Global financial risk is rising, warns IMF
Conditions are still conducive to world economic growth, IMF says
Risks to the global financial system have risen somewhat in recent months as some emerging markets have struggled and trade war tension has persisted, the IMF has warned.
The IMF, in its twice annual assessment of global financial stability, said conditions remain broadly conducive to economic growth, but are at risk of worsening should emerging markets deteriorate further or trade tensions escalate.
“New vulnerabilities have emerged and the resilience of the global financial system has yet to be tested,” the IMF said in the latest Global Financial Stability Report.
And the IMF is worried that market participants “appear complacent” about the potential risks that could be produced by a “sudden, sharp tightening of conditions”, such as rising interest rates or declining access to capital.
At the top of the list are worries about emerging economies, especially Argentina and Turkey, two countries with heavy external debt that have had to raise interest rates sharply in recent months. Argentina has twice had to go to the Washington-based lender for aid, including the latest deal for a $57bn three-year loan that has yet to be approved by the IMF board.
While foreign investors play a critical role in financial deepening in emerging-market economies, excessively high levels of participation may increase the sensitivity of emerging asset markets to external shocks.
As interest rates rise in advanced economies, prompting investors to take their money in search of higher returns, the IMF recommended that emerging economies take steps to insulate themselves from an exodus of funds.
That would include boosting foreign currency reserves, which could be used in a crisis, as well as working with local bond markets to build a local investor base, rather than relying on financing from abroad.
“While foreign investors play a critical role in financial deepening in emerging-market economies, excessively high levels of participation may increase the sensitivity of emerging asset markets to external shocks,” the report said.
The IMF also lists risks associated with high corporate debt, rising nonperforming loans and too much public debt overall. Still, investors have differentiated among emerging markets, rather than fleeing wholesale.
The report also amplified worries about international trade, echoing numerous earlier IMF statements, but noted that trade tensions have thus far affected individual sectors more directly than the financial system as a whole.
But additional tariffs and countermeasures “could lead to a broader tightening of financial conditions, with negative implications for the global economy and financial stability”, the fund warned.
Since the last report in April 2018, global economic conditions have become less balanced, with a more pronounced divergence between advanced and emerging economies.
Despite the Federal Reserve’s interest rate increases, financial conditions “have eased further” in the US as equity valuations have stayed lofty.
Conditions in Europe and other major advanced economies also have remained “relatively easy”, although investors have pushed back their expectations for the European Central Bank to lift interest rates, the report said.
In China the situation is still “broadly stable”, although corporate debt is above historical levels and household borrowing is at the high end among emerging countries.
Steps by the Chinese to ease some regulations could boost the economy in the near term, but "may entail greater risks to financial stability over the medium term", the report said.