EM central bank holdings of government bonds, % of GDP (latest data*)
The answer depends on QE definition...
We have received several client questions whether EM central banks (particularly Brazil, India, Indonesia, South Africa and Turkey) are currently doing / are planning to embark on Quantitative Easing (QE) to support their respective economies in the fight against the impact of the novel coronavirus (COVID-19). The answer is not straightforward as central banks engage in asset purchases and balance sheet expansion for various reasons – i.e. not only to extract duration and push longer dated yields down, but also in order to manage liquidity and improve market functioning. We follow the Fed definition of QE (purchase of long-term bonds), though we acknowledge that alternative definitions are possible. We believe that the size of the QE program (as % of GDP or % of bond market) and the maturity structure are important characteristics of any QE program.
What have the major central banks announced recently as QE?
A good starting point is to look at the recent announcements from major central banks. The Bank of England announced 9% of GDP worth of QE, heavily skewed towards gilts, but also including corporates. The European Central Bank (ECB) is engaging in c10% of GDP worth of QE, including sovereign and corporate bonds, ABS, covered bonds, and now also non-financial commercial paper. The Fed launched a QE of $1.7trn (8% of GDP) or more if needed – with initial QE consisting of Treasury securities (at least $500bn) and MBS (at least $200bn), but now converting to open-ended with unspecified amounts.
Few EM central banks are doing traditional QE; more borderline cases
We think it is important to highlight both the intent of EM central banks' QE and the size of purchases. First, most EM central banks have accumulated their bond holdings in the course of normal open market operations. The aim has generally not been to extract duration or push longer dated yields down (there is still scope to do that through conventional rate cuts) – here the notable exceptions are India and Brazil (based-on the planned legislation). Second, so far few countries have announced QE target purchases' levels (as % of GDP or market size), which makes it difficult to judge if the purchases were to reach large quantities. The exceptions here are Poland and potentially Indonesia – where QE is likely to result in significant bond purchases. Third, the current holdings of government securities on EM central banks' balance sheets are fairly subdued (compared to 15-20% of GDP for the above mentioned DM central banks) – but there are countries where the holdings are around/above 5% of GDP or 10% of the domestic government bond market size: India, Indonesia, Brazil and Argentina. Fourth, traditional repos fall outside our definition of QE; some central banks have called it "QE", but these banks are essentially engaged in conventional liquidity operations where they accept government bonds as collateral for short term liquidity provision.
A country-by-country detailed description of announced QEs for 17 EMs
We provide a detailed country-by-country overview of the announced Quantitative Easing programmes in 17 major Emerging Markets that we cover.