Six years of quantitative easing in the United States have brought fleeting gains to emerging markets, and more enduring pain.
The Federal Reserve’s near-$4 trillion bond-buying splurge raised the growth rate in many developing economies only briefly, while fuelling a credit binge. Now that QE has ended in the United States, emerging markets find themselves in an unenviable situation: they are saddled with high debt, and struggling to boost output to repay the loans.
Of 23 emerging markets analysed by Breakingviews, as many as 17 now have much higher private debt-to-GDP ratios than the average before the Fed embarked on its policy.
The build-up has been particularly striking in small, open Asian economies. Total credit in Hong Kong has zoomed to 250 percent of GDP, while in Singapore it has reached almost 140 percent of GDP. In nine developing economies, government borrowing has risen sharply. The Czech Republic’s public debt is 40 percent of GDP, double the pre-QE average. Malaysia’s government debt has expanded by 10 percent of GDP.
Higher GDP growth might have justified the extra borrowing, but this vanished in the second half of 2010. About half the 23 emerging markets – including Russia, Thailand and South Africa – are now expanding at a much slower pace than their average growth rate before QE.
QE averted a prolonged slump but failed to boost demand in rich countries. Once the U.S. fiscal stimulus faded and the euro zone chose austerity to save its single currency, the appetite for imports from emerging markets waned. A slowing Chinese economy has made things worse, particularly for exporters of oil, coal and metal.
It’s possible that QE didn’t go far enough. It relied on banks to create credit when loan demand in developed countries was lacklustre. Giving newly minted money directly to households might have been a more effective antidote to anaemic final demand. Healthier exports could also have given emerging markets sustained growth with less debt. Their gains would have been less ephemeral, and the pain not so long-lasting.