All in all, oil-exporting countries will weather Ukraine’s impact the best
As 2022 inflation rises beyond 2021 levels, MNCs will need to re-evaluate their pricing strategies. It will be essential to monitor shifting government plans to mitigate inflationary pressures on consumers, as this will help firms assess which sectors and markets are likely to be more resilient to price hikes. Firms should also consider the rising potential for social unrest stemming from inflation. While markets are likely to implement subsidies and other measures to curb the impact of rising prices, they are unlikely to fully fend off social unrest.
Overview
In the past week, protests have broken out in both Peru and Argentina. While protests in Peru have been much larger in scale, leading the government to implement a curfew in Lima and further eroding President Pedro Castillo’s ability to govern, both countries’ outbreaks are a consequence of the inflationary impact of the Ukraine war on the region. As sky-high commodity prices and sanctions on Russia further disrupt supply chains, placing upward pressure on prices, social and political risks will continue to rise in the region.
In Peru, unrest broke out on March 29 as farmers and truckers protested rising fuel and fertilizer prices. These protests soon expanded to a wider base of the population, as consumer prices soared, increasing by 6.82% YOY, the highest level since 1998. In response, the government has cut fuel taxes and implemented a minimum wage hike. While this may temporarily cool tensions, these measures are unlikely to be sufficient to prevent a demand slowdown and further social unrest.
In Argentina, unrest has been concentrated in the agricultural sector. Ahead of the soybean and corn harvest, farmers and truckers are protesting diesel fuel shortages, which, among other disruptions, raise the costs of crop transportation. The Argentine government, which is already in a difficult fiscal position, is likely to rely on raising export tariffs, further pressuring margins for agricultural producers and likely worsening tensions in the sector.
Our View
As indicated in our demand destruction index, Peruvian consumers are the most vulnerable across the region to high levels of inflation, as over 60% of household budgets go to essentials, including food, transportation, and utilities, categories that are seeing some of the most significant price hikes. Therefore, social unrest is likely to persist on and off throughout 2022. Political volatility is high in Peru as well, which is likely to complicate government efforts to mitigate the impact of inflation on consumers. While Argentine consumers have more flexibility budget-wise (approximately 44% of household budgets are allocated toward food, housing, and transportation), inflation has continued to erode consumer purchasing power. With producers under pressure to raise consumer prices, the government is likely to expand price controls, but we anticipate that this will be insufficient to cool prices while disrupting supply dynamics. As inflation continues to accelerate, social tensions are expected to rise throughout LATAM. While oil-exporting countries, such as Colombia and Ecuador, are likely to be able to more easily cushion the blow on consumers through subsidies, markets such as Peru and Argentina, which face significant political and fiscal limitations, respectively, are more likely to experience social tensions stemming from the Ukraine war.
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