Update Country Report Maldives 06 Jul 2022

• As global commodity prices soar and political discontent on food price grows, countries in Asia have introduced export restrictions for essential food items, fuelling inflation for food importers.
• South Korea, Taiwan and economies exposed to balance-of-payment difficulties, like Sri Lanka, are most affected by food inflationary pressures, and the latter two are facing acute food security problems.
• There is a moderate risk that food exporters will sanction restrictions under acute domestic pressure, both stemming from a sharp rise in prices and politics. The risk is comparatively high in Thailand.
• Food-exporting countries are likely to reinstate these restrictions when food prices are under acute pressure, either too high or low, but they will be short-lived.

In the backdrop of the Russia-Ukraine war, food prices have been surging across Asia under various categories. Acute price pressure and its associated political fallout have prompted some Asian economies to sanction export restrictions on foodstuffs to ensure an adequate domestic supply of such goods, which has fuelled inflation further in countries that rely on imports. EIU expects that most of these bans will be short-lived but reinstated with very short notices if acute pressure re-emerges. Given the turmoil in the global market, this is likely. This will mean that whenever significant price pressure occurs, export restrictions are likely to amplify global food inflation further.

Inflation on the rise

Food inflation has been among the primary drivers of inflation in Asia owing partly to its significance in the consumer basket. Noticeably, staple foods like rice and wheat are seeing less of a price rise compared to others, owing partly to the ample reserve of staples held by the government that can be released to the public. This is less likely the case for meat, vegetable and cooking oils, due to their less essential and more perishable nature.

Such a trend has placed acute inflationary pressures on many Asian economies. Consumer food prices have been rising rapidly in most countries in 2022 amid increasing price. The trend is particularly evident in economies with a high import dependency, including Singapore, South Korea and Taiwan, which will see more acute food price pressure owing to their inability to manage domestic supply to mitigate price surges. The situation is worsened in countries where the value of the local currency weakens significantly. Sri Lanka, for instance, has experienced food price increases in excess of 40% since March. A price surge like this is substantial enough to undermine food security in those countries, which risks upsetting political stability.

Next in line for export restrictions

Most countries that imposed restrictions on foodstuffs did so to head off potential discontent from the general public. Global price of foodstuffs is expected to grow further, amid supply-side factors like disruptions in sowing and high costs of input (like fertilisers). This will bring significant domestic price pressure or outright shortages of certain food items, which have been causing discontent within the electorate, prompting the government to restrict exports. For instance, in Malaysia, the majority of the electorates consume chicken as their main source of protein. Elevated chicken prices have led to criticism towards the government (which we expect will face a snap election this year) and prompted a chicken export ban. Other cases of food export restrictions occur when certain food prices fall markedly and governments, being pressured by politically important agricultural groups and viewing the country as having significant market power, halt exports in an attempt to shore up domestic prices.

In Thailand, poultry, eggs and dairy prices have increased by an average of 6.3% year on year in April-May 2022 with month-on-month figures quickly picking up, a level that poses modest risk of prompting the introduction of export restriction. The chance is further improved by widespread discontent towards the current Thai government, and the impending election in the first half of 2023. The government has also shown instincts of sanctioning export restrictions, as it has suggested discussion with Vietnam on a "rice cartel", although it is unlikely to take off owing to a lack of market power even with two countries combined. However, the risk of them sanctioning export restrictions remains moderate, as inflationary pressures build up but remain below an intolerable level, and producers might be better off reaping the windfall of global food price surges and using high global prices to offset much-higher input prices like fertilisers and seeds.

These export restrictions, however, are usually short-lived. For instance, Indonesia's palm oil export ban, which disrupted the global market, lasted around three weeks. Countries with significant foodstuff exports usually have domestic production far exceeding domestic demand. Deploying an export ban tends to lead to a glut in the domestic market. In some cases, exporters will hoard goods until the authorities revoke export bans, which offset the intended suppressing effects of food prices. This phenomenon is probably better managed under a domestic minimum obligation, which requires a certain percentage of products to stay in the domestic market. However, enforcement of this measure is likely to remain tricky. Prolonged export restrictions have also proved ineffective and contributed to the decline of market power. For instance, Thailand sanctioned export restrictions on rice in late 2011 and subsequently lost its position as the top rice exporter.

Frequent but more likely short disruptions

As food price matters to the electorates' day-to-day life, it is usually highly politically sensitive and governments are frequently compelled to act upon surges. We therefore expect food export restrictions to be applied when local food prices are under acute pressure. Export restrictions usually come in handy for governments of developing economies, as it is unlikely to incur much fiscal burden, and these governments possess a less substantial stockpile that can be released to the market and mitigate price pressures. This will disproportionately fuel inflation in countries with a high import dependency, including Singapore and South Korea.

However, we expect these disruptions to be generally short-lived and will be less likely to occur together, should no systemic disruptions like the covid-19 pandemic emerge. Idiosyncratic export restrictions on one certain good are unlikely to significantly fuel inflation. Still, countries looking to shield themselves from such restrictions are likely to diversify their source of exports, and shun from relying on countries with known records of sanctioning export restrictions. The impact of which varies, and in an event of a significant run-down of global stocks and capacity, it is almost impossible to fully offset the impact of export restrictions. Some countries have attempted to introduce self-reliance programmes; for instance, Singapore has introduced a 30% domestic supply target for the city state's nutritional needs in 2030 (although this is unlikely to be realised fully). Certain countries are likely to beef up their food reserves, including ramping up the storage facilities of perishable foods, to ensure sufficient domestic supply even in the time of international price volatility.