Emerging market economy exchange rates and local currency bond markets amid the Covid-19 pandemic

Boris Hofmann, Ilhyock Shim and Hyun Song Shin

No 5, BIS Bulletins from Bank for International Settlements

Abstract: Borrowing through domestic currency bonds has not insulated emerging market economies (EMEs) from the financial shock unleashed by Covid-19; EME local currency bond spreads spiked amid sharp currency depreciations and capital outflows. Portfolio investors face amplified losses as local currency spreads and exchange rates move in lockstep; their revised portfolio allocations in turn strengthen this correlation. EMEs with monetary policy frameworks that are equipped to address the feedback loop between exchange rate depreciation and capital outflows stand a better chance of weathering the financial fallout from the Covid-19 pandemic. To counter large stock adjustments in domestic bond markets, EME central banks may need to expand their toolkit to take on a "dealer of last resort" role; a number of them are already moving in this direction.

Pages: 9 pages
Date: 2020-04-07
New Economics Papers: this item is included in nep-ifn and nep-opm
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Citations: View citations in EconPapers (49)

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