Planting the seeds for Arab Spring 2.0
War-driven food crisis could spawn destabilizing uprisings all over.
A decade ago, rising food prices led to a wave of anti-government protests led by students and a disenfranchised populace swept through the Middle East/North Africa region, toppling strongmen and raising hopes for more democratic governments and improved economic opportunities. A dangerous cocktail of unemployed and large young populations, autocratic governance, technology and social media and inflation led to these startling developments. In the end, the “Arab Spring’’ changed little. The United Nations says the standard of living failed to improve much in the region and even worsened in Libya, Yemen and Syria.
Now, the seeds are being sown for a new Arab Spring, though this one seems certain to extend well beyond the MENA region. And instead of authoritarianism and demographics as a catalyzing overlay, it’s the Russia-Ukraine war. The conflict has cut off supplies and sent prices soaring across a range of critical commodities, exacerbating climate and pandemic-related shortages, particularly in poorer emerging market countries that rely on food and energy exports. Russia, as most have come to know by now, is the world’s largest and second-largest exporter of natural gas and oil, respectively. But it’s also the world’s largest exporter of wheat.
On top of that, Ukraine is not only a major exporter of wheat in its own right, the world’s sixth largest, but it’s also a major supplier of other food and fertilizing resources. It’s a leading provider of critical grains, oils and foodstuffs around the globe, particularly to the European Union countries, where it’s known as “Europe’s breadbasket.” Supply disruptions due to the war drove the United Nations Food and Agricultural Organization monthly price index to its highest level ever in March, with all-time highs for vegetable oils, cereals and meats. Indications are those prices continue to accelerate. Fertilizer prices are soaring, too—Russia and Ukraine are among the biggest producers of ammonia, nitrogen and other raw material inputs. High energy prices are a further headwind.
Is Sri Lanka the canary?
As food and fuel prices soar and shortages deepen, potential unrest is on the rise. In the South Asia island nation of Sri Lanka for example, protestors have taken to the streets, seeking the ouster of its president, Gotabaya Rajapaksa, and family members in other government offices. His brother, Mahinda, stepped down as prime minister last night but that only served to ignite further unrest. A number of MENA countries are starting to restrict exports to stockpile foods they produce. Witness Indonesia barring palm oil exports. On top of the pandemic, Fed tightening and a slowing China, these shocks are threatening to roil many EM countries. Turkey and Egypt tops Bloomberg Economics’ list of EM countries exposed to “economic and financial spillovers” from the war, and it ranks Tunisia, Ethiopia, Pakistan, Ghana and El Salvador among countries in danger of default.
It’s not just the EM. Developed countries are being squeezed, too. Citing war-induced commodity price increases and broadening inflation, the International Monetary Fund in April cuts its 2022 global growth forecast by eight-tenths of a point to 3.6% from the previous 4.4% in January. Germany, which heavily relies on its neighbor to the north for energy, suffered the biggest hit, with the IMF slashing its forecast for the EU’s largest economy to 2.2% GDP growth from 3.8% just three months earlier. Odds of at least a technical recession there are growing, particularly as it works to wean itself off Russian oil and natural gas as part of a broader EU initiative. In the U.S., April’s growth reduction was far more modest, to 3.7% from 4.0% (though January’s revision was a sharp 1.2 percentage-point reduction from October 2021).
To be sure, the run up in food and energy prices is creating opportunities. Resource-oriented countries with more commodity-based economies, such as Norway in Europe, Malaysia in Asia and Colombia and Brazil in Latin America come to mind. Moreover, many EM countries are less indebted than during past crises and took their inflation medicine last year, with a rash of rate hikes by their central banks, putting them ahead of the game. PMIs across much of the EM universe remain green. The question, of course, is how fast might the global economy—and demand—slow? The wild card is China as it balances strict zero-Covid policies that have been locking down large sections of its major cities against its goal of ramping up growth before this fall’s critical 20th National Conference, where President Xi is seeking an unprecedented third term.
For now, our international team feels the environment argues for a cautious neutral on the EM with only those markets sporting resources and account surpluses as being places to overweight. Selectivity will be key. If food shortages and protests like those in Sri Lanka spread, aggressive Fed tightening accelerates and China fails to strike the right the balance, it could get ugly—and fast. Then again, some of those issues could prove fleeting. We just don’t know at this juncture. So, while there’s little doubt there may be tactical opportunities, it’s hard at this moment of great uncertainty to get excited about the EM until we get more clarity. We believe that that clarity will come into focus later this year when it will likely make way for a powerful buying opportunity.