## EXECUTIVE SUMMARY ## Source details **Canonical URL:** [EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/gfsr/2021/april/english/execsum.pdf) ## Other formats - [Markdown version](/-/media/files/publications/gfsr/2021/april/english/execsum.pdf.md) - [Structured JSON version](/-/media/files/publications/gfsr/2021/april/english/execsum.pdf.json) --- ### Macro-financial context and risks - Extraordinary policy measures have eased financial conditions and supported the economy, helping to contain financial stability risks. - Unintended consequences of unprecedented policy support include excessive risk taking and stretched valuations: - Equity markets have rallied aggressively since the third quarter of 2020 and are trading at levels meaningfully higher than those suggested by models based on fundamentals. - Historically low real risk-free rates (despite most recent increases) have materially supported valuations. - Corporate bond spreads have remained very tight. - Long-term interest rates have increased significantly, especially in the United States. - A gradual rise in rates may be welcome, but a rapid and persistent increase, especially in real rates, may trigger a repricing of risk, sudden tightening in financial conditions, and interaction with elevated financial vulnerabilities. ### Emerging markets and capital flows - The recovery is expected to be asynchronous and divergent across economies (see the April 2021 World Economic Outlook). - Emerging markets face daunting challenges given large external financing needs; risks include marked tightening of financial conditions if advanced-economy policymakers move toward policy normalization. - IMF staff analysis points to a continued improvement in the outlook for portfolio flows, primarily reflecting easier global financial conditions, but countries with weaker fundamentals or limited access to COVID-19 vaccines remain vulnerable. - The sovereign–bank nexus has worsened in emerging markets as domestic banks have absorbed the bulk of increases in domestic debt. - For many frontier market economies, market access remains impaired. - China: faster recovery but further buildup in vulnerabilities, particularly risky corporate debt; funding conditions for capital instruments have tightened for weaker, smaller banks. ### Corporate sector and nonfinancial vulnerabilities - The global corporate sector has been hit hard by the pandemic; extraordinary policy support has mitigated the impact. - Large firms with market access issued debt to cope with liquidity pressures. - Buildup in corporate leverage from easy financial conditions poses a dilemma between short-term support to activity and longer-term vulnerabilities and downside growth risks. - Firm-level heterogeneity: - Liquidity stress is high at small firms across most sectors and countries. - Solvency stress is high at small firms and also notable at mid-sized and even large firms in the most affected sectors. - Chapter 1 proposes a framework to assess whether firms should rely on market financing, seek government support, or be restructured or liquidated. ### Commercial real estate - Commercial property transactions and prices slumped in 2020. - Structural changes may have hit retail, office, and hotel segments as some activities shift to virtual modes or relocate outside large cities. - A permanent increase in the vacancy rate by 5 percentage points is estimated to result, on average, in a drop in fair values by about 15 percent after five years. - Since the pandemic, price misalignments in commercial real estate appear to have increased, posing downside risks to growth if persistent. ### Banks and credit provision - Banks entered the pandemic with high capital and liquidity buffers and have been resilient so far. - Loan growth, particularly to businesses, has slowed in some countries; loan demand is expected to firm up once the recovery strengthens. - Loan officers in most countries do not anticipate a loosening in lending standards. - Phasing out of support policies could significantly impact some banks and weigh on lending appetite. - Uncertainties about credit losses and weak profitability prospects are likely to discourage significant reductions in capital buffers. - Authorities should encourage banks to use buffers, where prudent, to support the recovery. - Regulatory guidance on provisioning for expected losses remains pertinent but should be subject to supervisory scrutiny. - Restrictions on capital distributions should be maintained or relaxed only progressively in countries overcoming the pandemic, subject to supervisory stress tests. ### Policy recommendations and priorities - Act swiftly to prevent financial vulnerabilities from becoming entrenched and turning into legacy problems. - Continue accommodative monetary policy until mandated policy objectives are achieved. - Take early action given possible lags in macroprudential tool effects: - Tighten selected macroprudential tools to tackle pockets of elevated vulnerability while avoiding a broad tightening of financial conditions. - If macroprudential tools are not available (for example, in some segments of nonbank financial intermediation), develop them swiftly. - Consider building buffers elsewhere if designing and operationalizing tools within existing frameworks is challenging. - In emerging and frontier markets: - Countries with market access should use favorable financing conditions to improve debt composition. - Countries with limited market access will likely need additional assistance from the international community. - Countries facing significant debt burdens could benefit from deeper restructuring; the Group of Twenty (G20) Common Framework for Debt Treatments can help. - Rebuilding buffers, where possible, should be a key priority to prepare for sudden price adjustments and reversal of capital flows. - Repair corporate balance sheets to enable a sustainable and inclusive recovery: - Provide direct and firm-specific targeted support for viable firms with limited market access facing temporary liquidity or solvency risks. - Expedite reforms to enhance resolution frameworks and develop distressed debt and nonperforming loan markets where fiscal resources are limited. - For commercial real estate, deploy targeted macroprudential tools (such as limits on loan-to-value or debt-service-coverage ratios) once the extent of structural change is clearer; timing should depend on economy-specific recovery pace and sector vulnerabilities. - Broaden the macroprudential toolkit to cover nonbank financial institutions active in commercial real estate funding markets. *Source: IMF staff calculations.* --- _Source: https://www.imf.org/-/media/files/publications/gfsr/2021/april/english/execsum.pdf_