Executives need to assume higher inflation across the MEA region for 2022, with two main implications. First, they must monitor potential changes to the consumption habits of their middle-income consumers. Second, they will need to monitor talent retention risk into mid-2022 if inflation is trending at much higher rates than expected in the original budget. MEA executives may also face increased pressure from HQ to compensate for a significant slowdown in demand expected in Russia, Ukraine, and even Europe. Identifying where they can accelerate growth and increase profitability will be important for regional commercial performance. Doubling down on commodity exporters will be an option; however, fiscal consolidation and inflation risks will remain for those markets amid rising competition.
The Brent crude oil price reached above US$ 110 on Wednesday, March 2. Higher price pressures were driven by further escalation in the on-the-ground war in Ukraine, the realization that the initial release of some US strategic oil reserves is not sufficient to balance markets, and OPEC’s decision to increase oil production only by the original OPEC agreement amount of 400,000 b/d rather than a much higher figure.
Commodity exporters across the MEA region will benefit from higher prices through Q2. Higher-than-expected revenues will increase fiscal room for spending above budgeted expectations. However, both commodity exporting and importing governments will face higher costs for providing existing subsidies and may feel the need to increase their subsidy levels in order to limit some of the rising inflationary pressures. All countries across the region will face higher inflation forecasts for 2022, mainly driven by higher fuel, gas, and agriculture commodity prices. Thus, purchasing power recovery will be partially disrupted for at least middle- and low-income consumers.
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