Central banks in the developing world are pushing policy to extremes that would have been unimaginable a few weeks ago, as the coronavirus crisis shakes up debt markets and governments prepare for an unprecedented expansion in public spending .
Central banks in Poland, Colombia, the Philippines and South Africa have all started buying government and private sector bonds in secondary markets, while central banks in Brazil and the Czech Republic have asked new laws to allow them to do so.
These policies, known as quantitative easing, were used by the United States Federal Reserve and other central banks in the group of wealthy G7 countries after the global financial crisis of 2008-2009 because other means of easing monetary policy, such as lowering interest rates, have failed to revive their economies.
Today, policymakers in developing countries use the same methods as emergency measures, with their economies shrinking sharply.
“Only time will tell if they are right to do it, but I think they should do it,” said Eric Baurmeister, head of emerging market fixed income at Morgan Stanley Investment Management, a debt investor emerging since before the emerging crises of the late 1990s.
“We are all experimenting,” he said. “Every country in the world is increasing debt on government balance sheets in a way that no one can afford, especially in all of the emerging markets, but we will have to worry about it in the future.”
Friday, Roberto Campos Neto, president of the central bank of Brazil, became the last world decision maker to echo the 2012 wish of the president of the European Central Bank, Mario Draghi, to do “all that is necessary”. At the time, Mr. Draghi defended the eurozone economy against the bloc’s sovereign debt crisis; now, central bankers in emerging markets are seeking to ward off the economic devastation threatened by the coronavirus.
Announcing a fiscal and monetary stimulus package of rea 1.2 billion ($ 233 billion), Campos Neto said he had also asked for a constitutional amendment to allow the bank to buy government bonds in secondary markets.
“It is a far-reaching measure,” he said. “The central bank’s balance sheet is huge, at over 1.5 billion reais.”
Brazil is by far the largest QE package to be released to date in emerging economies.
The Polish central bank announced a “large-scale purchase” of treasury bonds two weeks ago, without saying how much it would buy. The central bank of Colombia followed last week with a plan to spend around $ 2.5 billion to buy bonds issued by private lenders.
The Philippine central bank is to spend $ 6 billion on government bonds over the next six months as “an additional lifeline for the national government.” Last Wednesday, the South African central bank began buying government bonds for an unspecified amount, as the country prepared for a three-week foreclosure.
These measures follow a series of other measures aimed at providing liquidity to the banking sectors of the developing world, as governments struggle to keep businesses afloat even before the pandemic sets in in their countries. They appear to have had some success over the past week, as bond yields have declined from the extreme highs they had reached earlier in March, easing some of the pressure on public finances.
But it may only be short-term relief. Many analysts question whether ultra-flexible monetary policy has succeeded in increasing production in the developed world over the past decade, or whether it has simply pushed up asset prices. In the developing world, they fear that this is not possible, and that large parts of many economies will be left out of reach.
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“It is very difficult for such policies to be effective when you have a large number of unemployed or self-employed, and when the personal and social safety net is non-existent,” said Alberto Ramos, chief economist for the Latin America at Goldman Sachs. . “People in the informal economy have no savings and cannot even collect unemployment insurance, so the human dimension will be complicated.”
Many governments have built defensive buffers since the crises of the 1990s in the form of large foreign exchange reserves. At the same time, however, many have failed to make budgetary adjustments that could have given them the fiscal power to support their economies in the context of a severe downturn.
“In developed economies, there is more production to be taxed to pay down debt and governments have the ability to print their own money, so that they can manage large stocks of debt,” said Mr. Baurmeister. by Morgan Stanley. “[Emerging economies] do what they can but the budgetary and monetary room for maneuver is not the same and they realize that there are limits. “
Some governments have successfully enlarged local debt markets over the past decade, making them less dependent on foreign lenders. But local sources of loans are likely to be overwhelmed by future demands on public finances.
“This is why the central bank of Brazil is so eager to be a player in the market,” said William Jackson, chief economist of emerging markets at Capital Economics, a consulting firm. “Brazil’s debt trajectory is causing so much concern and optimism that its pension reform [enacted last year] had deleted this cloud. Now, we will still have to increase our debts. “