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Prospects Weekly: Internationally-traded food prices rallied on weather, Inflation has risen in a majority of developing countries, Foreign direct investment (FDI) has helped stabilize overall capital flows

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After several months of decline, since February, international food prices have risen sharply due to drought in parts of South America and tensions in Ukraine. Inflation has risen in a majority of developing countries, but the overall picture is mixed. Foreign direct investment remains the most sizeable and least volatile form of capital flow for developing countries, stabilizing overall financial flows despite significant changes in global monetary and risk conditions in recent years.
Following three straight months of weakness, internationally-traded food prices rallied on weather, and to a smaller extent political, concerns. Dry weather in South America (and to a lesser extent in South East Asia) has put pressure on the USD price of most food commodities. Wheat is up 25 percent since February 1, soybean oil (13 percent), maize (12 percent), soybeans (10 percent), and sugar (9 percent). The Ukraine-Russia conflict likely contributed to the spike in grain prices; together, the two countries account for 15 percent of global wheat exports, with Ukraine alone accounting for 12 percent of maize exports. USD coffee (Arabica) prices are up 64 percent since the beginning of February due to persistent dry weather in Brazil (the world's largest coffee supplier), which is expected to produce 5 percent less than previously expected. Despite the price increases, the USDA's March 11 assessment of the 2013/14 global grain crop remains solid, suggesting limited further upside price risks. Estimates of the 2013/14 stock-to-use ratios were marginally higher in March for maize, and unchanged for wheat. The rice market continues to be well-supplied, with prices broadly stable.
Inflation has risen in a majority of developing countries, although the overall picture is mixed. The median rate of inflation among developing countries picked up to a 4.6 percent pace (3m/3m saar) in February, from 3.4 percent in mid-2013. However, among inflation-targeting countries, current inflation remains mostly clustered close to target levels. Those economies that endured some of the sharpest depreciations since mid-2013 are among the ones with inflation rates the farthest above target levels (Indonesia, Turkey and Ghana). Instead, inflation remains well below target levels in those countries in Central and Eastern Europe that still have significant economic slack (Hungary and Romania). Inflation rates have also fallen in some of the largest developing countries, including in China, where growth has moderated, and in India, where domestic food inflation slowed. The recent uptick in international food prices is unlikely to be sustained, but presents an upside risk to inflation in developing countries.

Foreign direct investment (FDI) has helped stabilize overall capital flows despite financial market tensions. Private capital flows to developing countries were broadly stable at $1.1 trillion in 2013 from the previous year, but declined as a share of developing-country GDP from 5.0 percent to 4.6 percent. Over a longer period, flows fell from an average of 5.3 percent of GDP in 2001-07 prior to the Lehman crisis to 4.9 percent in 2009-13. FDI flows (which are about 60 percent of overall flows) fell by 0.3 percentage point of GDP, in line with a marking down of developing-country growth prospects. But their larger size and relative stability (with coefficient of variation of 0.21 versus 0.52 for other flows) has helped to stabilize overall capital flows. The higher volatility of other flows partly reflects greater responsiveness to global monetary and risk conditions. Bond flows (which were 0.7 percent of GDP in 2013) surged 62 percent between the sub-periods, helped by quantitative easing in high income countries. Short-term debt flows were relatively stable, but portfolio equity flows fell 21 percent amid higher uncertainty and weaker growth, while bank lending fell 34 percent, adversely affected by deleveraging in Europe.

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