Transcript of Global Financial Stability Report April 2024 Press Briefing
IMF News, April 16, 2024
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- Published: April 16, 2024
Global baseline and key risks
- Baseline: global soft landing — "inflation is expected to return to target in countries around the world, while economic activity slows, but we don’t foresee a global recession in our baseline."
- Recent market developments:
- Credit spreads have compressed, including for riskier borrowers.
- Many countries that had been shut out of global capital markets have returned and issuance has resumed.
- Valuations have risen in stock markets, corporate bond markets, and sovereign bond markets.
- Short‑term risks:
- Persistence of inflation and cross‑country differentiation in pace of disinflation.
- Compressed volatility and high correlation across asset markets amid elevated fundamental uncertainty (including geopolitical tensions).
- Narrowing credit spreads alongside pockets of deteriorating credit quality and rising default rates in some corners.
- Medium‑term risk:
- Buildup of vulnerabilities: global debt levels increased since the pandemic; leverage is rising in many corners of the financial system and the nonfinancial system.
China: growth, property, and financial stability channels
- Growth signals:
- Recent GDP figure was "above expectations"; "Last year, for the whole year, GDP growth was also above 5 percent."
- Property sector dynamics:
- Marked slowdown in property investment, especially new construction and housing.
- Decline in housing prices has been "fairly moderate to date"; adjustment has occurred more in quantities than prices.
- Regional heterogeneity: some major cities strong; other provinces weaker; smaller banks in weaker provinces more impacted.
- Financial transmission channels and indicators (as described):
- Confidence not restored despite measures (lowering mortgage rates, easing purchases).
- Activity (sales, investment) has fallen sharply; existing home prices declined more than new home prices.
- Developers face reduced access to bank and nonbank financing and declining resale revenues, impairing project completion and reducing land sale revenues — contagion risk to local government funding vehicles with a "wall of maturity coming in."
- Equity market from peak to trough down "about 45 percent" (despite recent incline) — transmission to wealth management/private sector.
- Nonbank financial sector size cited as "about 110 trillion renminbi, or 90 percent of GDP."
- Risk that losses in wealth management products could prompt retail withdrawals, pressuring corporate bond yields and funding markets.
- Policy emphasis:
- Mix of macroeconomic support and structural reforms.
- Need for close monitoring of regional heterogeneity and targeted measures for weaker provinces and smaller banks.
Private credit: scope, risks, and data needs
- Definition and scale:
- Private credit: credit provided by nonbank financial institutions (e.g., direct lending funds) to firms without access to public markets.
- Global size cited as "more than $2 trillion"; about threequarters is in the U.S.
- In the U.S., private credit accounts for about "7 percent of lending to nonfinancial institutions or firms."
- Benefits:
- Diversifies funding sources and increases access to alternative funding for firms; potential higher returns for investors.
- Risks highlighted:
- Rapid growth and opacity; valuation infrequency ("stale valuation") can amplify shocks.
- Borrower characteristics: smaller firms, potentially higher default sensitivity.
- Liquidity mismatch risks and potential for runs, particularly in fast‑growing segments tailored to retail investors.
- Layers of leverage across borrowers, funds, and investors.
- Crossborder exposures (e.g., U.S. lenders in Europe).
- Assessment and recommendations:
- Current view: "we don’t see an imminent financial stability risk" but the sector could become an amplifier in a prolonged recession.
- Policy recommendations: improved data collection and transparency to allow policymakers and market participants to assess risks and transmission channels.
U.S. monetary policy, interest‑rate paths, and sectoral implications
- U.S. macro backdrop:
- U.S. economy performed "very strongly" since the pandemic with strong productivity and rising labor force participation.
- Longer‑term yields have increased amid inflation surprises and stronger fundamentals.
- Fund forecast: inflation will return to target; Fed expected to start cutting "at some point" but "how many cuts and the exact timing is certainly data‑dependent."
- Risks of higher‑for‑longer rates:
- If inflation stalls and rates remain high while the economy stays strong, equity valuations may be less impacted if earnings remain robust.
- Greater concern: central banks keep rates high in response to stalling disinflation while activity weakens, which would have a meaningful adverse impact on asset prices.
- Sectoral vulnerability — commercial real estate (U.S. example):
- "About $1 trillion" of commercial real estate debt coming due in the U.S. over the next year.
- Estimated funding gap of "about $300 billion."
- Observed deterioration in asset quality: rising defaults in CMBS markets and bank charges, with regional banks more exposed.
- Banks hold about "$475 billion" in owed/held to maturity assets (contextual reference to last year’s banking sector stress).
Global dollar, monetary divergence, and emerging markets
- Dollar moves:
- Recent U.S. strength has contributed to dollar appreciation; a stronger dollar can imply tighter financial conditions for some emerging markets.
- Spillovers and heterogeneity:
- Strong U.S. demand can produce positive spillovers (e.g., for Mexico).
- Net effect of U.S. higher rates and dollar appreciation on emerging markets can be positive or negative depending on country circumstances.
- Differentiation across emerging markets: some central banks moved early and built resilience; policy differentials vis‑à‑vis the U.S. vary (e.g., Latin America has a positive differential).
- Policy guidance for emerging markets:
- Maintain appropriate policy frameworks to build buffers: monetary buffers and medium‑term fiscal consolidation.
- Use the Integrated Policy Framework (interaction of monetary policy, exchange rate policy, macroprudential tools, FX intervention, capital flow measures) for small open economies.
Low‑income/frontier economies and transmission challenges
- Transmission challenges:
- In many low‑income countries, monetary transmission is weak and nonmonetary drivers (fiscal imbalances, supply constraints) materially influence inflation.
- Policy guidance:
- Monetary policy alone may be insufficient; fiscal measures and structural reforms (supply‑side reforms, energy sector, state‑owned enterprises) are often required.
- IMF programs and capacity development can help countries restore sustainable macroeconomic paths and strengthen institutions (central banks, debt management).
- Country notes:
- Pakistan: inflation "is projected to come down" but further work needed across demand (fiscal consolidation) and supply sides.
- Ghana: inflation has reduced "on the back of tighter monetary policy and fiscal consolidation."
Africa and Sub‑Saharan considerations
- Regional challenges:
- Many African countries face higher debt and lower growth relative to pre‑crisis projections; several are in debt negotiations or distress.
- External debt: "There is $60 billion of debt coming due over the next two years" (continent‑level figure).
- Policy and capacity priorities:
- Strengthen financial regulation, central banking, and debt management via capacity development.
- Early engagement with creditors and strong macro adjustments support access to international markets; countries with better macro adjustments have fared better.
- Market access context:
- Easing global financial conditions in the past half year allowed some sub‑Saharan issuers to issue; risks could reverse under greater uncertainty.
Geopolitical shocks and market implications
- Recent Middle East tensions:
- Market reaction: selling in risky assets (global equities down "about 2 to 3 percent" on a recent Friday with further declines on Monday).
- Oil prices "have been fairly stable" so far.
- Transmission channels from geopolitical shocks:
- Commodity and oil price movements can feed into headline inflation globally.
- Rising inflation expectations can prompt interest‑rate repricing, pressuring banks and other financial markets and leading to broader asset repricing.
Asset classes: gold and crypto
- Gold:
- Drivers of high gold prices: reserve managers’ reallocation toward commodities (including gold) and speculative demand amid geopolitical and macroeconomic uncertainty.
- Bitcoin/crypto:
- Valuation drivers are hard to pin down; U.S. approval of ETPs has supported inflows.
- Current IMF assessment: crypto does not pose a systemic risk "at this point" but is a risk going forward.
- Policy stance: authorities should monitor regulated entities’ exposures to crypto and derivative products; IMF and FSB worked on a policy framework for crypto assets to contain systemic fallout.
Practical recommendations emphasized throughout briefing
- For policymakers and authorities:
- Avoid premature easing; ensure inflation is durably returning to target before easing monetary policy.
- Strengthen financial sector frameworks: deposit insurance, emergency lending, resolution powers, and broader FSAP recommendations.
- Improve data collection and transparency for rapidly growing sectors (e.g., private credit, nonbank financial institutions).
- Use a mix of macro, structural, and financial sector reforms to address country‑specific problems (example: China property sector, low‑income country supply constraints).
- Early engagement with creditors and credible macro adjustments to manage debt vulnerabilities.
- For supervisors and market participants:
- Monitor cross‑sector and cross‑border exposures, especially in opaque, fast‑growing nonbank segments.
- Track sectoral stresses (e.g., commercial real estate, regional banking exposures) and adjust supervisory intensity accordingly.
Source: Transcript of Global Financial Stability Report April 2024 Press Briefing, April 16, 2024, IMF Communications Department