Coronavirus: Stimulus injections risk asset price overvaluation, OECD official says

Financial stimulus programs adopted worldwide in the wake of the COVID-19 pandemic may run the risk of asset price overvaluation, according to Assistant Director at the Organization for Economic Co-operation and Development (OECD) Dr. Patrick Lenain.

Lenain was speaking during an e-symposium hosted by Abu Dhabi-based TRENDS Research & Advisory on the risks and opportunities of using unconventional financial tools like excess liquidity amid the COVID-19 coronavirus pandemic.

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“These tools may have positive effects such as restoring credit flows, facilitating recovery, and encouraging risk-taking. They lower the risk of non-performing loans and sovereign default. However, they also risk harming bank profitability and income equality,” Lenain said during the panel discussion held virtually.

Lenain said that massive monetary injections also require central bank independence and credibility, which is not always the case in emerging markets.

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“The big concern with liquidity injection is that it would lead to a depreciation of the currency, higher inflation, financial stability risks, and foreign exchange mismatches,” Lenain said.

The OECD pointed to examples of massive currency depreciation in countries like Brazil, South Africa, Argentina, Turkey, Mexico, and Russia following the outbreak of the COVID-19 pandemic.

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