The Fiscal Response to the Covid-19 Crisis in Advanced and Emerging Market Economies (BIS Bulletin No 23)
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BIS Bulletin No 23, "The fiscal response to the Covid-19 crisis in advanced and emerging market economies," published by the Bank for International Settlements on 17 June 2020 and written by Enrique Alberola, Yavuz Arslan, Gong Cheng and Richhild Moessner. The bulletin compares the size and composition of fiscal packages, dividing them into budgetary measures and non-budgetary funding and credit guarantees. It reports budgetary measures of 4.6% of GDP for the G-20 countries by mid-May, 8.3% of GDP in advanced economies and 2.0% in emerging market economies. It examines pandemic incidence, fiscal policy room, financing conditions and monetary policy as determinants of the gap. The bulletin closes with a list of earlier issues in the series.
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BIS Bulletin
No 23
The fiscal response to the Covid-19 crisis in advanced
and emerging market economies
Enrique Alberola, Yavuz Arslan, Gong Cheng and
Richhild Moessner
17 June 2020
BIS Bulletins are written by staff members of the Bank for International Settlements, and from time to time
by other economists, and are published by the Bank. The papers are on subjects of topical interest and are
technical in character. The views expressed in them are those of their authors and not necessarily the views
of the BIS. The authors are grateful to Haiwei Cao, Emese Kuruc, Yifan Ma, Taejin Park and Robert Szemere
for excellent analysis and research assistance, and to Louisa Wagner for administrative support.
The editor of the BIS Bulletin series is Hyun Song Shin.
This publication is available on the BIS website (www.bis.org).
© Bank for International Settlements 2020. All rights reserved. Brief excerpts may be reproduced or
translated provided the source is stated.
ISSN: 2708-0420 (online)
ISBN: 978-92-9259-402-2 (online)
Enrique Alberola Yavuz Arslan Gong Cheng Richhild Moessner
enrique.alberola@bis.org yavuz.arslan@bis.org gong.cheng@bis.org richhild.moessner@bis.org
The fiscal response to the Covid-19 crisis in advanced and
emerging market economies
Key takeaways
• The fiscal policy response to the Covid-19 crisis has been swift and strong, in tandem with monetary
policy. Advanced economies (AEs) have deployed a much larger fiscal response than emerging market
economies (EMEs).
• The lower incidence of the pandemic in EMEs does not fully explain the difference. A narrower fiscal
policy space in EMEs, further reduced by the tightening of their financing conditions induced by the
pandemic shock, has constrained their fiscal response.
• The size and composition of the fiscal response also depend on other factors such as the level of income
and the strength of the social safety nets and automatic stabilisers.
Introduction
The policy reaction to the Covid-19 has brought together prompt responses from governments, central
banks and supervisory authorities. Fiscal policy has played a central role given the nature of the shock, a
public health emergency with unprecedented real effects. Governments have intensified their fiscal policy
actions and have adopted stringent containment measures as the pandemic has spread around the globe
(Graph 1, left panel). In advanced economies (AEs), fiscal actions peaked in late March, while emerging
market economies (EMEs) have responded later. A new round of fiscal stimulus, more focused on
supporting economic recovery, is expected as lockdowns relax and activity progressively resumes.
The response is different in terms of size and composition among countries, although the types of
measures are broadly similar. The main divide can be found between AEs and EMEs, but also within both
groups. This note explores the determinants of the differential fiscal response.
Composition and size of the fiscal packages
The goal of the fiscal policy actions is to buffer the short-term impact of the shock. Governments have
taken a wide array of measures to support individuals and firms. Central banks and financial regulators
have complemented these actions with policies that have eased financial conditions and enabled the
continued flow of credit to the real economy.1 The combined policy reaction does not only aim to calm
the financial turmoil but also to prevent temporary disruptions from inflicting permanent damage to the
economy.
1
See Cavallino and De Fiore (2020) and Arslan et al. (2020) for central bank responses in AEs and EMEs, respectively, and
Drehmann et al. (2020) for the role of prudential policies.
BIS Bulletin 1
The aggregate fiscal packages include both budgetary and non-budgetary measures – a standard
classification – as well as subcategories thereof.2 The response channelled through the budget has a direct
negative impact on fiscal balances. Budgetary measures include spending on health care, transfers to
firms and households, wage and unemployment subsidies and tax cuts or deferrals. The non-budgetary
part consists of funding and credit guarantees, which do not have an immediate impact on the fiscal
balance.3 Funding includes loans by governments – or their financial agencies and state banks – to firms,
with a focus on small and medium-sized enterprises (SMEs), and other financial support, including equity
injections to strategic firms, such as airlines. Government credit guarantees, including fiscal backing for
central bank programmes, are intended to maintain the flow of credit to the economy in a high uncertainty
environment (see Baudino (2020)).
Timeline and size of the response to the pandemic
Graph 1
New fiscal measures coronavirus Size of the fiscal response by country … and in individual countries
cases per day, stringency index1 groups4…
Fiscal measures Number In per cent of GDP In per cent of GDP
US
AU
JP
0.4 80 12 CA
DE
GB
0.3 60 9 FR
IT
ZA
BR
0.2 40 6 CN
KR
SA
RU
0.1 20 3 ID
TR
AR
MX
0.0 0 0 IN
13.02.20 20.03.20 25.04.20 G-20 AE EME 0 10 20 30
Advanced Emerging Budgetary5 Funding5 Non-budgetary
Measures (lhs) Guarantees5 2009 Budgetary Funding
New cases (rhs)2 Guarantees
Stringency
3
index (rhs)
1
7-days moving average. Fiscal measures refer to type of measure per day per country 2 New cases per million people 3 A composite index
of the strictness of lockdown policies, including school and business closures and mobility restrictions, scaled between 0 (least stringent) and
100 (most stringent). 4 AEs: AU, CA, DE, FR, GB, IT, JP and US; EMEs: AR, BR, CN, ID, IN, KR, MX, RU, SA, TR and ZA. 5 The bar graphs refer to
2020.
Sources: IMF Fiscal Monitor November 2009 and 2010, April 2020 and update May 2020; Yale COVID-19 Financial Response Tracker; Oxford
Stringency Index; BIS calculations.
The size of the budgetary measures, or “fiscal stimulus”, reached 4.6% of GDP for the G-20 countries
(Graph 1, centre panel) by mid-May. The magnitudes of funding support and credit guarantees are also
substantial, 1.7% and 3.4% of GDP, respectively. Compared with the GFC, the size of the fiscal stimulus is
2
While some of the measures are not additive, their aggregation in categories and the size of the total package provides a
suitable metric for the fiscal response to the extent that markets and governments care also about the aggregate amount. The
data, categories and size of the pledged measures are taken from the IMF Fiscal Monitor (2020a) and an update (IMF (2020b)),
with cut-off date 13 May. Tax deferrals are not included in the computation of budgetary measures.
3
Credit guarantees are contingent liabilities. They would only have an impact on the public debt if and when they are called in.
The fiscal impact of funding measures depends on their design and whether they imply additional borrowing. They could
represent an increase in gross public debt, or instead an increase in contingent liabilities, eg when loans are channelled through
public corporations.
2 BIS Bulletin
higher, but the size of non-budgetary measures is smaller, mainly due to the different nature of the two
crises.
The size of the fiscal support is much higher in AEs than EMEs. Budgetary measures in AEs have
reached 8.3% of GDP – 6.6 percentage points (pp) higher than in the aftermath of the GFC, while for EMEs
they represent just 2.0% of GDP, even less than in the GFC. The gap for the funding facilities is narrower:
4% of AEs’ GDP versus 1.3% in EMEs. The contrast is starkest for credit guarantees: 6.6% of GDP in AEs and
only 0.4% in EMEs.
There is also a large variability among countries in the size and composition of fiscal packages
(Graph 1, right panel). While Australia and the United States are deploying the largest fiscal stimulus, more
than 10% of their GDP so far, the size of budgetary measures is less than 3% of GDP in Italy, France and
all EMEs, except South Africa. There seems to be some substitutability between budgetary and non-
budgetary measures, and within non-budgetary measures. Some countries have provided large amounts
of credit guarantees (France and Great Britain, over 10% of GDP, Italy and Germany over 20%), while others,
like Japan, Korea, Brazil and India have opted for funding facilities. Overall, credit guarantees have been
used by all AEs, but in EMEs they are small, if used at all.
Determinants of the fiscal responses
Pandemic incidence and containment measures
Why are fiscal packages smaller in EMEs than in AEs? A first possible reason is the higher prevalence of
the pandemic in the latter group. The coronavirus has affected AEs earlier and more strongly so far than
EMEs, except for a few Asian EMEs. Although the incidence has risen sharply in some EMEs recently, by
Fiscal response and relation with pandemic incidence and financing conditions1 Graph 2
Incidence of the pandemic Government bond yields Sovereign debt ratings Changes in CDS spreads
DE
Total fiscal package (% GDP) Total fiscal package (% GDP) Total fiscal package (% GDP)
DE DE
Total fiscal package (% GDP)
IT IT IT DE IT
30 30 30 30
20 20 20 20
GB GB GB GB
JP FR JP FR JP FR JP FR
AU US AUUS USAU US AU
KR KR KR
10 ZA 10 ZA 10 ZA 10
CA CA CA
CA BR
BR BR BR
IN IN IN
CN SARU CN ID TR AR TR IDSACN SAID TR
MX TR 0 RU MX 0 RU MX 0 CN RU MX 0
1,000 3,000 5,000 0 3 6 9 12 15 CCC B BB BBB A AA AAA 0 100 200 300 400
1
Cases per 1m population Pre-crisis 10-year Pre-crisis sovereign Change in sovereign CDS
2 2 3
govt yield (%) debt rating spread during the crisis (bp)
EMEs AEs
1
Total package includes both budgetary (ie fiscal stimulus) and non-budgetary (eg funding and guarantees) measured as of 13 May 2020.
AEs include AU, CA, DE, DK, ES, FI, FR, GB, IT, JP, NO, SE and US. EMEs include AL, AR, BG, BR, CL, CN, EG, ID, IN, KR, KZ, MU, MX, PL, RU, SA,
SG, TN, TR and ZA. The line denotes the regression over the whole sample. A solid line denotes a significant linear relationship and a dashed
line denotes an insignificant linear relationship. 2 Local currency bonds. As of the beginning of 2020. AR is excluded 3 Since beginning of
2020. AR is excluded.
Sources: IMF WEO and Fiscal Monitor; Johns Hopkins University; Bloomberg; Datastream; Markit; national data; BIS calculations.
BIS Bulletin 3
mid-May the number of confirmed cases as a percentage of the population was three times higher in AEs
than in EMEs on average (2361 and 735 cases per million inhabitants, respectively).4
A higher prevalence of the pandemic is expected to have more adverse effects on the economy and,
hence, trigger a stronger policy response. Indeed, the size of fiscal packages has been significantly larger
in countries with a higher incidence of the pandemic (Graph 2, left-hand panel). The result applies to both
AEs and EMEs. However, the left panel in Graph 1 shows, the stringency of the containment measures has
been very similar in AEs and EMEs. Therefore, the economic impact of the virus could be deeper – and the
required fiscal response stronger – in EMEs than what the lower reported prevalence would imply. The
stringency index does not display a significant positive correlation with the size of the fiscal packages or
the budgetary measures in EMEs. These observations suggest that the more tepid fiscal response in EMEs
is not fully explained by the lower incidence of the pandemic.
Fiscal policy room
The room for fiscal policy is another important factor. International investors are more sensitive to EMEs’
fiscal fundamentals and less tolerant to their debt levels (Reinhart et al (2003)). Higher financing costs and
hampered access to external financing in times of financial stress constrain their fiscal response. The
current turmoil is no exception.
Financing costs, measured by ten-year local currency government bond yields at the beginning of
2020, were much higher in EMEs (on average 5.7%, excluding Argentina) than in AEs (0.7%). Graph 2, centre
panels, shows that fiscal packages have been significantly smaller in countries that entered the crisis with
higher bond yields and lower sovereign debt ratings.5
Furthermore, fiscal policy in EMEs tends to be procyclical, that is, economic downturns coincide with
fiscal contractions. Crucially, the procyclicality is determined by the evolution of financing conditions (see
Alberola et al (2016)). The coronavirus shock has induced a sharp capital retrenchment from EMEs and a
tightening of their financing conditions (Hördahl and Shim (2020)). Tougher financing conditions are
reflected in the increase of CDS spreads and they are negatively and significantly correlated with the size
of the fiscal packages (Graph 2, right panel). In addition, public finances in some EMEs are largely
dependent on commodity export revenues. The dramatic fall in oil demand and prices further limits the
fiscal space in oil producing countries: Saudi Arabia, Mexico or Russia have deployed relatively small fiscal
packages as a response to the crisis (Graph 1, right panel).
Monetary policy
Monetary policy can complement fiscal policy in the fight against the pandemic. EMEs had more room to
cut policy rates than AEs and they have been able to take advantage of it. At the start of 2020, policy rates
in EMEs were higher (on average 4.9%, excluding Argentina) than in AEs (0.4%). Even though higher policy
rates could indicate higher yields required by investors to compensate a higher risk perception, EMEs have
managed to loosen monetary policy. They have cut policy rates by around 114 basis points (excluding
Argentina) compared with 40 basis points in AEs.
Monetary policy accommodation also supports fiscal policy by reducing the financing costs of the
sovereign. This can be the case even with policy rates close to zero through the implementation of
unconventional monetary policies, in particular large-scale purchases of government bonds. With high
central bank credibility, this form of quantitative easing (QE) can increase fiscal space by reducing interest
rates along the yield curve. AEs have actively used asset purchases as a response to the pandemic. As a
4
The confirmed number of cases depends on the number of tests, the reporting coverage and communication protocols.
Therefore, confirmed cases are far less than actual cases across the board. The degree of underreporting is probably higher in
less developed economies and this could explain part of the large difference in incidence between AEs and EMEs.
5
The result is robust for long-term rates when controlling for the incidence of the pandemic. Both the size of the fiscal package
and of the fiscal stimulus is also significantly smaller for EMEs with lower ratings.
4 BIS Bulletin
result, long-term rates are below their pre-crisis levels in most countries. Some EMEs are venturing into
QE, too, but they are being cautious as they tread uncharted waters. Their asset purchase programmes are
intended to support the functioning of the market rather than lowering government funding costs (see
Arslan et al. (2020)).
Structural factors
In addition to policy space, structural factors of an economy can determine the size and composition of
fiscal packages.
Economies with a higher level of development could, in principle, react more forcefully to the shock
because their economic and public institutions allow them to mobilise the required resources quickly.
However, richer economies also tend to enjoy stronger economic and institutional mechanisms to
effectively buffer unexpected shocks. Deeper financial markets and broader social safety nets would call
for a more limited discretionary fiscal response. Graph 3 (left-hand panel) shows the relation between
fiscal packages and GDP per capita. For EMEs, the higher the living standards the larger fiscal packages,
whereas the relationship flips sign for AEs.
Fiscal measures, economic development and social safety nets1 Graph 3
Economic development Safety nets reduce the need for … that redirect resources to non-
budgetary measures in AEs, …2 budgetary measures
Non-budgetary measures (% GDP)
Budgetary measures (% GDP)
IT DE US
Total fiscal package (% GDP)
AU IT
30 10.5 DE 30
20 JP 7.0 20
GB ZA CA
JP FR
GB FR
AU DE
US
ZA KR CA 10 3.5 KR JP 10
CN BR GB
BR ID KR FR
IN ID CNTR SA RU TR IT ZACA
BR
AR MX RU 0
MX
0.0 ID MX CNRUAUTR US 0
9.5 10.5 11.5 10 20 30 40 10 20 30 40
GDP per capita (log) Social safety net (% GDP) Social safety net (% GDP)
EMEs AEs
1
Total package includes both budgetary (ie fiscal stimulus) and non-budgetary (eg funding and guarantees) measures as of 13 May 2020.
AEs include AU, CA, DE, DK, ES, FI, FR, GB, IT, JP, NO, SE and US. EMEs include AL, AR, BG, BR, CL, CN, EG, ID, IN, KR, KZ, MU, MX, PL, RU, SA,
SG, TN, TR and ZA. The red and blue lines denote the regression over the sample of EMEs and AEs respectively. A solid line denotes a significant
linear relationship and a dashed line denotes an insignificant linear relationship. 2 The social safety net is the sum of government spending
on public unemployment, family benefits, labour markets, pension and other social benefits to households as defined by the OECD.
Source: IMF Fiscal Monitor April 2020; OECD Economic Outlook November 2019; World Bank World Development Indicators; BIS; BIS
calculations.
Institutional safeguards go some way to explain this result. Social safety nets are larger in AEs
(Graph 3, centre and right panels) and they are usually associated with larger automatic stabilisers, which
play a key role in absorbing economic shocks. For AEs with stronger social safety nets, the size of budgetary
measures is significantly lower, but this is not the case in EMEs (Graph 3, centre panel). In addition, with
larger social buffers that provide protection to households, pensioners and the unemployed, countries are
able to focus their fiscal response relatively more on non-budgetary measures to ensure businesses’
survival and recovery. The right panel in Graph 3 shows a significant correlation for AEs between social
BIS Bulletin 5
safety nets and non-budgetary measures.6 The relation holds and is significant as well when automatic
stabilisers are used as an alternative metric for a smaller sample of 12 OECD countries (OECD, 2019).
Conclusions
The fiscal policy reaction to the coronavirus emergency has been quick and powerful at the global level.
However, EME responses have been much more limited. The size of EMEs’ budgetary measures represents
only one fifth of that of their AE counterparts in per GDP terms, and the divergence in the use of non-
budgetary measures is even larger.
The smaller incidence of the pandemic and the belated response in some EMEs can only justify a part
of this large gap; more important factors are at play. Probably, the most relevant is the limited fiscal space
of EMEs, which has been further constrained by the tightening of their financing conditions due to the
pandemic shock.
Finally, it should be noted that this analysis is a snapshot of the current situation. Fiscal measures are
expected to expand and adapt to the evolution of the pandemic crisis and to support the recovery phase
as the containment measures are lifted. The expectation is that EMEs will be able to respond with less
firepower in the recovery phase, too.
References
Alberola, E, I Kataryniuk, A Melguizo and R Orozco (2016): “Fiscal policy and the cycle in Latin America: The
role of financing conditions and fiscal rules”, BIS Working paper no 568.
Arslan, Y, M Drehmann and B Hofmann (2020): ”Central bank bond purchases in emerging market
economies”, BIS Bulletin no 20.
Baudino, P (2020): “Public guarantees for bank lending in response to the Covid-19 pandemic”, FSI Briefs
no 5.
Cavallino, P and F De Fiore (2020): “Central bank response to Covid-19 in advanced economies”, BIS
Bulletin no 21.
Drehmann, M, M Farag, N Tarashev and K Tsatsaronis (2020): “Buffering Covid-19 losses - the role of
prudential policy”, BIS Bulletin no 9.
Hale, T, S Webster, A Petherick, T Phillips and B Kira (2020): “Oxford COVID-19 government response
tracker”, Blavatnik School of Government.
Hördahl, P and I Shim (2020): “EME bond portfolio flows and long-term interest rates during the Covid-19
pandemic”, BIS Bulletin, no 18.
IMF (2011): Fiscal monitor, November.
IMF (2020a): Fiscal monitor, April.
IMF (2020b): “Tracking the $9 trillion global fiscal support to fight Covid-19”, IMF Blog, 20 May.
OECD (2019): “OECD economic outlook”, volume 2019, issue 2.
Reinhart, C., K S Rogoff and M A Savastano, (2003): "Debt intolerance," Brookings Papers on Economic
Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 1-74.
6
The relation remains significant when measuring budgetary and non-budgetary measures as a share of the total fiscal package.
Overall, the link between social safety nets and the size and composition of the fiscal packages remains robust after controlling
for pandemic incidence and economic and public finance variables.
6 BIS Bulletin
Previous issues in this series
No 22 How are household finances holding up Anna Zabai
15 June 2020 against the Covid-19 shock?
No 21 Central banks’ response to Covid-19 in Paolo Cavallino and Fiorella De
06 June 2020 advanced economies Fiore
No 20 Central bank bond purchases in emerging Yavuz Arslan, Mathias Drehmann
02 June 2020 market economies and Boris Hofmann
No 19 Dealing with Covid-19: understanding the Frederic Boissay, Daniel Rees and
22 May 2020 policy choices Phurichai Rungcharoenkitkul
No 18 EME bond portfolio flows and long-term Peter Hördahl and Ilhyock Shim
20 May 2020 interest rates during the Covid-19 pandemic
No 17 On health and privacy: technology to combat Carlos Cantú, Gong Cheng,
19 May 2020 the pandemic Sebastian Doerr, Jon Frost and
Leonardo Gambacorta
No 16 Covid-19 and regional employment in Europe Sebastian Doerr and Leonardo
15 May 2020 Gambacorta
No 15 US dollar funding markets during the Covid- Egemen Eren, Andreas Schrimpf
13 May 2020 19 crisis – the international dimension and Vladyslav Sushko
No 14 US dollar funding markets during the Covid- Egemen Eren, Andreas Schrimpf
12 May 2020 19 crisis – the money market fund turmoil and Vladyslav Sushko
No 13 The CCP-bank nexus in the time of Covid-19 Wenqian Huang and Előd Takáts
11 May 2020
No 12 Effects of Covid-19 on the banking sector: the Iñaki Aldasoro, Ingo Fender, Bryan
7 May 2020 market’s assessment Hardy and Nikola Tarashev
No 11 Releasing bank buffers to cushion the crisis – Ulf Lewrick, Christian Schmieder,
5 May 2020 a quantitative assessment Jhuvesh Sobrun and Előd Takáts
No 10 Covid-19 and corporate sector liquidity Ryan Banerjee, Anamaria Illes,
28 April 2020 Enisse Kharroubi and José María
Serena
No 9 Buffering Covid-19 losses – the role of Mathias Drehmann, Marc Farag,
24 April 2020 prudential policy Nikola Tarashev and Kostas
Tsatsaronis
No 8 Identifying regions at risk with Google Sebastian Doerr and Leonardo
21 April 2020 Trends: the impact of Covid-19 on US labour Gambacorta
markets
All issues are available on our website www.bis.org.
BIS Bulletin 7
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