Russia-Ukraine fallout begins to cut down fragile ‘border’ economies

© . FILE PHOTO: Egyptian workers prepare dough for baking Egyptian traditional breads at a bakery in Cairo’s southeastern Mokattam district as prices of basic goods have risen in Egypt since the Russian invasion of Ukraine, in Egypt, March 16, By Rachel Savage and Marc Jones LONDON () -The fallout from the war between Russia and Ukraine has just contributed to two of the world’s poorest countries plunged into full-blown crisis, and the list of high-risk countries – and the queue at the door of the International Monetary Fund – will only get bigger. longer from here. They may be a long way from the fighting in Ukraine, but a massive resignation of the Sri Lankan cabinet on Monday and drastic weekend maneuvers by Pakistani Prime Minister Imran Khan to prevent his removal show how far the economic impact is spreading. Both Sri Lanka and Pakistan have seen their long-running public unrest over economic mismanagement come to a head, but there is a double-digit list of other countries that are also in the danger zone. A handful were already on the brink of debt crisis in the wake of the COVID pandemic, but the war-induced surge in energy and food prices has undoubtedly made matters worse. Turkey, Tunisia, Egypt, Ghana, Kenya and others who also import most of their oil and gas, as well as staple foods, such as wheat and corn, all of which are up between 25% and 40% this year, have also faced heavy pressure. Rising import costs and subsidies for daily necessities had already convinced Cairo to devalue its currency by 15% in recent weeks and seek IMF help. Tunisia and a long-resistant Sri Lanka have also asked for help. Ghana, still reluctant to approach the Fund, meanwhile is seeing its currency sink, while Pakistan, a country that already has 22 IMF programs to its name, will almost certainly need more now that it has sunk back into turmoil. . “This energy shock is certainly adding to the political uncertainty in Sri Lanka and Pakistan,” said Charlie Robertson, Renaissance Capital’s chief economist, calling it a key factor for both Egypt and Ghana. “I wouldn’t be surprised if more countries were affected,” he added, citing Jordan and Morocco, where a relatively sizable middle class makes it susceptible to political change. HUNGER IN AFRICA IMF director Kristalina Georgieva has issued a stark warning that “war in Ukraine means hunger in Africa”. The IMF’s sister organization, the World Bank, has also said a dozen of the world’s poorest countries may be in default for some time to come. year, which would be “the biggest wave of debt crises in emerging economies in a generation”. The over-indebted “frontier economies,” as the least developed group of countries is called, now owe $3.5 trillion — about $500 billion above pre-pandemic levels, the Institute of International Finance (IIF) estimates. Pakistan and Sri Lanka already spent the equivalent of 3.4% and 2.2% of their respective GDP 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 pressure is only mounting. Every additional $10 spent on a barrel of oil adds 0.3% to Turkey’s current account deficit, according to the IIF. For Lebanon, that is 1.3%, while rating agency Fitch estimates that the cost of electricity subsidies in Tunisia could rise to more than 1.8% of GDP this year from 0.8%. UNREST Food prices are also a pressing problem. They have already risen as countries came out of lockdown, exacerbated in some regions by drought. With Ukraine and Russia accounting for 29% of global wheat exports and 19% of maize shipments, their prices have risen another 25%-30% this year. Egypt buys more than 60% of its wheat abroad, four-fifths from Russia and Ukraine. After devaluing the currency and approaching the IMF, the government of President Abdel Fattah al-Sisi also just set bread prices to contain runaway food costs. “For many countries, these (energy and food price) increases will affect budgets, subsidies and political and social stability.” said Viktor Szabo, emerging markets portfolio manager at abrdn in London. “If you don’t control prices, you can get unrest. Just think back to the Arab Spring and the role of food prices there.” With global borrowing costs now also rising rapidly as major central banks begin to raise interest rates, Max Castle, a fixed-income portfolio manager at Mediolanum Irish Operations, said several importers of emerging market commodities have little choice but to seek help. “It is the right situation for the IMF to step in to support the more vulnerable countries, especially those with current account deficits,” he said.

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