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Coping with high inflation and borrowing costs in emerging market and developing economies

As the old adage goes, all good things come to an end. Gone are the days of low inflation and easy global financial conditions. Many emerging market and…

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By Jongrim Ha, M. Ayhan Kose, Franziska Ohnsorge

As the old adage goes, all good things come to an end. Gone are the days of low inflation and easy global financial conditions. Many emerging market and developing economies (EMDEs) have recently been experiencing an unpleasant combination of elevated inflation and rising borrowing costs. At 8.5 percent in March 2022, inflation in EMDEs has reached its highest level since 2008 (Figure 1). In advanced economies, inflation is now at its highest level since 1991. Global financing conditions are tightening, as major advanced economy central banks are expected to raise policy interest rates at a faster pace than previously anticipated to contain inflationary pressures.

Figure 1. Consumer price index inflation, 1990 – 2022 

Sources: Ha, Kose, and Ohnsorge (2021); World Bank.
Note: Last observation is March 2022 and includes year-on-year group median inflation for 81 countries, of which 31 are advanced economies and 50 are EMDEs.

Amid deteriorating growth prospects, EMDEs will likely continue grappling with elevated inflation and more expensive borrowing terms. To cope with high inflation and borrowing costs, policies in these economies will require careful calibration, credible frameworks, and clear communication. This is easier said than done, especially when fiscal space is limited and financial vulnerabilities are prominent. However, sticking to certain principles of policymaking can pay large dividends in making these economies more resilient as they navigate uncharted waters.  

Monetary policy: Tighten with care

For monetary policy, calibrating policy levers within a clear and predictable framework to get ahead of inflation without stifling the recovery will be key. Many EMDEs had already started tightening monetary policy well before the war in Ukraine to stem inflation pressures. The average policy rate in EMDEs is now higher than the average during the 2010s (Figure 2).

Figure 2. Monetary policy rates in EMDEs, 2019 – 2022

Monetary policy rates in EMDEs graph, 2019 - 2022

Sources: Bloomberg, Haver Analytics, World Bank.
Note: Sample includes 22 EMDEs and nominal policy rates using real GDP as weights. Last observation is March 2022.

Going forward, communicating monetary policy decisions clearly, leveraging credible monetary frameworks, and safeguarding central bank independence will be critical to manage the cycle in these economies. To reinforce the anchor of low inflation expectations, policymakers need to communicate efficientlynot only with financial markets but also with households and firms. 

Financial policy: Contain risks

On the financial side, policymakers need to rebuild reserve buffers and realign prudential policy to prepare for possible financial stress. During the pandemic, at least three-fourths of EMDEs implemented regulatory forbearance measures to prevent a credit crunch. Many governments supported lending to firms to address liquidity constraints through loan guarantees and payment moratoria.  

In light of these earlier interventions, banking system exposures to exchange rate and rollover risks need to be monitored carefully and, if necessary, mitigated through macro- and micro-prudential policies. Credit quality and nonperforming loans need to be reported transparently such that prompt corrective action can be taken. Banks’ capital and liquidity buffers need to be sufficiently sound to be able to absorb shocks. If deployed appropriately, reserve buffers can help stem temporary exchange rate pressures. 

Fiscal policy: Commit to credible plans

Fiscal policy challenges have been building in many EMDEs. Fiscal positions deteriorated sharply in the pandemic, and these deteriorations have not been fully unwound by 2022. Despite a strong initial rebound in growth last year, EMDE fiscal deficits are still 1.1 percentage points of GDP wider than in 2019, and government debt is 10 percentage points of GDP higher (Figure 3). In part to contain the fiscal deteriorations, EMDEs already tightened fiscal policy in 2021, unwinding about one-half of the 2020 fiscal impulse.

Figure 3. Government debt and fiscal deficits in EMDEs, 2019 and 2022 

Government debt and fiscal deficits in EMDEs bar graph, 2019 and 2022

Sources: International Monetary Fund, Kose et al. (2021), World Bank.
Note: Aggregates weighted with GDP in U.S. dollars for 152 EMDEs (government debt) and 155 EMDEs (deficit). LHS stands for left scale and RHS stands for right scale.

The pace and magnitude of further withdrawal of fiscal support must be finely calibrated and closely aligned with credible medium-term fiscal plans. Moreover, policymakers need to address investor concerns about long-run debt sustainability by strengthening fiscal frameworks, enhancing debt transparency, upgrading debt management functions, and improving the revenue and expenditure sides of the government balance sheet. Inflation expectations are unlikely to be well anchored if there are concerns about fiscal sustainability due to fears that monetary policy is constrained, especially in cases where high interest rates imply unstable public debt dynamics. 

If the recent surge in energy and food prices persists, EMDE commodity exporters and importers will face diverging policy challenges. Commodity importers may need to contain inflation pressures, which could weigh on growth, while controlling challenges associated with fiscal and external imbalances resulting from high commodity prices. Commodity exporters may need to keep inflation in check amid strong growth on the back of rapidly expanding resource sectors. Some of the windfalls from higher commodity prices need to be invested to enhance long-term growth—including human capital—instead of being used for distortive energy subsidies. 

Other interventions: Avoiding distortive measures

Export restrictions and disrupted global food markets due to the war are expected to contribute to rising global food inflation. The use of trade policy interventions and price controls to insulate domestic markets from food price shocks could compound the volatility of international prices and lead to even higher domestic prices. To address the volatility in food prices, EMDE policymakers need to strengthen social safety nets and enhance the resilience of food systems, while refraining from counterproductive price control measures. Price controls were pervasive in EMDEs even before the recent surge in commodity prices. These controls tend to distort markets and have adverse consequences for growth and poverty reduction, which often prove difficult to roll back after a crisis. If political considerations make price controls or untargeted subsidies unavoidable, their longer-term damage can be contained if they are introduced with automatic sunset clauses.

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Looming Global Food Crisis Requires Immediate and Coordinated Action from All Sectors

Looming Global Food Crisis Requires Immediate and Coordinated Action from All Sectors
PR Newswire
BOSTON, May 17, 2022

The War in Ukraine Exposes an Urgent Need to Rethink and Improve the Structure and Resilience of Our Food SystemsPublic, Private,…

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Looming Global Food Crisis Requires Immediate and Coordinated Action from All Sectors

PR Newswire

  • The War in Ukraine Exposes an Urgent Need to Rethink and Improve the Structure and Resilience of Our Food Systems
  • Public, Private, and Social Sectors Must Collaboratively Reshape Food Systems to React Quickly When Humanitarian Needs Are Most Pressing
  • New BCG Report Provides 30 Near- and Medium-Term Solutions to Make Global Food Systems More Resilient

BOSTON, May 17, 2022 /PRNewswire/ -- Russia's invasion of Ukraine is testing the capacity of global food systems to feed the world in times of crisis. An estimated 1.7 billion people—most of them in developing economies—could suffer severely increased food insecurity, higher energy prices, or greater debt burdens, according to the UN Task Team for the Global Crisis Response Group. Each of these individual factors adversely affects people's ability to feed themselves. At the same time, there is a critical need to address them more holistically and across all sectors in order to reshape our food systems so that we can counteract this humanitarian crisis—and future ones.

A new report from Boston Consulting Group (BCG), titled The War in Ukraine and the Rush to Feed the World, explores in detail the multiple direct and indirect impacts of the turmoil in Ukraine and provides 30 near- and medium-term solutions to help respond to the crisis and improve the resilience of global food systems. As the report notes, the looming global food crisis isn't about the world's capacity to produce enough food. Rather, it is about our food systems' inability to securely and equitably store and distribute enough food—and the inputs needed to produce it—in the face of the disruption caused by the ongoing war.

Together, Russia and Ukraine account for about 12% of the total food calories traded around the world, and both are critical exporters of key commodities such as wheat (28% of global trade) and sunflower oil (69%), according to the International Food Policy Institute. The UN's World Food Programme (WFP) buys from Ukraine half of the wheat it distributes around the world. Further, as exports from these countries tumble, some other leading exporting countries have announced export bans or licensing restrictions designed to protect their own food stockpiles.

As a result, prices are skyrocketing—not just for food, but also for essential agricultural inputs, such as fertilizer and fuel, that Russia has long been a key supplier of. About half of the world's people rely on food outputs that use fertilizer, and a drop in fertilizer supply could severely affect exposed populations for up to four years unless action is taken immediately to boost supplies. Moreover, the ripple effects of disruptions to the fertilizer supply chain will reach consumers worldwide.

The war's impact on fuel prices has been equally dramatic. Aside from the added cost to farmers of fuel they need to power their equipment, last-mile inland transportation account for as much as 40% of food costs in many developing countries. So as fuel prices go up, the total cost of food increases, creating a vicious cycle.

Making matters worse, the current crisis coincides with high debt levels in many developing economies around the world. Largely due to public spending to address the challenges presented by COVID-19, about 60% of low-income countries are currently in, or at high risk of, debt distress, compared with just 30% in 2015, according to the International Monetary Fund.

"While this crisis will impact all of us around the world in significant ways, low-income economies risk devastation and potential unrest," said Ertharin Cousin, CEO and founder of Food Systems for the Future, and a coauthor of the report. "We're not just talking about the poorest of the poor, who are already suffering from hunger. We're also talking about people who could recently afford a loaf of bread for their families and who now will literally be unable to do so."

Relieving the current crisis requires, most importantly, a coordinated and immediate emergency humanitarian response by all stakeholders—governments, development institutions and banks, NGOS, and private companies—to meet the most pressing needs for humanitarian aid. They must provide not only food and financial support, but also the seeds, inputs, tools, and technical assistance needed to support in-country sustainable intensification and other crop substitution actions. The report outlines a solution set of 30 key recommendations for all stakeholders. (See the exhibit.)

"There is a lot of talk about the individual components of the crisis, but it is critical that we look at things holistically and recognize the interdependence of factors ranging from rising costs of food, fertilizer, and fuel, to maxed-out debt, climate-related issues, ongoing conflicts elsewhere in the world, and COVID-19. There are multiple prongs of failure at risk of being tipped over by Russia's invasion of Ukraine," said Shalini Unnikrishnan, a managing director and partner at BCG, the global leader for Food and Nature in the firm's Social Impact practice, and a coauthor of the report.

"Just as critically, we need a coordinated effort across all sectors to rethink and repair our food systems, making them more equitable, more resilient, and more responsive in times of great need," Unnikrishnan continued. "Avoiding more such crises will require diversifying food production across diets, supply chains, and markets, and addressing the indebtedness, economic inequities, and market distortions that have contributed to the current crisis."

Download the publication here: https://www.bcg.com/publications/2022/how-the-war-in-ukraine-is-affecting-global-food-systems

For media queries, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com.

About Boston Consulting Group
Boston Consulting Group partners with leaders in business and society to tackle their most important challenges and capture their greatest opportunities. BCG was the pioneer in business strategy when it was founded in 1963. Today, we work closely with clients to embrace a transformational approach aimed at benefiting all stakeholders—empowering organizations to grow, build sustainable competitive advantage, and drive positive societal impact.

Our diverse, global teams bring deep industry and functional expertise and a range of perspectives that question the status quo and spark change. BCG delivers solutions through leading-edge management consulting, technology and design, and corporate and digital ventures. We work in a uniquely collaborative model across the firm and throughout all levels of the client organization, fueled by the goal of helping our clients thrive and enabling them to make the world a better place.

About Food Systems for the Future
Food Systems for the Future (FSF) was founded to catalyze, enable, and scale market-driven agtech, foodtech, and innovative businesses across the value chain to improve nutrition outcomes in underserved and low-income communities. Through wraparound support to enterprises and broader ecosystem building, FSF addresses barriers to affordability, availability, and awareness of healthy, nutrient dense foods through our core services: financing, business acceleration, public policy & education, partnerships & community engagement, and nutrition expertise. FSF currently operates in the United States and Sub-Saharan Africa. To find out more, visit fsfinstitute.net.

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SOURCE Boston Consulting Group (BCG)

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Economics

Morgan Stanley: SPX could return to its pre-pandemic 3,400 level

The S&P 500 index could return to its pre-pandemic 3,400 level in the coming months that translates to another 15% downside from here, warned a Morgan…

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The S&P 500 index could return to its pre-pandemic 3,400 level in the coming months that translates to another 15% downside from here, warned a Morgan Stanley analyst on Monday.

Don’t be fooled by the bear market rally

Michael Wilson dubs the recent bounce (about 4.0%) in U.S. equities a “bear market rally” and says investors should brace for more pain ahead as inflation and supply constraints remain a significant headwind. In his note, the analyst said:

With valuations now more attractive, equity markets so oversold an rates potentially stabilizing below 3.0%, stocks appear to have begun another material bear market rally. After that, we remain confident that lower prices are still ahead.

Last week, the U.S. Bureau of Labour Statistics said inflation stood at 8.30% in April – a marginal decline versus the prior month but still ahead of the Dow Jones estimate.

How to navigate the current environment?

Wilson continues to see a recession as unlikely, but agrees that the risk of such an economic downturn has certainly gone up. The U.S. economy unexpectedly shrank 1.40% in the first quarter of 2022.

That is just another reason why equity risk premium is too low, and stocks are still overpriced. The bear market won’t be over until valuations fall to levels (14 – 15x) that discount the kind of earnings cuts we envision, or earnings estimates get cut.

He recommends increasing exposure to real estate, health care, and utilities stocks to navigate the current environment, while tech and consumer discretionary stocks remain a big “no” for him.

The post Morgan Stanley: SPX could return to its pre-pandemic 3,400 level appeared first on Invezz.

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World a ‘virtual tinderbox’ for catastrophic levels of severe malnutrition in children – UNICEF

World a ‘virtual tinderbox’ for catastrophic levels of severe malnutrition in children – UNICEF
Canada NewsWire
NEW YORK, May 16, 2022

Soaring food prices driven by the war in Ukraine and pandemic-fuelled budget cuts set to drive up both need for, …

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World a 'virtual tinderbox' for catastrophic levels of severe malnutrition in children - UNICEF

Canada NewsWire

Soaring food prices driven by the war in Ukraine and pandemic-fuelled budget cuts set to drive up both need for, and cost of life-saving therapeutic food treatment, the latter by up to 16 per cent

Multimedia content available to download here

NEW YORK, May 16, 2022 /CNW/ - The number of children with severe wasting was rising even before war in Ukraine threatened to plunge the world deeper into a spiralling global food crisis - and it's getting worse, UNICEF warned in a new Child Alert.

Released today, Severe wasting: An overlooked child survival emergency shows that in spite of rising levels of severe wasting in children and rising costs for life-saving treatment, global financing to save the lives of children suffering from wasting is also under threat.

"Even before the war in Ukraine placed a strain on food security worldwide, conflict, climate shocks and COVID-19 were already wreaking havoc on families' ability to feed their children," said UNICEF Executive Director Catherine Russell. "The world is rapidly becoming a virtual tinderbox of preventable child deaths and child suffering from wasting."

Currently, at least 10 million severely wasted children – or 2 in 3 – do not have access to the most effective treatment for wasting, ready-to-use therapeutic food (RUTF). UNICEF warns that a combination of global shocks to food security worldwide – led by the war in Ukraine, economies struggling with pandemic recovery, and persistent drought conditions in some countries due to climate change – are creating conditions for a significant increase in global levels of severe wasting.

Meanwhile, the price of ready-to-use therapeutic food is projected to increase by up to 16 per cent over the next six months due to a sharp rise in the cost of raw ingredients. This could leave up to 600,000 additional children without access to life-saving treatment at current spending levels. Shipping and delivery costs are also expected to remain high.

"For millions of children every year, these sachets of therapeutic paste are the difference between life and death. A sixteen per cent price increase may sound manageable in the context of global food markets, but at the end of that supply chain is a desperately malnourished child, for whom the stakes are not manageable at all," said Russell.

Severe wasting – where children are too thin for their height resulting in weakened immune systems – is the most immediate, visible and life-threatening form of malnutrition. Worldwide, at least 13.6 million children under five suffer from severe wasting, resulting in 1 in 5 deaths among this age group.

South Asia remains the 'epicentre' of severe wasting, where roughly 1 in 22 children is severely wasted, three times as high as sub-Saharan Africa. And across the rest of the world, countries are facing historically high rates of severe wasting. In Afghanistan, for example, 1.1 million children are expected to suffer from severe wasting this year, nearly double the number in 2018. Drought in the Horn of Africa means the number of children with severe wasting could quickly rise from 1.7 million to 2 million, while a 26 per cent increase is predicted in the Sahel compared to 2018.

The Child Alert also notes that even countries in relative stability, such as Uganda, have seen a 40 per cent or more increase in child wasting since 2016, due to rising poverty and household food insecurity causing inadequate quality and frequency of diets for children and pregnant women. Climate-related shocks including severe cyclical drought and inadequate access to clean water and sanitation services are contributing to the rising numbers.  

The report goes on to warn that aid for wasting remains woefully low and is predicted to decline sharply in the coming years, with little hope of recovering to pre-pandemic levels before 2028. According to a new analysis for the brief, global aid spent on wasting amounts to just 2.8 per cent of the total health sector ODA (Official Development Assistance) and 0.2 per cent of total ODA spending.

To reach every child with life-saving treatment for severe wasting, UNICEF is calling for:

  • Governments to increase wasting aid by at least 59 per cent above 2019 ODA levels to help reach to help reach all children in need of treatment in 23 high burden countries.

  • Countries to include treatment for child wasting under health and long-term development funding schemes so that all children can benefit from treatment programmes, not just those in humanitarian crisis settings.

  • Ensure that budget allocations to address the global hunger crisis include specific allocations for therapeutic food interventions to address the immediate needs of children suffering from severe wasting.

  • Donors and civil society organizations to prioritize funding for wasting to ensure a diverse, growing and a healthy ecosystem of donor support.

"There is simply no reason why a child should suffer from severe wasting – not when we have the ability to prevent it. But there is precious little time to reignite a global effort to prevent, detect and treat malnutrition before a bad situation gets much, much worse," said Russell.

"Millions of children around the world are suffering from severe wasting, the most immediate, visible and life-threatening form of malnutrition. The triple threat of COVID-19, climate change and conflict are increasing severe wasting cases impacting millions of children around the world. The conflict in Ukraine is set to plunge the world in to even deeper nutrition and food crisis, with children paying the ultimate price. But the good news is we already have the knowledge and tools to make a lasting difference between life and death for the world's most vulnerable children. Canada, as a global leader, must build on its commitments and address the growing malnutrition crisis, including support for the prevention, detection and treatment of malnutrition and wasting. Canadian leadership on the global stage will help save lives. Now is the time to take action." - David Morley, President and CEO, UNICEF Canada

Notes to Editors

About RUTF
Ready-to-use therapeutic food (RUTF) paste is a lipid-based energy dense, micronutrient paste, using a mixture of peanuts, sugar, oil, and milk powder, packaged in individual sachets. UNICEF, the global leader in RUTF procurement, purchases and distributes an estimated 75-80 per cent of the world's supply from over 20 manufacturers located across the world.

About ODA
Official development assistance (ODA) is government aid that promotes and specifically targets the economic development and welfare of developing countries. The Development Assistance Committee (DAC) of the Organization for Economic Co-operation and Development (OECD) adopted ODA as the main instrument of foreign aid in 1969 and it remains the main source of financing for development aid. ODA data is collected, verified and made publicly available by the OECD.

About UNICEF
UNICEF is the world's leading humanitarian organization focused on children. We work in the most challenging areas to provide protection, healthcare and immunizations, education, safe water and sanitation and nutrition. As part of the United Nations, our unrivaled reach spans more than 190 countries and territories, ensuring we are on the ground to help the most disadvantaged children. While part of the UN system, UNICEF relies entirely on voluntary donations to finance our life-saving work. Please visit unicef.ca and follow us on Twitter, Facebook and Instagram.

SOURCE UNICEF Canada

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