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Changyong Rhee and Katsiaryna Svirydzenka
The Asia-Pacific region was the first to be hit by the COVID-19 pandemic; it put a strain on its people and economies, and policymaking became exceptionally difficult. This departmental paper contains the assessment of the key challenges facing Asia at this critical juncture and policy advice to the region both to address the current challenges and to build the foundations for a more sustainable and inclusive future. The paper focuses on (1) adjusting to the COVID-19 shock, (2) using unconventional policies when policy space is limited, (3) dealing with debt, and (4) helping the vulnerable and greening the recovery. The paper first presents the different ways countries are adjusting to the COVID-19 shock.
Chiara Fratto, Brendan Harnoys Vannier, David de Padua, and Ms. Helene Poirson Ward
The COVID-19 crisis induced an unprecedented launch of unconventional monetary policy through asset purchase programs (APPs) by emerging market and developing economies. This paper presents a new dataset of APP announcements and implementation from March until August 2020 for 27 emerging markets and 8 small advanced economies. APPs’ effects on bond yields, exchange rates, equities, and debt spreads are estimated using different methodologies. The results confirm that APPs were successful in significantly reducing bond yields in EMDEs, and these effects were stronger than those of policy rate cuts, suggesting that such UMP could be important tools for EMDEs during financial market stress.
International Monetary Fund. Monetary and Capital Markets Department


Near-term global financial stability risks have been contained as an unprecedented policy response to the coronavirus (COVID-19) pandemic has helped avert a financial meltdown and maintain the flow of credit to the economy. For the first time, many emerging market central banks have launched asset purchase programs to support the smooth functioning of financial markets and the overall economy. But the outlook remains highly uncertain, and vulnerabilities are rising, representing potential headwinds to recovery. The report presents an assessment of the real-financial disconnect, as well as forward-looking analysis of nonfinancial firms, banks, and emerging market capital flows. After the outbreak, firms’ cash flows were adversely affected as economic activity declined sharply. More vulnerable firms—those with weaker solvency and liquidity positions and smaller size—experienced greater financial stress than their peers in the early stages of the crisis. As the crisis unfolds, corporate liquidity pressures may morph into insolvencies, especially if the recovery is delayed. Small and medium-sized enterprises (SMEs) are more vulnerable than large firms with access to capital markets. Although the global banking system is well capitalized, some banking systems may experience capital shortfalls in an adverse scenario, even with the currently deployed policy measures. The report also assesses the pandemic’s impact on firms’ environmental performance to gauge the extent to which the crisis may result in a reversal of the gains posted in recent years.

Mr. Itai Agur, Melissa Chan, Mr. Mangal Goswami, and Mr. Sunil Sharma
The paper investigates the international integration of EM sovereign dollar-denominated and local-currency bond markets. Factor analysis is used to examine movements in sovereign bond yields and common sources of yield variation. The results suggest that EM dollar-denominated sovereign debt markets are highly integrated; a single common factor that is highly correlated with US and EU interest rates explains, on average, about 80 percent of the total variability in yields. EM sovereign local currency bond markets are not as internationally integrated, and three common factors explain about 74 percent of the total variability. But a factor highly correlated with US and EU interest rates still explains 63 percent of the yield variation accounted for by common factors. That said, there is some diversity among EM countries in the importance of common factors in affecting sovereign debt yields.
International Monetary Fund. Asia and Pacific Dept
This Selected Issues paper analyzes the capital inflows to Indonesia since the global financial crisis. Capital inflows to Indonesia have increased since the crisis. Their average volume increased from 3.25 percent of GDP in 2005–09 to 4.50 percent of GDP in the first quarter of 2010 to the third quarter of 2016. From the global perspective, driven by the liquidity released from the systemic economies’ unconventional monetary policies, a global search for yields has led to large capital inflows to emerging and developing economies (EMDEs), especially portfolio inflows. Although many EMDEs experienced a steady decline in capital inflows during 2013–16, capital inflows to Indonesia increased and reached a peak in late 2014, and then started to decline but remained at relatively high levels from the first quarter of 2015 to the third quarter of 2016.
International Monetary Fund. Asia and Pacific Dept

The Indonesian economy continues to perform well, supported by robust growth and greater macroeconomic stability. A prudent mix of macroeconomic policies and structural reforms has helped the economy weather the commodity down-cycle and several episodes of emerging market (EM) financial turbulence. Securing and boosting growth in a more uncertain external environment requires maintaining policy buffers, while upgrading the medium-term framework through fiscal and structural reforms.