Thursday, March 17, 2022 / 05:10 PM / S & P Global  Ratings / Header Image Credit: Reuters 

S&P Global Ratings believes that there's a wide range of channels through which the conflict in Ukraine may affect emerging markets (EMs), according to its report published today, titled "Emerging Markets Monthly Highlights: Russia-Ukraine Conflict Causes A Storm Across Commodity Markets". Many EMs are net energy importers and are vulnerable to swings in energy prices. Even though the price rally will benefit some commodity exporters, conflict-induced deceleration of global growth will worsen external environment. Ongoing market volatility may put additional pressure on EM yields amid the Federal Reserve's upcoming tightening.

Commodity prices have surged across many categories. Ongoing price rally across energy markets prompted us to update our current Brent oil forecast for the remainder of 2022 to $85 per barrel. Prices for other commodities have jumped as well, with double-digit price increases for precious and industrial metals since the beginning of the year. Global food prices also went up, with wheat prices rising by more than 40% since the start of 2022.

Inflation risks are now firmly on the upside. Data in some EMs are starting to show the impact of the recent surge in energy and food prices on inflation. Food consumption makes up for a larger share of consumer baskets in EMs than those in developed economies, making them particularly vulnerable to any spikes in global food prices. Commodity price increases will complicate disinflation in EMs and pose challenges for the central banks.

Spreads have risen in EMs. The EM EMEA spreads rose much more sharply than in other regions, given this region's geographic and economic proximity to the conflict. Nevertheless, spreads for other EMs went up as well, due to market volatility and spill-overs from higher commodity prices. Ongoing volatility may further tighten financing conditions for lower-rated EMs.