IMF Warns Of Growing Financial Risks In Emerging Markets

Lima-Peru (Oct 7)  Stronger economic growth in the US and  Europe  have bolstered financial stability in those regions, but risks have grown in other regions, the  International Monetary Fund  said Wednesday.

"Despite these improvements in advanced economies, emerging market vulnerabilities remain elevated, risk appetite has fallen, and market liquidity risks are higher," the international crisis lender said in a report issued ahead of the IMF annual meeting this week in  Lima  .

In the US, the Federal Reserve could begin tightening its benchmark interest rates this year from an unprecedented near-zero level, which would prevent "further buildup of excesses in financial risk taking," the IMF said.

In its Global Financial Stability Report, the IMF urge the US central bank to provide "clear and consistent" communication about the direction of monetary policy to allow "the smooth absorption of rising US rates, which is essential for global financial health."

Higher US interest rates are one of several factors that are already tightening financial conditions in emerging markets, where the IMF forecasts 4% growth this year, down from 4.6% in 2014 and 5% in 2013.

In the slower-growing advanced economies, the IMF is forecasting growth at 2%, up from 1.8% recorded last year and 1.1% in 2013.

In the eurozone, the IMF described improving credit conditions and said "credit demand is picking up," with the  European Central Bank  maintaining very accommodative monetary policy.

Many emerging markets were able to avoid the worst impacts of the 2008-09 financial crisis as companies took on more debt. But that extra leverage has left them exposed, especially in commodity sectors that have lately seen sharply falling prices, and the rising dollar since last year has worsened the problem.

"This confluence of borrowing and foreign currency exposure has increased the sensitivity of these economies to a tightening of global financial conditions," the IMF said.

An August correction in Chinese share prices sent global stock markets reeling, reinforcing concerns about spillovers from the slowing Chinese economy.

"  China  in particular faces a delicate balance of transitioning to more consumption-driven growth without activity slowing too much, while reducing financial vulnerabilities and moving toward a more market-based system - a challenging set of objectives," the IMF said.

But advanced economies should take steps to improve resilience, too, the IMF report found. Both government and corporate debt remain high in many countries.

In the eurozone, the IMF called for "more progress in strengthening the financial architecture of the common currency to bolster market and business confidence. Addressing the overhang of private debt and bank nonperforming loans in the euro area would support bank finance and corporate health, and boost investment."

Source: AllianceNews