EM Policy Reactions to the Virus

As the struggle to contain the impact of the virus continues, EM governments and central banks have embarked in a set of uncoordinated but synchronised policy actions. In this piece we recap the actions taken by some EM countries and share our reaction.



South Korea has been at the front line of emergency fiscal measures.  The government announced an extra budget to the tune of nearly $10 bln, along with tax breaks and rent subsidies. The new spending will add around 5 ppt to the deficit, now projected at -4.1% of GDP for this year. We are not at all concerned about Korea’s fiscal capacity given its very low debt burden (40% of GDP), and we think they have ample room to act again if needed. The BOK, on the other hand, took a backseat at first by defying expectations and keeping rates on hold at its January 17 meeting (though there were two dissents). The bank also called an emergency meeting since then but did not act. We are confident that easing is on the way, most likely at the scheduled April 9 meeting, and agree with their measured approach. BOK officials are concerned about financial stability risks from a further credit expansion on the housing market and, given the fiscal support, they are not under so much pressure to act.  Note, however, that the nation has been the second hardest hit by the virus (after China) with about 7,500 cases and 53 deaths confirmed.



Bank Negara Malaysia (BNM) just delivered the widely expected 25 bp cut to 2.50%, the second cut this year. We are still 50 bp away from the 2.00% low for the bank’s policy rate in early 2010 and CPI is running at 1.6% y/y, so there is more room to go. The BNM also allocated MYR3.3 bln ($0.8 bln) through funding facilities for SMEs. On the fiscal side, the government came out with a MYR20 bln ($4.8 bln) spending package to help offset the impact of the virus, especially on the tourism sector. But Malaysia also has another vulnerability: oil. The collapse in oil prices puts pressure on the government accounts given its high dependency on revenues from the state-owned Petronas. On top of this, the political outlook remains very muddied, at best, after PM Mahathir Mohamad resigned last month.


In early March, Bank Indonesia cut reserve requirements in half to 4.0% to lean against the impact of Covid-19.  The government reckons this will add some $3.2 bln in extra liquidity. Banks engaged in trade financing will get an additional temporary 50 bp cut in their requirements. Officials will continue intervening in FX spot, NDFs, and fixed income markets. On the fiscal side, the package will include tax breaks for the tourism sector and support for airlines via subsidizes prices from the state-run oil firm Pertamina. The central government will also transfer the equivalent of $240 mln to affected local governments in the form of grants and is said to be preparing incentives for other sectors. Note that Indonesia is comparatively insolated, having fewer trade links to China and the global production chains disrupted by the virus.


Singapore’s budget will provide a huge slug of stimulus to lean against the economic impact of the virus.  It pledged the equivalent of $4.6 bln in dedicated support, taking the deficit to -2.1% of GDP for the upcoming fiscal year.  This would be the largest in at least two decades and compares to a projected -0.3% for the current fiscal year.  A big chunk of this will go to the health ministry, but also to assist lower income families. In addition, sectors most exposed to shock (tourism, aviation) will get support through property tax rebates and rental waivers. More recently, officials said that it could do more if needed. We think the MAS will likely complement these measures with easing measures at its semiannual policy meeting in April.


The government is still mulling over a stimulus measure, but it has not come out yet. Reports suggest it will be to the tune of $3.2 bln, including loans, tax breaks and a cash handout for low-income earners. The packages should be submitted to the Cabinet in the next few days. Simultaneously, the central bank plans to relax rules for commercial bank lending and debt restructuring for impacted companies.


The Brazilian central bank started to intervene via FX swaps in earnest last week, but the impact has been modest at best. It’s been $6 bln by our count so far. This followed a statement highlighting the potential impact of the virus, hence opening the door for rate cuts. This just confirms that Brazil has now become a low-growth and low-carry country, with a central bank that is not (yet) willing to provide a strong backstop for the currency, even when it underperforms other EMs. That said, the BCB has plenty of ammunition, including a big war chest of FX reserves, which means that if they decide to get serious, they will probably be effective in controlling the short-term move. The ball is in their court, and we would expect them to act more vigorously. Unlike counties such Korea, Brazil has very limited (if any) fiscal space to spare, not to mention a complicated relationship between the executive and legislative branches that makes it highly unlikely that will get any significant fiscal action.


No action yet, but potential for it. The virus impact could be the nudge that the government needs to implement bottled up investment spending – a major criticism of the AMLO government and one of culprits of the country’s low growth. Now the oil shock is another headwind. For now, however, the government has limited itself to saying that they are in close contact with Banxico about the consequences of the virus, suggesting a far smaller degree of concern than seen from officials in other countries. This seems fair to us given Mexico’s relatively insulated position and minor trade flows with Asia. The central bank should continue cutting rates despite the considerable hit on the peso (-10.5% year to date), especially now that they have cover from the Fed.