Soaring global food prices constitute a negative exogenous shock for numerous rated sovereigns, says Standard & Poor?s in a new report published on Wednesday. The report, titled, ?Is food the new oil? Credit implications of the unfolding food-price shock?, looks at the food-price problems facing governments around the globe, with a view to assessing sources of vulnerability to credit fundamentals, and detailing how short-term measures to address food costs will be counter productive in the long run.
While steps such as increased subsidies and export bans will contain political fallout, they come at a cost of additional fiscal and external pressures, which in many cases will be unsustainable. Moreover, such measures will stifle rather than stimulate the mechanism of a long-term supply adjustment that is needed to counter the apparent permanent shift in world food demand, says the report.
?Although the global food price rise in itself is unlikely to be the direct cause of adverse rating action, for many sovereigns ongoing high food costs will significantly increase overall susceptibility to negative rating movements by exacerbating already weak external and fiscal positions, or through the potential for political and social unrest?, said Agost Benard, of S&P?s Sovereigns and International Public Finance Ratings group. Governments around the word will need to bring about significant investment in agriculture and infrastructure to address the problem long term, which, for low-income sovereigns, could mean recourse to borrowing, he added.
The report explains how even countries acting as the world?s breadbaskets are vulnerable to food-price inflation and susceptible to increased political instability if government attempts to capture higher revenues from food exports or secure domestic supply are mismanaged.