## EXECUTIVE SUMMARY

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### Global outlook and inflation
- The world economy is experiencing stubbornly high inflation, a challenge not faced for decades.
- Since the April 2022 GFSR the global economic outlook has deteriorated materially, with a number of downside risks crystallizing, including higher-than-anticipated inflationary pressures, a worse-than-expected slowdown in China, and additional spillovers from Russia’s invasion of Ukraine.
- The range of adverse GDP growth outcomes based on the probability distribution of future GDP growth is in the worst 20th percentile of the last four decades.
- Central banks in advanced economies are accelerating policy normalization to restore price stability; policymakers in emerging markets have continued to tighten policy with notable regional differences.

### Financial conditions, market volatility, and liquidity
- Global financial conditions have tightened notably since April 2022—partly from tighter monetary policy and partly from rising uncertainty; conditions in China have eased somewhat due to policy support.
- Interest rates and prices of risk assets have been extremely volatile since April; risk assets sold off sharply through June and then rallied mid-year before further losses as major central banks reaffirmed anti-inflation commitments.
- Key gauges of systemic risk, such as higher dollar funding costs and counterparty credit spreads, have risen, creating the risk of a disorderly tightening of financial conditions amplified by preexisting vulnerabilities.
- Market liquidity metrics have worsened across asset classes, including US Treasury markets where bid-ask spreads have widened significantly, market depth has declined sharply, and liquidity premiums have increased.

### Emerging markets, sovereigns, and portfolio flows
- Global financial conditions tightening led to capital outflows from many emerging and frontier market economies with weaker macroeconomic fundamentals; nonresident portfolio flows remain weak despite some signs of stabilization after sizable outflows in the first half of the year.
- Sovereign spreads of high-yield emerging markets rose nearly to levels last seen in March 2020.
- Emerging markets face multiple risks: high external borrowing costs, stubbornly high inflation, volatile commodity markets, heightened uncertainty, and pressures from policy tightening in advanced economies.
- Pressures are particularly acute in frontier markets where tightening conditions, deteriorating fundamentals, and high exposure to commodity price volatility combine.
- Issuance of sovereign hard currency bonds has deteriorated sharply; without improved market access many frontier market issuers will need alternative funding sources and/or debt reprofiling and restructurings.

### Corporate sector, leveraged finance, and housing risks
- Credit spreads have widened substantially across sectors since April 2022.
- Large firms have reported contraction in profit margins due to higher costs; downward revisions to global earnings growth forecasts are gaining momentum amid recession concerns.
- Small firms in major advanced economies have seen bankruptcies start to increase owing to rising borrowing costs and declining fiscal support.
- Companies reliant on leveraged finance markets face tighter lending terms and standards; credit quality of these assets may be tested in a downturn with potential macroeconomic spillovers.
- As central banks aggressively tighten policy, soaring borrowing costs and tighter lending standards, coupled with stretched valuations, could adversely affect housing markets; in a worst-case scenario, real house price declines could be significant.

### China property sector and bank exposures
- The property sector downturn in China has deepened after a sharp decline in home sales during COVID-19 lockdowns, exacerbating liquidity stress for property developers and raising solvency concerns.
- Property developer failures could spill over into the banking sector, affecting some vulnerable small banks and domestic systemically important banks given lower capital buffers and higher property-related concentration risk.
- IMF Global Bank Stress Test: in a scenario with an abrupt and sharp tightening of financial conditions that sends the global economy into recession in 2023 amid high inflation, up to 29 percent of emerging market banks (by assets) would breach capital requirements, while most advanced economy banks would remain resilient.
- To rebuild buffers and cover the capital shortfall would require over $200 billion.

### Nonbank financial institutions and open-end investment funds
- Open-end investment funds pose financial stability concerns due to liquidity mismatch when holding illiquid assets while offering daily redemptions; this can raise the likelihood of investor runs and asset fire sales and create cross-border spillovers that tighten domestic financial conditions.
- Price-based liquidity management tools such as swing pricing can be effective in lowering asset price fragilities; policymakers should provide further guidance on implementation.
- Counterparties should monitor intraday activity and leverage exposures, strengthen liquidity risk management, and enhance transparency and data availability.

### Climate finance and EMDEs
- Emerging market and developing economies will need significant climate financing in coming years to reduce greenhouse gas emissions and adapt to physical effects of climate change.
- Sustainable finance has grown rapidly but emerging market and developing economies remain at a disadvantage.
- Scaling up private climate finance faces significant challenges, including the lack of supportive climate policies (such as effective carbon pricing) and a still-weak climate information architecture.
- Decisively scaling up private climate finance will require new finance instruments, involvement of multilateral development banks to attract private investors, leveraging private investment, and strengthening risk absorption capacity; a larger share of equity financing and additional resources for climate finance from multilateral development banks would help.

### Regional strains and notable episodes
- European financial markets showed strains since April 2022 amid natural gas shortages and reemergence of fragmentation risks in the euro area; spreads of southern European government bond yields over German yields later tightened after the European Central Bank announced the Transmission Protection Instrument.
- In the UK, investor concerns about the fiscal and inflation outlook following announcement of large debt-financed tax cuts and fiscal measures to address high energy prices led to abrupt depreciation of the pound and sharp declines in sovereign bond prices; on September 28 the Bank of England announced temporary and targeted purchases of long-dated UK government bonds to prevent gilt market dysfunction from posing a material risk to UK financial stability.

### Policy recommendations
- Central banks must act resolutely to bring inflation back to target to prevent inflation expectations de-anchoring and preserve credibility; clear communication about policy reaction functions and commitment to mandates is crucial.
- Emerging market economies managing the global tightening cycle could consider targeted foreign exchange interventions, capital flow measures, and/or other actions to smooth exchange rate adjustments, reduce financial stability risks, and maintain appropriate monetary policy transmission where appropriate.
- Sovereign borrowers in developing economies and frontier markets should enhance efforts to contain high debt vulnerabilities through early creditor contact, multilateral cooperation, and international community support; enacting credible medium-term fiscal consolidation plans could help contain borrowing and refinancing costs.
- Policymakers should contain further buildup of financial vulnerabilities by adjusting selected macroprudential tools as needed, balancing containment of vulnerabilities with avoiding procyclicality and disorderly tightening of financial conditions.
- Implementation of policies to mitigate market liquidity risks is paramount: supervisory authorities should monitor trading infrastructure robustness, support transparency in markets, and improve availability of trade-level data for timely liquidity risk assessment.
- To scale private climate finance, new instruments and multilateral development bank involvement are needed to leverage private investment and strengthen risk absorption capacity; the IMF can assist through financial stability risk assessments, lending via the Resilience and Sustainability Trust, and advocacy for closing data gaps and disclosures.
- Policy action is warranted to mitigate vulnerabilities in open-end investment funds; price-based liquidity management tools such as swing pricing can lower asset price fragilities, but further guidance on implementation is needed.

### Additional tools and recommendations (Section 2)
- Link the frequency of redemptions to the liquidity of funds’ portfolios.
- Consider tighter monitoring of funds’ liquidity risk management practices.
- Consider additional disclosures by open-end funds to better assess vulnerabilities.
- Consider measures to bolster the provision of liquidity.

*International Monetary Fund | October 2022 — EXECUTIVE SUMMARY (Section 1)*

### Section 1

### EXECUTIVE SUMMARY

### Global outlook and inflation
- The world economy is experiencing stubbornly high inflation, a challenge not faced for decades.
- Since the April 2022 GFSR the global economic outlook has deteriorated materially, with a number of downside risks crystallizing, including higher-than-anticipated inflationary pressures, a worse-than-expected slowdown in China, and additional spillovers from Russia’s invasion of Ukraine.
- The range of adverse GDP growth outcomes based on the probability distribution of future GDP growth is in the worst 20th percentile of the last four decades.
- Central banks in advanced economies are accelerating policy normalization to restore price stability; policymakers in emerging markets have continued to tighten policy with notable regional differences.

### Financial conditions, market volatility, and liquidity
- Global financial conditions have tightened notably since April 2022—partly from tighter monetary policy and partly from rising uncertainty; conditions in China have eased somewhat due to policy support.
- Interest rates and prices of risk assets have been extremely volatile since April; risk assets sold off sharply through June and then rallied mid-year before further losses as major central banks reaffirmed anti-inflation commitments.
- Key gauges of systemic risk, such as higher dollar funding costs and counterparty credit spreads, have risen, creating the risk of a disorderly tightening of financial conditions amplified by preexisting vulnerabilities.
- Market liquidity metrics have worsened across asset classes, including US Treasury markets where bid-ask spreads have widened significantly, market depth has declined sharply, and liquidity premiums have increased.

### Emerging markets, sovereigns, and portfolio flows
- Global financial conditions tightening led to capital outflows from many emerging and frontier market economies with weaker macroeconomic fundamentals; nonresident portfolio flows remain weak despite some signs of stabilization after sizable outflows in the first half of the year.
- Sovereign spreads of high-yield emerging markets rose nearly to levels last seen in March 2020.
- Emerging markets face multiple risks: high external borrowing costs, stubbornly high inflation, volatile commodity markets, heightened uncertainty, and pressures from policy tightening in advanced economies.
- Pressures are particularly acute in frontier markets where tightening conditions, deteriorating fundamentals, and high exposure to commodity price volatility combine.
- Issuance of sovereign hard currency bonds has deteriorated sharply; without improved market access many frontier market issuers will need alternative funding sources and/or debt reprofiling and restructurings.

### Corporate sector, leveraged finance, and housing risks
- Credit spreads have widened substantially across sectors since April 2022.
- Large firms have reported contraction in profit margins due to higher costs; downward revisions to global earnings growth forecasts are gaining momentum amid recession concerns.
- Small firms in major advanced economies have seen bankruptcies start to increase owing to rising borrowing costs and declining fiscal support.
- Companies reliant on leveraged finance markets face tighter lending terms and standards; credit quality of these assets may be tested in a downturn with potential macroeconomic spillovers.
- As central banks aggressively tighten policy, soaring borrowing costs and tighter lending standards, coupled with stretched valuations, could adversely affect housing markets; in a worst-case scenario, real house price declines could be significant.

### China property sector and bank exposures
- The property sector downturn in China has deepened after a sharp decline in home sales during COVID-19 lockdowns, exacerbating liquidity stress for property developers and raising solvency concerns.
- Property developer failures could spill over into the banking sector, affecting some vulnerable small banks and domestic systemically important banks given lower capital buffers and higher property-related concentration risk.
- IMF Global Bank Stress Test: in a scenario with an abrupt and sharp tightening of financial conditions that sends the global economy into recession in 2023 amid high inflation, up to 29 percent of emerging market banks (by assets) would breach capital requirements, while most advanced economy banks would remain resilient.
- To rebuild buffers and cover the capital shortfall would require over $200 billion.

### Nonbank financial institutions and open-end investment funds
- Open-end investment funds pose financial stability concerns due to liquidity mismatch when holding illiquid assets while offering daily redemptions; this can raise the likelihood of investor runs and asset fire sales and create cross-border spillovers that tighten domestic financial conditions.
- Price-based liquidity management tools such as swing pricing can be effective in lowering asset price fragilities; policymakers should provide further guidance on implementation.
- Counterparties should monitor intraday activity and leverage exposures, strengthen liquidity risk management, and enhance transparency and data availability.

### Climate finance and EMDEs
- Emerging market and developing economies will need significant climate financing in coming years to reduce greenhouse gas emissions and adapt to physical effects of climate change.
- Sustainable finance has grown rapidly but emerging market and developing economies remain at a disadvantage.
- Scaling up private climate finance faces significant challenges, including the lack of supportive climate policies (such as effective carbon pricing) and a still-weak climate information architecture.
- Decisively scaling up private climate finance will require new finance instruments, involvement of multilateral development banks to attract private investors, leveraging private investment, and strengthening risk absorption capacity; a larger share of equity financing and additional resources for climate finance from multilateral development banks would help.

### Regional strains and notable episodes
- European financial markets showed strains since April 2022 amid natural gas shortages and reemergence of fragmentation risks in the euro area; spreads of southern European government bond yields over German yields later tightened after the European Central Bank announced the Transmission Protection Instrument.
- In the UK, investor concerns about the fiscal and inflation outlook following announcement of large debt-financed tax cuts and fiscal measures to address high energy prices led to abrupt depreciation of the pound and sharp declines in sovereign bond prices; on September 28 the Bank of England announced temporary and targeted purchases of long-dated UK government bonds to prevent gilt market dysfunction from posing a material risk to UK financial stability.

### Policy recommendations
- Central banks must act resolutely to bring inflation back to target to prevent inflation expectations de-anchoring and preserve credibility; clear communication about policy reaction functions and commitment to mandates is crucial.
- Emerging market economies managing the global tightening cycle could consider targeted foreign exchange interventions, capital flow measures, and/or other actions to smooth exchange rate adjustments, reduce financial stability risks, and maintain appropriate monetary policy transmission where appropriate.
- Sovereign borrowers in developing economies and frontier markets should enhance efforts to contain high debt vulnerabilities through early creditor contact, multilateral cooperation, and international community support; enacting credible medium-term fiscal consolidation plans could help contain borrowing and refinancing costs.
- Policymakers should contain further buildup of financial vulnerabilities by adjusting selected macroprudential tools as needed, balancing containment of vulnerabilities with avoiding procyclicality and disorderly tightening of financial conditions.
- Implementation of policies to mitigate market liquidity risks is paramount: supervisory authorities should monitor trading infrastructure robustness, support transparency in markets, and improve availability of trade-level data for timely liquidity risk assessment.
- To scale private climate finance, new instruments and multilateral development bank involvement are needed to leverage private investment and strengthen risk absorption capacity; the IMF can assist through financial stability risk assessments, lending via the Resilience and Sustainability Trust, and advocacy for closing data gaps and disclosures.
- Policy action is warranted to mitigate vulnerabilities in open-end investment funds; price-based liquidity management tools such as swing pricing can lower asset price fragilities, but further guidance on implementation is needed.

*International Monetary Fund | October 2022 — EXECUTIVE SUMMARY (Section 1)*

### Section 2

### execsum - Section 2

### Additional tools and recommendations
- Link the frequency of redemptions to the liquidity of funds’ portfolios.
- Consider tighter monitoring of funds’ liquidity risk management practices.
- Consider additional disclosures by open-end funds to better assess vulnerabilities.
- Consider measures to bolster the provision of liquidity.

*Source: https://www.imf.org/-/media/files/publications/gfsr/2022/october/english/execsum.pdf*

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_Source: https://www.imf.org/-/media/files/publications/gfsr/2022/october/english/execsum.pdf_