## Foreword

## Source details

**Canonical URL:** [Foreword](https://www.imf.org/-/media/files/publications/gfsr/2019/april/english/foreword.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/gfsr/2019/april/english/foreword.pdf.md)
- [Structured JSON version](/-/media/files/publications/gfsr/2019/april/english/foreword.pdf.json)

---

### Market developments and immediate risks
- Markets sold off sharply late last year, broadly across asset classes, amid growing signs of a slowing global economy and rising concerns about US-China trade tensions.
- Policymakers across the globe took steps to prevent a sharper deceleration of the economy; such a forceful response supported market sentiment and triggered a sharp rebound in risk assets.
- Financial markets remain susceptible to a sudden tightening in financial conditions. Potential triggers include:
  - a sharp repricing of risk,
  - an intensification of trade tensions,
  - a further slowdown in global economic activity,
  - political shocks.

### Financial vulnerabilities and amplification channels
- An abrupt deterioration in financial conditions could unmask financial fragilities that have built during the period of very low interest rates.
- The Report introduces a more structured, systematic approach aimed at monitoring financial vulnerabilities.
  - Uses data back to 2000 for 29 systemically important economies that account for a significant share of the global economy.
  - Assesses the level of vulnerability across regions and sectors (banks, nonbank financial institutions, sovereigns, firms, and households).
- The new framework detects elevated financial vulnerability in several sectors around the world, including sovereigns, firms, and nonbank financial institutions.
- Specific vulnerability observations:
  - Corporate debt has been rising around the world, and there is a weak tail of companies with high leverage and weak earnings prospects.
  - There are growing signs that this credit cycle may be maturing, and risks of an economic slowdown are rising. The most highly indebted companies could be vulnerable to such a shock.
  - While fundamentals in emerging markets are stronger and policy frameworks generally more resilient than in the past, some countries have low reserves, high leverage, or high foreign currency exposures that could make them more vulnerable to capital flow pressures.
  - In Europe, fiscal challenges in some countries have reignited worries about the sovereign-bank nexus as a potentially powerful amplification mechanism in economies with more indebted sovereigns.
  - Housing markets in many advanced and emerging markets are at risk.
- In sum, these rising financial vulnerabilities point to elevated medium-term risks to financial stability.

### Policy recommendations and priorities
- Policymakers should act now to reduce these vulnerabilities while they can. Recommended actions include:
  - Activate countercyclical capital buffers in countries with rising vulnerabilities.
  - Develop macroprudential tools to contain corporate vulnerabilities.
  - Keep monetary policies data dependent and well communicated to avoid market overreaction and prevent further growth deceleration.

*Tobias Adrian, Financial Counsellor*

---


_Source: https://www.imf.org/-/media/files/publications/gfsr/2019/april/english/foreword.pdf_