Overcoming the Growing Inflationary Pressures in Emerging Markets by Integrating Monetary and Economic Indicators With Geospatial Strategies

With the growing inflationary pressures in emerging markets, monetary policymakers must consider new types of trade-offs, approaches, and solutions. These include integrating geospatial systems with artificial intelligence, machine learning, and advanced analytics to unlock the productivity and sustainability of financial systems. Given the high degree of uncertainty, adjustments are needed at a time when countries are struggling with inflation well above their monetary policy targets. If inflationary pressures spread to other countries, more governments would need to tighten monetary policy sooner than expected. However, the strength of the economic recovery and the extent of underlying inflationary pressures vary considerably from country to country. Therefore, Central banks in emerging markets and developing economies are required to accelerate the reduction of their asset purchase program and set the groundwork for an increase in base rates.

The McKinsey report on “The transformative power of automation in banking” further predicts the emergence of the second wave of automation and AI in the upcoming years, where machines will do 10-25% of the work in banking functions, increasing capacity and freeing employees to focus on activities with greater added value, Forbes added. In the long term, this will contribute to the gradual reduction of inflation and the anticipation of economic and financial crises.  The central banks should develop communication strategies in order to not create a wave of panic in the markets which could have deleterious effects not only within their countries but also abroad, especially in emerging countries leading to heavy debts. That is why measures taken in response to rising prices must be calibrated to match the particular circumstances of each economy. In countries where the gross domestic product (GDP) is growing rapidly, labor shortages and inflationary pressures are increasing. Monetary policymakers should consider easing monetary policy and making fiscal policy expansionary. Thus, in countries where the recovery is delayed and where inflationary pressures are stronger, the normalization of monetary policy must be accelerated.

The global financial crisis due to lockdowns and health crisis led to an unprecedented recession, as described by forecasts and can still cause the reduction of supply and demand gaps in the upcoming year. Supporting the economic recovery with a focus on monetary policy could fuel significant and persistent inflationary pressures, with the risk of destabilizing inflation expectations. However, risks of accelerating inflation are materializing as supply shortages and strong demand last longer than expected. The low level of inflation, combined with a low level of demand, has led countries to monetary easing. Inflation levels are likely to be higher and longer than expected, meaning real rates are even lower than before, suggesting an increasingly expansionary trend in monetary policy. The rising inflationary pressures are due to exceptionally high levels of inflation in some sectors, such as energy and autos, levels that should have returned to normal before the end of the year as shortages related to the pandemic subside. The inflation situation and the strength of the economic recovery vary from country to country. The integration of geospatial strategies with the monetary economic indicators taken, that must be adapted to the particular circumstances of the emerging markets. This will enable central banks, which have long struggled to keep inflation low and stable, to overcome this rise in inflation and keep interest rates low to support the economic recovery.

Geospatial services have a strong multiplier effect, with their use adding value across a variety of industries that together generate nearly three-quarters of global GDP. Recent research suggests that total geospatial revenue could be worth $1.6 trillion in the United States alone. Rise in energy and food prices have fueled inflation in many emerging markets. These factors, particularly high prices of oil, energy and food, are expected to continue to increase. Regulators should take steps to limit the build-up of mismatches between the currencies in which assets and liabilities are denominated in balance sheets. Core consumer price inflation, which excludes volatile oil, energy and food inflation, has also increased but varies widely across countries. In addition, emerging markets and developing countries should prepare for a rise in interest rates that will lead to the extension of debt maturities and thus reducing their refinancing needs.

In some emerging markets, part of the rise in core inflation is explained by the reversal of the previously observed downward trend in prices. Monetary policy indicators should be carefully optimized and integrated with geospatial strategies, to anticipate changes and to focus on the evolution of annual cumulative inflation. In Asia and Middle East, emerging markets particularly in Indonesia, Turkey, India and Japan, the signs of a rise in core inflation are limited and extremely high underlying. Median inflation, which is not influenced by exceptionally strong or weak price movements in certain categories of goods and which therefore shows the extent and likely duration of price pressures, is subject to similar variations from one country to another.

In many emerging markets, long-term inflation expectations have increased but remain close to historical averages and therefore appear to be well stabilized. This suggests that long-term expectations may be more stabilized in regional and national central banks targeting an inflation rate of 2%. Emerging markets run the risk of having contagion effects that can be problematic for monetary policies, leading to an outflow of capital and pressure on exchange rates, which may lead emerging countries to tighten further policies. In several emerging countries, including Japan, South Africa, India, and Indonesia; inflation expectations remain well below the established threshold and are showing signs of stabilization. This tightening comes as production slows and could weigh even more on output and employment. Exceptions include Turkey, where there is a clear risk that inflation expectations will become destabilized as monetary policy relaxes despite inflation. Given the heightened risk of inflation expectations becoming destabilized in emerging markets, some central banks in countries such as Brazil and India are anticipating inflationary pressures and sharply raise interest rates.

The benefits of geospatial services are not limited to companies that produce or sell industry-related products such as satellites or navigation software. The recent rise in median inflation in some emerging countries, which approached 3% due to large changes in oil prices, is one of the most significant signs of upcoming inflationary pressures. Decision-makers and monetary policymakers must carefully adjust their responses based on the new data available. For instance, digital data and geospatial technology reduce travel time by 12%, estimated at $264 billion, improves revenues and costs by at least 5% in sectors that contribute more than 70% to global GDP, such as retail and mining. Geospatial services also enable consumers to make purchasing decisions faster, saving more than 21 billion hours, estimated at $283 billion. Digital maps generate $1.2 trillion in sales worldwide, with an estimated value of around $2.7 trillion and also saves $20 billion in fuel. Through targeted business listings on digital maps, businesses can also connect directly with customers and thus achieve greater growth. Using digital maps for market research and identifying the most profitable locations for potential markets, leads an increase in revenue from geospatial services, many times greater than the direct revenue from the geospatial sector.

The correlation between the strength of the recovery and underlying inflation, suggests that underlying inflationary pressures are stronger in emerging markets where demand has recovered more quickly. While in several countries inflation levels are expected to remain high in the upcoming months, in most countries medium to long-term inflation expectations are close to the established monetary targets. A Covid-19 variant that drastically reduces the vaccine’s effectiveness could lead to further supply disruptions and a contraction in labor supply, increasing inflationary pressures, while a low level of demand would have the opposite effects. Large and recurring supply shocks is an even greater challenge for central banks in emerging countries. The uncertainty surrounding the evolution of the pandemic and its economic consequences remains extremly large and in addition to the inflationary forces that should decrease, the integrated models and optimized monetary indicators can bring inflation back to target levels. Supply disruptions due to climate change and the allocation of spending to goods rather than services, have added to inflationary pressures, additionally to pressures on wages in some sectors of the labor market.

The economic activity has quickly recovered in many emerging countries, while some markets have experienced a more prolonged decline in labor force participation, which added to wage and inflationary pressures. In emerging markets where economic activity has returned more quickly than elsewhere to pre-pandemic trends, core inflation has risen sharply from pre-crisis levels. The supply-demand gap is expected to narrow over time, which will help reduce some of the inflationary pressures on these emerging markets. Additionaly, transit times, delivery delays, and semiconductor shortages are expected to improve fiscal measures. To promote a sustainable global recovery, it is essential that central banks communicate their intentions via public private partnerships because if central banks act more aggressively to mitigate inflation risks, it could increase inflationary pressures, particularly in emerging markets and developing countries.

[Photo by Tumisu / Pixabay]

Manuel Ntumba is Chief Global Strategist at Tod’Aérs Global Network (TGN). He is a Strategic Advisor in Geostrategy, Geospatial Intelligence, and Globalization – providing expertise and consultancy to private sectors, and to governments of emerging market economies worldwide, especially in Africa, Middle East, Asia-Pacific, the Caribbean, and Latin America. The professional portfolio of Manuel Ntumba includes collaborations with the European Union (EU), the United Nations (UN), The African Union (AU)’s Presidential Panel of 2021, and many other governments,  universities, international organizations, and multinational companies.

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