Global outlook c h a p t e r 1

A. EMDE inflation during the 
pandemic and global financial crisis 
B. Expected EMDE inflation deviation
from target
C. EMDE policy interest rates 
D. EMDE announced or completed
asset purchases 
E. Impact of EMDE asset purchases:
EMDE 10-year bond yields 
F. Proportion of firms in arrears or 
expecting to be within 6 months 

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1.21.D and 1.21.E; Arslan, Drehmann, and 
Hofmann 2020; Hartley and Rebucci 2020). The 
medium- to long-term effect of these programs on 
EMDE output and inflation is untested, and 
prolonged use of these unconventional tools may 
create new risks (chapter 4). If asset purchase 
programs continue to expand without clearly 
articulated goals that are consistent with policy 
mandates, hard-won central bank independence 
and credibility may be at risk of being eroded. 
Furthermore, if central bank asset purchases are 
perceived to fund unsustainable budget deficits, 
they could trigger capital flight and raise risk 
premia, as well as result in large currency 
depreciations and persistently higher inflation 
(Drakopoulos et al. 2020; Ha, Stocker, and 
Yilmazkuday 2020).
Although banking sector capital adequacy ratios 
remain above regulatory minimums, on average, a 
large proportion of firms are reporting to be in, or 
expect to fall into, loan arrears, as the collapse in 
activity continues to weigh on household and 
corporate income (figure 1.21.F). Policy makers 
face the challenge of balancing the need to extend 
the easing of macro- and micro-prudential policies 
to support activity through credit availability—
such as the relaxation of minimum liquidity and 
capital requirements, and the slackening of 
borrower loan-to-value ratios to encourage 
lending—against upholding regulatory standards 
to prevent the buildup of greater systemic risks in 
the financial sector.
Measures to support lending to firms suffering 
from temporary liquidity constraints, such as 
regulatory forbearance and payment moratoria, 
need to be reassessed periodically to ensure they 
remain appropriate and do not impede asset 
quality transparency or harm bank capitalization. 
Inefficient insolvency regimes, and measures to 
increase flexibility over nonperforming loan 
classifications or reduce asset risk weighs below 
globally recognized standards, may heighten 
uncertainty around bank capitalization and asset 
quality, harming credit provision. Enhanced 
supervisory assessment of loan quality and regular 
stress testing can limit risks to bank solvency from 
rising loan arrears, while strong resolution and 
recovery regimes can limit contagion risks 
following bank failures.