December 2, 2022

Donalds Hobby

World Finance Reviews

Ukraine war will increase poverty in developing economies, warns World Bank

The war in Ukraine threatens to cause lasting damage to the economies of low- and middle-income countries, pushing millions of people into poverty and tipping dozens of countries into a debt crisis, the World Bank has warned.

High commodity prices, collapsing trade growth, rising interest rates and a stronger US dollar will exacerbate fiscal pressures in many countries, making it harder for net importers in particular to service mounting debts, said Indermit Gill, the bank’s vice-president for equitable growth, finance and institutions.

Soaring prices for oil and wheat alone will be enough to severely hamper growth in many developing countries unless the war ends quickly, he added. Oil importers such as China, Indonesia, South Africa and Turkey were particularly at risk.

“If wheat and oil prices stay high for six months to a year, that will shave a percentage point off the growth rates that we forecast little more than a month ago,” Gill said.

Growth in developing countries was already suffering long-term decline before the war began, he noted. In January, the World Bank forecast that output growth in developing countries would average 6.3 per cent in 2021, 4.6 per cent this year and 4.4 per cent in 2023.

A percentage point reduction in growth may be manageable in some Asian countries “but for Turkey or Brazil, it is huge”, Gill said.

Last year, the bank warned that about 100mn people would be pushed back into poverty, which it defines as living on less than $1.90 a day, or would fall into poverty for the first time as a result of the coronavirus pandemic. While it was too early to predict the impact of the war, that number was now certain to rise, Gill said.

About 40 low-income countries were already in debt distress or at risk of falling into debt distress because of the pandemic, he said, adding: “With the war, debt crises may come much sooner, and that can cause a lot of permanent damage.”

The economic impact of the war will not be evenly distributed, analysts have said, and is likely to be exacerbated by further disruption to supply chains caused by Covid-19 restrictions in China. A recent report by the Institute of International Finance (IIF), a financial industry association, compared the war’s impact on emerging markets through merchandise exports, overall trade and commodity price effects on current account balances.

Video: China, Russia and the war in Ukraine

It found that central European countries such as Poland, the Czech Republic and Hungary were especially exposed through disrupted trade with Ukraine and Russia, while Turkey and Egypt were even more exposed through both trade and their dependency on imports of oil and wheat.

Commodity exporters in Latin America stood to gain from rising food and fuel prices, the IIF noted. But it warned that any further escalation of the war and of sanctions against Russia were likely to cause indiscriminate capital outflows from all emerging markets.

Chart showing how Latin American commodity exporters are well placed to weather the storm; EM Impact index of Russia-Ukraine conflict

Mark Rosenberg, chief executive of political risk consultancy GeoQuant, said some of the most economically exposed countries, including Egypt, Turkey, India, South Africa and Thailand, had favourable relations with Russia.

While this would allow them to continue to import food or fuel from Russia, as India has done, it may also leave them exposed to greater fallout from western sanctions on Russia and, possibly, its trading partners.

Rosenberg said Egypt was the most exposed to the war, given its trade ties and high risk of political instability. Last week, the country asked for support from the IMF. He added that India was also vulnerable to geopolitical tensions, having “done damage to its relations with those countries forming an anti-Russia alliance”.

The World Bank’s Gill said economic damage from the war was likely to be felt most severely in countries with few or no economic ties to Russia, such as Ghana and Sri Lanka, but whose economies would be damaged through disruptions to trade and worsening global financial conditions.

Many countries had limited pandemic-related damage by providing support to businesses and households through debt-financed public spending, which was made possible by very low global interest rates and ultra-loose policies from advanced economy central banks. But with monetary policy tightening around the world, developing countries have already used up what fiscal space they had.

“The damage from the pandemic was reversible because it could be dealt with through domestic policy,” Gill said. “But we are very worried by the war. It is not in the hands of domestic policymakers and this could lead to irreversible effects.”

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