{
  "title": "The Local Stress Index: A New Tool to Summarize Local Market Conditions, and an Application to the South African Local Market",
  "publication": "IMF News, October 27, 2020",
  "sourceUrl": "https://www.imf.org/en/news/articles/2020/10/27/sp-the-local-stress-index",
  "canonical": "https://www.imf.org/en/news/articles/2020/10/27/sp-the-local-stress-index",
  "overlayPath": "/en/news/articles/2020/10/27/sp-the-local-stress-index/index.md",
  "summary": "Speech by Tobias Adrian, Financial Counsellor and Director, Monetary and Capital Markets Department, International Monetary Fund — October 27, 2020.",
  "publishDate": "2020-10-27",
  "sections": [
    {
      "heading": "Context and motivation",
      "content": "- Speech by Tobias Adrian, Financial Counsellor and Director, Monetary and Capital Markets Department, International Monetary Fund — October 27, 2020.\n- Motivation: need for policymakers to monitor signals from increasingly complex local financial markets, where currency and interest-rate derivative markets have grown and non-residents have become dominant players in select local-currency bond markets.\n- Reference: introduced in Chapter 2 of the October 2020 edition of the IMF’s Global Financial Stability Report."
    },
    {
      "heading": "Local Stress Index (LSI) — definition and construction",
      "content": "- The LSI is constructed from local currency market liquidity and stress indicators.\n- Key inputs include:\n  - bid-offer spreads,\n  - realized volatility,\n  - other risk-premium measures for local currency bonds and exchange rates.\n- The LSI aggregates multiple liquidity, activity and risk-premia indicators and captures contagion effects by considering increases in correlations during crises.\n- Methodological lineage: approach pioneered by the European Central Bank for the SovCiss index; IMF applies it to a broad set of Emerging Markets."
    },
    {
      "heading": "Key empirical findings (global Emerging Markets and COVID-19)",
      "content": "- The LSI shows overall stress in EM local markets comparable to the impact of the Global Financial Crisis of 2008 and 2009.\n- The pace of deterioration and subsequent normalization during COVID-19 was unprecedented.\n- Distinct behavior between currency and bond markets:\n  - Currency markets: stress was less severe and conditions normalized more quickly.\n    - Contributing factors: rapid policy response by major central banks (including dollar liquidity lines by the Federal Reserve), structural changes such as decentralization and greater electronic trading.\n  - Local currency bond markets: stress was larger than in recent crises, including 2008–2009.\n    - Three significant contributing factors:\n      - COVID-19 response skewed toward fiscal policy, increasing bond supply risks.\n      - Greater integration of Emerging Market local bond markets with the global financial system; non-residents often the largest investors.\n      - Local market depth did not match higher non-resident participation; domestic investor base often underdeveloped, with domestic banks frequently the sole alternative liquidity providers."
    },
    {
      "heading": "South Africa — case study and LSI application",
      "content": "- South African markets among the most developed in Emerging Markets.\n- Non-resident holdings of local government bonds stood around 35 percent of the total debt stock just before the pandemic.\n- Currency market:\n  - Experienced significant pandemic-related stress peaking in early April.\n  - Realized and options-implied volatility jumped to levels not seen since the Global Financial Crisis.\n  - Dollar liquidity shortage (currency basis) was much less pronounced compared to the 2008–2009 crisis.\n  - Widening of bid-ask spreads was limited.\n- Domestic bond market:\n  - Experienced an unprecedented shock when analyzed via the LSI and has not yet fully normalized.\n  - Pre-pandemic concerns included weak growth, limited fiscal-policy space, elevated asset swap spreads, and a steep bond yield curve.\n  - A major credit downgrade coincided with the global FCI shock and led to the exclusion of local bonds from the World Government Bond Index.\n  - Result: large outflows, elevated volatility, deterioration of liquidity (widened bid-offer spreads) signaling severe distress.\n  - While volatility has subsided and bid-offer spreads have normalized, the risk premium in the bond market remains elevated, reflecting bond supply risk and absence of non-resident inflows."
    },
    {
      "heading": "Broader cross-country pattern",
      "content": "- Similar pattern observed in other major Emerging Markets: Brazil, India, Indonesia, Mexico, Poland and Turkey.\n- COVID-19 shock produced a “sudden stop” in local bond markets that had been reliable financing sources.\n- Coinciding factors:\n  - Rapid growth in budget financing needs from fiscal stimulus.\n  - Exhaustion of conventional monetary policy space in several EMs, with policy rates reduced to all-time lows."
    },
    {
      "heading": "Policy responses: Asset Purchase Programs (APPs)",
      "content": "- Many Emerging Market economies introduced APPs for the very first time during the pandemic.\n- Rationale for APPs:\n  - Increased credibility of Emerging Market central banks’ inflation-targeting regimes.\n  - Positive experience of Advanced Economies with APPs.\n- Heterogeneity: programs varied in scope, scale and modality across countries.\n- Aggregate impact (October 2020 GFSR analysis):\n  - APPs had a positive impact on bond markets by lowering yields, improving market liquidity, and reducing the overall level of stress as measured by the LSI.\n  - APPs did not lead to currency depreciation or increased stress in currency markets, as evident from the LSI.\n  - Countries that introduced APPs saw a swifter reduction of stress in local markets compared with countries without such programs.\n- Caveat: further research is needed as APPs progress and diverge across countries."
    },
    {
      "heading": "Policy implications and recommendations",
      "content": "- The LSI can serve as a yardstick for policymakers to measure financial-market stress across multiple indicators and to capture contagion effects.\n- Monitoring both currency and bond market dimensions is essential because they can behave differently during crises.\n- Strengthening domestic investor bases and market depth can reduce vulnerability to non-resident outflows.\n- Where conventional monetary policy is exhausted, carefully designed APPs can help restore market functioning without provoking currency stress, but cross-country monitoring and further research is required."
    },
    {
      "heading": "Next steps and dissemination",
      "content": "- IMF will continue developing the LSI and share results in an upcoming IMF Working Paper and through other avenues.\n- The LSI aims to be a useful tool for policymakers in Advanced Economies and Emerging Markets alike.\n\nSource: Speech by Tobias Adrian, Financial Counsellor and Director, Monetary and Capital Markets Department, International Monetary Fund, October 27, 2020.\n\n---\n\n\n References\n\n- Tobias Adrian\n- South Africa and the IMF\n- Speeches\n- PRESS CENTER\n- www.imf.org/GFSR\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2020/10/27/sp-the-local-stress-index"
    }
  ],
  "bullets": [
    "[Markdown version](/en/news/articles/2020/10/27/sp-the-local-stress-index/index.md)",
    "[Structured JSON version](/en/news/articles/2020/10/27/sp-the-local-stress-index/index.json)",
    "[Bundle manifest](/en/news/articles/2020/10/27/sp-the-local-stress-index/bundle-manifest.json)",
    "Published: October 27, 2020",
    "Speech by Tobias Adrian, Financial Counsellor and Director, Monetary and Capital Markets Department, International Monetary Fund — October 27, 2020.",
    "Motivation: need for policymakers to monitor signals from increasingly complex local financial markets, where currency and interest-rate derivative markets have grown and non-residents have become dominant players in select local-currency bond markets.",
    "Reference: introduced in Chapter 2 of the October 2020 edition of the IMF’s Global Financial Stability Report.",
    "The LSI is constructed from local currency market liquidity and stress indicators.",
    "Key inputs include:",
    "The LSI aggregates multiple liquidity, activity and risk-premia indicators and captures contagion effects by considering increases in correlations during crises.",
    "Methodological lineage: approach pioneered by the European Central Bank for the SovCiss index; IMF applies it to a broad set of Emerging Markets.",
    "The LSI shows overall stress in EM local markets comparable to the impact of the Global Financial Crisis of 2008 and 2009.",
    "The pace of deterioration and subsequent normalization during COVID-19 was unprecedented.",
    "Distinct behavior between currency and bond markets:",
    "South African markets among the most developed in Emerging Markets.",
    "Non-resident holdings of local government bonds stood around 35 percent of the total debt stock just before the pandemic.",
    "Currency market:",
    "Domestic bond market:",
    "Similar pattern observed in other major Emerging Markets: Brazil, India, Indonesia, Mexico, Poland and Turkey.",
    "COVID-19 shock produced a “sudden stop” in local bond markets that had been reliable financing sources.",
    "Coinciding factors:",
    "Many Emerging Market economies introduced APPs for the very first time during the pandemic.",
    "Rationale for APPs:",
    "Heterogeneity: programs varied in scope, scale and modality across countries.",
    "Aggregate impact (October 2020 GFSR analysis):",
    "Caveat: further research is needed as APPs progress and diverge across countries.",
    "The LSI can serve as a yardstick for policymakers to measure financial-market stress across multiple indicators and to capture contagion effects.",
    "Monitoring both currency and bond market dimensions is essential because they can behave differently during crises.",
    "Strengthening domestic investor bases and market depth can reduce vulnerability to non-resident outflows.",
    "Where conventional monetary policy is exhausted, carefully designed APPs can help restore market functioning without provoking currency stress, but cross-country monitoring and further research is required.",
    "IMF will continue developing the LSI and share results in an upcoming IMF Working Paper and through other avenues.",
    "The LSI aims to be a useful tool for policymakers in Advanced Economies and Emerging Markets alike.",
    "[Tobias Adrian](http://www.imf.org/external/np/bio/eng/ta.htm)",
    "[South Africa and the IMF](http://www.imf.org/external/country/ZAF/index.htm)",
    "[Speeches](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[www.imf.org/GFSR](http://www.imf.org/GFSR)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
  ],
  "alternates": {
    "markdown": "/en/news/articles/2020/10/27/sp-the-local-stress-index/index.md",
    "json": "/en/news/articles/2020/10/27/sp-the-local-stress-index/index.json",
    "bundleManifest": "/en/news/articles/2020/10/27/sp-the-local-stress-index/bundle-manifest.json"
  },
  "generatedAtUtc": "2026-09-25T23:54:58.969Z"
}