institute of International Finance (IIF).

Pakistan and Sri Lanka already spent the equivalent of 3.4% and 2.2% of their respective GDPs on energy before the pandemic. In Turkey, the figure was even higher, at 6.5%, and with oil prices above $100 a barrel for months, the pressures are getting worse.

Every additional $10 spent on a barrel of oil adds 0.3% to Turkey’s current account deficit, according to the IIF. For Lebanon it is 1.3%, while the rating agency Fitch estimates that the cost of electricity subsidies in Tunisia could rise to more than 1.8% of its GDP this year from 0.8%.

Exposure of frontier emerging markets to food and energy


Food prices are also a stinging issue. They were already rising as countries emerged from lockdowns, exacerbated in some regions by droughts.

With Ukraine and Russia accounting for 29% of global wheat exports and 19% of corn shipments, prices for these have risen another 25-30% this year.

Egypt buys more than 60% of its wheat from abroad, four-fifths from Russia and the Ukraine. After devaluing its currency and reaching out to the IMF, the government of President Abdel Fattah al-Sisi has also just fixed bread prices to contain runaway food costs. Read more

“For many countries these increases (in energy and food prices) will have repercussions on budgets, subsidies and political and social stability.” said Viktor Szabo, portfolio manager for emerging markets at abrdn in London.

“If you don’t control prices you can have riots, just think about the Arab Spring and the role of food prices there.”

With global borrowing costs also now rising rapidly as major central banks begin to raise interest rates, Max Castle, fixed-income portfolio manager at Mediolanum Irish Operations, said several commodity importers from markets emerging may have little choice but to seek help.

“It’s the right situation for the IMF to step in by supporting the most vulnerable countries, particularly those with current account deficits,” he said.

Countries with the largest imports of wheat from Russia and Ukraine
Performance of selected indices JPM EMBI Diversified (outperformed, during the last six weeks)
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Reporting by Rachel Savage and Marc Jones; Additional reporting by Tommy Reggiori Wilkes and Karin Strohecker; Edited by Tomasz Janowski

Our standards: The Thomson Reuters Trust Principles.

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