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Emerging and pre-emerging countries: means of action in times of financial stress

Dimitris Drakopoulos, Rohit Goel, Fabio Natalucci and Evan Papageorgiou

October 23, 2020

The COVID-19 pandemic has penalized economic activity in emerging countries in unprecedented ways. As a result, production in these countries is forecast to contract by 3.3% in 2020 according to projections. In all emerging countries, central banks reacted quickly and firmly by orchestrating their own unprecedented response. In doing so, they have employed various means of action and have, to a large extent, helped stabilize markets and keep them functioning.

Virtually all central banks cut rates, most of them intervened in foreign exchange markets, and about half of them reduced the reserve requirement ratio of banks, allowing liquidity to flow into the bank. the financial system and eased credit conditions. In addition, the central banks of some 20 emerging countries have for the first time launched quantitative easing programs, officially called asset purchase programs: they bought public and private debt in order to ease tensions and to preserve the functioning of markets. Based on our recent analysis in the Global Financial Stability Report, these asset purchase programs have generally proven to be effective, including helping to stabilize local financial markets.

Quantitative easing: a first for emerging countries

The reasons central banks have opted for quantitative easing vary from emerging country to emerging country. As the chart below shows, the motivations for these asset purchases can be categorized into three main categories. First, central banks with policy rates well above zero have tended to purchase assets to improve the functioning of bond markets (South Africa, India, Philippines). Second, those whose key rates are closer to the “zero floor” (Chile, Hungary, Poland) have partly adopted a strategy comparable to that of central banks in advanced countries: quantitative easing has served to ease financial conditions. and to strengthen monetary stimulus, but also to achieve market functioning and liquidity objectives. Third, some central banks have made it clear that one of their goals is to temporarily ease tensions on public funding in the context of the pandemic (Ghana, Guatemala, Indonesia and the Philippines).

Have the asset purchases paid off?

After nearly six months of effective quantitative easing, our analysis shows that these purchases have had a generally positive impact on local financial markets. Importantly, this has been true even after taking into account the cuts in policy rates, the high volume of additional asset purchases by the Federal Reserve, and the noticeable increase in risk appetite globally. In particular, asset purchases by central banks in emerging countries have made it possible to reduce government bond yields without the local currencies depreciating in parallel. They have also gradually helped to ease tensions in local markets.

A wider range of instruments

Beyond the current pandemic, the positive balance of asset purchases could encourage central banks in more emerging countries to make unconventional monetary policy measures an essential component of their toolkit, especially when their margin action under conventional policy is restricted. Asset purchases may be suitable for some central banks, depending on their ability to complete them successfully and the state of the market. However, policymakers should consider the potential pros and big cons of quantitative easing. Assuming regular recourse to asset purchases in the future, especially if they are massive and unlimited, several risks could arise: the credibility of institutions and central banks could be weakened; pressures on capital outflows could increase, especially in countries with weaker fundamentals; and investors may fear dominance in fiscal policy. These risks must be assessed before central banks start to change the nature of their policies and their implementation.

More effort to provide

In summary, emerging market asset purchase programs can be helpful, but further evaluation will be required as more data on their effectiveness becomes available, especially if such purchases continue.

Some lessons can already be learned. Asset purchases appear to be more effective when they are part of a broader set of macroeconomic policies. Transparency and clear communication are essential to minimize the risks that asset purchases pose to the credibility of central banks, especially in countries with more fragile institutions. In most cases, the duration and scope of asset purchase programs should be limited and they should be linked to well-defined objectives. Finally, purchases should preferably be made on secondary markets. Indeed, purchases on the primary market or at rates lower than those of the market can disrupt the process of determining the fair price of bonds and raise fears that central banks will sacrifice their mission of price stability in order to finance the public authorities ( dominance of fiscal policy).


Dimitris Drakopoulos is a financial sector expert in the IMF’s Monetary and Capital Markets Department.

Rohit Goel is a financial sector expert in the IMF’s Monetary and Capital Markets Department. He contributes to the Global Financial Stability Report (Chapter 1) and is part of the IMF’s market surveillance team. He takes an in-depth look at the risks to financial stability in emerging countries, changes in market liquidity and quantitative modeling across all asset classes. His previous work has also focused on corporate stability in the United States and the analysis of banks around the world. Prior to joining the IMF, Mr. Goel was Assistant Vice President and Analyst at Barclays Asia Equities for four years. He holds a Bachelor of Computer Science from the Indian Institute of Technology in New Delhi and an MBA from the Indian Institute of Management in Bangalore. He is also a Chartered Financial Analyst (CFA) and has obtained CAIA and FRM certifications.

Fabio M. Natalucci is one of the deputy directors of the Monetary and Capital Markets Department. He is responsible for the Global Financial Stability Report, which presents the IMF’s assessment of risks to the stability of the global financial system. Prior to joining the IMF, Natalucci served as Senior Associate Director in the Monetary Affairs Division of the Board of Governors of the United States Federal Reserve System. From October 2016 to June 2017, he served as Assistant Secretary for International Financial Stability and Regulation in the United States Department of the Treasury. He holds a doctorate in economics from New York University.

Evan Papageorgiou is Deputy Head of the Global Market Surveillance and Analysis Division in the IMF’s Monetary and Capital Markets Department. He contributes to the drafting of the World Financial Stability Report, dealing with issues relating to emerging countries, sovereign credit risk, fixed income securities markets and sustainable finance. Previously, he worked in the Nordic Unit of the IMF’s Europe Department, where he wrote on macroprudential policies, household savings and the external sector. Prior to joining the IMF, Mr. Papageorgiou was a fixed income analyst in New York and London, where he focused primarily on local rates and emerging market exchange rates. He holds a doctorate in operations research and financial engineering from Princeton University.

EDITOR’S NOTE: This article is a translation. Apologies should the grammar and / or sentence structure not be perfect.

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