Philippine President-elect Ferdinand Marcos Jr is turning Manila political tradition on its head by taking on the additional title of minister of agriculture.
It’s not that Marcos, who takes office on June 30, has vast farming experience or degrees in horticulture. But he realizes that the first crisis of his presidency is going to be the surging food prices that threaten to derail the economy’s expected 6% growth rate this year.
The poverty rate jumped to 23.7% of the nation’s 112 million people in 2021, up from 21.1% in 2018. And that increase pre-dated Russia’s invasion of Ukraine – which has sent costs of food, cooking oils and energy skyrocketing.
Now, Manila is bracing for inflation as high as 8%.
And the Philippines isn’t alone. A new report from Nomura Holdings warns that already overheating food prices will get even hotter with India, Indonesia, the Philippines, Singapore and South Korea among Asian economies facing some of the biggest inflation shocks.
In May, food costs among Asia ex-Japan economies rose an annualized 5.9% – more than double the 2.7% rate for December. Nomura notes that there’s a roughly six-month lag between the shifts in costs and their fallout in Asia. As increases catch up with the region’s economies, inflation data are sure to get uglier and unnerve bond and stock markets.
It is not just Nomura ringing the alarm bells. The United Nations’ food agencies warned in April that the Ukraine crisis is a “perfect storm that threatens to devastate the economies of developing countries.”
Since then, the storm has grown with ominous intensity as China’s pandemic lockdowns, swine fever outbreaks in Thailand and heat waves in India and the rest of South Asia generate new headwinds.
Bad news coming to your dinner table
“Consumers’ perception of inflation is strongly influenced by the prices of frequently purchased necessities, such as food, and can lead to higher inflation expectations,” Nomura says.
Jakarta and Manila are already hiking minimum wages to offset higher costs of living, Nomura notes as governments throughout developing Asia come under pressure to shield populations from additional price surges.
Nomura notes that price rises are already moving beyond edible oils and cereals to meat, processed food and staples common in restaurants. Rice affordability appears to be the next crisis-point as Asian populations pivot to alternatives to pricey wheat.
It’s no coincidence that in the Philippines, Marcos was elected, in part, for his pledge to slash the price of rice by more than half.
Other large food importers also are moving into a precarious period. Inflation in Singapore may surge to 8.2% later this year from 4.1% today. Inflation in India might top 9% amid skyrocketing feedstock prices.
The Monetary Authority of Singapore says elevated food prices will continue to contribute to local inflation beyond 2022. Economist Dil Rahut at the Asian Development Bank Institute concurs. The problem, Rahut says, is that there are few if any supplier countries that can fill the void left by Ukraine and Russia.
These price trajectories, Nomura notes, are sure to have central banks around the region scrambling to hike interest rates to tame price trends.
Central bankers’ dilemma
Until now, monetary authorities planned to tolerate rising costs, assuming supply-side shocks would prove “transitory.” It’s a bet that US Federal Reserve Chairman Jerome Powell made, too – a bet that’s now blowing up on the world’s biggest economy.
John Lipsky, who until 2011 was the International Monetary Fund’s number 2 official, speaks for many when he warns of a “wreck coming towards us” that’s sure to “push a large number of low-income countries into the need for debt restructuring,” among other problems from slowing growth to poverty.
In the case of the Fed in Washington, all Asia can do is hope Powell’s team acts prudently. That could be a vain hope.
“With inflation so far above the 2% target, those old rules no longer appear to apply,” says Andrew Hunter at Capital Economics research group.
“To the extent that surging energy and food prices are being driven by global supply factors — primarily the war in Ukraine — the Fed wouldn’t necessarily be expected to respond” if this situation had arisen in the past, Hunter says.
Today, there’s no playbook to which to refer.
Last month, Fed Board Governor Christopher Waller stressed that the US central bank must do whatever it takes to tackle inflation – and fast. “At this point, I don’t care what the reasons are,” he said. “Inflation is too high, and my job is to get it down.”
Either way, though, economist Gregory Daco at EY-Parthenon figures that “the inflation slowdown through year-end will be anything but steep.”
That could be especially the case in Asia.
Brace for food nationalism
Take the Philippines, where efforts over the last decade to reduce poverty are suffering sizable setbacks. Until now, the government had hoped to achieve zero poverty nationwide by 2040, says Socioeconomic Planning Secretary Karl Kendrick Chua.
“So far, we are sticking to this target,” Chua says. “There are 3.9 million more poor, so we have to work hard to at least bring them out of poverty. We end this year on track to early recovery. Our growth prospects are encouraging. As we collectively strive toward our 2040 vision, the poor will be at the center of our recovery and development strategy.”
Strategist Jeffrey Halley at Oanda notes that the 22.8% year-over-year increase in Philippine imports is “likely reflecting skyrocketing food and energy prices.”
Things are apt to get worse as nations from Indonesia, India and far beyond limit food exports. “Food nationalism,” Halley says, “will continue to be a real issue throughout 2022 and into 2023.”
Economist Stefan Angrick at Moody’s Analytics says several Asia-Pacific countries “have scrambled food protectionist policies to secure domestic supply and keep a lid on food inflation. But the longer Russia’s invasion of Ukraine continues, the higher food prices will go and the greater the risk of food shortages.”
Halley says there’s great uncertainty about the “downstream impacts globally” of food inflation “and the need to assist in mollifying them.” He adds that “like China’s Covid-zero policy, nobody should be naïve enough to expect them not to return and bite the global economy again.”
India risks painful setbacks as local weather events collide with soaring international prices. “The outlook on inflation remains worrisome as weather shocks have come on top of high international commodity prices in raising supply-side pressure on the economy,” says Dharmakirti Joshi at global analytics company CRISIL Ltd.
Joshi notes expectations for international prices to “stay elevated for a wide range of agriculture, energy and industrial commodities, which will put a broad-based pressure on food, fuel and core inflation.”
Threats abound for China, too.
Economist Neil Thomas at Eurasia Group observes that “Beijing will seek to promote its own narrative as worries over global food security intensify.”
Recently, President Xi Jinping embarked on an inspection trip to the southwestern province Sichuan, visiting a rice cultivation base in Meishan, one of China’s major grain production regions. There, Xi acknowledged efforts to advance high-standard farmland development and to ensure food-supply self-reliance. It was aimed at signaling the importance Xi attaches to food security.
“These recurring signals,” Thomas says, “came amid mounting apprehension over food security and food inflation despite repeated efforts by China’s agricultural authorities to reassure that farming activities are on track this year and that the country is not at risk of food shortages.”
These worries, he adds, “have grown on the back of geopolitical conflicts in the past few months. They were also heightened by the likelihood of delays in spring farming and seeding activities, logistical snarls stemming from severe mobility restrictions as part of China’s ‘zero-Covid’ policy, and forecasts of extreme weather conditions and natural disasters in southern China during summer.”
It’s telling, though, how much Xi’s team is turning to spin concerning the appearance its hoarding is warping the global food market.
The Communist Party’s counternarrative faults the US for, as Thomas puts it, “politicization and weaponization of the food security issue to shift the blame on Russia and undercut China’s position in global food and grain governance.”
Xi’s inner circle also is playing up Beijing’s role as an advocate for developing peers by protesting unilateral sanctions and defending open trade. Analysts reckon that Beijing will amplify this narrative to deflect criticism of its efforts to strengthen local food supply over global stability.
Asia’s most developed economies are feeling the pinch, too.
Korea and Japan take the pain
In May, inflation in South Korea hit a nearly 14-year high thanks to rising food and energy costs. Consumer prices jumped 5.4% from a year earlier, well above a 4.8% spike in April. It marked the steepest increase since August 2008.
This has Bank of Korea Governor Rhee Chang-yong keeping the door open for more aggressive interest-rate hikes. “It’s our unchanged forward guidance that monetary policy should be managed with a focus on inflation until the rising trend eases,” Rhee told reporters. “There are still three weeks of time left and the board will have to make a decision based on new data.”
New decisions are likewise the order of the day in Japan, too, where wholesale prices are rising at the fastest rates in 40 years. Earlier this month, Prime Minister Fumio Kishida said that “current price increases are having a major impact on people’s lives and corporate activity, causing concerns about the future.”
Kishida’s Liberal Democratic Party, which faces parliamentary elections next month, is tapping reserve funds secured under its fiscal 2022 supplementary budget to soften the blow from food imports. It also faces global bond traders worried that Tokyo is ill-equipped to manage the globe’s most crushing debt load.
“Given Japan’s dependence on food imports, the surge in global food prices is a major concern,” says Moody’s economist Angrick. “Climbing food prices are an added burden for households that are already contending with higher energy prices.”
Yet the real risk could be how surging costs of food and energy are derailing US growth and its fallout for China, say economists at Nomura.
“With rapidly slowing growth momentum and a Fed committed to restoring price stability, we believe a mild recession starting in the fourth quarter of 2022 is now more likely than not,” says Nomura economist Aichi Amemiya.
Such food for thought is colliding with food inflation that’s upending all that investors thought they knew about 2022.
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