Soaring food prices raise investment risk

By Peter Apps - Analysis

LONDON (Reuters) - Soaring global food prices are sparking riots and political discontent, raising investment risk in a string of emerging markets and taking the shine off otherwise successful economies that escaped the credit crunch.

Higher food prices have been fuelled by dry weather in key growing areas, competition from biofuels, rising oil prices boosting production and delivery costs and growing demand from emerging Asia.

While the developed world, particularly the United States, is seen facing a downturn in part fuelled by a credit crunch stemming from problems in the U.S. mortgage market, emerging economies are expected to continue to grow.

But those economies least exposed to the credit crunch are those most affected by the higher food prices -- which the United Nations says rose 35 percent in the year to the end of January but have since risen another 65 percent.

"Food prices are the big problem," said Commerzbank emerging markets research head Michael Ganske.

"For poor people it is maybe 50-60 percent of their spending. Particularly anywhere you have huge divisions of wealth you could have problems."

Food riots led to the fall of Haiti's prime minister over the weekend, with violence also seen in Cameroon, Ivory Coast, Senegal, Burkina Faso, Ethiopia and Madagascar as well as the more developed economies of the Philippines and Indonesia.

Many poorer countries are aid dependent and have always been seen as risky investments, but there are signs of growing trouble in previously more appealing destinations.

Shares in the Philippines and Indonesia are off 19 and 17 percent this year as they battle inflation and other worries.

Some other markets have yet to be heavily affected. Egypt's stock market has been hitting record highs and with its growing trade links to Asia the government says it is at least part insulated from Western economic woes.

But last week thousands of youth and workers clashed with Egyptian police over rising prices.

Further problems, experts say, range from spiraling inflation and wage pressures to protectionism, growing budget deficits, higher taxes and charges on foreign direct investment.

RAISING RATES, PRESERVING GROWTH

But angry urban populations who have been used to progressively rising living standards in recent years often blame local governments, prompting them to raise food subsidies or cap prices.

Analysts warn any disasters such as floods or cyclones hitting crops could leave them unable to cope, sparking further instability -- making climate change a greater worry than usual.