## Foreword

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### Market sentiment and baseline outlook
- Financial markets have turned quite optimistic since October 2023, driven by expectations for a global economic soft landing and continued progress on disinflation.
- The IMF’s baseline case is a soft landing, as documented by the April 2024 World Economic Outlook.
- Investors appear reassured by the perception that the banking turmoil from last year has been contained.
- Notwithstanding still-high interest rates, households and businesses have been obtaining financing at lower costs.

### Risks from stretched valuations and asset repricing
- Models reveal stretched valuations across various asset classes, predominantly through compressed risk premiums relative to historical standards.
- Examples:
  - Corporate bond market: spreads continue to grind lower despite rising default rates.
  - Sovereign debt market: spreads, even for vulnerable issuers, have narrowed.
  - Stretched valuations are also noticeable in stock and some commodity markets.
- Consequences:
  - Asset prices have moved up together, increasing asset price correlations and lowering market volatility.
  - This environment makes rapid asset repricing possible.
- Potential catalysts for adverse repricing include sudden policy shifts, a flare-up of geopolitical tensions, and commodity and supply chain disruptions.
- If expectations about inflation and monetary policy change, financial conditions could tighten sharply as investor sentiment sours and asset price correlations decline.

### Real estate, credit markets, and concentrated exposures
- Commercial real estate refinancing risks:
  - Estimated 600 billion of US commercial real estate debt is due this year, posing refinancing challenges, especially for segments with weak prospects.
  - Difficult and costly refinancings could lead to defaults and pressure on lenders with concentrated exposures.
- Broader credit trends:
  - Default rates in riskier credit markets have been rising in many countries.
  - Rapid surge in private credit over the past few years—lending by institutions not regulated like commercial banks or other traditional players—could expose fragilities due to opacity in this market.

### Emerging markets and sovereign vulnerabilities
- If global financial conditions tighten, capital outflow pressures on emerging markets could emerge, putting currencies and other assets under depreciation pressure.
- Major emerging markets have generally weathered interest rate hikes well, demonstrating domestic resilience built with improved policy frameworks.
- Weaker sovereigns may see international sources of funding dry up again.

### Medium-term macrofinancial vulnerabilities and cyber risks
- Easy financial conditions can foster accumulation of vulnerabilities:
  - Overuse of debt by governments and private-sector borrowers raises concerns about debt sustainability for governments.
  - Opacity and rapid growth in private credit increase risks in the private sector.
- Growing risk of malicious cyber attacks is a concern given deepening digitalization and reliance on technology.

### Policy recommendations and supervisory priorities
- Monetary and communication policy:
  - Policymakers should push back against overly optimistic expectations of the pace of disinflation and monetary policy easing to mitigate asset repricing risks.
  - Recent communications by major central banks cautioning that disinflation has not yet been fully achieved are consistent with this recommendation.
- Financial regulatory and supervisory actions:
  - Ensure banks and other institutions can withstand defaults and other risks using stress tests, early corrective actions, and other supervisory tools.
  - Enhance reporting requirements where there are data gaps, such as in private credit markets.
  - Prioritize full and consistent implementation of internationally agreed prudential standards, notably finalizing the phase-in of Basel III.
  - Further progress on recovery and resolution frameworks is of first-order importance to limit fallout from the demise of weaker institutions.
- Fiscal and external sector policy:
  - Strengthen efforts to contain debt vulnerabilities, including through appropriate fiscal consolidation, as recommended by the April 2024 Fiscal Monitor.
  - For emerging markets and frontier economies, such efforts should lessen the incidence and severity of capital outflows and external funding squeezes.
- Preparedness:
  - Policymakers must remain vigilant and plan for action not just in the baseline but also in adverse scenarios, given the history of a series of adverse shocks since the outbreak of the COVID-19 pandemic in 2020.

### Outlook and concluding assessment
- The overall outlook for global macrofinancial stability risks has improved in the past year, alongside declines in global inflation.
- However, several salient risks remain at the top of IMF concerns, including stretched valuations, credit and refinancing pressures, sovereign funding strains, and cyber threats.
- Only prudent policy and alert readiness will ensure that potential future adverse scenarios can be tackled effectively.

*Foreword — International Monetary Fund | April 2024*

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_Source: https://www.imf.org/-/media/files/publications/gfsr/2024/april/english/foreword.pdf_