Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Speaker: And now onto today's show.
Speaker: Welcome to the Emerging Market Spotlight, a podcast series from HSBC.
Speaker: The emerging markets landscape is more complex than ever at a time of divergent monetary policy, high commodity prices, supply chain disruptions and geopolitical tensions.
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Speaker: Thanks for listening.
Speaker: And now on to today's show.
Speaker: Well, good morning, good afternoon, and good evening.
Speaker: Well, first of all, my name is Murat Turgent.
Speaker: I'm the Global Head of Emerging Markets Research.
Speaker: I have two guests, two experts of their fields, very distinguished guests.
Speaker: So let me introduce them first.
Speaker: We have Mr. John Buffess, who is the Senior Agriculture Economist Development Economic Prospects Group at the World Bank.
Speaker: and Mr. Peter Nagel, who is also Senior Economist Prospects Group at the World Bank as well.
Speaker: So Peter and John, welcome and thank you very much for joining us today.
Speaker: Well, obviously, global food prices have been very, very volatile.
Speaker: The food prices and commodity prices have come off from their peak levels, like compared to earlier in the year, the outbreak of the Russia-Ukraine war, but they're still elevated and a lot of factors are feeding into it.
Speaker: And given that they have a relatively high share in the EM consumption basket, it would be great to discuss what they all mean for EM inflation prospects or growth prospects.
Speaker: So we will take a deep dive on all these factors and obviously focus on the previous commodity price shocks as well.
Speaker: And I have to say, Peter and John, they published a fantastic paper in April.
Speaker: You may have seen it.
Speaker: It's a World Bank paper.
Speaker: It's about the impact of the war in Ukrainian commodity markets.
Speaker: So super tiny.
Speaker: And I'm sure they may want to refer to that paper as well.
Speaker: So without further ado, Peter, can we start with you sort of to paint the global backdrop for us, the general macro backdrop
Speaker: for commodities markets, particularly for the energy commodities and oil markets.
Speaker: And then we go to John to discuss the agricultural commodities.
Speaker: So Peter, over to you.
Speaker: Thank you very much.
Speaker: Thanks very much.
Speaker: And it's a pleasure to be here with you today.
Speaker: As you said, Mirat, there's many different factors affecting commodity markets at present, and we're seeing huge price volatility at the moment.
Speaker: And I think that reflects two competing narratives.
Speaker: On the one hand, you have widespread concerns about the state of the global economy.
Speaker: We have a significant and rapid tightening of monetary policy by central banks around the world, and that's leading to concerns about a global economic slowdown, if not an outright global recession.
Speaker: Now set against that, you have widespread concerns on the supply side that we might have insufficient supplies.
Speaker: And for energy that reflects several years of low investment in fossil fuels.
Speaker: That really starts in 2014 and has been exacerbated over the past couple of years.
Speaker: We still have some supply side effects from the disruption from the pandemic.
Speaker: And of course, these factors have been turbocharged by
Speaker: the impacts of the war in Ukraine.
Speaker: So on the demand side, if we take a look at oil, for example, I think the worries that we're seeing around demand are still just that, they're worries.
Speaker: If you look at the actual data, there has been some slowing in oil demand growth, but it's still positive.
Speaker: And the International Energy Agency is expecting growth of 2 million barrels a day this year and next year.
Speaker: So still pretty rapid growth despite the economic backdrop.
Speaker: I think on the supply side, you have an array of factors that are potentially quite concerning.
Speaker: Whilst Russian exports have held up fairly well so far, they are expected to come off towards the end of this year as EU sanctions ramp up.
Speaker: The EU will fully ban crude oil from December and oil products from February.
Speaker: And that's expected to take around one and a half to 2 million barrels a day off the market.
Speaker: On top of that, we know that OPEC Plus are essentially at their maximum production capacity.
Speaker: Many of their members are producing well under target.
Speaker: And on top of that, the group actually announced a production cut, albeit a very modest one.
Speaker: But it's an indication that they're happy for oil prices to be quite a bit higher than they perhaps had previously had as their
Speaker: an implicit target um opec of course also has very minimal spare capacity at the moment um it's really only saudi arabia and perhaps uae that have any spare capacity and that leaves the oil market vulnerable to to shocks
Speaker: Other important factors are the drawdown of strategic petroleum reserves, particularly in the United States.
Speaker: This has been pretty substantial, maybe around 1 million barrels a day of extra supply to the market.
Speaker: And that's expected to come to an end within the next month.
Speaker: It could, of course, be extended, but there's no guarantee there.
Speaker: And finally, in terms of the US more broadly, US shale is once again expected to come to the rescue.
Speaker: And there are these very substantial predictions for production growth this year and next.
Speaker: But so far, it doesn't look like that's on track.
Speaker: If you look at the rig count, it's still quite subdued.
Speaker: And increasingly, these companies are focused more on returning cash to shareholders rather than increasing production.
Speaker: And even for the ones that do want to increase production, there are many supply side factors that are restricting them, such as a shortage of labor, a shortage of equipment and parts.
Speaker: And so it is going to be hard for the US to ramp up.
Speaker: So I think whilst we are seeing much, you know, quite a sharp pullback in oil prices recently, over the one to two year horizon, we think that these supply factors will start to outweigh the worries about demand.
Speaker: Now, in contrast to previous energy crises, in fact, oil is almost the sideshow in its natural gas and coal where all of the action is.
Speaker: What we've seen is Russia has shut off flows to Europe.
Speaker: Europe has managed to rebuild its inventories, but only at great cost.
Speaker: It's basically sucked in every available cargo of liquefied natural gas around the world.
Speaker: And that's had really severe ramifications on other countries.
Speaker: I mean, Pakistan, for example, hasn't been able to
Speaker: bid for any LNG cargoes because Europe has just been drawing all of them in.
Speaker: So a lot will depend this year on how severe or mild the winter in Europe is.
Speaker: I think if it's mild Europe can probably squeak through, but if you do see a severe winter, it could require pretty drastic reductions in natural gas demand.
Speaker: And for policymakers, the key question there is going to be how much of that is borne by industry or how much is borne by households.
Speaker: So with that brief overview, probably a little pessimistic, but I think that's the state of the world we're in.
Speaker: I'll pass over to John to talk a bit more about agriculture and also the broader impacts of the war in Ukraine.
Speaker: Well, thanks, Pete, and thank you very much, Murat.
Speaker: I'm delighted to be part of this.
Speaker: Let me begin by touching upon the issue of price volatility for food commodities and the kinds of disruptions that we have seen in the global food commodity markets.
Speaker: In terms of what is behind the price volatility that we have experienced the past couple of years, of course, the first issue is the pandemic, which caused quite a few supply disruptions around the world.
Speaker: Then we had some adverse weather patterns, especially in Latin America, that affected the crops such as soybeans and wheat.
Speaker: We also had some problems in Southeast Asia that affected crops such as palm oil.
Speaker: And more importantly, of course, we had the war in Ukraine, which disrupted the exports of a number of commodities, especially wheat.
Speaker: And Ukraine, along with Russia, are accounting for a good chunk of the wheat export market.
Speaker: So when Russia invaded Ukraine, exports from Ukraine came to practically to zero.
Speaker: And that sort of induced fears of further supply disruptions.
Speaker: Now, since then, not since then, I mean, for the past three months, I would say agricultural prices, especially wheat prices have kind of entered a downward path, they have declined a little.
Speaker: And that reflects the fact that Russia agreed to let some of the export ports of Ukraine to start operating.
Speaker: So the world market has seen some, I would say, some relative stability in terms of price volatility.
Speaker: As we move ahead, like the short term, the medium term outlook, a lot will depend, of course, what kind of actions various countries are going to take in terms of policy restrictions, including, of course, whether we're going to see exports coming out of Ukraine and Russia.
Speaker: A couple of years we did see a number of policy restrictions, especially export restrictions by numerous countries.
Speaker: Another issue that I would like to highlight is the fact that energy commodities and food commodities are linked and are linked very closely, both in the short term and in the long term.
Speaker: And just as a side note, I mean, for the ones that have been in a farm, if you visit a farm, what you see is trucks, tractors, water pumps, fertilizer, chemicals, etc.
Speaker: And everything, all those items depend on energy.
Speaker: They run on energy.
Speaker: To summarize, we have seen volatility, which on the one hand comes from the pandemic and the supply disruptions and the export restrictions.
Speaker: But on the other side, it comes also through the strong links between energy and the non-energy commodity markets and the food commodity markets.
Speaker: Comparing what is unfolding now, the current sort of price spike, and if we compare it with the spikes that took place back in 2007-8, as well as in 2011-12, I would say there's also, there's of course the similarity
Speaker: between the energy price spikes in the sense of both then and now we have increased in energy prices that of course, of course, affects the cost of production.
Speaker: The second similarity is the policy restrictions, which I mentioned, which are in terms of numbers the same, but they are less restrictive, I would say now, but there's a third, I would say difference.
Speaker: And that is what has helped in a sense food prices.
Speaker: They have not skyrocketed as one we have expected.
Speaker: It's the fact that
Speaker: food markets now are much better supplied than what they were back then, especially in 2007 and 2008.
Speaker: And that's why we have seen quite a bit of volatility in food markets, not as much as one would have expected.
Speaker: Of course, if we have adverse weather events like next year or the year after, stocks, inventors will be depleted and we'll have probably more severe problems.
Speaker: I will stop here and as Pete said, unfortunately, I don't have better news, but anyway.
Speaker: Excellent.
Speaker: Thank you very much, Peter and John, for setting the stage very nicely for our succeeding discussion.
Speaker: Perhaps
Speaker: I can pick your brains on the policy response.
Speaker: I mean, given the shock we've seen on commodities, and obviously there's a supply and demand element, commodities in general and agricultural commodities in particular, how do you see the policy response?
Speaker: Is it satisfactory?
Speaker: Is it counterproductive?
Speaker: So can we talk a little bit about the policy perhaps with the same division of labor?
Speaker: Peter, we start with you.
Speaker: on broad commodities backdrop, oil markets, et cetera, and then go to John for agricultural commodities more specifically.
Speaker: Thank you.
Speaker: Yes, it's a great question.
Speaker: I think what we've seen in terms of the scale of the increases in energy prices, they have necessitated a huge amount of policy response.
Speaker: The question is whether that's the right policy response.
Speaker: So what we've seen, the most policy responses have been tax cuts or price subsidies.
Speaker: We've seen that in almost every country around the world, particularly in Europe.
Speaker: Governments have been spending huge amounts of money on price caps for households, particularly for electricity and natural gas bills.
Speaker: Now, the scale of the increase in prices we've seen means that you do need substantial help.
Speaker: Households are really struggling.
Speaker: But to some extent, putting price caps in place doesn't do anything to address the underlying demand and supply imbalance.
Speaker: And so what we've seen in Europe is that industry has been the one to suffer the brunt of adjusting on the demand side.
Speaker: Simon Carnes, Now there have been some policy measures on the supply side and that I think is where you can really that that's the best way to address these issues fundamentally we need more energy.
Speaker: Simon Carnes, The EU has announced a lot of plans to boost renewables, but of course that will take time individual countries have implemented measures to.
Speaker: increase their ability to import liquefied natural gas, building new infrastructure and terminals.
Speaker: And that's welcome to the extent it addresses energy supply issues.
Speaker: But of course, it's in March contradiction to the EU's broader climate change objectives.
Speaker: I think beyond this, what we would recommend is more targeted support to households rather than these widespread
Speaker: rebates or price caps.
Speaker: But of course, that's in an ideal world.
Speaker: And in practice, it's very hard to do.
Speaker: And when households generally are suffering, price caps are a simple tool.
Speaker: So perhaps not the policy responses that we would like to see, but it's not an idealized world either.
Speaker: John, I'll pass over to you on agriculture.
Speaker: Yeah, thanks, Pete.
Speaker: We did have quite a number of policy responses, export bans, etc.
Speaker: in agriculture, but not as bad as we had seen before.
Speaker: And one of the reasons may be, again, I have an interest to say that, is that this time the international organizations, as well as I would say the financial press, etc., they brought the issue to the forefront very early on.
Speaker: I would like to believe that that helped.
Speaker: Excellent.
Speaker: Thank you.
Speaker: Thank you, John.
Speaker: I think one of the questions is how will the energy price shock impact the transition to cleaner forms of energy?
Speaker: Maybe to you, Peter.
Speaker: Yes, this is the hot topic at the moment.
Speaker: I think on the one hand, this presents a real opportunity to policymakers to accelerate the energy transition.
Speaker: But the way I view it is that the war in Ukraine is likely to delay the transition in the near term, but perhaps accelerate it in the longer term.
Speaker: And what I mean by that is that energy security has really come to the fore.
Speaker: The importance of energy security has risen very high on policymakers' lists of priorities.
Speaker: And in the short term, policymakers are willing to do anything to secure that, including returning to fossil fuels.
Speaker: You see that in Europe, you see that in many other countries.
Speaker: The question is whether alongside that short term response, they put in place measures to promote the necessary investment in renewable energy, which also has very real energy security benefits.
Speaker: So I do think it will have very significant consequences for the energy transition.
Speaker: As I said, a delay perhaps in the near term, but potentially accelerating it in the longer term.
Speaker: Thank you, Peter.
Speaker: So maybe this one is for John.
Speaker: Global food prices don't appear to be in crisis with an agricultural organization.
Speaker: Food prices just up 3.3% year to date.
Speaker: Why is food in CPI so much higher?
Speaker: This is a good question.
Speaker: Yes, if you look at the data and you pick the right sort of months,
Speaker: If you start from, let's say, May to August, you see a decline in the food price point to make.
Speaker: Are we in a crisis?
Speaker: Let me make two points here.
Speaker: The first point is that the FAA price index, as well as the World Bank Commodity Price Index and other price indices, food price indices, we monitor prices at what we call export level or FOB or CIF level at the border pretty much.
Speaker: And of course, between the border, the price in the border and our dinner plates and the breakfast plates, there's a huge difference.
Speaker: You have transportation costs, storage costs, a lot of labor, other inputs, energy inputs, et cetera, et cetera.
Speaker: And that's why we see the CPI being persistent while we do not see a corresponding sort of push from the primary commodity side.
Speaker: The second reason is that it takes time also from
Speaker: the primary commodity sort of shock to be transmitted around the world.
Speaker: And that's why we see some countries have higher inflation, experienced higher inflation.
Speaker: Three months ago, other countries experienced higher inflation now.
Speaker: Now, why we call it a crisis?
Speaker: I think that's a fair question.
Speaker: But I wouldn't call it a price crisis because the commentator raised a good point that the price has increased, but not as much.
Speaker: Perhaps one can go back to Houston and see even larger price increases.
Speaker: But what we experience now is that disruption in supplies.
Speaker: For example, when following the invasion back in
Speaker: In February, a lot of grains, especially wheat that was supposed to go to countries such as the Middle East and North Africa, wheat simply did not arrive there.
Speaker: And we did see within a matter of weeks some food prices skyrocketing there to increase by a factor of two or by a factor of three.
Speaker: So the conclusion here is that the crisis, so to speak, or the volatility has had a disproportional impact across the globe.
Speaker: And it hit hard countries that were dependent on imports from Russia and Ukraine.
Speaker: So yes, it may not be a crisis for all, but it's certainly a crisis for some countries.
Speaker: for some countries.
Speaker: And of course, the other issue is that in a lot of low income countries, as we know, or in all I would say low income countries, even small price increase play a huge role because in low income countries, about 50 to 60% of disposable income goes for food, something which is not the case for advanced economies where only 10 to 15% goes for food.
Speaker: So even for small price increase for those countries pay
Speaker: they pay a huge price consuming.
Speaker: Thank you, John.
Speaker: No, it's great.
Speaker: And perhaps I may go back to an earlier question, which essentially was saying, you know, why could this shock be longer lasting?
Speaker: I mean, there's interlinkages between, you know, energy commodities and agricultural commodities through three various channels.
Speaker: But I know you also discuss in the paper, maybe Peter Moore for you, that there aren't enough substitutes when it comes to energy commodities.
Speaker: Can you open that up for us, please?
Speaker: Thank you.
Speaker: Thank you, yes.
Speaker: And so in the paper, what we do is look back at previous energy crises, particularly the 1970s oil price shocks.
Speaker: And we looked at how
Speaker: those evolved and how they were addressed.
Speaker: And what we found was that, particularly in the oil price shocks of the 1970s, you had this widespread substitution away from crude oil and towards coal and natural gas.
Speaker: So back then, crude oil was used in electricity generation and countries shifted fairly rapidly towards coal and also nuclear power.
Speaker: On top of that, you had a lot of increases in energy efficiency and appliances.
Speaker: You had a lot of government policies put in place to have things like fuel efficiency standards in the US.
Speaker: There was a really dramatic improvement in the efficiency of US cars.
Speaker: Now, if you compare that with today,
Speaker: As I said at the start, it's almost oil prices which are the cheapest form of fuel at the moment and the highest increases have been for natural gas and coal.
Speaker: So you have much less scope for substitution to a cheaper fuel.
Speaker: I mean, that's one reason perhaps why we might expect to see more rapid deployment of renewables if we think that those are increasingly the cheapest option.
Speaker: So potentially a reason for optimism amongst our other gloomy comments.
Speaker: We are seeing some government policies on the efficiency side, but really we think these are not perhaps sufficient.
Speaker: There is more that governments could do in that regard.
Speaker: And again, as I said at the start, the price signal is one of the best ways to achieve that.
Speaker: The market has a way of balancing demand and supply, but if you mute that price signal by putting in place price caps, then you're kind of shutting off that natural correction.
Speaker: And I think, you know, beyond this, you also have the fact that energy costs as a share of GDP have fallen quite substantially, particularly in advanced economies.
Speaker: And so perhaps consumers might be a little less sensitive to oil prices than they were back in the 1970s.
Speaker: Excellent.
Speaker: Thank you, Peter.
Speaker: Now, I totally take your point about the price signals when you bring caps or perhaps even sort of these export bands or restrictions, as you talked about, which is suppressing the price signal.
Speaker: Okay, let's move on.
Speaker: It's an interesting question for you, John, I guess.
Speaker: Are biofers and ethanol contributing significantly to increasing grain prices?
Speaker: Great.
Speaker: Thanks, Monad.
Speaker: Thanks, the commentator.
Speaker: This is a...
Speaker: Great question that I was going to answer it anyway.
Speaker: That's I found it very, very interesting, very important.
Speaker: Certainly they do contribute.
Speaker: Nobody, we cannot deny that.
Speaker: And the numbers are supporting shortspeakers.
Speaker: According to our calculations, about 3 to 4% of global Arab land is allocated to the production of biofuels.
Speaker: That's quite a bit of a big chunk of land that's allocated to biofuels.
Speaker: Other number that I would like to highlight here and make the contrast in biofuels is, as I said, on the one hand, three to four percent of land is allocated for the production biofuels.
Speaker: But when we see how much biofuels account for in terms of energy, they account for about 1.8 percent for total oil consumption, but they only account for 0.6 to 0.7 percent for total energy consumption.
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Speaker: We do a lot of negative sort of damage, if I could put it plainly on the food side, and we only get a little benefit on the energy side.
Speaker: So this is one aspect of biofuels.
Speaker: And the other aspect is that quite a bit of research
Speaker: has come out recently and earlier, I would say, that they are questioning whether there are environmental benefits in the first place.
Speaker: So we have this diversion, but it does not guarantee that we do have environmental benefits.
Speaker: So I think it's a legitimate question to ask.
Speaker: Do biofuels help?
Speaker: And I don't know.
Speaker: I don't think the answer is positive here.
Speaker: Excellent.
Speaker: Thank you, John.
Speaker: So maybe more sort of on a big picture philosophical question long term.
Speaker: I know we did touch upon this here and there, like with export spend and stuff.
Speaker: But I think it's a very relevant question, especially in the current global backdrop.
Speaker: What impact could de-globalization and rising protections have on food inflation and markets?
Speaker: I think this question is more broad based, not only agriculture, food commodities, but also for global commodities, energy commodities and everywhere.
Speaker: So maybe Peter, we can start with you.
Speaker: Yes, no, it's a really important point.
Speaker: I think particularly in the case of energy, as I said, energy security is becoming very important and that's leading countries to really shift patterns of trade.
Speaker: And these by their nature are inefficient.
Speaker: In an ideal world, commodities will flow to their
Speaker: you know, nearest people or places with the shortest transport cost.
Speaker: And instead, what we're seeing is if we take the example of Europe, shipping natural gas by pipeline from Russia to Europe is a very cost effective way of transporting natural gas.
Speaker: Now, instead, Europe is importing liquefied natural gas from all over the world, from from very far off places.
Speaker: And this pushes up the cost of transporting it, both in terms of the dollar cost, but also the energy cost.
Speaker: And the same is true for coal.
Speaker: There was this story doing the rounds the other day about Tanzania, which typically only exports coal to its most immediate neighbors and is now seeing demand from Europe, even though the cost of shipping coal from Tanzania to Europe is extremely high.
Speaker: and would be uneconomic at normal levels of coal prices.
Speaker: So I think the inefficiency argument is definitely there and a concern.
Speaker: And to the extent that this makes markets more costly, it will also serve to push up prices ultimately for the consumer as well.
Speaker: Perfect.
Speaker: So, Jonathan, can you touch on the regional differences in rising food prices?
Speaker: Which regions are most impacted by this and obviously which the least?
Speaker: Yes, first, let me say that when you look at the sort of a heat map on the food price increase, you see if you color red for food prices, which experience inflation, let's say above 5%, you just need the world map becoming red.
Speaker: So it's taking place across the world.
Speaker: F. G. affects both developing and developed countries, so nobody has escaped so to speak that, but when you zoom in into food commodities, I would say that probably sub Saharan Africa and what we call the MENA region, the North Africa and the Middle East region, they have been affected the most.
Speaker: And the Middle East and North Africa region is a as I will elaborate it earlier in the discussions because they have direct links with the imports from Russia and the Ukraine simply because of geography there proximity, so to speak.
Speaker: So those are the regions I would say that have been affected the most.
Speaker: Now, the regions that have been affected the least is East Asia, the Pacific region, which includes China, Thailand, Indonesia, and those countries.
Speaker: And the reason that, in our opinion, this region has been affected the least is because from a cultural perspective, they are a rice consuming nation, they are rice consuming nations.
Speaker: And in contrast to Middle Eastern North Africa, which are wheat consuming nations.
Speaker: So the price of rice did not increase much, has been quite stable throughout the past three to four years.
Speaker: And that's probably the reason why we do not see much food price inflation in the East Asia region, while we saw the most in North Africa in the Middle East.
Speaker: So we do see quite a bit of variation.
Speaker: But again, as I said earlier, if you look at the map, nobody has escaped.
Speaker: Excellent.
Speaker: Excellent.
Speaker: Thank you so much, John, Peter.
Speaker: So this was an amazing discussion, very insightful.
Speaker: Really, really appreciate your participation.
Speaker: And once again, I would highly recommend this amazing paper, World Bank paper from April, where John and Peter co-authored on the impact of the war in Ukraine and commodity markets.
Speaker: Really very enlightening.
Speaker: Peter and John, thank you very much again.
Speaker: Have a great rest of the day.
Speaker: Thank you.
Speaker: Thank you.
Speaker: Thank you for joining us for this episode of Emerging Market Spotlight.
Speaker: We hope you enjoy the discussion.
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