Tuesday, August 9, 2022

IMF warns of threat to financial stability from vaccine shortages

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The IMF has warned that emerging markets’ limited access to Covid-19 vaccines poses a risk to global financial stability, saying the shortages could hurt economic recovery in low-income countries.

“Inequitable vaccine distribution risks exacerbating financial vulnerabilities, especially for border market economies,” the IMF wrote in its latest update on global financial stability.

Emerging market assets were boosted by record influx in the first weeks of the year. But Tobias Adrian, head of the IMF’s financial markets division, said there was a risk that “viral infections will worsen in emerging markets because vaccines are not being rolled out so quickly.”

“What is taken into account is that the vaccines are not being deployed, but the possible shock is wider infections in a resurgence of the virus, with negative macroeconomic impacts,” he said.

Emerging markets would also be vulnerable if there was a “shift in the global appetite for risk,” Adrian said. “Investors are very ‘risky’. Will there be a “risk-free” episode? “

Emerging market equities have so far risen nearly 8% in 2021 in dollars, adding to a 19% rise in the last three months of 2020, according to an MSCI index that tracks asset class.

The gains come amid a meteoric start to 2021 in global asset markets, with sweeping stimulus packages from governments and central banks that combine with a surge in retail to raise the prices of riskier assets like stocks.

The market was turned upside down earlier in the year when some Federal Reverse officials signaled a possible termination of the central bank’s $ 120 billion-per-month asset purchase program starting before the end of 2021. Jay Powell, chairman of the Fed, has since calmed down. short-term concerns of a repeat of the “taper tantrum” that rocked emerging markets in 2013.

Mr Adrian said the risk to financial stability from potential emerging market shocks “depends on how the negative surprises are widely distributed among countries.”

“What we are seeing are pockets of vulnerability. . . We therefore expect some countries and banking systems to face challenges, but overall the global economy and (global) financial sector appear quite resilient. ”

He said countries with large exchange rate imbalances could find themselves particularly vulnerable, including some in South Asia and the Middle East.

Other critical risks to financial stability identified by the IMF include viral mutations and the “premature withdrawal of political support,” Adrian said.

The IMF has also expressed concern that continued low interest rates could weigh on global banks’ profits and discourage them from lending.

Mr Adrian has said so far that indications suggest it was “more a matter of will” as banks report “that their capital position is good.” . . (but) they don’t like what they see in terms of borrower risk ”.


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