Analysis: Russian-Ukrainian fallout begins to tear down fragile ‘frontier’ economies

Egyptian workers prepare dough before baking traditional Egyptian breads at a bakery in Cairo’s southeastern district of Mokattam, as commodity prices in Egypt have risen since Russia invaded Ukraine, in Egypt, 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 tipped two of the world’s poorest countries into major crises, and the list of those at risk – and the queue of waiting at the door of the International Monetary Fund – only get more from here.

They may be far from the fighting in Ukraine, but a massive resignation from the Sri Lankan cabinet on Monday and Pakistani Prime Minister Imran Khan’s weekend drastic maneuvers to avoid his withdrawal show how far the economic impact is spreading.

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

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A handful of them were already on the brink of a debt crisis as a result of the COVID pandemic, but the energy and food price spikes that resulted from the war have undoubtedly worsened things. Read more

Turkey, Tunisia, Egypt, Ghana, Kenya and others who also import the majority of their oil and gas as well as food staples, such as wheat and maize, all of which have climbed between 25% and 40% this year, have also faced great pressure.

The rising costs of imports and subsidies for these basic necessities had already convinced Cairo to devalue its currency by 15% and to seek help from the IMF in recent weeks. Tunisia and a longtime Sri Lankan have also asked for help.

Ghana, still reluctant to approach the Fund, is seeing its currency plummet, while Pakistan, a country already with 22 IMF programs under its belt, will almost certainly need more after sinking back into turmoil. Read more

“This energy shock is certainly contributing to political uncertainty in Sri Lanka and Pakistan,” said Renaissance Capital chief economist Charlie Robertson, flagging it as a key driver for Egypt and Ghana as well.

“It wouldn’t surprise me if more countries were affected,” he added, also citing Jordan and Morocco where a relatively large middle class makes it sensitive to political change.


IMF Managing Director Kristalina Georgieva issued a stern warning: “War in Ukraine means hunger in Africa.”

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

Oil, gas, wheat and corn prices have soared

The debt-ridden “frontier” economies, as the group of least developed countries are called, now owe $3.5 trillion, some $500 billion more than pre-pandemic levels, according to estimates from the Institute of International Finance (IIF).

Pakistan and Sri Lanka were already spending 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 now, the pressures are 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, it is 1.3%, while the rating agency Fitch estimates that the cost of electricity subsidies in Tunisia could climb to more than 1.8% of its GDP this year against 0.8 %.

Frontier Emerging Markets Exposure to Food and Energy


Food prices are also a major problem. They were already increasing 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 commodities have risen another 25-30% this year.

Egypt buys more than 60% of its wheat from abroad, four-fifths from Russia and Ukraine. After devaluing its currency and approaching the IMF, the government of President Abdel Fattah al-Sissi has also just fixed the price of bread to contain soaring food prices. 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, emerging markets portfolio manager at abrdn in London.

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

While global borrowing costs are also rising rapidly as major central banks begin raising interest rates, Max Castle, fixed income portfolio manager at Mediolanum Irish Operations, said several emerging market commodity importers n maybe had no choice but to ask for help.

“This is the right situation for the IMF to step in to support the most vulnerable countries – especially those with current account deficits,” he said.

Countries with the highest wheat imports from Russia and Ukraine
Performance of selected JPM EMBI Diversified indices (rebased, over the past six weeks)
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Reporting by Rachel Savage and Marc Jones; Additional reporting by Tommy Reggiori Wilkes and Karin Strohecker; Editing by Tomasz Janowski

Our standards: The Thomson Reuters Trust Principles.

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