Quantative Easing in Emerging Markets: Playing with fire?

 

As the pandemic led to investor panic in March 2020, EMs experienced unprecedented net capital outflows (-USD84bn, excluding China), causing  dramatic jumps in government bond yields. In this context, 16 EM central banks announced that they were ready to engage in government bond purchases, if needed. Thirteen of them have already started such Quantitative Easing (QE, see Figure 4), instead of cutting policy interest rates that mostly stood well-above the effective lower bound . As a result of these bond-buying programs, long-term government bond yields in our sample of EMs declined by -48bp on average by the end of April compared to the end of March (vs. an average +69bp rise between March-end and 2019-end). The easing of domestic monetary conditions was another short-term success of the QE, as demonstrated by our proprietary monetary impulse indices. In particular, the indices reached the highest level since at least 2009 (or approached the record) in 12 out of the 16 countries we look at. In the meantime, depreciation of local currencies remained limited (with the exception of a few usual suspects).

 

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Selin Ozyurt
Euler Hermes
Francoise Huang
Euler Hermes
Manfred Stamer
Euler Hermes