Macro Analysis / Global

QE in EM: The countries that could be next, and those that must avoid it

  • We quantify the risk associated with quantitative easing (QE) across a sample of 50 emerging and frontier economies
  • Countries that should avoid QE on our metrics include Egypt, Zambia, Ghana, Pakistan, Angola and Ukraine
  • Of our sample, we see QE as most viable in Czech Republic, Slovenia or Morocco

While QE has so far been deployed across 17 EMs, it has yet to be attempted by any frontier market economies. Looking ahead, will lower-income countries be tempted to try their hand at QE given its apparent success so far in mainstream EMs?

Recent history of global policymaking is littered with examples of emerging and frontier markets copying developed market policy, dating back to the adoption of the 60% debt-to-GDP ratio from the Maastricht Treaty and extending to the decade of countercyclical fiscal policy following the GFC. Many have found it difficult to reverse course, with countries like Kenya failing to make any headway on consolidation (see here). If other B-rated countries (in addition to Turkey) blindly adopt QE simply because others are doing it, while ignoring their relatively greater vulnerabilities, they may experience swift punishment from markets.

Below we quantify the risk associated with QE across a sample of 50 emerging and frontier economies. In the top left are countries with low inflationary risk but high risk of fiscal dominance, and in the bottom right are countries with high inflationary risk but low risk of fiscal dominance.

The top right is populated by countries with high risk for both. This is our dangerzone, and shows the countries who should not attempt QE under any circumstances. Conversely, the bottom left is populated by countries with low risk of both, and which can probably safely experiment with QE.

This template can be used to identify countries that might benefit from QE vs those where it should be avoided. In the near horizon, QE has been discussed as an option in Brazil and the central bank has been granted legislative approval to purchase public and private debt instruments. However, a history of high inflation, high and rising debt, and growing concerns over fiscal dominance mean Brazil should tread very carefully before embarking on a program of asset purchases.

Other countries that should avoid QE on our metrics include Suriname, Egypt, Zambia, Ghana, Pakistan, Angola and Ukraine. On the other hand, countries at lower risk that have yet to implement QE include Czech Republic, Cambodia and Slovenia, and to a lesser extent Morocco, China, Kazakhstan, and the Dominican Republic (though admittedly Cambodia could be an anomaly given relatively underdeveloped markets).

In the event of a protracted post-Covid recovery, these countries could consider QE to complement existing stimulus measures. Of these countries, we see QE as most likely in Czech Republic, Slovenia or Morocco, as they all have rates at or near the zero-lower bound. The other countries still have positive (in some cases substantially) nominal and real policy rates, and are thus more likely to ease via the interest rate channel.

This is an extract from our full report on QE in emerging markets, QE for all! EMs learn to navigate the risks of unconventional monetary policy.

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