Since 24 February 2022, the geopolitical risk related to Russia’s further invasion of Ukraine has contributed to higher and more volatile crude oil prices. The uncertainty around the availability of the commodity worsens speculative pricing in the global market.
Namib Mills on Thursday announced that the prices of bread, maize meal, rice, instant porridge products, sugar, and pasta are set to increase as of 25 April 2022 as a result of the ongoing war between Russia and Ukraine having exacerbated already increasing global food and energy costs. Russia is the world’s top wheat exporter. Together with Ukraine, both account for roughly 29% of the global wheat export market. If tensions continue to rise and we see an increase in disruptions due to a potential war or sanctions. Russia-Ukraine geopolitical tensions are now threatening to further disrupt energy supplies, with the potential to push price increases higher and shift monetary and fiscal policy. We believe that the Bank of Namibia will take a pro-cyclical stance and hike interest rates by 25 basis points on 13 April 2022, with the view of maintaining a healthy rate differential between Namibia and South Africa. Geopolitical tensions are also threatening to drive up energy prices and drag headline inflation. High energy prices and limited supply will make our economy especially vulnerable to any additional energy shocks, exacerbating the repercussions of current geopolitical tensions.
Furthermore, the contagion from currently rising geopolitical tension is unlikely to remain limited to financial assets and warrants a change in key macro forecasts for 2022-2023. Namibia, which has no oil production or refining capability of its own, is dependent on the transit fuel that is sourced mostly through South Africa. Since the onset of the pandemic, Namibia has been encountering episodes of rising inflation but the headline number has stayed fairly and has tended to revert back to the target as each supply shock has receded. Global spillovers are impacting core inflation on an ongoing basis and keeping it elevated. The most crucial negative impact of the sanctions over the course of the next few months is likely to be from energy prices. We have seen a sharp spike in the price of oil and gas, which is going to impose a significant cost on our economy. The costs will significantly impact both consumers and companies as well as force governments to consider ways to protect the economy from this energy price shock.
The conflict has been a profound shock. At the start of the year, we were looking at an economy that was recovering from the Omicron COVID variant. The activity was picking up; we were seeing a recovery in consumer spending and business investment. This all now looks in doubt. We are now facing an environment of significantly higher commodity prices, which could persist for longer than many would anticipate. It will raise inflation and reduce economic growth, posing an extremely challenging problem for policymakers. If we see an escalation of sanctions, particularly when it comes to energy, that will deliver a much bigger price shock to both oil and gas. Namibia has experienced significant annual price increases in some of the food products in which Ukraine is a large global producer or exporter. We simply do not have the fiscal space to support the Namibia economy if something else goes wrong somewhere. However, while food and oil prices may feed into inflation, and that could in turn result in higher interest rates, there is some reason to believe the opposite might also be true in the longer term. Inflation has actually been unexpectedly subdued in Namibia in the face of the same supply-chain bottlenecks the rest of the world is facing.
Despite all the problems we have, and we have plenty of them, Namibia is still a relatively safe place to do business. If politicians play this correctly, we actually can become a magnet for international investment. In the current uncertain environment, a flight to safety will help to attract capital inflows. It may not be possible to achieve both objectives at the same time with one policy instrument. Perhaps governments need to balance the objectives in the areas of income equality and human capital formation. General education policy appears to be an effective policy to attract and upgrade FDI beneficial for human capital formation but is also expensive. Higher oil price creates challenges for policymakers when choosing the optimum policy solution between both lower inflation and growth stability in the presence of oil shocks.
Moreover, the time-varying correlation depicts a decreasing behavior over time and increasing uncertainty in recent periods. The decreasing correlation can be attributed to the commitment of the Bank of Namibia to anchor inflation expectations in the presence of external shocks during the inflation targeting regime. If higher prices led to inflation expectations getting entrenched among consumers and businesses, that would raise the worst-case scenario for monetary policy, the need to tighten aggressively even in a weak economy.
Therefore, consequently, import prices are expected to increase at a faster pace than those of exports, resulting in a further deterioration in Namibia’s terms of trade. Russia is considered the world’s third-largest producer of crude oil, but as various countries continue to place stringent sanctions on them, there could be an enormous surge in oil prices over the coming months. The crisis is also contributing to a reassessment of the global economy’s structure and concerns about self-sufficiency. The pandemic has already highlighted the downsides of far-flung supply chains that rely on lean production. It’s running high right now, which means the market expects volatility in the short term to be picking up. And what volatility means simply is that there’s greater anxiety for investors. As needed, the government will increase fiscal and monetary stimulus measures to support growth. – by Josef Kefas Sheehama
