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THE FERTILIZER SHOCK THAT LOOMS OVER LOW-INCOME EMERGING MARKETS

The surge in fertilizer prices triggered by the Iran war is shaping up as a slow‑burn macro shock rather than a sudden global inflation spike, and some analysts say market consequences may be heavily skewed toward low-income economies.

The Middle East accounts for a sizeable share of energy-intensive nitrogen-based fertilisers such as urea - prices of which have jumped more than 50% since hostilities began.

Damage to Qatar’s gas infrastructure would mean supplies are unlikely to normalize quickly, even if the Strait of Hormuz reopens.

Higher prices and supply constraints could weigh on food availability in low-income countries and squeeze their fiscal and current account balances where the International Monetary Fund says that food makes up nearly 50% of the consumer basket in some cases.

Research consultancy Capital Economics said that lower-income EMs in Africa and South Asia are especially vulnerable and S&P Global Ratings warned that Egypt, Mozambique and Rwanda are among the "most exposed."

"Some of the countries had been able to purchase fertilizers earlier on and ahead of the crisis in the Middle East which mitigates this somewhat, but it also raises the risk of prices still being elevated," said Leon Bezuidenhout, sovereign and multilateral institutions analyst at S&P Global.

"We think it’s going to be elevated for some time, and this could significantly impact the following planting season."

The three countries are rated junk by the agency, and Mozambique is seeking a new loan programme from the IMF, even as international bond prices of all three countries are trading above 80 cents on the dollar, suggesting that investors are yet to price in the full impact.

Another potential concern is weather. The El Nino weather pattern is expected to set in from next month and could hamper on food production in Asia and Africa.

"If you got that triple whammy of energy, fertilizer and El Nino, you could be looking at some pretty large spikes in food price inflation," said Gillian Edgworth, fixed income portfolio manager, emerging markets, Wellington Management.

"That, again, is tough for an energy importing country and is tough for countries at the weaker end of the credit spectrum."

(Johann M Cherian)

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