Update Country Report Maldives 23 Sep 2022

• Although the EIU's baseline view is that rice prices will be stable in the remainder of 2022 and 2023, a combination of supply and demand developments highlight the risk of a sharper rise that would be economically disruptive in Asia.
• Risk factors include volatile weather, high fertiliser and energy prices, and safe-haven stockpiling. Trade protectionism is an additional and unpredictable factor that India's recent ban on some of its rice exports has highlighted.
• Higher rice prices would keep inflation in Asia higher for longer, adding to pressures in terms of monetary and fiscal policy in the region.

Although inflation has accelerated in Asia in 2022, it has done so more moderately than many other parts of the world. A contributing factor has been the stable price of rice, which is the main staple in the region. While prices for global wheat, corn and oilseed surged as a result of supply disruption following Russia's invasion of Ukraine, rice has been much less affected with global benchmark prices remaining lower than their recent peak in 2020. Asia produces-and consumes-around 90% of the world's rice.

Helpfully for the inflation outlook in the region, rice prices are forecast to be stable. We forecast that global prices, as measured by Thailand's export prices (grade B 100% white rice), will average US$425/tonne in 2023-unchanged from this year. An important factor acting to restrain growth in prices are the plentiful reserves that have been built up in Asia's major rice-consuming and exporting countries. Global rice stocks are forecast to remain at about 180m tonnes in 2023, comfortably above the average of recent seasons.

A perfect storm brewing in rice markets?

Still, we have considered several risk factors that could upset our projections, including second-order developments stemming from the Russia-Ukraine conflict.

Surging global demand for animal feed: Higher global grain prices have incentivised cattle and poultry producers to look for alternative grains for animal feed, such as low-grade rice. With wheat, corn and oilseed prices still at historically high levels, this will continue to support demand for rice from the animal feed industry.

Safe-haven demand: Rice demand tends to rise when global economic conditions deteriorate and incomes fall due to governments and households stockpiling the essential (and relatively cheaper) grain. The deteriorating outlook, as a result of high inflation and rising interest rates, raises the likelihood of some rice stockpiling ahead.

Elevated fertiliser and energy prices: Fertiliser prices will remain heightened as natural gas prices remain elevated in most parts of the world and fertiliser exports out of major producers, Russia and Belarus, remain muted. Higher input costs will have a particular impact on rice, which is the third-most fertiliser-intensive grain, adding to strains from high energy prices. Absent government support, farmers could cut back on planted area and fertiliser usage, with an impact on supply.

Unfavourable weather conditions: Erratic rainfall in India, drought conditions in China and flooding in Pakistan are set to weigh on rice output this year. In India's Kharif region, which accounts for close to 90% of the country's rice production, the sown area was 6% lower than the year-earlier period in early September. About 10% of Pakistan's annual rice crop is estimated to have been lost as a result of recent drastic flooding.

Trade protectionism: Inflation concerns this year have already prompted several governments in Asia to impose restrictions on several food exports. In early September India extended these measures into the rice market by implementing a ban on the export of broken rice and a 20% duty on a variety of other rice grades in a bid to control domestic prices. In October Thailand and Vietnam, the main alternative suppliers, are set to discuss collaboration on pushing up prices. Although widespread and long-term trade restrictions affecting rice fall outside our core forecast, they represent a moderate and potentially disruptive risk in the current environment.

These risks will bear watching, as any rise in rice prices would weigh on the economic outlook for Asia. Rice is by far the most important food in the Asian diet, making up roughly 30% of the average daily calorific intake-compared with about 2% and 6% in Europe and the Americas respectively. Therefore, any acute shortages or a stark rise in prices will have a significant impact on food security and inflation in the region.

Sticky food inflation would complicate policy choices

Food and beverages dominate the consumer price index (CPI) in many emerging economies in Asia, with rice and rice products weighted notably heavily in the indices for India, the Philippines and Thailand. The countries more vulnerable to rising rice prices and trade disruption will be those with a high level of consumption but significant reliance on imported supply. The Philippines stands out in this regard, despite a multi-year campaign to become self-sufficient in the grain, alongside import-reliant Singapore.

An upward trend in rice prices could prompt monetary policy reconsideration, if the release of stocks proved insufficient. At a time when price pressures in many economies in the region seem to have peaked-or are close to doing so-as energy costs moderate, an upswing in rice prices could act to keep inflation higher for longer. Many central banks in the region will look to the ending of steep interest rates increases by the Federal Reserve (the US central bank), which we expect to occur by end-2022, as an opportunity to slow or even stop their own monetary policy tightening. They will not, however, be in a position to offer such support to economic growth if price pressures persist.

For fiscal policy, too, governments would likely come under pressure to provide support to farmers and households if rice prices rise too quickly. That will slow the pace of fiscal consolidation in the region at a time when administrations are looking to reduce budget deficits in order to trim their exposure to increasing financing costs. However, a failure to do so would risk social unrest, if food security became compromised. Protests in Indonesia following the country's recent reduction of fuel subsidies show what a difficult balance this can be for governments to strike.