EM Central Banks Enter Uncharted Policy Waters

The policy response to the pandemic-driven financial crisis has been extraordinary for emerging markets (EM)—not only in terms of magnitude, but more importantly, in terms of the policy tools deployed. In previous episodes of a sudden stop in capital flows, EM policymakers moved quickly to defend their currencies by hiking rates. But this time, their primary concern has been to protect growth at any cost.

Several EM central banks have announced programs to buy government bonds in the primary and secondary markets, with some of them printing money to fund their purchases. Indeed, this is uncharted territory.

Policymakers Look to QE to Address Extraordinary Challenges  

The COVID-19 pandemic has created unprecedented global financial challenges, and the damage to economic growth will be more severe than that of prior global recessions. This explains why some EM countries believe QE programs are necessary. The 2008-2009 global financial crisis spared many EM countries from recession, largely due to China’s economy, which was growing at an annual rate of 9% to 10%. This growth helped the broad EM universe end 2009 with real GDP growth of 2.8%.1 This time, though, China’s economy is struggling, and EM economies collectively may contract 1% in 2020. In fact, several EM countries will face their worst recessions in many decades. See Figure 1.

In addition, fiscal deficits are expected to reach double digits in some countries by the end of the year, with financing needs far beyond the scope of domestic markets. See Figure 1. Central banks are most concerned with rising yields and the associated cost of borrowing. They hope QE measures will help control yield levels, particularly at the longer end of the curve. This is a crisis of liquidity, so many central banks want to provide as much liquidity as necessary.

Source: Bloomberg and Haver Analytics as of 5/20/2020.

1 International Monetary Fund, “World Economic Outlook,” April 2020.

To read more, download the full PDF below.

EM Central Banks Enter Uncharted Policy Waters

Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

American Century Investments is not responsible for and does not endorse any comments, content, advertising, products, advice, opinions, recommendations or other materials on or available directly or via hyperlinks to third party applications or websites. Logos or icons used are registered trademarks of their respective owners.