Russia-Ukraine conflict: Soaring commodity prices are the dominant indirect impact on business environment risk, particularly in Africa

Regional overview of the fallout from the Russia-Ukraine conflict

The war in Ukraine is directly harming economies in the CIS countries and in Europe. However, repercussions go well beyond those two regions as indirect consequences are and will be felt across all of the world’s regions, albeit unevenly. This justifies a few extra country downgrades for the business environment risk in Africa and Asia.

• MENA (Middle East and North Africa)

The MENA region is affected by the current Russia-Ukraine conflict mainly through the disruption of cereal markets and the increase in food prices. All countries in the region are relying on cereal imports. Hence, the current turmoil will put pressure on import bills, inflation rates and the cost of living. Nonetheless, the overall impact on countries will diverge between oil exporters and oil importers. The multi-year high oil prices are benefiting the business environment of oil exporters (especially GCC countries), and the benefits from higher oil revenues will likely offset the cereal market shock. Instead, oil importers – especially those with weak public finances and relying on Ukraine and/or Russia for cereal imports (Egypt and Tunisia) – are likely to be substantially affected. Egypt is perceived as one of the most-exposed countries in the region (excluding countries in distress). As the world’s top wheat importer, Egypt is highly dependent on Ukraine and Russia for wheat imports (85% of wheat imports) and an important share of tourist arrivals comes from these two countries. Moreover, Egypt’s reliance on portfolio inflows and weak public finances make the country vulnerable to tightening global financial conditions and are causing investors to flight to safety. The country has already requested IMF assistance and devalued its currency (cf. graph). Similarly, Tunisia’s weak public finances, political and societal turmoil are likely to be exacerbated by high oil and food prices. For these reasons, the business environment risk rating has been downgraded for Egypt (from E/G to F/G) and Tunisia (from F/G to G/G). Even if Jordan is a high net food importer (6.6% of GDP in 2020), Morocco and Jordan’s exposure is more ambiguous as they are less reliant on Ukrainian and Russian cereal imports (around 20% of cereal imports for both in 2019) but both are oil importers. Overall, however, there is a heightened risk of social unrest driven by the increase of living costs in the region’s oil-importing countries. 

• Sub-Saharan Africa

Direct trade flows between Sub-Saharan Africa and Russia and Ukraine are limited, representing only about 1% of Sub-Saharan Africa’s total imports and 0.6% of the region’s total exports. The largest importers in the region of wheat from Russia and Ukraine are Kenya, Nigeria, South Africa, Tanzania and Ethiopia. However, the Russian invasion in Ukraine will negatively affect most Sub-Saharan African countries indirectly through higher global energy and food prices and through worsening financial-market conditions in the longer term. Rising inflation in 2022 will encourage a tighter monetary policy, leading to weaker growth projections and higher interest rates, which – together with high fuel subsidies – will add pressure to public finances. In major net fuel-exporting countries like Nigeria, Angola and Congo Republic, higher crude oil export revenues should offset the rising cost of refined fuel imports. Moreover, for net fuel importers that can count on significant non-oil commodity revenues like Zambia, South Africa and Congo DRC, current and fiscal accounts are also likely to improve.

Net importers of both fuel and food, like Lesotho, Gambia, Botswana, Burkina Faso, Mauritius, Senegal, Burundi, Benin, Togo and Comoros are especially exposed to soaring global energy and food prices. Besides, certain net importers of fuel or food with high public debt levels – such as Ghana, Rwanda and Gabon – are also greatly exposed, since fiscal space to help absorb the shock is lacking and the risk of sovereign default will increase further. Given their vulnerability to the impact of the Russia-Ukraine conflict, notably via high net food and fuel imports and/or high public debt, Niger (from E/G to F/G) and Senegal (from D/G to E/G) have been downgraded for the business environment risk.

• Latin America

The region has limited trade links with Russia: Russia accounted for less than 1% of total Latin American imports, and only 0.5% of total Latin American exports are destined for Russia. Moreover, no economy in the region sends more than 5% of its exports to Russia or receives more than 5% of its imports from the country. Instead, the main impact of the war between Russia and Ukraine on Latin American economies will be higher energy and food prices and hence higher inflationary pressures given the large weights of these categories in consumer price baskets across the region. Hence, unrest is expected to unfold especially in Caribbean islands (highly dependent on fuel and food imports) and Central America (highly dependent on fuel imports), but also Argentina, Suriname and Venezuela (where inflation is already skyrocketing) are at risk. Moreover, inflationary pressure could lead to further tightening of monetary policies, weakened economic growth and bank lending as a second-round effect. Nevertheless, most Latin American countries have already aggressively tightened their monetary policies in the past year, while depreciatory pressures have eased in the past month and most countries are expected to profit from the higher (soft) commodity prices or higher tourism arrivals from the US. As a result, for the time being, all business environment risk ratings remain unchanged. Still, even if it is currently not the baseline scenario, if the Russia-Ukraine crisis would seriously dent growth prospects in either China or the US – the region's largest trade partners for South and Central America respectively – Latin America's economic prospects would quickly worsen as well.

• Asia

Given relatively limited trade links with Russia and Ukraine, the primary economic impact for Asia will be felt indirectly through higher energy prices – as the region is a net fuel importer – and higher food prices. Besides a negative socio-economic impact in South-East Asia and heavy fuel imports for China, South Asia is going to be the most-hit subregion, particularly Pakistan and Sri Lanka. This is due to their exposure to costlier imported fuel and food, combined with poor public finances which put governments in an unstable position. Prior to the war in Ukraine, both countries were already reporting double-digit inflation. In Sri Lanka, soaring fuel and food prices have exacerbated existing shortages and will extend the ongoing economic crisis. Given scarce foreign exchange reserves to defend its currency amid a deepening current account deficit and high external financing needs, the Sri Lankan authorities have recently sharply devalued the rupee and introduced import limits on hundreds of items. The devaluation will further boost Asia’s highest inflation (at 15% in February) and deteriorate the business environment risk, particularly given the absence of fiscal space to mitigate the socio-economic impact. In Pakistan, the situation is hardly better with weak public finances, high inflation and a weakened rupee. Moreover, Pakistan could suffer from its high reliance on cereal imports from Russia (more than 35% of total imports). As the government is increasingly contested, some support will be inevitable to alleviate the socio-economic burden at the cost of jeopardising its relation with the IMF, which is likely to lead to a postponement in loan disbursements. In the coming months, inflation and interest rates are likely to increase further, the rupee is expected to continue to decline and the economic growth forecast is likely to be revised downward. The accentuation of this negative trend has led to the business environment risk rating downgrades of Pakistan (from E/G to F/G) and Sri Lanka (from F/G to G/G).

Analyst: Jolyn Debuysscher – j.debuysscher@credendo.com; Raphaël Cecchi – r.cecchi@credendo.com