Transcript of April 2021 Global Financial Stability Report Press Conference
IMF News, April 6, 2021
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- Published: April 6, 2021
Opening assessment and three priorities
- Global economy beginning to emerge from the economic shock caused by the COVID‑19 virus; extraordinary policy measures have eased financial conditions and prevented a deeper downturn.
- Policy tradeoffs: continuing policy support remains necessary, but can have unintended consequences — valuations for risk assets have become stretched and financial vulnerabilities have intensified.
- Three priorities identified:
- Addressing corporate sector vulnerabilities and repairing balance sheets.
- Tightening some macroprudential tools in advanced economies and enhancing supervision and regulation of nonbank financial institutions.
- Rebuilding buffers in emerging markets to prepare for potential repricing of risk and reversal of capital flows.
- Central banks: successful financial rescue to date; creativity will be tested as they guide economies through asynchronous recoveries, stretched market valuations, and social strains.
U.S. interest rates, term premia, and global spillovers
- Since the summer, yields on the 10‑year U.S. treasury note have more than tripled and are now back to their pre‑pandemic level.
- Both nominal and real interest rates have risen; nominal yields have risen more, suggesting market‑implied inflation is recovering.
- Rapid adjustment in rates could generate volatility, tighten global financial conditions, and trigger risk‑off sentiment.
- Market uncertainty drivers: future path of Treasury supply and central bank asset purchases; rising treasury term premia and market‑implied interest rate volatility.
- Policy guidance emphasis: need for forward guidance not only on the Federal Funds Rate but also on the future path of asset purchases.
- Fed monetary framework: average inflation targeting aiming for a temporary inflation overshoot to make up for past misses.
- Spillover magnitude example: a 1 percentage point increase in U.S. term premia can have up to 1 percentage point increase for emerging market term premia if associated with higher inflation expectations.
Emerging markets: vulnerabilities, financing needs, and IMF capacity
- Emerging markets face large external financing needs and slow vaccination rollouts; exposed to rollover risk and higher funding costs as U.S. real yields rise.
- Earlier in the year, international investor flows into emerging market debt experienced a sudden reversal for several weeks — a change not witnessed since last summer.
- Market access: many frontier market economies remain impaired.
- Fiscal support comparisons for 2020:
- Advanced economies: 15 percent of fiscal support to companies and households.
- Emerging markets: about half of that, 7 to 8 percent.
- Sub‑Saharan Africa: only between 1 and 2 percent of fiscal support.
- IMF stance and capacity:
- IMF has a large balance sheet and large financing capacities and has provided rapid financing to a very, very large number of countries.
- IMF stands ready with additional financing to members in need.
- International community actions: G‑20 Debt Service Suspension Initiative (DSSI) extended to June 30; IMF recommended extension toward end of year; Common Framework for Debt Treatment exists with potential to apply more broadly.
Corporate sector stress: liquidity, solvency, and policy responses
- Corporate sector emerging overindebted in many countries with notable differences by firm size and sector.
- Report provides a decision‑tree to assess whether firms should rely on market financing, seek government support, be restructured, or be liquidated.
- Liquidity vs solvency:
- Liquidity stress is high at small firms in more sectors and across countries.
- Solvency stress is high at small firms and notable at medium‑size and even large firms in the most affected sectors (contact‑intensive: tourism, entertainment, restaurants).
- Policy responses recommended:
- Targeted fiscal measures to address liquidity (loan guarantees) and solvency (equity injections).
- Enhanced, quicker resolution regimes (including out‑of‑court solutions).
- Timely, holistic, data‑sensitive monitoring to inform unwinding of support and banks’ willingness to lend.
- Recalibration of support using the decision‑tree framework to prioritize restructuring vs liquidation vs continued support.
Sub‑Saharan Africa: economic headwinds and policy stance
- Pandemic hit all countries; Southern Africa reported somewhat lower pandemic numbers but experienced strong economic headwinds from the global economy.
- Fiscal support in Sub‑Saharan Africa in 2020 estimated at between 1 and 2 percent, versus 7 to 8 percent in emerging markets and 15 percent in advanced economies.
- Recovery in Sub‑Saharan Africa expected to be slower, increasing asynchronous recovery risks.
- Monetary policy stance across Sub‑Saharan Africa and emerging markets: accommodative and expected to remain so.
- Country example: Uganda policy rate lowered to 7 percent and still has positive real policy rates.
- Capital markets: spreads widened during pandemic peak, recovered somewhat but remain above pre‑pandemic levels; recent hard currency bond issuance resumed after a long pause.
China: rapid recovery and buildup of vulnerabilities
- China recovered to pre‑crisis levels in 2020 faster than any other country; recovery accompanied by further increases in leverage and vulnerabilities.
- Preexisting vulnerabilities: weaknesses in small and provincial banks and leverage in some corporate segments.
- Policy guidance:
- Balance supporting the economy with addressing medium‑term buildup of vulnerabilities.
- Urgent need to unwind implicit guarantees to avoid distortions in spreads and investor perceptions.
Nonbank financial intermediation, market episodes, and supervisory gaps
- Recent episodes (bitcoin run‑up, GameStop, Archegos) reflect stretched valuations and episodes of volatility; not necessarily systemic by current assessment but raise concerns.
- Concerns highlighted:
- Interaction of stretched valuations and elevated financial leverage increases systemic risk, especially within nonbank financial intermediation.
- Nonbank sector lacks visibility and comprehensive data; interconnections with banking sector (prime brokerage) can transmit losses.
- Regulatory and supervisory recommendations:
- Tighten selected macroprudential tools to tackle pockets of vulnerabilities while avoiding broad tightening of financial conditions.
- Develop macroprudential tools tailored to nonbank financial intermediation.
- Expand data collection and disclosure regimes to improve monitoring and early detection.
- Consider raising buffers elsewhere in the system to ensure resilience and absorb losses.
- Archegos episode assessment: not systemic at present; manageable by financial institutions given current capital and liquidity, but highlights counterparty risk management and interconnectedness.
Central bank policy considerations and term premium dynamics
- Two components of yields: expected future short‑term rates (managed by forward guidance) and term premium (impacted by asset purchases and treasury supply).
- Rapid, persistent increases in interest rates over narrow windows pose absorption challenges; moderate increases reflecting stronger activity and inflation are healthier.
- Positive effects of rising rates: improved bank profitability via steeper yield curve; reduced reach‑for‑yield pressure in nonbank sectors.
- Policy coordination: forward guidance should address both overnight rates and asset purchase paths.
Cryptocurrencies, distributed ledger technology, and digital currencies
- Technology revolution in financial sector; DLT and blockchains have applications beyond cryptocurrencies (stablecoins, securities clearing, payments).
- Benefits: potential for improved payments, lending operations, and broader financial inclusion.
- Risks: stretched valuations in cryptocurrencies, integrity concerns (law enforcement and misuse), and need to balance innovation with risk mitigation.
- International work: IMF collaborating with BIS, FSB, central banks, and G‑20 initiatives to improve global cross‑border payments (cheap, accessible, safe).
Sustainable finance and ESG market developments
- Shift in investor sentiment toward ESG (environmental, social, governance) driven by awareness and changing policy frameworks.
- Architecture needed to scale sustainable finance:
- High‑quality, consistent, granular, forward‑looking data.
- Taxonomy convergence or minimal globally accepted taxonomy.
- Convergent climate‑related sustainability frameworks and linkage to financial variables.
- Current asset size: rapid growth in ESG‑dedicated assets noted but overall asset class still relatively small; example — whole stock of green sovereign bonds in the euro area amounts for less than 1 percent than the entire outstanding amount.
Transcript of April 2021 Global Financial Stability Report Press Conference — April 6, 2021, IMF Communications Department