The global recovery is expected to be asynchronous and divergent between advanced and emerging market economies, the IMF said on Tuesday, noting policymakers should take early action and tighten some macroprudential policy tools while avoiding a widespread tightening of financial conditions.
“Extraordinary policy measures have eased financial conditions and supported the economy, helping to contain financial stability risks,” the International Monetary Fund (IMF) said in its report on global financial stability released ahead of the spring meeting of the global lender and the World Bank.
However, actions taken during the pandemic can have unintended consequences such as stretched assessments and growing financial vulnerabilities, he said.
“The recovery is expected to be asynchronous and divergent between advanced and emerging market economies,” the IMF said, noting that given the large external financing needs, emerging markets face significant challenges, especially if a rise Persistent US rates lead to a reassessment of risk. and tighter financial conditions.
The corporate sector in many countries is emerging from the debt distress pandemic, with notable differences by company size and industry. Concerns about the credit quality of hard-hit borrowers and the outlook for profitability should weigh on banks’ risk appetite during the recovery, the report said.
“Stress is high in small businesses in most industries across countries. Solvency stress is high in small businesses, but also noticeable in medium-sized businesses and even large in affected industries,” did he declare.
The IMF has said urgent action is needed to avoid a legacy of vulnerabilities.
“Policymakers should take swift action and tighten up some macroprudential policy tools while avoiding a general tightening of financial conditions. They should also support balance sheet repair to foster a sustainable and inclusive recovery,” the report said.
China, where the COVID-19 pandemic first erupted in December 2019, has recovered faster than other countries, but at the cost of a further rise in vulnerabilities, especially in corporate debt to risk, he said.
Financial conditions may become less favorable given expectations of tightening policies and further measures to impose discipline on banks, local governments and real estate developers, as well as growing uncertainty about implied guarantees.
Funding conditions for capital instruments have tightened for weaker and smaller banks, the report says, adding that national authorities face a delicate but urgent challenge of unwinding implied guarantees – a task that must be addressed. delicately given the potential for messy repricing.
“The global corporate sector has been hit hard by the pandemic. Extraordinary political support has helped mitigate its impact. Large companies with access to the market have taken advantage of favorable conditions to issue debt and cope with liquidity pressures.” , did he declare.
But the increase in corporate indebtedness resulting from easy financial conditions poses a dilemma for policymakers, as the short-term stimulus to economic activity must be balanced against an increase in vulnerabilities and downside risks for policy makers. growth going forward, according to the report.
The IMF has said that most emerging markets have significant financing needs this year and are exposed to refinancing risk, particularly if domestic inflation increases or if global long-term interest rates continue to rise. .
Countries with weaker positions or limited access to vaccines may also face portfolio exits. For many border market economies, market access remains limited, he said.