Uncharted territory: How asset purchase programs became a thing for EMDEs: Amid the economic fallout from the pandemic, a wave of asset purchase programs in emerging markets and developing economies (EMDEs) over the past year has helped to instill some stability in financial markets, but their long-term macro consequences remain unclear, according to the World Bank. Asset purchases are a quantitative easing policy that sees a central bank piling into government bonds or other financial assets from commercial banks and financial institutions in a bid to stimulate GDP growth and help accelerate inflation. The policy measure, which is somewhat unusual, also helps to bring down yields on bonds and financial assets and bump up money supply.

EM central banks — at least 18 of them — resorted to buying government bonds in 2020 — making purchases ranging from less than 1% to 6% of GDP — despite the practice traditionally being limited to the developing world. Defying warnings the move would prove fiscally irresponsible and cause inflation to soar uncontrollably, developing economies managed to bring bond yields down and stabilise their currencies. “While most have been purchasing only in secondary markets, some have purchased bonds directly from governments with the objective of financing rising fiscal deficits.” In some cases, the asset purchase programs continue to grow, and many central banks have not announced the scale and duration of purchases.

And some have continued their QE programs into 2021: India announced earlier this month that it would purchase USD 14 bn worth of government bonds in the first quarter of its 2021-2022 fiscal year (which starts 1 April) having purchased USD 41 bn in FY2020-2021. This is the first time India’s central bank has committed upfront to an amount, amid pressure from traders to give guidance on government purchasing plans. Though markets are taking the policy positively, according to ICICI Securities’ Naveen Singh, “it would be a challenge to keep absorbing the huge supply at prevailing prices.”

This is the first rodeo for many EMDEs, and the timing may help them out. Current macro conditions in EMDEs are much more “benign” than previous instances when central banks in these economies financed fiscal deficits. These previous scenarios were “preceded by long periods of high inflation, external debt defaults, and stubbornly high fiscal deficits, set against the backdrop of less credible fiscal and monetary frameworks,” the World Bank writes, making EMDE asset purchase programs less risky this time around.

But don’t take that to mean that the positive outcome makes future success in implementing the same policy a certainty, as the context of “uniquely accommodative macroeconomic policies in advanced economies” may be undone in the future. The bank also points to the fact that “fragile liquidity conditions in EMDE financial markets are conducive to volatile movements in asset prices, possibly leading to unintended consequences,” especially if the programs are seen to be financing unsustainable fiscal deficits.