Colombia's quantitative easing seen as bold move by former ministers
March 26, 2020 |
Measures are expected to keep local markets liquid, limited capital flight expected
The coronavirus COVID-19 has caused unprecedented moves by central banks around the world to underpin the global economy, including what is believed to be the first incidence of quantitative easing measures taken in Latin America, a region where financial institutions are gaining credibility but are still not at the level of their developed market peers.
Colombia’s central bank announced on Monday it would engage in quantitative easing (QE) in response to rising sovereign bond yields and a collapse in global oil prices, which puts a significant strain on the Andean nation’s budget.
“This is the first time an emerging market is doing quantitative easing in the context of a crisis, said Ricardo Hausmann, Venezuela’s minister of planning in the 1990s and economics professor at Harvard’s Kennedy School of Government. “We are looking to see how that turns out.”
These measures are considered unconventional for central banks because they represent monetary policy measures not tied directly to the raising or lowering of interest rates. Rather, the policies are utilized when central banks purchase outright government securities or other market instruments in order to increase the supply of cash in an economy with the hope it will lead to more lending and investment.
With the country in lock-down to slow down the spread of the coronavirus, and with the precipitous fall in oil prices following the inability of Russia and Saudi Arabia to reach production agreements, Colombia is finding itself in a difficult situation. Though fiscal dependence on oil revenue was decreased significantly, it still represented almost 7% of government revenues in 2019, according to the OECD.
Quantitative easing was triggered by a rapid rise in 2028 sovereign bond yields, to 9% from 5.5%, in the wake of the oil shock. “Institutional investors were trying to cash treasury bonds (TES) to have liquidity due to fear,” said Mauricio Cárdenas, former minister of finance and public credit of Colombia from 2012-2018.
Cárdenas, who is currently a visiting senior research scholar at Columbia University’s School of International and Public Affairs, called the measures new and part of an “unprecedented script.”
“It is bold because in Latin America, when there’s a lot of liquidity, or when the economy is inundated with liquidity, there is always the fear that that liquidity will go to buying dollars. It’s also bold because, when buying private sector bonds full, the central bank is taking on a credit risk that is not taken through the traditional repo mechanism,” he said from Bogota.
But Cárdenas says that conditions in Colombia are right where he does not expect a run on the Colombian peso nor will there be hyperinflation.
“Colombian’s trust their currency. The peso is currently solid and stable. Inflation is under control, and people hold their assets in pesos, not in dollars. That is our advantage,” he said.
The QE program, which began to be implemented on Tuesday, includes authorizing the central bank to buy notes issued by private credit institutions maturing within three years. The first auction, scheduled for Tuesday, was set for COP2 trillion ($475,586). Total purchases will be for COP10 trillion. The central bank was also authorized to buy up to COP2 trillion worth of TES before the end of March.
The central bank will continue auctioning repos with private notes for COP500 billion a day, in the days when no auctions of these assets are taking place. The central bank will also be auctioning public sector notes on a daily basis “for ample amounts,” it said in its announcement.
The measure has had an immediate effect. On Tuesday, interest rates in Colombia fell 50 basis points, Cárdenas said.