Food crises to worsen credit risks in emerging markets, Moody’s says

Recurring food insecurity shocks will worsen emerging markets’ credit risks, economic strength, public finances, inequality levels and current account deficits, Moody’s Investors Service has said.

Low-rated frontier markets across Africa and the Middle East, along with parts of South Asia, will remain the most exposed to future food security crises due to water scarcity and their vulnerability to severe weather, the credit rating agency said in report earlier this week. Mozambique, Rwanda, Zambia and Ethiopia are among the most exposed countries, it found.

“With food shocks exacerbating macroeconomic challenges and social risks, acute food insecurity will be a recurrent source of credit risk for many emerging market sovereigns, in particular, those most exposed and vulnerable to physical climate risk,” said Mickael Gondrand, an analyst at Moody’s.

“Global food price volatility has increased over the past two decades, with the current spike the third in 15 years.”

The report is part of a growing chorus of warnings about global food insecurity and its devastating impact on the most vulnerable groups of people and less-developed economies. Last week, the World Bank said soaring food prices would weigh on the growth of Mena economies this year, as double-digit food inflation hits poorer households and intensifies food insecurity in the long term.

Global food prices soared after Russia’s invasion of Ukraine in February last year.

While they have since fallen from the record highs reached in March last year, food prices are expected to remain at historically high levels throughout this year, Moody’s said.

This reflects risks related to Ukraine’s crop production and distribution, tight global supplies, volatile weather and disruptions to fertiliser supplies, it said. Rising demand for food, geopolitical tension and climate risks will keep global food security fragile and vulnerable to shocks, Moody’s said. Food demand is set to keep increasing on the back of world population growth, rising incomes and urbanisation.

Geopolitical conflict disrupts agricultural production and food trade while rising temperatures, changing rain patterns and more frequent climate shocks such as droughts, wildfires, floods and heatwaves are making food production less reliable.

Last year, the surge in food prices hurt emerging and frontier markets, eroding real incomes, Moody’s said.

Problems arising from food supply shocks are bigger for emerging and frontier markets, where food accounts for a higher share of household spending. The gap between overall and food price inflation as of February was highest in Lebanon, Egypt and Rwanda.

“Food insecurity and climate shocks hampering agricultural production can have long-lasting implications for economic strength,” Moody’s said. “Food scarcity and higher food prices can force low-income households to reallocate resources away from health and education, damaging human capital and, ultimately, the economy’s long-term growth potential.”

The World Bank said last week that soaring food prices would affect the growth of countries in the Mena region