Coronavirus recovery: how the stimulus splurge in advanced economies has opened doors for emerging markets

Name: Coronavirus: What’s going to happen to China’s economy?
Uploaded: 2020-08-20T12:45:13.000Z
Duration: 5 min 59 s
Description: Coronavirus: What’s going to happen to China’s economy?

The spillover effects from quantitative easing in the world’s biggest economies have helped emerging markets broaden their toolkit of monetary policy

There are limits to the benefits of this new freedom, though, as a prolonged recession will inevitably hit balance sheets and lead to bankruptcies and bad loans

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The US Federal Reserve building in Washington on July 1. The monetary policies undertaken by the Fed and other major central banks in response to the Covid-19 pandemic have created more room for central banks in emerging economies to experiment with and pursue new policies. Photo: AFP

Piroska Nagy-Mohacsi

Published: 8:45pm, 20 Aug 2020Updated: 10:18pm, 20 Aug 2020

Central banking in emerging markets has undergone a quiet revolution during the Covid-19 pandemic. Unlike in past crises, they have been able to mimic what central banks in advanced economies have been implementing: countercyclical policies with quantitative easing, local-currency asset purchases, interest rate cuts and monetisation of government deficits.

In the past, such policies would have fuelled inflation and downward exchange rate pressure, but not so this time. With the exception of a few central banks that were already in trouble before the pandemic, emerging market central banks have been able to use QE to create more room to respond to the crisis.

Monetary policies in advanced economies have enabled this change. Their own QE programmes have had positive spillover effects, and they have expanded their currency swaps and foreign exchange repurchase (repo) operations in response to the crisis.

Among the measures taken by the globally systemic central banks, the US Federal Reserve’s response has been the most important. However, swaps and repos by the European Central Bank and the People’s Bank of China have also had a significant impact at the regional level.

The effects of interest rate cuts and huge liquidity injections in advanced economies have reached emerging markets as a result of the global search for yields. After an initial market stumble in March, capital flows returned to emerging markets, which have seen high debt issuance in subsequent months.

05:59

Coronavirus: What’s going to happen to China’s economy?

Emerging markets have also been able to reduce their interest rates, and their central banks have started issuing assets denominated in domestic currency in cases where the market is sufficiently large.

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