Summary
Higher global food prices following Russia’s invasion of Ukraine (Ca stable) have brought
renewed focus to the issue of food security. The difficulties relating to food supply shocks
are greater for emerging and frontier markets, where a higher share of food in household
spending combines with other vulnerabilities, such as generally higher exposure to
environmental and social risks. In this report, we assess the credit impact of food shocks on
sovereigns and the effectiveness of the policy response.

Food insecurity shocks will be a recurrent source of credit risk. Three factors will
combine to keep global food security fragile and vulnerable to shocks: rising global
demand for food, exposure to geopolitical disruption, and physical climate risks. We
expect low-rated frontier markets across Africa and the Middle East, along with parts of
South Asia, to remain the most vulnerable to future food security crises. Our analysis
finds Mozambique (Caa2 positive), Rwanda (B2 negative), Zambia (Ca stable), and
Ethiopia (Caa2 negative) among the most exposed and vulnerable countries.

Food price shocks exacerbate macroeconomic difficulties and social risks.
Beyond their human and development costs, food crises have clear negative economic,
external, fiscal and social repercussions for the most exposed and vulnerable sovereigns.
Malnutrition and related difficulties have long-term effects on health, education,
and ultimately productivity and human capital. Higher food prices can also impact
government finances and the balance of payments, exacerbating macroeconomic
vulnerabilities and fiscal and external imbalances. Food insecurity worsens social
difficulties and can trigger social-political instability or violence.

The national and international policy response can only partially offset food
shocks. Effective support measures and timely financing have helped reduce some of the negative social and economic costs of the current crisis. But they will not fully offset the negative credit impact for the most exposed sovereigns. The 2022-23 food price shock will spur regional and international efforts to improve food security and supply-chain resilience. Still, weak governance and capacity constraints in many of the countries most affected, and the difficulty of maintaining longer-term international support, will hamper these policy efforts.

Food insecurity shocks will be a recurrent source of credit risk
Acute food insecurity will be a recurrent source of credit risk for many emerging market sovereigns, in particular those most exposed and vulnerable to physical climate risk. Global food price volatility has increased over the past two decades, with the current spike the third in 15 years.

Global demand for food will keep rising on the back of continued, though slowing, world population growth, rising incomes and urbanisation. The OECD and Food and Agriculture Organization (FAO) projects global demand for agricultural commodities, including for use as food, feed, fuel and industrial input, to grow at 1.1% per year through to 2031, though at a slower annual rate than during the previous decade.

Most additional demand for food is projected to come from low and middle-income countries, predominantly across Sub-Saharan Africa and India (Baa3 stable). In contrast, slow population growth and demand saturation will curb demand growth in
high-income countries.