The coronavirus pandemic's erosion of global economic growth has hit emerging markets especially hard, including those in Latin America, where a limited and depleting fiscal armory has left central banks scrambling to find new tools.
In late March, Colombia's central bank, Banco de la República, launched an asset purchase program widely considered to be Latin America's first ever first quantitative easing, or QE, initiative. The 12 trillion peso (US$2.98 billion) package, which hopes to "inject permanent liquidity" in the economy, covers private and public debt, including treasury bonds.
Chile, meanwhile, has launched a form of QE with a $4 billion asset purchase program, though it only covers bank bonds held by financial institutions at the moment.
"Until recently, it would have been hard to image that EM central banks would join the club of advanced economies undertaking bond purchases. But the current crisis has ripped up the rule book," Liam Peach, an economist with Capital Economics, said in a report.
The programs add to a list of emerging markets across the globe that are now turning to QE-like measures as part of their response to the pandemic. South Africa, Poland, Romania, Croatia and the Philippines also have introduced bond buying programs, and more may soon follow.
Banco Central do Brasil, which is legally prohibited from launching QE-like operations, is currently pushing for a constitutional amendment that would allow it to buy government bonds traded on local or international markets and other "public or private financial assets." Such a change, analysts say, would pave the way for a much more comprehensive quantitative easing program.
Importantly, these QE programs are coming even as most emerging market central banks still have benchmark rates well above zero; this differs, Peach noted, from developed markets which typically only resorted to QE after exhausting conventional policy tools like lowering rates. But the purpose also is slightly different, he noted. For developed countries, "QE was intended to affect the long-term structure of the yield curve by reducing term premiums," while in emerging markets "these measures have been adopted to provide liquidity and stabilize the financial system."
Liquidity has become a major concern across Latin America, which like many emerging markets, has seen record-level capital outflows and a sudden halt to debt issuances. According to Moody's, there wasn't a single rated debt issuance from a Latin American company during the month of March, compared to $13.9 billion worth in January and February. Economic activity also has slowed to a crawl amid widespread lockdowns aimed at containing the coronavirus' spread. Most experts now expect an economic contraction for the region in 2020, with declines across Latin America's major economies.
Latin American countries have struggled to react to the pandemic's impact with the same depth and breadth as developed countries. Fiscal stimulus packages contemplated in Europe, the United States and Japan represent anywhere from 5% to 20% of GDP. Programs in Latin American countries, if they have one at all, are far smaller, representing between 1% and 2.5% of GDP. Chile's stimulus program is the exception, with a stimulus sized at 4.7% of GDP.
The size of the Latin American programs is "a reflection of their weak fiscal starting positions and the regulatory and practical limitations on monetization of deficits," economists at UBS Securities noted in a recent report. "Weak healthcare systems, widespread informality, high borrowing costs and high debt levels, loss of dollar generating capabilities, and the absence of reserve status for their currencies limits the ability of regional authorities to push the envelope on the fiscal and monetary fronts."
To date, most major central banks in the region have slashed rates to record or multi-year lows, while they and other regulators have launched a slew of other measures to help increase liquidity. These include lowering reserve requirements, easing access to central bank repo operations, and improving credit access to small- and medium-sized enterprises.
Despite these steps, some argue that authorities will have to do more. "Unprecedented times call for unprecedented measures, and we have seen countries in the region already resorting to unorthodox policies," the UBS economists said. Among these, they noted, is QE, though they also pointed out that such measures mark a sharp reversal for the region.
"Latin America's efforts at macroeconomic stability in the last four decades to a large extent have been centered on weaning governments off the printing press for financing
purposes and on reducing the public sector’s footprint in economic activity," the economists said. "To reopen this door now has its dangers."
For one, the purchase of private sector assets under the program would transfer sovereign risk to the public sector, a sticky situation for a region which have seen several credit profile downgrades in just the last month.
As Capital Economics' Peach noted, there is also longer-term concerns for emerging markets with weak institutional policy framework, as the bond purchases blur the lines between monetary and fiscal policy.
"There is a risk that large-scale bond purchases are used over a prolonged period to help finance government deficits, particularly in Brazil or in countries where central banks are highly politicized," he noted. "This could create inflation problems and dent policymakers' credibility."
Despite those and other risks, though, Peach noted that "the speed with which central banks have introduced these measures suggests that the taboo about central bank bond purchases in EMs has been broken."