Addressing the challenge of financing the low-carbon transition will require substantial investment in the European Union and in emerging and developing economies. Sustainable finance frameworks have proliferated in advanced and emerging markets but fragmentation of financial flows due to different classification systems and standards for green financial instruments is a real risk. Ensuring consistency should be a core agenda for the new International Platform on Sustainable Finance.
Central banks in emerging markets with weak currencies should not resort to unorthodox monetary tools such as quantitative easing as a response to the crisis triggered by COVID-19. Preferable alternatives include shifting public spending away from less pressing needs, moderately increasing public debt and falling back on official development assistance.
Emerging economies are fighting COVID-19 and the economic sudden stop imposed by the containment and lockdown policies, in the same way as advanced economies. However, emerging markets also face large and rapid capital outflows as a result of the pandemic. This column argues that credible emerging market central banks could rely on purchases of local currency government bonds to support the needed health and welfare expenditures and fiscal stimulus. In countries with flexible exchange rate regimes and well-anchored inflation expectations, such quantitative easing would help ease financial conditions, while minimising the risks of large depreciations and spiralling inflation.
COVID-19 is by far the biggest challenge policymakers in emerging economies have had to deal with in recent history.
COVID-19 is by far the biggest challenge policymakers in emerging economies have had to deal with in recent history. Beyond the potentially large negative impact on these countries’ fiscal accounts, and the related solvency issues, worsening conditions for these countries’ external funding are a major challenge.
Without a robust healthcare system and lack of medical equipment, emerging market economies are vulnerable to the current COVID-19 pandemic. How can developed countries help tackle the issue? Is international cooperation more needed than ever? This week, Giuseppe Porcaro and Guntram Wolff are joined by Barry Eichengreen to discuss the impact of COVID-19 on emerging markets.