## Section 1 — EXECUTIVE SUMMARY

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---

### Vaccines, markets, and the policy bridge
- Approval and rollout of vaccines have boosted expectations of a global recovery and lifted risk asset prices, despite rising COVID-19 cases and persistent uncertainties.
- Until vaccines are widely available, the market rally and the economic recovery remain predicated on continued monetary and fiscal policy support.
- Inequitable distribution of vaccines risks exacerbating financial vulnerabilities, especially for frontier market economies.
- Key observations:
  - Announcements and rollout of vaccines have pushed risk asset prices higher; industries such as airlines, hospitality, and consumer services rebounded in late 2020.
  - Investment-grade and high-yield corporate bond spreads have tightened sharply—close to or even below pre-February 2020 levels—while rates have reached record lows.
  - Investors cite expectations of very low rates over coming years and upward revisions in earnings expectations since the vaccine announcements as drivers of the market rally.

### Risks from uneven vaccine access and delayed recovery
- Vaccine access is likely to be uneven; many advanced economies have prepurchased vaccines with large per capita coverage, while procurement for emerging market and developing economies via direct negotiation or COVAX lags significantly.
- COVAX aim: make 2 billion doses available by the end of 2021 (note from source).
- Delayed access to comprehensive health care solutions could mean an incomplete global recovery and endanger the global financial system.
- Emerging market importance:
  - about 65 percent of global growth (about 40 percent excluding China) over 2017–19—delays in tackling the pandemic in emerging markets may harm the global economy.
- Supply chain disruptions could affect corporate profitability even where the pandemic is under control.
- Risks outlined:
  - An asset price correction could interact with elevated vulnerabilities, creating knock-on effects on confidence and macro-financial stability.
  - An uneven, partial recovery risks jeopardizing the health of the financial system.

### Emerging markets: financing needs and market access
- Emerging markets have large financing needs in 2021; market financing has been a significant source of funding in recent months.
- Resumption of portfolio flows is central to the stability of many emerging market economies; retaining market access is essential.
- A prospect of higher long-term rates in advanced economies as central banks normalize policy may jeopardize rollover of large external financing needs.
- Selected metrics and data points:
  - Emerging markets accounted for about 65 percent of global growth (about 40 percent excluding China) over 2017–19.
  - COVAX target: 2 billion doses by end of 2021.

### Corporate sector, credit markets, and solvency concerns
- Solvency pressures have been limited so far, but risks in the nonfinancial corporate sector remain.
- Spreads have recovered almost entirely, even in the sub-investment-grade sector, although sectoral differences persist.
- Default and distress indicators:
  - Default rates at large firms have remained well below previous peaks; bankruptcies among smaller firms have stayed low or declined in some cases.
  - The global number of potential “fallen angels” (firms with a BBB minus rating and negative outlook) has tripled globally since the beginning of the pandemic; in some jurisdictions (for example, the European Union and the United States) potential for further downgrades is elevated.
  - In China, defaults by state-owned enterprises in the last quarter of 2020 indicate ongoing financial vulnerabilities.
- Liquidity pressures and the risk of pressures morphing into insolvencies could resurface if investors reassess economic growth or policy outlook.

### Households, banks, and lending
- Household debt may rise, supported by accommodative financial conditions.
- Government support and declines in interest rates have mitigated household sector strains so far, reducing debt service loads.
- Vulnerabilities are unevenly distributed; poorer and marginalized households have been more affected.
- Bank sector performance:
  - Banks entered the pandemic with large capital and high liquidity buffers and have shown resilience.
  - Profitability challenges in the low-interest-rate environment may weigh on banks’ ability and willingness to lend in the future.
  - Banks may be concerned about rising credit exposures and increasing nonperforming loans once policy support measures end.
  - Underwriting standards for nonfinancial firms have tightened in some instances; bank loan growth in many countries has remained low or slowed in recent months.

### Investment funds, valuations, and liquidity mismatches
- Inflows to investment funds have resumed amid improving market sentiment and a drive to reach for yield.
- Fixed income fund flows:
  - Between March and November 2020, fixed income funds registered cumulative inflows of about $280 billion, $230 billion of which poured in since the beginning of September.
- Vulnerabilities in investment funds remain:
  - Stretched asset valuations expose funds to the risk of a price correction.
  - Liquidity and maturity mismatches remain largely unaddressed.

### Sustainable finance and the green recovery
- Capital markets are increasingly used to fund climate change and social goals; sustainable debt issuance rose strongly in 2020.
- Sustainable debt issuance in 2020 set to surpass the 2019 record at more than $650 billion (2020 partial data as of November 30 in source).

### Policy guidance and trade-offs
- Ongoing policy support remains necessary until a sustainable recovery takes hold to prevent the pandemic crisis from posing a threat to the global financial system.
- Recommended policy actions:
  - Preserve monetary policy accommodation.
  - Ensure liquidity support to households and firms.
  - Keep financial risks at bay while building a bridge to widespread vaccine availability.
  - Pursue multilateral cooperation for equitable vaccine development and delivery to ensure an even and complete economic recovery.
- Policymakers must balance continuing support to restore growth with addressing medium-term vulnerabilities including rising corporate debt, fragilities in nonbank financial institutions, increasing sovereign debt, market access challenges for some developing economies, and declining profitability in some banking systems.
- Prepare for risks of a market correction should investors suddenly reassess growth prospects or the policy outlook; a sudden sharp tightening of financial conditions could be particularly pernicious if it interacts with existing vulnerabilities.
- The IMF and other multilateral institutions stand ready to provide further support should further downside risks materialize.

### Attribution
- International Monetary Fund | Global Financial Stability Update, January 2021

### Section 2

### Key finding
- Employing macroprudential policies to tackle these vulnerabilities is crucial to avoid putting growth at risk in the medium term.

### Chart notes and definitions
- Source: IMF staff calculations.
- Higher indicates tighter financial conditions.
- EM = emerging market.
- Series begins December 2019 and ends December 2020.
- Note for all charts where applicable: Data labels use International Organization for Standardization (ISO) country codes.

### Chart axis values and time labels (as presented)
- Numeric axis ticks: -1.0, -0.5, 0.0, 0.5, 1.0, 1.5, 2.0, 2.5
- Time sequence labels (as presented): Dec, Mar, Jun, SepDecDec, Mar, Jun, SepDecDec, Mar, Jun, SepDecDec, Mar, Jun, SepDecDec, Mar, Jun, SepDec

### Series and category labels (as presented)
- Interest rates
- House prices
- Corporate valuations
- EM external costs
- Index
- United States
- Euro area
- Other advanced
- China
- Other emerging

*International Monetary Fund | Global Financial Stability Update, January 2021*

### Section 1

### EXECUTIVE SUMMARY

### Vaccines, markets, and the policy bridge
- Approval and rollout of vaccines have boosted expectations of a global recovery and lifted risk asset prices, despite rising COVID-19 cases and persistent uncertainties.
- Until vaccines are widely available, the market rally and the economic recovery remain predicated on continued monetary and fiscal policy support.
- Inequitable distribution of vaccines risks exacerbating financial vulnerabilities, especially for frontier market economies.
- Key observations:
  - Announcements and rollout of vaccines have pushed risk asset prices higher; industries such as airlines, hospitality, and consumer services rebounded in late 2020.
  - Investment-grade and high-yield corporate bond spreads have tightened sharply—close to or even below pre-February 2020 levels—while rates have reached record lows.
  - Investors cite expectations of very low rates over coming years and upward revisions in earnings expectations since the vaccine announcements as drivers of the market rally.

### Risks from uneven vaccine access and delayed recovery
- Vaccine access is likely to be uneven; many advanced economies have prepurchased vaccines with large per capita coverage, while procurement for emerging market and developing economies via direct negotiation or COVAX lags significantly.
- COVAX aim: make 2 billion doses available by the end of 2021 (note from source).
- Delayed access to comprehensive health care solutions could mean an incomplete global recovery and endanger the global financial system.
- Emerging market importance: about 65 percent of global growth (about 40 percent excluding China) over 2017–19—delays in tackling the pandemic in emerging markets may harm the global economy.
- Supply chain disruptions could affect corporate profitability even where the pandemic is under control.
- Risks outlined:
  - An asset price correction could interact with elevated vulnerabilities, creating knock-on effects on confidence and macro-financial stability.
  - An uneven, partial recovery risks jeopardizing the health of the financial system.

### Emerging markets: financing needs and market access
- Emerging markets have large financing needs in 2021; market financing has been a significant source of funding in recent months.
- Resumption of portfolio flows is central to the stability of many emerging market economies; retaining market access is essential.
- A prospect of higher long-term rates in advanced economies as central banks normalize policy may jeopardize rollover of large external financing needs.
- Selected metrics and data points from the source:
  - Emerging markets accounted for about 65 percent of global growth (about 40 percent excluding China) over 2017–19.
  - COVAX target: 2 billion doses by end of 2021.

### Corporate sector, credit markets, and solvency concerns
- Solvency pressures have been limited so far, but risks in the nonfinancial corporate sector remain.
- Spreads have recovered almost entirely, even in the sub-investment-grade sector, although sectoral differences persist.
- Default and distress indicators:
  - Default rates at large firms have remained well below previous peaks; bankruptcies among smaller firms have stayed low or declined in some cases.
  - The global number of potential “fallen angels” (firms with a BBB minus rating and negative outlook) has tripled globally since the beginning of the pandemic; in some jurisdictions (for example, the European Union and the United States) potential for further downgrades is elevated.
  - In China, defaults by state-owned enterprises in the last quarter of 2020 indicate ongoing financial vulnerabilities.
- Liquidity pressures and the risk of pressures morphing into insolvencies could resurface if investors reassess economic growth or policy outlook.

### Households, banks, and lending
- Household debt may rise, supported by accommodative financial conditions.
- Government support and declines in interest rates have mitigated household sector strains so far, reducing debt service loads.
- Vulnerabilities are unevenly distributed; poorer and marginalized households have been more affected.
- Bank sector performance:
  - Banks entered the pandemic with large capital and high liquidity buffers and have shown resilience.
  - Profitability challenges in the low-interest-rate environment may weigh on banks’ ability and willingness to lend in the future.
  - Banks may be concerned about rising credit exposures and increasing nonperforming loans once policy support measures end.
  - Underwriting standards for nonfinancial firms have tightened in some instances; bank loan growth in many countries has remained low or slowed in recent months.

### Investment funds, valuations, and liquidity mismatches
- Inflows to investment funds have resumed amid improving market sentiment and a drive to reach for yield.
- Fixed income fund flows:
  - Between March and November 2020, fixed income funds registered cumulative inflows of about $280 billion, $230 billion of which poured in since the beginning of September.
- Vulnerabilities in investment funds remain:
  - Stretched asset valuations expose funds to the risk of a price correction.
  - Liquidity and maturity mismatches remain largely unaddressed.

### Sustainable finance and the green recovery
- Capital markets are increasingly used to fund climate change and social goals; sustainable debt issuance rose strongly in 2020.
- Sustainable debt issuance in 2020 set to surpass the 2019 record at more than $650 billion (2020 partial data as of November 30 in source).

### Policy guidance and trade-offs
- Ongoing policy support remains necessary until a sustainable recovery takes hold to prevent the pandemic crisis from posing a threat to the global financial system.
- Recommended policy actions:
  - Preserve monetary policy accommodation.
  - Ensure liquidity support to households and firms.
  - Keep financial risks at bay while building a bridge to widespread vaccine availability.
  - Pursue multilateral cooperation for equitable vaccine development and delivery to ensure an even and complete economic recovery.
- Policymakers must balance continuing support to restore growth with addressing medium-term vulnerabilities including rising corporate debt, fragilities in nonbank financial institutions, increasing sovereign debt, market access challenges for some developing economies, and declining profitability in some banking systems.
- Prepare for risks of a market correction should investors suddenly reassess growth prospects or the policy outlook; a sudden sharp tightening of financial conditions could be particularly pernicious if it interacts with existing vulnerabilities.
- The IMF and other multilateral institutions stand ready to provide further support should further downside risks materialize.

*International Monetary Fund | Global Financial Stability Update, January 2021*

### Section 2

### Section 2

### Key finding
- Employing macroprudential policies to tackle these vulnerabilities is crucial to avoid putting growth at risk in the medium term.

### Chart notes and definitions
- Source: IMF staff calculations.
- Higher indicates tighter financial conditions.
- EM = emerging market.
- Series begins December 2019 and ends December 2020.
- Note for all charts where applicable: Data labels use International Organization for Standardization (ISO) country codes.

### Chart axis values and time labels (as presented)
- Numeric axis ticks: -1.0, -0.5, 0.0, 0.5, 1.0, 1.5, 2.0, 2.5
- Time sequence labels (as presented): Dec, Mar, Jun, SepDecDec, Mar, Jun, SepDecDec, Mar, Jun, SepDecDec, Mar, Jun, SepDecDec, Mar, Jun, SepDec

### Series and category labels (as presented)
- Interest rates
- House prices
- Corporate valuations
- EM external costs
- Index
- United States
- Euro area
- Other advanced
- China
- Other emerging

*Source: text - Section 2 (text - Section 2).*

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_Source: https://www.imf.org/-/media/files/publications/gfsr/2021/january/english/text.pdf_