After the disruption caused by the pandemic, the global economy and markets have now turned their attention to the conflict between Russia and Ukraine. One pressing issue is the spiralling commodities prices.
As far as emerging and frontier markets are concerned, most of the negative impact will be concentrated in areas near the conflict zone and in net commodity importers.
While proximity to the conflict zone is obviously dependent on geographical distance, there are other important aspects to consider when we refer to proximity: tied commercial investments and touristic interlinks as well as remittances flows. Eastern Europe is expected to suffer more through its direct exposure to Russia and Ukraine as well as indirectly through a weaker demand coming from core European countries such as Germany, one of the region’s most important trade partners.
Moreover, a more prolonged conflict could generate increasing migrants inflows, which would weigh on fiscal positions which have yet to be restored after the pandemic. In this regard, among the Eastern European countries, the most vulnerable in terms of low fiscal buffers are Hungary and Romania.
Having said that, we should highlight some opportunities arising from the current contest.
Across neighbouring frontier countries able to maintain a certain degree of neutrality and not incurring secondary sanctions, proximity can open opportunities such as benefitting from business relocation and rerouting of trade and financial flows from Russia (such as Armenia and Georgia) or exporting agricultural products replacing Ukraine (Moldova).
While hard to handle in the short term, migrant inflows for countries such as Poland can be a medium-term opportunity. The presence of Ukrainian immigrants in the country are already important and the Poland labour force desperately needs reinforcement.
When we consider how the crisis will impact commodities we must first look at a broader raw material universe including energy, agriculture and even metals where short-term shocks are adding to more structural pushes caused by net zero transition ambitions.
As a second point, assessing the impact will result in a more complex exercise than the one of drawing a net preference line between exporters and importers identifying winners and losers. It is certainly true that energy and food net importers will experience an external and a fiscal deterioration: imports bills have skyrocketed and governments are in a hurry to limit the pain for households drafting fiscal initiatives such as higher subsidies, prices caps, cash hand-outs, excise taxes cuts resulting in higher fiscal cost.
Of course, the economies already reporting important twin deficits (fiscal and external), with a more fragile debt position are meant to suffer the most and more likely to incur in rating revisions or default. The Russia/Ukraine conflict has certainly accelerated the Sri Lanka discussion with the IMF where high oil prices and decline of touristic revenues have further limited the country’s ability to service its external debt.
Conversely, commodity exporters should benefit from the consequences of recent events. Indeed, Latin American countries are not only are physically distant from the conflict zone and worth considering even those most positively correlated to the commodity cycle, either via oil, agro or metals, with Mexico representing the most important exception among the main countries. However, higher input costs are further weighing on inflation profiles that are already very stretched, possibly prolonging the tighter stance of their central banks.
Moreover, the sense of urgency to contain further inflation spikes is calling for larger fiscal support yet diverting fiscal resources or deteriorating fragile fiscal positions. Indeed, it looks like high oil prices are penalising Nigeria, a commodity exporter where the government would historically use its fiscal revenues to finance fuel subsidies.
The issues have been magnified in some countries, by the need to ensure food security where inflation is biting.
On the brighter side, if not immediately spent in public capex, the increase in oil revenues will allow GCC countries to replenish oil funds reserves depleted during the pandemic crisis.
Alessia Berardi is a research emerging macro strategist at Amundi
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