Global Financial Stability Report, October 2015: Vulnerabilities, Legacies, and Policy Challenges - Risks Rotating to Emerging Markets
Global Financial Stability Report, October 7, 2015
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- Global Financial Stability Report, October 2015: Vulnerabilities, Legacies, and Policy Challenges - Risks Rotating to Emerging Markets
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Bibliographic details
- Published: October 7, 2015
- Series: Global Financial Stability Report
- DOI: https://doi.org/10.5089/9781513582047.082
Key findings
- Financial stability in advanced economies has improved, but risks continue to rotate toward emerging markets.
- The global financial outlook is clouded by a triad of policy challenges: emerging market vulnerabilities, legacy issues from the crisis in advanced economies, and weak systemic market liquidity.
- Emerging market companies and banks have more vulnerable balance sheets, making firms more susceptible to financial stress, economic downturns, and capital outflows.
- Recent market developments highlighting these vulnerabilities include slumping commodity prices, China’s bursting equity bubble, and pressure on exchange rates.
- The prospect of the U.S. Federal Reserve gradually raising interest rates implies an unprecedented adjustment in the global financial system as financial conditions and risk premiums “normalize” from historically low levels alongside rising policy rates and a modest cyclical recovery.
Market liquidity: drivers and implications
- The report examines factors that influence liquidity levels in securities markets and the implications of low liquidity.
- Current market liquidity is being supported by benign cyclical conditions.
- It is too early to assess the full impact of recent regulatory changes on market liquidity.
- Changes in market structure, such as larger holdings of corporate bonds by mutual funds, appear to have increased the fragility of liquidity.
Corporate debt in emerging markets
- Corporate debt in emerging markets quadrupled between 2004 and 2014.
- Global drivers have increasingly influenced leverage growth, issuance, and spreads in emerging markets.
- Higher leverage has been associated with, on average, rising foreign currency exposures.
- Despite weaker balance sheets, firms have managed to issue bonds at better terms as a result of favorable financial conditions.
Policy challenges and implications
- Policymakers must account for rotating risks toward emerging markets when calibrating monetary and financial stability policies in advanced economies.
- Monitoring and addressing vulnerabilities in emerging market balance sheets and foreign currency exposures is critical to mitigate triggers for financial stress and capital outflows.
- Market-structure changes that increase liquidity fragility warrant close attention, especially in the context of regulatory reform and evolving asset manager behavior.
Content in this bundle
- Global Financial Stability Report: Vulnerabilities, Legacies, and Policy Challenges, October 2015
References
- https://www.imf.org/en/publications/gfsr
- United States and the IMF
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- Asset and liability management
- Bonds
- Emerging and frontier financial markets
- Financial institutions
- Financial markets
- Foreign currency exposure
- Liquidity
- Money
- Securities markets
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