## Steadying the Course: Financial Markets Navigate Uncertainty (Executive Summary)

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### Near-term outlook and risks
- Global economic activity has moderated since the April 2024 Global Financial Stability Report, and inflation has continued to slow.
- Monetary easing is under way among major central banks; financial conditions have remained accommodative.
- Emerging markets have remained resilient, and asset price volatility has stayed relatively low, on net.
- The IMF’s one-year-ahead growth-at-risk measure indicates near-term financial stability risks remain contained at around the 40th historical percentile.
- Accommodative financial conditions help keep near-term risks low but facilitate the buildup of vulnerabilities—lofty asset valuations, global rises in private and government debt, and increased use of leverage by nonbank financial institutions—which raise risks to financial stability in the future.
- The widening disconnect between uncertainty and market volatility increases the chance of sudden surges in volatility and sharp asset repricing; market turmoil in early August 2024—when stock market volatility spiked in both Japan and United States—illustrated how spikes in volatility interacting with leverage can create nonlinear market reactions and hasten sell-offs.
- Chapter 2 quantitative example: if global real economic uncertainty jumps by an amount equivalent to its rise during the global financial crisis, the downside outcome (the 10th percentile) of one-year-ahead global real GDP growth worsens by 1.2 percentage points; the effect is stronger when macrofinancial vulnerabilities are more elevated or when market volatility is more disconnected from uncertainty.

### Vulnerabilities and imbalances
- High levels and rapid growth of sovereign debt remain a global challenge; many jurisdictions are failing to achieve their longer-term debt-stabilizing primary balances.
- In many advanced economies, increasingly large shares of government debt issuance will need to be absorbed by price-sensitive buyers amid ongoing quantitative tightening by central banks, potentially increasing bond market volatility.
- Emerging markets and frontier economies with weak and worsening fiscal buffers have seen sovereign bond and credit default swap spreads increase more than other jurisdictions, making debt servicing more challenging.
- Emerging markets have continued to demonstrate resilience; central banks remain focused on domestic economic and inflation conditions and use exchange rate adjustments to mitigate external headwinds.
- With major advanced economies set to ease monetary policy, near-term pressure on emerging markets could moderate; further ahead, elevated uncertainty on trade policies and geopolitics and slowing growth in China could make preserving financial stability in emerging markets more challenging.
- Interest rate spillovers from advanced economies to emerging markets have increased over the past decade: changes in the 10-year US term premium have explained an increasing share of changes in the term premiums of 10-year emerging market bonds.
- Global issuance of sustainable debt rebounded in 2024; emerging markets account for just 13 percent of year-to-date issuance, and the share of emerging-market sustainable debt denominated in local currencies is small.
- Firms face debt-servicing challenges even as global interest rates decline: defaults have steadily risen for weaker firms; some midsized companies borrowing at high interest rates in private credit markets are resorting to payment-in-kind methods.
- Despite credit deterioration signs, corporate bonds have continued to trade within tight spreads by historical standards, indicating pricing misalignments and increased risk of abrupt repricing of credit risk.
- Residential real estate stability risks appear contained in most countries, but commercial real estate (CRE) pressures remain acute—misalignment in prices and fundamentals point to further corrections, especially in the office sector; funding withdrawals could push down prices and strain financial institutions, including banks with large CRE concentrations and nonbank investors such as REITs.
- The global banking sector has remained resilient, with ample capital and liquidity buffers; nonperforming loan ratios have increased for some lending (consumer credit cards, automobile loans, CRE), but overall asset quality has not deteriorated significantly.
- Net interest margin and bank profitability could be negatively impacted by interest rate cuts; a temporary sell-off of some banks’ stocks in early August highlighted risks for a relatively large tail of weaker institutions.
- Nonbank financial intermediaries (NBFIs) can transmit and amplify strains: rapid unwinding of leveraged positions can generate liquidity imbalances and increase volatility. Growth of open-ended bond funds, hedge funds, and private credit has increased leverage in several NBFI segments.
- Data gaps hinder authorities’ ability to assess vulnerabilities associated with nonbank leverage and to identify large and concentrated positions.
- Use of artificial intelligence (AI) in capital market activities could further support NBFI growth. Adoption is at a relatively early stage but could accelerate—share of applications related to AI and machine learning in patent filings in asset management has risen impressively in recent years.
- Widespread AI adoption could worsen financial fragilities via potentially higher volatility during stress, more opacity, monitoring challenges, reliance on a few AI service providers (increasing operational risks), and growing cyber and market manipulation risks.

### Policy recommendations
- Central banks:
  - Provide clear communications that the path of monetary policy should not react excessively to any individual data point to help reduce uncertainty.
  - Where growth and inflation momentum are set to continue, gradually ease monetary policy toward a more neutral stance.
  - Where inflation remains stubbornly above targets, push back against overly optimistic investor expectations for monetary policy easing.
- Fiscal policy and sovereign debt management:
  - Fiscal adjustments should focus primarily on credibly rebuilding buffers to keep financing costs reasonable, help anchor medium-term inflation expectations, and contain risks of sovereign rating downgrades.
  - For countries with less fiscal space, credible fiscal plans are imperative to prevent cliff effects in ratings that could adversely affect financing conditions.
  - Sovereign borrowers in frontier economies and low-income countries should strengthen efforts to contain debt vulnerability risks through communications with creditors, multilateral cooperation, and international community support.
- Nonbank financial intermediation (NBFI) and macroprudential policy:
  - Enhance reporting requirements for NBFIs and strengthen policies that mitigate vulnerabilities and amplification mechanisms stemming from nonbank leverage.
  - Improve NBFIs’ liquidity preparedness, implement Financial Stability Board agreed-upon standards, and enhance stress testing for nonbanks.
  - Strengthen the macroprudential policy framework to contain excessive risk taking in the nonbank financial sector and ensure banking capital and liquidity buffers are adequate to support credit provision through stress periods.
  - Tighten macroprudential tools to increase resilience against a range of shocks while avoiding a broad tightening of financial conditions.
- Corporate and CRE resilience:
  - Maintain vigilance monitoring corporate vulnerabilities and the CRE sector.
  - Conduct stress-testing exercises that incorporate scenarios involving trade restrictions, geopolitical events, and significant declines in CRE prices to inform capital adequacy decisions.
  - Enhance reporting requirements for private credit to improve monitoring and risk management.
- Banking supervision, resolution, and liquidity provision:
  - Ensure supervisors are equipped to intervene early and that banks are prepared to access central bank liquidity.
  - Advance adoption and implementation of frameworks for recovery and resolution to address weak or failing banks without undermining financial stability or risking public funds.
  - Full, timely, and consistent implementation of international standards remains important for enhancing prudential frameworks.

*Source: Executive Summary, Global Financial Stability Report – October 2024 (execsum).*

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