IMF warns of rising threats to global financial system

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The International Monetary Fund (IMF), has warned that increasing debts in global economies, especially in emerging markets and low income economies like Nigeria are at higher risks to any adverse developments in global financial condition.

The warning came yesterday, as the IMF released its Global Financial Stability Report (GFSR), April 2018, which assesses key risks facing the global financial system, and envisaged that the road in the short term, three years from now, could be bumpy if central banks do not take active steps to normalise monetary policy.

The report noted that, “Monetary policy normalisation in advanced economies could result in a tightening of global financial conditions, and a reduction in capital flows, (thereby) increasing rollover risks and adversely affecting productive investment.”

Harping on, Vulnerabilities in Emerging Markets, Low Income Countries, and China, the GFSR said: “A number of emerging market economies have taken advantage of benign external financial conditions to address imbalances and build buffers; in others, however, vulnerabilities have continued to build.”

It added that “… a considerably number of low income countries and other small non-investment-grade issuers have experienced a sharp deterioration in debt sustainability.”

Addressing a press conference on the findings of the report, the IMF Financial Counselor and Director, Monetary and Capital Markets, Tobias Adrian, said since the last report, “short-term risks to financial stability have increased, and medium-term risks remain elevated.”

Adrian reiterated that “Vulnerabilities may make the road ahead bumpy, and could put growth at risk,” adding that “our ‘Growth at Risk’ analysis – which links financial conditions to the distribution of future global growth – indicates that, under a severely adverse scenario, growth could be negative three years from now.”

He maintained that “Debt sustainability in low-income countries has deteriorated, and a more complex creditor composition poses challenges for any future debt restructuring,” while countries that are building up higher debt levels are exposed more to currency mix-matches and liquidity transformation stand at higher risks.

Adrian therefore urged policymakers to take urgent actions in a number of areas, and in particular, charged central banks to normalise monetary policy gradually, and communicate their decisions clearly, while “regulators should address financial vulnerabilities by deploying and developing prudential policy tools.”

He further charged emerging markets and low-income countries to “strengthen fundamentals and build buffers,” just as “policymakers should ensure that the post-crisis regulatory reform agenda is implemented – and they should resist calls for rolling back reforms.”   

Meanwhile, the Division Chief, Monetary and Capital Markets, IMF, Anna Ilyina, noted that many emerging countries have benefited from very favourable economic climate, which created room for them to strengthen their positions.

However, policy instability heightens uncertainty and volatility. “There is an improvement in public debts in the past few years.

In fact, the median debt-to-GDP ratio in the past few years in low income countries rose by over 13 per cent to about 47 per cent of GDP, which is quite dramatic over a short period of time,” she said.

But she warned that “this leads to difficulties in some countries in managing and servicing these debts. In fact, over 40 per cent of these debts are at high risk of distress.

From our reports, we do track the debt issuance by the low-income countries, and we have seen that there is a strong rebound in international bond issuance in frontier markets.”

To this end, she said the IMF is working with various countries to evaluate and improve fiscal policies.

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