Tellimer Insights
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Tellimer Insights

Quantitative easing for all! EMs learn to navigate the risks of unconventional monetary policy

At least 17 EM central banks have initiated quantitative easing since Covid.

Quantitative easing has so far reduced yields without undermining FX stability, but loss of credibility and fiscal dominance are risk

Once reserved for developed country central banks, unconventional monetary policy (UMP), and more specifically quantitative easing (i.e. direct central bank purchases of government bonds or other financial assets), has made its way to emerging markets. Struggling with the ongoing Covid crisis and with little room for fiscal stimulus, EM central banks have taken advantage of ample global liquidity to adopt QE into their monetary policy toolkits.

Advanced economies (AEs) have myriad tools to deal with the current crisis, rolling out fiscal stimulus measures averaging 19.8% of GDP in 2020 to combat the Covid crisis. However, debt sustainability concerns have constrained the ability of EMs to respond, with fiscal measures averaging only 5.1% of GDP in large mainstream EMs and 1.1% of GDP in low-income developing countries (see here).

The large reliance on fiscal stimulus in AEs stems in part from a lack of traditional monetary policy ammunition, with an average policy rate of 0.705% heading into the current crisis across the largest five central banks (Fed, ECB, BoJ, BoE and BoC) vs 4.875% pre-GFC. However, major AE central banks have rolled out QE on an unprecedented scale so far this year, proving that they still have ample “unconventional ammunition” when operating at the zero-lower bound.

According to Fitch, global QE is expected to reach US$6trn by the end of this year (driven mainly by the Fed), equalling half of the 2009–18 total in just one year. Since the beginning of the year, the balance sheets of the four largest central banks (Fed, ECB, BoJ and BoE) have already expanded by c12.7% of GDP on average, and the BIS expects this figure to reach 15–23% of GDP across these four banks plus Canada by year-end.

Despite a weak economic outlook, QE has successfully supported asset prices around the globe. After an initial c34% drop, the S&P 500 is nearly flat ytd and is only c5% from its all-time high. Likewise, after record-shattering outflows exceeding US$100bn from EM assets in the three months through mid-May, AE monetary stimulus has pushed investors back into EM assets in a renewed global search for yield.

The emergence of QE in emerging markets

Taking advantage of the global backdrop, EM central banks have responded by rolling out QE programmes en masse for the first time ever. Following the GFC, just two EM central banks carried out asset purchases (South Korea and Israel, which many would argue are not even EMs), but this time around that number has risen to at least 17. Except for South Africa, Turkey, Costa Rica and Croatia, all these countries are investment grade.

Compared to advanced economy QE, programmes have been much smaller in EMs. Across the five EM central banks which have announced an explicit size for asset purchases, the average is only 0.9% of GDP. That said, since the beginning of the year, central bank balance sheets have expanded on average by 3.7% of GDP (unweighted) across a sample of 13 EMs with QE programmes (compared to 12.7% across the biggest four AE banks), showing a conservative approach to this largely untested new policy tool.

This article first appeared on To read more about the impact of Covid-19 on emerging markets, go here.



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