Elevated Inflation Heightens Risk Of Political Unrest


BMI V iew: The Middle East and North Africa region was one of the largest grain importing region s in 2012 , and we expect it to remain massively reliant on imports over the medium term. This will make it very dependent on movements in global grain prices over that time . Inflationary pressure will leave the risk of political unrest throughout the region heightened , especially as reforms to ongoing subsidy program me s are in process.

The Middle East and North Africa (MENA) remained one of the largest grain-importing regions in 2012, and we expect it to continue to be massively reliant on imports over the medium term. Even though Egypt will import slightly less wheat in its 2012/13 season than usual, imports into other countries such as Morocco or Iran have surged in the current season because of smaller harvests and depleted stocks. Out to 2016/17, we forecast deficits in major MENA importers to widen further, with Egypt remaining the largest wheat importer in the region. Algeria, Iran and Saudi Arabia will see their deficits increase only slightly over our forecast period. Only Morocco could see its production deficit narrowing slightly largely because of saturated wheat demand and improvements in GDP growth over our forecast period.

Increasing Import Needs Overall
Select MENA Countries - Wheat Imports ('000 tonnes)

The region's reliance on grain imports will continue to make it very dependent on movements in global grain prices in the near term. In 2012, the surge in grain prices on the back of the worst US drought in 56 years had delayed but significant effects on MENA countries, especially Tunisia and Egypt. However, generous government subsidies for food prices kept food price inflation in the region in check, with Egyptian food prices not returning to their 2009 highs. Tunisia has seen inflation gradually tick up in recent months, and as it is at about 8.7% y-o-y in January 2013 (compared with 3.5% in July 2011), we believe it has reached an unsustainable level for the country.

Jordan saw inflation increase significantly in September 2012, as the country imports wheat mostly from the US, which was in high demand in 2012 as other major producers such as the EU and the Black Sea region ran out of supply quickly. Syria and Iran have seen inflation reach record highs in recent months, as both countries have been struggling with financial sanctions preventing food imports and the gradual reduction in stocks for grains and main agricultural commodities beyond safety levels. Latest official estimates for Iran show food price inflation at 42.0% y-o-y in October 2012, and we do not believe inflation has come down by much since then. For Syria, the September 2012 figure was at 48.0% y-o-y, and we believe the situation may have worsened since then.

Inflation Ticking Higher
Select MENA Countries - Food Price Inflation (% chg y-o-y)

We believe these inflationary pressures will leave the risk of political unrest throughout the region at a high over the first months of 2013. Recent protests in Tunisia, Egypt and Iran have been partially motivated by the economic hardships of the local population, some of the main issues being spiralling food and fuel costs. If these concerns are combined with denigrated and authoritarian regimes (Syria and Iran) or slow process of reforms for government put in place after the Arab Spring (Tunisia and Egypt), we see little chance of violence abating in these countries in the near term.

Select Grains - Historical Annual Averages & Forecasts
Units 2008 2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f
Source: BMI, Bloomberg
Wheat USc/bushel 795 582 576 709 752 780 750 675 650 675
Corn USc/bushel 527 403 422 680 695 650 575 520 na na
Soybean USc/bushel 1233 968 1039 1317 1465 1480 1400 1320 na na
Rice US$/cwt 15.3 13.7 12.5 15.1 14.9 14.0 13.0 12.8 12.6 12.5

This cautionary outlook is a result of two forces playing against each other regarding the outlook for food prices in the region. On the one side, we forecast global grain prices to moderate in the medium term, which is likely to provide some relief to global food price inflation. We even expect inflation to move into negative territory globally in H213. We forecast food price inflation for the region to move down from 14.7% in 2012 to 12.3% in 2013 on average, reaching 8.6% in 2014 in line with our view for moderating global grain prices.

The Impossible Rebalancing
Select MENA Countries - Fiscal Balance (% of GDP)

On the other side, we see ongoing talks about reforms of food subsidy programmes in the region presenting downside risks to our view for falling inflation in the region. In fact, most countries in the MENA region heavily subsidise food prices (especially bread prices). According to the IMF, food subsidies accounted for 7.0% of total government spending in Tunisia in 2011. Food and fuel subsidies accounted for 19.7% of total government spending in Morocco and for 21.9% in Egypt. Because of ongoing negotiations with the IMF, which include financial assistance to several countries in the region dependent up reduce spending on subsidies, we believe the amount spent for food subsidies could be decreased in the future.

In spite of ongoing reforms, we expect governments to remain very important in the grain import tendering process and believe they will continue to step in whenever major upside to food price inflation is spotted. This will cushion movements in inflation in the region, although we still expect inflation to remain high by global standards in the medium term.

This article is tagged to:
Sector: Agribusiness
Geography: Middle East, Middle East

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