[1] Source: Pictet Asset Management, IMF Global Financial Stability Report of October 2020, looking at local stress indices of APP vs. non-APP economies.
[2] Source: Pictet Asset Management, IMF Global Financial Stability Report, October 2020
[3] Source: Refinitiv, Pictet Asset management, April 2021
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Has quantitative easing become emerging markets’ new saviour?
Emerging markets started exploring quantitative easing last year, in the midst of the Covid-19 economic crisis. Does this mean QE is now part of the monetary tools? What are the benefits and risks?
Written by
Anjeza Kadilli
Senior Economist
Emerging markets (EMs) are turning to Quantitative Easing (QE) in the face of the current economic crisis.
With signs of rising inflation, especially in food and commodities, several EM central banks are initiating a tightening cycle. Brazil, Turkey, Russia and Ukraine all recently hiked policy rates. As illustrated in Fig.1 below, changes in policy rates are the main tool used by EM central banks to manage inflation, growth and financial stability.
But since the start of the crisis in March 2020, QE has also been deployed in more than 15 emerging countries (Fig.1). In most cases, the size of those schemes remains limited (<5 per cent of GDP2). By way of comparison, the balance sheet of the US Federal Reserve doubled in 20203. We however expect QE to remain in EM central banks’ toolbox.
17 EM central banks have used QE measures since the start of the COVID-19 crisis in 2020.
Fig.1 - Measures taken by central banks across emerging markets
A new tool for EMs, but already some success
EM countries have been using QE to stabilise financial markets, finance fiscal spending in the context of the Covid-19 crisis and compensate for a fall in foreign investments. This has had some success.
Currencies of countries that resorted to asset repurchasing programs (APP) were stabilised earlier and to a larger extent than those of countries which did not opt for APP1. But the effects of EM central banks using QE can also be observed on bonds spreads and inflation.
- Sovereign and corporate bonds
Countries which have rolled out APP now see the spreads on their sovereign and corporate debt back to almost pre-crisis levels, now averaging 228 bps and 342 bps respectively (Fig.2). That was achieved in a context where central banks were lowering their policy rates.
Another positive effect is the fact that spreads at the peak of the crisis in March 2020 remained well below those reached during the Global Financial Crisis, when only developed economies explored QE measures.
Benefits of QE by some EM central banks can be seen through the spreads of their sovereign and corporate debt
Fig.2 - EMBI and CEMBI spreads for countries that used QE over the past year
- Inflation
Inflation is the main risk associated with quantitative easing measures. Current levels are low (Fig.3), below targets for most EM countries, giving central banks some room for manoeuvre. With lockdown measures still in place in many countries, demand and inflationary pressures remain limited.
Concerns however come from food and commodities inflation, due to supply chain disruptions and strong demand for commodities. This has led some central banks to raise interest rates.
EM inflation remains low, except for commodities (oil) and food
Fig.3 - (top chart) EM inflation and oil price growth & (bottom chart) EM inflation and agricultural prices index growth
So, will emerging markets continue to use QE measures?
We think emerging market central banks will continue to use quantitative easing, but the scope and size of these programs should be limited.
QE was able to smooth financial markets volatility, without creating significant inflationary pressures so far or risk central banks’ credibility and independence. Inflation is still low in most emerging markets, but meeting inflation targets will be an absolute priority for central banks.
An early tightening in developed economies – especially from the Fed – would prompt emerging market central banks to raise interest rates to ensure an orderly functioning of financial markets (fund flows and currencies). The use of further QE measures would however depend on the economic context of each country.
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