Approval and rollout of vaccines have boosted expectations of a global
recovery and lifted risk asset prices, despite rising COVID-19 cases and
softening economic activity in late 2020.
Until vaccines are widely available, the market rally and the economic
recovery remain predicated on continued monetary and fiscal policy support.
Inequitable distribution of vaccines risks exacerbating financial
vulnerabilities, especially for frontier market economies.
An ongoing rebound of portfolio flows provides better financing options
for emerging market economies facing large rollover needs in 2021.
Policy accommodation has mitigated liquidity strains so far, but solvency
pressures may resurface in the near future, especially in riskier segments
of credit markets and sectors hit hard by the pandemic. Credit concerns and
profitability challenges in the low-interest-rate environment may weigh on
banks’ ability and willingness to lend in the future.
Policymakers should continue to provide support until a sustainable
recovery takes hold: under-delivery may jeopardize the healing of the
global economy. However, with investors betting on a persistent policy
backstop and a sense of complacency permeating markets as asset valuations
rise further, policymakers should be cognizant of the risks of a market
correction.
With monetary policy anticipated to remain accommodative in coming years,
policymakers should address rising vulnerabilities to avoid putting growth
at risk in the medium term.
