## Transcript of Global Financial Stability Report April 2024 Press Briefing

_IMF News, April 16, 2024_

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## Bibliographic details
- Published: April 16, 2024

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### 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*

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## References

- [Tobias Adrian](http://www.imf.org/external/np/bio/eng/ta.htm)
- [Arab Republic of Egypt and the IMF](http://www.imf.org/external/country/EGY/index.htm)
- [Ghana and the IMF](http://www.imf.org/external/country/GHA/index.htm)
- [Mexico and the IMF](http://www.imf.org/external/country/MEX/index.htm)
- [Pakistan and the IMF](http://www.imf.org/external/country/PAK/index.htm)
- [Transcripts](https://www.imf.org/en/news/searchnews)
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_Source: https://www.imf.org/en/news/articles/2024/04/16/tr041624-transcript-of-gfsr-april-2024-press-briefing_