The decline in oil prices has helped countries such as India improve their external positions, but low commodity prices have kept risks elevated in emerging market economies, the International Monetary Fund (IMF) said in its latest Global Financial Stability Report. The spill-over effects of the growing uncertainty about China’s economy and setbacks to growth and confidence in advanced economies are other factors undermining global financial stability, according to the report.
“These developments tightened financial conditions, reduced risk appetite, raised credit risks and stymied balance sheet repair,” the IMF said in the report. The report warns that global output could decline 3.9 per cent by 2021 if action isn’t taken to address the risks faced by the financial system. “The main message of this report is that additional measures are needed to deliver a more balanced and potent policy mix for improving the growth and inflation outlook and securing financial stability. In the absence of such measures, market turmoil may recur,” it said. However, if timely measures are taken, world output could expand by 1.7 percent, relative to the baseline, by 2018, the report said.
The financial stability report assesses the risks faced by the global financial system and the current edition surveys the issues that surfaced since October 2015.
The report identifies a window of opportunity in the current economic recovery to deal with what it calls a “triad of global challenges,” namely, the legacy issues in advanced economies, vulnerabilities in emerging markets and greater systemic market liquidity risks.
Jose Vinals, IMF Financial Counselor, said at the release of the report that equity market fluctuations that occurred earlier this year could return. “Market turmoil may recur and intensify, and could create a pernicious feedback loop of fragile confidence, weaker growth, tighter financial conditions, and rising debt burdens…That could tip the global economy into economic and financial stagnation.”
IMF suggests that in advanced economies, banks must deal with bad assets and other legacy issues. The report observed that in the U.S. mortgage markets continue to benefit from significant government support and the measures must be taken to reduce the dominance of institutions such as Fannie Mae and Freddie Mac. Given the increasing role of China in the global financial system, “clear and timely communication of its policy decisions and transparency about its policy goals and strategies consistent with their achievement will be ever more important,” the IMF said.
