The SA Reserve Bank, like central banks around the world, has taken unprecedented action to respond to the devastating economic effects of the Covid-19 pandemic. Measures range from cutting interest rates and granting significant regulatory relief for banks and more recently, several fiscal and tax measures to support households, businesses and ultimately the economy. The Reserve Bank says in its annual report released this week that despite significant turbulence in financial markets, these measures have helped stabilise markets and enabled banks to continue to operate by extending credit to support their customers. And as part of its continuous measures to manage liquidity amid the Covid crisis, the bank bought back over R30bn of SA government bonds in April and May alone, making its bond-buying scheme among the more conservative policies in emerging markets, reports Reuters. But Bloomberg warns that stimulus addiction poses a huge risk for emerging markets. Brendan McKenna, a foreign-exchange strategist at Wells Fargo Securities in New York told the newswire that in the next six to 12 months, South Africa’s rand may be among the most at risk given lower policy rates, underlying vulnerabilities and the central bank’s quantitative-easing program. – Fadia Salie
Who says emerging economies shouldn’t print money?
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By Jon Sindreu
(Wall Street Journal) – Activist central banks aren’t just a rich-nation story anymore. Emerging markets are reclaiming their right to play with money too—and it is probably a good thing.
Traditionally, experimental central bankers were pictured as money printers who inevitably stoked inflation. While a decade of unconventional monetary policy and low inflation has taught investors that Federal Reserve announcements are a signal to buy stocks, this newfound love for stimulus hasn’t often extended to developing nations. There, the same policies still tend to be seen as destructive.
On Tuesday, however, the Basel-based Bank for International Settlements published research suggesting that this hasn’t been the case during the Covid-19 crisis. Over the past few months, central banks in countries like India, South Africa and Poland have followed the example of their Western peers and, for the first time, launched “quantitative easing” programs to buy government bonds. In its annual report, the BIS found that these moves improved market conditions, lowering bond yields and shoring up domestic currencies.
In South Korea, Mexico and Thailand, central-bank stimulus has even extended to the domestic corporate-bond market, in imitation of what the Fed and the European Central Bank are doing. Market stability has in turn helped poorer countries’ deployment of fiscal policy.
In U.S. dollar terms, the MSCI Emerging Markets stock index is now down only 11% since the start of the year, better than its eurozone equivalent. That is despite the perfect storm that has battered many countries, including a plunge in the price of oil, disruptions to global value chains and a collapse in exports. After an investor exodus that broke records for speed, flow data suggests that international money is slowly starting to return.
Unlike in rich countries with stronger currencies, the exchange rate is the main constraint on policy in developing nations. When it plummets, the availability of key imports also drops, sparking both recessions and inflation.
Since 2010, emerging economies have deepened their domestic financial markets. This has made them more liquid, the BIS report stressed, but it also means that international money managers own a bigger chunk of local currencies. That explains the rapid selloff when they ran for the door earlier this year.
Yet bigger problems would have followed if the debts were written in U.S. dollars, or if central banks hadn’t stepped in to buy the bonds from these foreigners. Too often, investors have taken it as a given that activist policies come at the expense of a country’s currency. This confusion likely comes from the fact that, when the most beleaguered nations grapple with depreciating currencies and evaporating tax receipts, they often have no choice but to print money.
Developing countries remain in grave danger in the current health crisis. Infection rates in Latin America and Africa haven’t significantly come down. And they are more vulnerable both to the global economic slowdown and to a potential second wave of the pandemic. Help from international institutions like the International Monetary Fund would most likely be insufficient.
But the fact that Western-style policies can’t fix all of emerging markets’ woes doesn’t mean they necessarily make them worse. There may be further room for quantitative easing to provide liquidity to markets and even finance fiscal policy. Rather than a cause for alarm, greater monetary sovereignty for developing economies should be a reason for tentative optimism.
Write to Jon Sindreu at [email protected]
