Emerging

Monetary policy is back to the fore

th  
2
EcoEmerging// 4 quarter 2019  
economic-research.bnpparibas.com  
Editorial  
Monetary policy is back to the fore  
Growth prospects for the emerging countries in 2020 (EC) have dimmed with the slowdown in export markets and the climate of  
uncertainty that reigns with the US-China trade war. This uncertainty has increased the volatility of portfolio investments since last  
summer, although external financing conditions are still favourable on the whole. The majority of countries have also eased monetary  
policy, and the pass-through of key policy rates to lending rates is functioning rather well. Yet private sector debt has risen sharply over  
the past decade, which could hamper monetary easing if credit risk were to rise.  
Monetary policy to the rescue  
Monetary policy stance  
For our selection of 26 emerging countries, real GDP growth hit a  
record low of only 4.1% year-on-year in Q2 2019, down from 5.2%  
one year ago. Excluding the financial crisis of 20082009, we must  
look back to 2001 to find such a weak performance. The main  
causes are the slowdown in export markets and the climate of  
uncertainty that prevails with the US-China trade war. Uncertainty  
has fuelled high volatility not only in EM exports, but also in portfolio  
foreign investments to EM. Yet external financing conditions have  
not tightened yet, with the exception of Argentina and Lebanon (for  
very specific reasons). Globally, spreads on sovereign external debt  
have tended to narrow since Q4 2018, while the ones for corporates  
have remained flat. Sluggish world growth is also straining  
commodity prices, which is helping to contain inflationary pressures.  
Against this backdrop, a large majority of central banks (16 out of  
Policy rate evolution  
Monetary easing pass-through (*)  
Date de début  
19/10/2016  
17/10/2013  
16/12/2016  
08/02/2017  
30/12/2014  
14/01/2015  
-
Date de fin  
Brazil  
103%  
162%  
81%  
58%  
72%  
39%  
n.s  
31/05/2019  
31/05/2019  
31/05/2019  
31/05/2019  
31/05/2019  
31/05/2019  
-
Chile  
Colombia  
Mexico  
China  
India  
Indonesia  
Malaysia  
Taiwan  
Thailand  
Poland  
n.s  
-
-
n.s  
-
-
63%  
111%  
110%  
-
16/10/2012  
07/11/2012  
27/08/2012  
-
18/12/2018  
31/05/2019  
31/05/2019  
-
Hungary  
Czech Republic  
Romania  
Turkey  
2
6) had initiated or continued to cut their policy rates at the end of  
119%  
n.s  
01/07/2013  
-
31/05/2019  
-
September, compared to only 4 in 2018. The only exceptions are  
the central banks of the central and eastern European countries,  
where growth rates exceeded their long-term potential through  
H1 2018, triggering labour market pressures. Could monetary  
easing help buffer the impact of the slowdown in exports?  
Russia  
116%  
45%  
138%  
n.s  
31/12/2014  
21/02/2018  
22/09/2014  
-
31/05/2019  
31/05/2019  
31/05/2019  
-
Egypt  
Morocco  
South Africa  
(
*) Lending rate change divided by policy rate change during the specified period  
Limited manoeuvring room  
Source: IMF, Central Banks, BNP Paribas Group Economic Research  
Since year-end 2018, if we exclude mainland China (whose  
government sets the target for credit growth) and countries like  
Argentina, Brazil and Turkey, which have experienced volatile credit  
cycles, the growth of domestic bank lending has slowed in the  
emerging countries. For most countries, however, the effects of the  
current round of monetary easing have not been felt yet. This does  
not mean that the monetary policy transmission channel is  
functioning poorly or not at all. To the contrary, with the notable  
exception of India and Egypt, the apparent pass-through coefficient  
between the changes in policy rates and those of bank lending rates  
is rather elevated or very elevated, i.e. larger than 1 (see table).  
and, to a lesser extent, India and Indonesia). Yet a high real lending  
rate might also reflect a structurally high non-performing loan rate  
for certain types of credit, as is the case for cash loans and credit  
card loans in Latin America.  
Lastly, private sector debt might also hamper monetary easing if it  
leads to a deterioration in credit risk. This is obviously the case in  
China (see our analysis below). But many emerging countries,  
mostly in Latin America, have reported an increase of more than  
50% in their bank lending to GDP ratios since 2010. In Asia, ratios  
have not risen as strongly, but they stood initially at a higher level.  
Turkey is a good illustration of an intermediate profile (a rapid rise  
starting from a relatively moderate level): in case of an external  
shock, past experiences show that credit risk would rise more  
rapidly than in countries with relatively heavy debt loads but more  
moderate credit growth.  
Yet a bold monetary policy support, i.e. a decrease in the policy rate  
stronger than actual or anticipated disinflation, supposes that there  
exists some room of manoeuvre.  
One way to measure the room of manoeuvre is to compare real  
interest rates with potential growth rate. Looking at key policy rates,  
few countries have very big differences (Mexico, Egypt and Russia).  
If we look at bank lending rates, in contrast, numerous countries  
have significant differences (South Africa, Brazil, Colombia, Turkey  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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