It’s not just the usual suspects: some oil exporters also have low official reserves levels.
When writing last week’s piece on the IMF’s shoddy deal with Pakistan, I was blown away at the country’s astonishingly-low level of international reserves.
$9.5 billion for a $350 billion economy. That’s only around 3% of GDP and 1-2 months of import cover. Such a low amount of cash on hand isn’t exactly best practice, whether it’s sovereign, corporate, or personal finance.
So it got me thinking: is Pakistan really such an outlier? Or am I just crazy or ill-informed?
Lower-middle income countries
Turns out I was right: among countries in its income bracket, Pakistan has the lowest reserves-to-GDP ratio of all.
Bolivia, Egypt, Swaziland, Nigeria, and Indonesia are not far behind, at 10% or less.
Yet international reserves are far from the only macro indicator that matters of course. So I suppose we should be forgiving of Indonesia, which generally has much of its (macro) house in order.
Upper-middle income countries
Looking at upper-middle income countries, only three in-sample are sub-10%: Argentina, Ecuador, and Costa Rica. I suppose Latin America really does have a savings problem.
As expected, these slightly richer countries generally exhibit higher reserve-to-GDP ratios than their poorer counterparts. No surprise there.
What is surprising, however, is to see oil-exporters like Azerbaijan, and Kazakhstan sub-15 percent.
Mexico, Brazil, and Colombia also produce oil and also have low ratios. But, then again, they are also Latin American…
“What’s the big deal?”, I hear you asking.
Well, Ukraine is a lower-middle income country fighting a war and undergoing debt restructuring. Yet Kyiv still manages to have more in the bank than wealthier countries with much lower-levels of security threats.
To me, that speaks volumes about economic management.
Pakistan and the IMF recently agreed on a program worth $7 billion, which appears woefully insufficient to resolve the country’s macroeconomic imbalances. The Fund claims that the Extended Fund Facility over the next 37 months intends to “cement macroeconomic stability and create conditions for a stronger, more inclusive, and resilient growth.” But this nothingburger of a deal – painfully, obviously so ($2.3 billion per year?) – will more likely achieve the opposite.
Some quick stats from 2023 pulled from my sovereign stress tracker, where Pakistan flashes red on reserve cover and debt-to-revenue:
Average annual interest payments over the next five years = ~6.5% / GDP (~$20 billion)
Average annual principal payments over the next five years = $19 billion
Imports typically range from $60-85 billion
Export revenues range from $30-40 billion
Tax revenues = ~10% / GDP (~$35 billion)
In 2023, the current account deficit narrowed to -0.7% of GDP (-$2.4 billion), but in the past these have been much larger (e.g. ~-$17.5 billion in 2022). But even financing small external deficits could prove difficult. With annual FDI generally under $2 billion and in the absence of other private capital inflows, the government will likely have to borrow more. This is a problem given already-high public debt levels at 77% / GDP, of which Pakistan owes 28% / GDP to external creditors.
So it is crucial that Pakistan runs small current account deficits or, dare I say it, surpluses. If the global trading system worked as it should (i.e. fantasy-land), non-commodity-exporting emerging and frontier economies should be expected to run current account deficits. The idea is that the current account surpluses of wealthy countries would fund the development and climate transition of poorer nations.
But since so few advanced economies run surpluses, I guess this nuclear power and world’s fifth-most populous country will just have to tighten its belt. Fantastic.
To avoid large external deficits, Pakistan’s real exchange rate needs to depreciate. Yet the exact opposite is happening, so don’t hold out too much hope for a small CAB deficit this year:
Olivier Blanchard once said that inflation is the canary in the coal mine. In the chart below you can see that Pakistan’s weighted inflation differential with its trading partners skyrocketed in May 2024.
Consider the alarm sounded. Even on the off-chance Pakistan manages to run a small CAB deficit in 2024 (say, like the -$2.4 billion in 2023), annual IMF support ($2.3 billion) will barely help bridge that gap. Islamabad still has to cough up about $39 billion in combined principal and interest payments every year going forward. This sum is roughly equivalent to export receipts and slightly larger than tax revenues.
This looks to be a solvency issue. And with inflation through the roof, it’s hard to see how this doesn’t get worse before it gets better. Watch this space.
Looking across the emerging markets complex, Turkey stands out as one of the larger, systemic EMs that is rapidly headed in the wrong direction. Inflation has of course been the main symptom of imbalances in the economy, gyrating between 40-80% since 2022. It currently stands at around 70%, despite the central bank hiking the policy rate from 45% to 50% in March.
Part of the reason behind rampant inflation is an ongoing credit boom in the country. Private firms and households account for much of the borrowing, with worryingly strong growth in credit card debt. Lenders are issuing more debt in foreign currency, which increases currency risks. Non-performing loans remain low, but the central bank has tightened macroprudential regulations in response to this recent credit growth.
At above 33 to the dollar, the lira is at record lows. Even so, Turkish export competitiveness is eroding as the real exchange rate with trading partners has surged by more than 5% YTD through end-May.
With the lira tanking, inflation is of course driving real exchange rate appreciation. Prices have been rising much faster in Turkey than has been the case with its trading partners in 2023 and 2024.
It seems that so far Turkey has had somewhat of a reprieve from these brewing imbalances. Not only does loan performance remain decent, but the current account deficit was “unusually” small in May. The carry trade is driving surging portfolio and bank flows to Turkey, which has driven official reserves to increase to $148 billion in June.
Still, Turkish foreign exchange reserves are low compared to EM peers. They currently stand at 13.3% of (2023) GDP. While an improvement since last year, that’s still only 4.9 months of imports.
So it’s certainly worth keeping an eye on increases in the country’s external financing needs. An increase in the current account deficit and/or an abrupt halt to the carry trade flows linked to further worries over lira weakening could see the central bank dip into its reserves to cover gaps. Watch this space.
In last week’s post, I discussed savings and investment across large emerging markets and the G7 countries. As has been well-documented, imbalances in the G7 have profound consequences not only on domestic economies and the rise of populism. High consumption and the low savings that result across the G7, especially ex-Japan / Germany, means that there is less capital to flow from these rich countries to emerging and developing economies.
In the US, both savings and investment are low as a share of output. Yet investment is endemically higher than savings in the US, partly as a result of strong global demand for US assets. What that robust foreign appetite means is that in most years more investment flows into the US than flows out of the country. The stock of these accumulated flows is the Net International Investment Position.
In cases where net investment flows into rather than out of a country in a given period, its NIIP declines. As such, the US has by far the world’s most negative NIIP, which stood at -$19.8 trillion in 2023. The UK has the next-largest negative NIIP, which at -$1 trillion is a far cry from the US.
Capital flows to the US, UK, and several other external deficit countries thanks to strong investor protections, rule of law, and diversified economies. With open capital accounts, it is easy for international capital to acquire assets domestically and affect prices in financial markets, real estate, and other investment categories. There is naturally a price effect, which I have begun to measure.
As a starting point, I’ve compared normalized annual changes in the US’s overall NIIP to the S&P 500’s cyclically-adjusted price-to-earnings ratio. CAPE is a valuation metric that compares current prices with the 10-year average of earnings per share.
As expected, I do find a negative association between changes in NIIP and CAPE levels. So more net investment into the US in a given year (i.e. a NIIP decrease) is loosely correlated with stock prices that are higher compared to long-term earnings.
In plain English, what this means is, for example: there were large net investment inflows into the US in 2020, 2021, and 2023, and S&P500 valuations were also high during those years. Conversely, large net outflows in 2022, 2009, and 2007 coincided with lower P/E ratios. There are of course factors other than net international investment flows at work, including monetary and fiscal policy.
So I won’t make any grand claims based on the chart above. Moreover, it has only a limited number of data points, and which are weakly correlated. I might run portfolio investment flows against price-to-earnings metrics to see if there is a tighter link. I also might look at other asset valuations, potentially in real estate, to see what the relationship is with capital inflows.
Essentially, I’m working my way towards testing whether foreign capital inflows contribute to asset bubbles in the US. As usual, I’ll also be expanding my analysis to other countries, in this case other G7 / advanced economies.
The point is to get a sense of the extent to which open capital accounts are driving asset prices in wealthy economies beyond the reach of local workers, thus contributing to the rise of populist political forces. Meanwhile, many emerging markets and developing economies have the potential to deliver better returns on investment than capital-saturated wealthy countries. But investment gaps in the EMs will likely persist as long as rich countries continue to run such large, negative NIIPs.
The past few weeks of political headlines have provided yet more confirmation of a long-term trend: the distinction between emerging and developed markets is less clear than it once was. Emerging and frontier markets are less politically stable, or so the old consensus goes.
Yet Emmanuel Macron has flown in the face of all that by dissolving France’s parliament and calling snap legislative elections. The prospects of extremist parties coming to power or of a hung parliament in France has sent European markets reeling.
Sadly, Macron’s folly is just the latest episode in a recent litany of rich-world self-sabotage. Cue January 6th, just about everything that Donald Trump does, Brexit, and the tenures of Boris Johnson and Liz Truss. To complement the Anglosphere’s masochism, add in the rise of the Italian far right, multi-faceted German despondence, and demographic reversals in Japan, Italy, and Germany. The result is something other than a pretty picture. At the recent G7 meeting in Italy, every leader save Prime Ministers Meloni and Kishida was speaking from a position of political weakness.
The upside-down global trading system
One of the driving forces behind this wealthy-country malaise is the absence of a well-functioning global trading system. Consider that savings is the difference between income and consumption. One would think then that advanced economies would have more savings than emerging economies, as they have greater income. Not so.
As a share of GDP, China, India, Indonesia, and sometimes Russia all have higher savings rates than G7 countries. In fact, only Germany and Japan have roughly equivalent savings rates, followed by Canada, France, and Italy. The US and the UK trail distantly.
The Chinese anomaly
The advantage of a high domestic savings rate is of course that a country can use these fund investments. China is an extreme example of this. By suppressing domestic consumption, Beijing has been able to jack up investment levels to dizzying heights without even running a current account deficit.
This is of course a significant problem because that abundance of savings ends up penalizing savers. The result is a vicious circle where the authorities discourage consumption in order to keep interest rates low for investment, which hurts people with money saved up in the bank. It’s a classic case of financial repression. Remember that the Chinese government directs a lot of investment from state-owned banks to inefficient state-owned enterprises. This is a recipe for slower growth, which China is currently experiencing.
Unfinished construction in a Chinese “ghost city.” Civic Data Design Lab
These chronically high savings end up “exporting” China’s weak consumer demand to the rest of the world, to the dismay of its trading partners. Juicing up savings to such levels results in over-investment domestically, without which the world’s largest current account surplus in dollar terms would be even larger. Remember that investment most typically reflects fixed capital formation, e.g. the construction of infrastructure and real estate assets. Hence the ghost cities that pepper the real estate landscape. Echoing US residential real estate pre-2007, many Chinese families had bought several apartments as investments during the boom years and are now enduring the ongoing property crisis currently afflicting the country.
CAB deficit, low investment, high consumption
The US and the UK are the best counter-examples to the Chinese model. In these countries, consumption is subsidized, partly through easy access to a diverse array of credit products at relatively low rates. Higher consumption naturally results in lower savings rates, which in turn mean some combination of:
Investment would have to decrease significantly for the current account to be at zero and/or
If investment doesn’t decrease by a lot, then there must be a current account deficit.
In reality both countries experience both low investment and current account deficits. This combination isn’t only an obstacle for directing resources towards badly-needed infrastructure maintenance and upgrades. Current account deficits make it harder for capital to flow from rich countries to poor ones that need it.
A deadly Amtrak train crash in DuPont, Washington in December 2017. Stephen Brashear / Getty Images
What we have is a world where the US, the UK, and other wealthy countries over-consume. France, Canada, and Australia are mostly in this camp as well. Over-consumption, external deficits, and financialization don’t only come at the cost of infrastructure investment and funding for international development. They also result in the outsourcing of jobs and entire industries because subsidizing consumption comes at the expense of production.
Exorbitant privilege, exorbitant cost
This status quo also reinforces the US dollar’s status as the reserve currency because US current account deficits mean that the US can flood the world with dollars. The US can do this because of well-entrenched, large global demand of US assets, whether financial, real estate, or other. This is what gives the US Treasury its “exorbitant privilege” to borrow significantly, at low cost.
Savers around the world are always keen to invest in highly-diversified economies with strong property rights. Open capital accounts across most of the developed world make it possible for capital to move around nearly seamlessly for buying and selling assets. This is one reason why asset valuations across much of the Anglosphere seem so stretched, whether stock market valuations or residential real estate prices. Local workers, even in wealthy cities like New York, Vancouver, and Sydney, are being priced out by global capital.
Moreover, a global economy awash in dollars is one where the dollar can be weaponized via sanctions. Dollar dominance also reinforces the power of US banks, which are already strengthened by domestic financialization.
This is also a system that benefits US dollar strength. While a strong dollar hurts US exporters, no one in the US government or Congress really seems to care about export competitiveness beyond lip service. Worse still is the fact that an appreciating dollar is associated with lower trade volumes and more expensive debt servicing costs on dollar-denominated debt for emerging market issuers.
CAB surplus, high investment, low consumption
On the flip side are the economies running current account surpluses. First and foremost China, but also Germany, Japan, Russia, and – sometimes – Italy. One thing that these countries all have in common is rapidly-aging populations. People in prime working years tend to consume more due to higher income levels and spending needs, including children.
China, Germany, and Japan also under-consume because they subsidize production at the expense of consumption. If you’ve ever wondered why Japanese unemployment rates are so low, consider that a relatively small working-age population has a lot of domestic exporting industries to choose from. Or why wages and real estate prices are lower in Frankfurt and Berlin than in London and Paris. Germany has kept wages and consumption low to boost manufactured exports.
Unsustainable consumption imbalances
The global trading status quo doesn’t only damage the developing countries that need access to rich-world capital. These imbalances are also causing rot at the heart of G7 economies. For the US and other deficit countries, consumption is too high. Jobs and industries have been outsourced, while asset prices have skyrocketed out of reach for workers.
In Germany, Japan, and Italy, consumption is too low in these aging societies with external surpluses. Domestic industry has survived, in part thanks to the typically-abundant savings of the elderly.
Balanced consumer demand is needed across advanced economies, in China, and beyond. Only then will more stable electoral politics return to the G7.
With the African National Congress party having endured a crushing defeat in South Africa’s election on May 29th, the political horse-trading around forming a minority government is already well under way. The final tally shows the ANC receiving 40% of the votes and 159 of the parliament’s 400 seats, a sharp drop from the 230 held previously.
Coalition-forming
These are uncharted waters in the post-apartheid era, as the ANC has lost its parliamentary majority for the first time in three decades and now finds itself constrained to seek coalition partners. Although many observers expected a challenging vote for the party, the scale of this electoral setback and its ramifications are still sobering.
The market-oriented, center-right Democratic Alliance continues on as the assembly’s next-largest party with 87 seats and is amenable to coalition talks, as parties seek to strike a deal before a parliamentary session begins in two weeks. Ex-president Jacob Zuma’s uMkhonto weSizwe party is in third position with 58 seats, though the personal antagonism between Zuma and the ANC’s leader, President Cyril Ramaphosa, likely precludes any bargain between the two.
Macro mismanagement, demographic dividends
As the dust settles over this result, a quick look at some macro variables helps explain why the ANC got thrashed and where South Africa might be headed. Since 2010, average annual real GDP growth has been lackluster, at less than 1.5%, while inflation has been above 5% on average. Budget deficits have mostly been in the range of -4% to -5% of GDP for the entire period. The current fiscal approach is probably unsustainable over the long term, especially given that these spending overruns don’t seem to result from long-term investments in key areas. The woes of the national power grid operator Eskom serve as a prime example.
One outcome from the ANC’s economic policies is that GDP per capita has failed to rise significantly over the past two decades: the $6800 recorded in 2022 isn’t far above the $6100 registered in 2006. Indeed, real output growth has barely been able to annual outstrip population growth, which after dropping sharply in the 1990s, rose from the 2000s until peaking above 2% in 2015. Thankfully, annual population growth has moderated in recent years, and the fertility rate stands at a reasonable 2.37 births per woman, slightly above the replacement rate of 2.1.
As such, South Africa has a demographic advantage with a relatively small and declining share of the population that is outside the working ages of 15-64. At 53%, this is on par with the US and much lower than elsewhere in Africa (e.g. 80% in Senegal). The numbers of young South Africans set to enter the workforce over the short- and medium-terms is large compared to the overall numbers of young and elderly residents, meaning that the country has a demographic tailwind to be harnessed – but only if the new government gets its policies right.
Today’s charts are snapshots of credit-to-GDP gaps in emerging and advanced economies. As a reminder, the credit gap measures the difference between actual credit to the private sector and trend credit to the private sector.
These estimates through Q3 2023 are provided by the Bank for International Settlements, which describes its credit-to-GDP ratio as capturing total borrowing from all domestic and foreign sources by the private non-financial sector.
Several factors have an impact in determining private sector borrowing. These include how developed the country’s financial system is, the ability of domestic firms to borrow internationally, and the extent to which public sector borrowing crowds out the private sector.
As such, the level of credit to the private sector as a percentage of GDP varies significantly from country to country. It is therefore more helpful to look at credit-to-GDP gaps when comparing across countries.
Besides, credit gaps are one measure that the IMF uses in measuring sovereign stress for market-access countries. A high, positive credit gap can point to the presence a credit bubble. Such bubbles are sometimes a symptom of macroeconomic imbalances and policies that can lead to sovereign debt strains.
There is little evidence of excessive credit gaps in emerging markets. The absence of credit bubbles is at least partly attributable to EM central banks hiking rates rapidly in response to inflation when it first began appearing in the latter stages of the pandemic. This early tightening has enable EM central banks to start easing before many of their developed market peers, e.g. Brazil and Mexico in Q1-2024.
Of course the chief objective of monetary policy is price stability. But, by definition, rate changes also affect credit conditions and lending.
South Korea is one of only two EMs in this sample with a sizable, positive credit gap. That excess credit is, however, declining, as the country’s central bank maintains its policy rate at a 15-year high with no signs of imminent loosening.
The other is Thailand, where the central bank is holding its policy rate steady despite political pressure to ease. In the meantime, its credit gap is also narrowing.
This relatively benign outlook across major EM is a sign of improving policy credibility compared to the volatility that led to various EM financial crises in the past. On the other hand, a negative credit gap doesn’t necessarily indicate sound macroeconomic management, e.g. see Turkey, South Africa etc.
The BIS only provides data for 21 EMs, which is already a lot. But achieving broader country coverage is why I also use similar World Bank data in my sovereign stress analysis.
Looking at advanced economies, the gaps are virtually all negative, as in EM. But, unlike EM, almost all of the gaps appear to still be widening, representing the later start to post-pandemic monetary policy tightening by AE central banks.
Note the sizable negative gap in the Euro Area (i.e. “XM”), which is a cyclical indicator suggesting that a turning point for the ECB might not be too far off. Indeed, Switzerland has recently led the way with a first DM rate cut this cycle. Japan is the outlier with its large, positive credit surplus, but tighter monetary policy has been eroding that gap in recent quarters.
Higher for (a bit) longer, but don’t buy into inflationista hype.
I wrote recently that emerging market sovereigns considering new issuance should be ready for Federal Reserve rate cuts in 2024, despite the hot Q1 inflation prints. The point is that core goods inflation has all but disappeared from the consumer price index and that core services inflation is concentrated in the transportation services segment, particularly motor vehicle insurance. The rise in car insurance costs in the US is a structural change, and the base effect will be locked in before long.
This inflation stickiness in transportation services is a lingering effect of Covid supply chain disruptions. Although these have lasted longer than most expected, they won’t last forever and will be resolved eventually. Juxtapose that point with data out of the San Francisco Fed that measures volume dynamics to gauge whether price rises are supply- or demand-driven. Supply is currently driving inflation, which confirms the CPI narrative around motor vehicle services.
This week of course Jerome Powell signaled that rates would be staying higher for longer. This makes good sense given higher Q1 inflation following his (overly) dovish remarks in December that markets interpreted (too) exuberantly.
One-to-two rate cuts are still priced in for this year, and any talk of new rate hikes are overblown. Powell himself said this week that a rate increase would be “unlikely.” Moreover, the Fed is slowing down its quantitative tightening program, lowering the monthly cap on US Treasuries it rolls off its balance sheet from $60bn to $25bn. So rates may be higher for longer than expected amid all the December-January euphoria, but the wind is still blowing in an “easing” rather than in a “tightening” direction.
There are other reasons that declining inflation and lower rates are likely in store later this year. Monetary policy has a lag time, so the restrictive stance that has been in place for the past few years will continue to work through the economy. There is also a post-Covid negative potential GDP trajectory gap, a point that my former colleague Robin Brooks makes. In fact, I’m hardly alone on this: see Claudia Sahm on the Covid hangover and Brian Levitt of Invesco on transportation services.
I’ll get back to more of a direct focus on emerging markets next week, but it’s important for EM watchers to keep an eye on the elephant in the room as well. Those developed market policy rates tend to have statistically significant negative relationships with capital flows to and from EM. Besides, Sovereign Vibe is also about global macro!
Debt management offices in emerging market finance ministries should be prepared for Fed rate cuts.
Emerging market sovereign debt issuance started 2024 off strongly with record-breaking issuance in January at ~$47bn and another ~$16bn in February, marking the highest January-February result since before the pandemic. Sub-Saharan African sovereigns even returned to the Eurobond market, with Côte d’Ivoire leading the way and Benin placing a debut issuance. Larger players including Saudi Arabia, Mexico, Indonesia, Hungary, and Romania made placements as well.
With borrowing costs having immediately fallen in the wake of Federal Reserve Chair Jerome Powell’s dovish comments on US inflation in December, the start-of-the-year timing for issuance was savvy given renewed concerns since March around higher-for-longer interest rates. With the 10-year US Treasury yield having climbed nearly 600bps since early March and the dollar also strengthening, debt management offices have likely become more circumspect regarding US inflation and the Fed.
The fading prospects of US rate cuts before H2 haven’t put a halt to activity this April out of Abu Dhabi and, more absurdly, El Salvador. And other debt management offices, including Tanzania, are also considering Eurobond issuance. Apparently EM sovereigns have issued about $93bn so far this year, which means about $30bn for March-April. These are still big numbers, but nothing close to that fast start in January.
Friday’s US inflation print came in hotter than expected, fueling ongoing concerns that rates will have to stay high for a while yet. The Fed’s preferred metric is core personal consumption expenditures (i.e. ex-food and energy), which rose 2.8% year-over-year in March – a third high monthly reading in a row. But digging through US data shows that the Fed may yet bring inflation lower soon. Looking at the consumer price index provides more granularity than is easily available through PCE, though it measures slightly different things.
In any case, it’s clear that almost all price pressures are emanating from services, with core (i.e. ex-food and energy) goods inflation having even turned negative. Within services, the largest component is shelter, which is often the case historically as well, but shelter inflation has moderated significantly over the past several months.
The main inflationary challenge is actually in the transportation services segment, which accounts for the lion’s share of services ex-shelter inflation. Within this category, motor vehicle insurance prices have been surging, e.g. 22% y-o-y in March, due to lingering Covid-era supply chain effects, changing car technology, higher car prices, and higher repair costs. It is likely that these factors are now locked in and will not rise much further, if at all. With the high base effect is now baked in, transportation services inflation will almost certainly fade over the coming months.
The upshot is that emerging market DMOs should expect US inflation to moderate over the coming months and for the Fed to cut rates at some point this year – and perhaps sooner rather than later. So I wouldn’t be surprised to see a pick-up in EM issuance again this year, though investor demand may be more for EM IG than for EM HY. Whether it’s wiser to place a Eurobond or a local currency bond, and whether offices should hedge their currency exposure in the former case is another matter. In the meantime, let the roadshows begin?
As global markets grapple with the prospect of higher rates for longer, it’s important to keep an eye on another important potential headwind: the direction of worldwide central bank asset purchases.
Without delving too deeply into the history of unconventional monetary policy, post-Global Financial Crisis the world’s major central banks implemented quantitative easing programs. This meant buying government bonds as a way to further support recovery by injecting cash into the economy. As a result, central bank balance sheets expanded significantly.
All the extra liquidity swilling around as a result of these purchases clearly has an impact on markets. When central bank buying decreases, this often seems to coincide with challenging periods for the S&P500, the MSCI All-World Index, and others. For example, 2018 and 2022 saw poor market returns, just as central bank asset purchasing was dipping in to negative territory, as presented in the chart below.
Looking at the balance sheets of major central banks, purchases of total assets are simply any changes from one period to the next. I’ve chosen a 12-month rolling window to show you annual purchases each month here.
Central bank buying was positive throughout much of the 2010s, hovering around $2.5tn year-on-year over 2016-2018, before turning negative in late 2018 and most of 2019. Annual purchases then skyrocketed to nearly $10tn during the pandemic, amid market ebullition from H2 2020 until the Omicron Covid variant dampened sentiment in November 2021 .
Since Q2 2022, annual central bank asset accumulation has been negative, reaching a nadir of some -$3tn in H2 of that year, which was a rough one for most asset classes. From late 2022 and through most of 2023, net buying headed back towards positive territory, with last year witnessing strong, broad-based returns.
In 2024, purchasing is starting to decrease again, which would be a negative signal for markets if the trend is confirmed. This tighter stance aligns with the likelihood that the Fed will keep rates at current levels for much of the year and the Bank of Japan allowing short term rates to increase when it abandoned yield curve control last October.
However, there may be a silver lining for markets. Weak growth and low inflation prints in the Eurozone are likely to lead the ECB to cut rates in 2024. While the ECB may not abandon the quantitative tightening program launched in March 2023, it is unlikely to ramp it up at a time when it needs to loosen policy. This is especially true since it has managed to reduce its balance sheet from €8.8tn in 2022 to around €6.6tn today, as visualized in dollar terms below.
