Emerging market central banks embark on radical stimulus policies
Central banks across the developing world are pushing policy to extremes that would have been unimaginable a few weeks ago, as the coronavirus crisis sends debt markets into turmoil and governments prepare for an unprecedented expansion of public spending.
The central banks of Poland, Colombia, the Philippines and South Africa have all begun to buy government and private sector bonds on secondary markets, while the central banks of Brazil and the Czech Republic have asked for new laws to allow them to do so.
Such policies, known as quantitative easing, were used by the US Federal Reserve and other central banks in the G7 group of wealthy nations after the global financial crisis of 2008-09, as other ways of loosening monetary policy such as cutting interest rates failed to reignite their economies.
Now policymakers in the developing world are resorting to the same methods as an emergency measure as their economies suffer a sharp contraction.
“Only time will tell if they are right to do this, but I think they have to,” said Eric Baurmeister, head of emerging market fixed income at Morgan Stanley Investment Management, an investor in EM debt since before the emerging market crises of the late 1990s.
“We are all experimenting,” he said. “Every country in the world is increasing the debt on government balance sheets in a way that nobody can afford, least of all emerging markets, but we will have to worry about that down the road.”
On Friday, Roberto Campos Neto, president of Brazil’s central bank, became the latest global policymaker to echo then-European Central Bank president Mario Draghi’s 2012 vow to do “whatever it takes”. At the time, Mr Draghi was defending the eurozone economy from the bloc’s sovereign debt crisis; now emerging market central bankers are seeking to stave off the economic devastation threatened by coronavirus.
Announcing a package of R$1.2tn ($233bn) in fiscal and monetary stimulus, Mr Campos Neto said he had also asked for a constitutional amendment to allow the bank to buy government bonds on secondary markets.
“This is a far-reaching measure,” he said. “The central bank’s balance sheet is enormous, at more than R$1.5tn.”
Brazil’s is by far the largest QE package to be unveiled so far across emerging economies.
Poland’s central bank announced a “large-scale purchase” of Treasury bonds two weeks ago, without saying how much it would buy. Colombia’s central bank followed last week with a plan to spend about $2.5bn to buy up bonds issued by private lenders.
The Philippine central bank is to spend $6bn on government bonds over the coming six months as “an extra lifeline to the national government”. South Africa’s central bank began buying government bonds last Wednesday to an unspecified amount, as the country prepared for a three-week lockdown.
The moves follow a string of other measures to supply liquidity to banking sectors across the developing world, as governments fight to keep businesses afloat even before the pandemic takes hold in their countries. They appear to have achieved some success over the past week, with bond yields retreating from the extreme highs they hit earlier in March, easing some of the pressure on public finances.
But that may be only a short-term relief. Many analysts question whether ultra-loose monetary policy has been effective in raising output in the developed world over the past decade, or whether it has merely pumped up asset prices. In the developing world, they worry that it may not achieve even that, and that large parts of many economies will be left beyond its reach.
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“It is very difficult for such policies to be effective when you have a large contingent of unemployed or self-employed, and where the personal and social safety net is non-existent,” said Alberto Ramos, chief economist for Latin America at Goldman Sachs. “People in the informal economy don’t have savings and can’t even collect unemployment insurance, so the human dimension is going to be complicated.”
Many governments have built up defensive buffers since the crises of the 1990s in the form of large reserves of foreign currencies. At the same time, however, many have failed to make the fiscal adjustments that might have delivered the budgetary power to support their economies in the approaching severe downturn.
“In developed economies, there is more output to tax for paying down debt and governments have the ability to print their own money, so they can handle large stocks of debt,” said Mr Baurmeister at Morgan Stanley. “[Emerging economies] are doing what they can but the room for fiscal and monetary stimulus is not the same and they realise there are limits.”
Some governments have managed to expand local debt markets over the past decade, making them less reliant on foreign lenders. But local sources of lending are likely to be overwhelmed by the coming demands on public finances.
“That’s why Brazil’s central bank is so keen to be a player in the market,” said William Jackson, chief emerging markets economist at Capital Economics, a consultancy. “There have been such worries about Brazil’s debt trajectory, and so much optimism that its pension reform [enacted last year] had removed that cloud. Now it’s going to have to increase its debts again.”