Source: International Monetary Fund
October 22, 2024
Speakers:
Tobias Adrian, Financial Counselor and Director, Monetary and Capital Markets Department, IMF
Caio Ferreira, Deputy Division Chief, Monetary and Capital Markets Department, IMF
Jason Wu, Assistant Director, Monetary and Capital Markets Department, IMF
Moderator: Alexander Müller, Communications Analyst, IMF
Mr. MÜLLER: OK. Good morning, good afternoon, and good evening, depending on where you are joining us from. Welcome to this press briefing on our latest Global Financial Stability Report, titled “Steadying the Course: Uncertainty, Artificial Intelligence, and Financial Stability.”
I am Alex Müller with the Communications Department here at the IMF. I am joined today by Tobias Adrian, the IMF’s Financial Counsellor and Director of the Monetary and Capital Markets Department; to Tobias’s left, Jason Wu, assistant director at the Monetary and Capital Markets Department; and to his left, Caio Ferreira, deputy chief of the Global Markets Analysis Division.
Our latest GFSR is out as of right now, so you can download the full text, our executive summary, and the latest blog on our website at IMF.org/GFSR.
This press briefing is on the record. And we’ll start things off with some opening remarks just to set the stage before opening the floor to your questions. As a reminder we do have simultaneous interpretation into Arabic, French, and Spanish, both in the room and online.
With that, I think we can get started.
Tobias, when we released our last GFSR in April, optimism in financial markets was fueling asset valuations, credit spreads had compressed, and valuations in riskier asset markets had ratcheted up. At the time, you warned of some short‑term risks, like persistent inflation, as well as the tension between these narrowing credit spreads and the deteriorating underlying credit quality in some regions; but you also warned of some more medium‑term risks, like heightened vulnerabilities amidst elevated debt levels globally. So where are we now since then, six months later?
Mr. ADRIAN: Thanks so much. And let me welcome all of to you this launch of the Global Financial Stability Report.
So the themes that you highlight, Alex, have broadly continued.
Let me start with inflation. So global inflation has progressed toward target in most countries. So most central banks continue with a tight stance of policy but have started to cut rates. Now, with inflation heading towards target in many countries, the focus of the central banks has shifted from being primarily focused on inflation toward also considering real activity.
So, concerning real activity, we have seen upward surprises relative to expectations. In financial markets, that has been particularly visible in earnings surprises that have been on the positive side. So as a result, the likelihood of a global recession has continued to recede. So the baseline forecast is one of a soft landing globally. And that is the optimism that we had flagged already in April. That has been reinforced in many ways. And that is fueling optimism in financial markets. So financial conditions globally continue to be accommodative. Credit spreads continue to be tight. Implied volatility, particularly in risky asset markets, such as equity markets, continues to be fairly low.
Now, you know, our main theme in Chapter 1, which was released today, is a tension between this financial market assessment of volatility‑‑i.e. the implied volatility in the equity market is perhaps the best indicator here‑‑which is at fairly low levels by historical standards, relative to measures of global geopolitical uncertainty.
So in the report, we’re showing two measures that are computed not at the Fund but by other institutions. One on geopolitical uncertainty. The other one on economic uncertainty. And those continue to be relatively elevated. So there’s a kind of wedge in between the financial market‑implied volatility and the assessment of political or economic uncertainty. So this tension worries us, as it gives rise to the potential for a sharp readjustment of financial conditions. So we saw a little bit of that in August in a sell‑off that was very brief. So it’s a blip, in retrospect; but it does raise the concern, whether there are some vulnerabilities in the financial system that could be triggered if adverse shocks hit.
Mr. MÜLLER: Thank you, Tobias. That sets the stage nicely for us, I think.
We will turn to your questions now. We do have runners in the room with mics, so please do raise your hand. You can raise your hand both online or in the room, and we’ll come to you. Please do remember to state your name and affiliation. And keep it as brief as possible so we can get to as many questions as possible.
Let’s start over here with the first question.
QUESTION: Thank you so much. I am not asking you to comment on the presidential election in the U.S. But we have a presidential election here in 14 days, and President Trump or Vice President Harris may win the election. And that election will have ramifications not just in the U.S. but around the world.
How does the IMF assess the outlook for the U.S. economy in the lead‑up to the presidential election? And what implications could a potential economic shift have for emerging markets in Africa, particularly regarding investment flows and debt sustainability? Thank you.
Mr. ADRIAN: Thank you so much.
Mr. MÜLLER: Do you want to group some questions? Do we have similar questions on the election or the U.S.? Can we take the question over there, please?
QUESTION: How do you explain the recent backup in U.S. yields? And are you concerned about financial stability in the United States, given the rising projections of federal debt, irrespective of the outcome of the election? Thank you.
Mr. MÜLLER: I think we can start with that for now.
Mr. ADRIAN: OK. Sounds good. Yes.
You know, we don’t comment on specific election outcomes. Of course, this year is an unusual year, in that over half of the population globally either has elected already this year or will elect this year new governments. And so that is certainly part of the reason why this policy uncertainty globally is high. There’s some uncertainty as to, you know, what the policy path for economic policies and broader policies is going to be going forward.
When we look at volatility, as I said, that uncertainty in equity markets is relatively contained. But in interest rates, volatility is somewhat more elevated than it was, say, in the decade after the global financial crisis. So we are back to levels that are more similar to pre‑financial crisis. So interest rate volatility is relatively high. And that answers to some degree the second question.
We have seen volatile longer‑term yields throughout the year, but we don’t think that that volatility is excessive, relative to the fact that monetary policy has become more data dependent. You know, after the global financial crisis, there was this challenge of the zero lower bound for monetary policy; so forward guidance was a very important tool. And that had even been phase in prior to the financial crisis with, you know, forward guidance being a compressor of volatility for interest rates. And that is less the case today. So interest rate volatility has increased.
When we look at the longer‑term yields, we do certainly see that term premia have decompressed to some extent. So after the global financial crisis, we had seen negative term premia at a 10‑year level in the U.S. and many other countries, and some of that has decompressed. And that is, as would be expected, as the interest rate wall is coming up, asset purchases are normalizing, and quantitative tightening is being phased in.
Now turning to Africa. Of course, you know, financial markets are global. So the base level of interest rates is moving across the world in a common fashion. So you can think about sort of like the base level of interest rates and then the spreads in countries, relative to that. So what we see in sub‑Saharan Africa is that countries with market access‑‑so those are the frontier economies‑‑they have seen spreads being compressed, so financial conditions have eased. And you know, relative to, say, 12 months ago, interest rates have certainly declined as a base. And many frontier markets have reissued, sort of accessed international capital markets. So, of course, there are countries that do face debt challenges, that do face liquidity challenges; and we’re actively engaged with the membership to address those.
Mr. WU: Just to quickly add to what Tobias said about Africa.
As he pointed out, the backdrop heading into this year was one of improvement, both in terms of growth, as well as financing conditions and spreads. Inflation is still high in the region, but it is coming down and stabilizing. Debt is an issue, but we have seen several cases this year being resolved. So that is good news.
I think to your broader point, you know, we don’t comment on election outcomes; but we do know that financial markets tend to see, you know, more uncertainty around those outcomes. And this may affect financing conditions around the world, including in Africa. Uncertainty can also bring, you know, some slowdown in investments in the near term or the medium term. And so those are all possible outcomes. I think the key thing is for the macroeconomic framework to remain stable to address domestic situations and for countries that may be facing debt issues to engage with their creditors early, including through the Common Framework and other international setups.
Mr. MÜLLER: Thank you. Can we take other questions? I think we have a question here in the middle, at the center.
QUESTION: I was hoping you could talk about quantitative tightening. The Fed is still doing it. What are the risks now going forward? When do you think they might stop it? Thanks.
Mr. ADRIAN: Thanks so much.
As I mentioned earlier, you know, during the global financial crisis and then in the decade after the global financial crisis and then again with the COVID crisis, central banks‑‑advanced economy central banks around the world engaged in a quantitative easing. So these are asset purchases, called large‑scale asset purchases, in the U.S. that led to an increase in the balance sheet size of the central banks. So in the U.S. case, it grew roughly by a factor of 10. And the Fed has started to move towards a normalization of the balance sheet size. So that is generally referred to as quantitative tightening. And that has proceeded in a very orderly fashion. So when we look at market functioning, we see orderly markets in money markets. We see ample liquidity in core funding markets, including Treasury markets. And that is generally the case in other advanced economies that are doing quantitative tightening, as well.
Of course, there is the question of how far the balance sheet normalization is going to go. And policymakers in the U.S. and other advanced economies have indicated how far this normalization would be going. So what is notable here is that the operational framework of the Federal Reserve changed to a floor system, so having a sufficient amount of reserves in the system to operate that floor system is key. So, you know, looking at funding conditions in money markets and market functioning is absolutely key. Back in 2019, there were some dislocations, and that is certainly something that policymakers are watching out for. But I would say that this balance sheet normalization has proceeded in a satisfactory and very orderly manner.
Mr. FERREIRA: Tobias, just a quick complement.
I think that we have seen a quantitative tightening from all of the major central banks. And I think that from the peak in 2022, of about 28 trillion in terms of assets in their balance sheets, it has come down by about one‑quarter already and, as Tobias was saying, in a very orderly fashion.
The main risk that I think is important to monitor going forward is the potential drain on reserves, as Tobias was saying, to avoid the kind of episodes that we have seen in 2019. But there is also a potential risk for a bounce of increasing volatility, in the sense that we are moving from central banks being one of the main buyers of Treasuries to more price‑sensitive buyers. And this might cause volatility coming from data releases.
Mr. MÜLLER: OK. Let’s take it back as well. We have a question in the front here, in the center, that we can take.
QUESTION: Thank you for taking my question. I want to ask about the U.S. Federal Reserve’s policy and its impact, spillover impact. I think recently, it started to cut rates, and it’s going to cut rates further going forward. And it seems to be allowing other governments, other policymakers to have more room, including the People’s Bank of China. I want to ask Tobias whether he could comment on the latest action by China’s central bank and what’s the IMF’s suggestion going forward. Thank you.
Mr. ADRIAN: Yeah. Absolutely.
What we have seen in China is an easing of monetary policy. So the question is referring to the most recent action, which was a cut in interest rates. And, of course, we have seen PBoC engaging in asset purchases, which has supported the easing of financial conditions. So when we look at financial conditions‑‑so, you know, the cost of funding for households and corporations in China, those financial conditions have eased quite markedly. Equity markets have rallied. Longer‑term bond yields have declined. And we generally welcome that easing. We think that is the appropriate policy for monetary policy.
There have been also some announcements on the fiscal side that are indicating support ‑‑ to the real estate sector, in particular. And, of course, authorities in China had already engaged for some time in terms of addressing the exposure of the banking system to the real estate sector. The real estate sector has cooled off in China, and that has created some risks in the banking sector. So authorities are working actively at addressing those by merging banks and using asset management corporations (AMCs) in an active manner. And we welcome that, as well.
You know, we are watching closely how financial stability policies are going to evolve going forward, relative to the real sector but also the broader economy, and how fiscal policy is evolving going forward.
Mr. FERREIRA: Maybe on this last point, Tobias, on financial stability.
Of course, there’s some slowdown in economic activity, and the problems that we are seeing in the property sector are exerting some pressure on the financial system. The good news I think is that particularly the large banks seem to have strong capital buffers and liquidity buffers. The authorities also have the capacity to make target interventions, and this somewhat limits the risks of spillovers.
There are some vulnerabilities that need to be monitored. Right? So one, of course, is this potential pressure on asset deterioration coming from this slowdown in the property market. So far, banks have been quite good in terms of being able to deal with this potential deterioration, particularly using asset management companies to dispose of some of the nonperforming assets. The capacity of these asset management companies to keep absorbing these assets needs to be monitored going forward. It’s also important to monitor the stability of the smaller banks that are not as strong as the larger banks.
And the last point I think that’s important to mention is that the financial sector holds a lot of exposure to local government financing vehicles. And if there is‑‑and there are some pressures on these vehicles, and a potential restructuring of these debts might cause some losses to the banking sector, as well.
Mr. MÜLLER: Thank you, Caio. Do we have any other questions on China before we move to anything else?
So we can turn over to the side.
QUESTION: Thank you. My question will be for Tobias and Jason.
Of course, reading your report, you talked about financial fragilities, so I would like to know what financial fragilities you see in developing economies and what policymakers should do to keep financial markets resilient and stable in the face of high interest rates as a result of high inflation in developing economies like Nigeria, too.
The question I have for Jason would be around, what does vigilance really mean for policymakers? Because in your report, you said that the policymakers need to be vigilant. Because vigilance in European economies or advanced economies is also different vigilance for developing economies. Thank you.
Mr. ADRIAN: Thank you so much. Those are very pertinent questions. And thanks so much for taking a close look at the report.
For developing economies broadly, I would say that there are three priorities. In terms of financial stability, we are engaging with many countries in terms of building capacity on regulatory issues, so making sure that banks are well capitalized, that monetary policy frameworks are sound. And Nigeria is a good example, where the central bank has been moving toward an inflation‑targeting regime, has liberalized the exchange rate. And we welcome that direction.
Secondly‑‑and I think you alluded to that‑‑is, of course, the overall indebtedness. That is a challenge for some countries. As I mentioned earlier, frontier markets are developing economies with market access. And we have seen many frontier markets issue this year. The issuance levels are fairly high. And we think market access is there, though, of course, financing conditions have improved but are still more expensive than they were, say, in 2021, before the run‑up in inflation.
So with inflation coming down and interest rates expected to further normalize, we would also expect that frontier market funding conditions will improve. And as I said, interest rate spreads are fairly tight.
Now, of course, there are some countries a that do not have market access, and many of those countries are in programs with the IMF. And we are working actively with authorities on the debt issue. We do feel we have made good progress within the Common Framework, but there is certainly more to be done.
Now, of course, it remains key to also work on structural issues to enhance the growth outlook. And that is really something that the regional economic briefings are going to address in detail.
Mr. WU: Maybe just a quick word, to add to what Tobias said about Nigeria, in particular. We recognize that many citizens do face difficulty. The flood was quite devastating. Inflation is still very high, at some 30 percent. So in that regard, the central bank’s rate hikes so far this year have been appropriate.
You asked a question about vigilance. I think importantly, macroeconomic conditions within the country should stabilize. Right? And that includes inflation that will provide room to guard against external shocks, which is less controllable, right, for the economy of Nigeria. So when appropriate, the various foreign exchange measures that were taken by authorities earlier this year are also appropriate in improving vigilance, as are the banking sector‑related measures that Tobias has mentioned.
Mr. MÜLLER: All right. Do we have any more questions on that side of the room before we turn it back over here?
QUESTION: Thank you very much.
So Ghana has just completed its debt restructuring. It’s good news for Ghanians. However, it appears the government is looking at the capital market. What advice do you have for the government at this point? And also because we have an election around the corner.
Mr. ADRIAN: Yeah. As I noted earlier, we don’t really comment on elections in the countries of our membership. You know, these are democratic processes. And the people in each country are‑‑it’s their liberty to vote for the government, so we don’t comment on that.
We are, of course, engaged very closely with Ghana. Ghana is in a program. Ghana did restructure its debt. And we are confident that the outlook is going to improve going forward. The regional economic press briefing on Africa is going to go further into detail on those issues.
Mr. MÜLLER: Thank you, Tobias.
As a reminder these regional press briefings will be on Thursday and Friday. So they’re all going to be here, so you will have the opportunity to ask those specific questions then.
Can we turn it over here to the middle for a question, please? Right in the center. Thank you.
QUESTION: Thank you.
A follow‑up question related to the yields going up for the Treasury. In simple words, do you see them going up as a source of a potential sell‑off in the financial markets?
And a separate question, if possible. For the same token, yields are going up because of the fiscal trajectory in the U.S. that is worrisome for some, at least, although the candidates are not talking about it. For the same token, considering that the Italian debt is only going up, according to the latest estimates from the IMF, does that represent a source of financial instability for the euro zone?
Mr. ADRIAN: Yeah. Thanks so much for this question.
We have, indeed, done work on the interconnection or the nexus between fiscal‑‑or, you know, sovereign debt and financial market debt. So in the euro area, of course, we are watching closely the sovereign‑bank nexus, so the exposure of banks to the sovereign. And you know, in general, we have seen an amelioration there. So, you know, debt‑to‑GDP has been increasing. And that’s very broadly the case around the world. It’s really in the pandemic that we see a sharp upward move in debt‑to‑GDP in both advanced economies and emerging and developing economies. And you know, the fiscal outlook in many countries does imply that debt-to-GDP may continue to rise. So that could‑‑you know, that is certainly a backdrop for the financial system.
Now having said that, governments in advanced economies and major emerging markets have ample room to adjust the fiscal situation going forward through spending measures, through revenue measures. So it is not an immediate financial stability concern in those advanced economies or major emerging markets.
You know, in terms of the pricing of sovereign debt‑‑so, you know, Treasury yields and other benchmark yields around the world‑‑as I said earlier, volatility in those longer‑term yields has increased relative to the decade of the post‑crisis environment, where central banks were constrained at the zero lower bound or the effective lower bound, so had very low interest rates; so they deployed forward guidance and these quantitative asset purchases. So that really compressed longer‑term yields. And that has normalized to some degree, but we don’t think that it is an unusual move. So we are quite comfortable with the kind of levels that we are seeing.
Mr. MÜLLER: Thank you. Let’s bring it back over here. I think we have a few questions. Can we take the one in the middle right at the center? Thank you.
QUESTION: A question for Tobias, if I may.
There has been quite a lot of talk about fragmentation and geopolitical risk. Do you think that, as others have said, the momentum for financial regulation and for completing the job on a lot of areas of that is fading? Is there a risk of complacency there? Thank you.
Mr. ADRIAN: Yeah. So let me note that we are working around the membership on the regulation of banks but also non‑banks, including security markets, insurance companies, pension funds, and other non‑bank financial institutions.
Concerning banking regulation, of course, there was a major initiative after the global financial crisis to improve capital and liquidity in the banks and to improve the supervision of the banks, primarily of internationally active banks. So the members of the Basel Committee‑‑this is, you know, a group of countries that roughly maps into the G‑20‑‑have committed to phasing in Basel III as a standard for capital and liquidity requirements in those banks. And our understanding is that the membership is still committed to that phase‑in.
I would note that it has taken longer than was initially anticipated, but we are very confident for now that, you know, the major advanced economies and major emerging markets that have signed onto this Basel III framework are going to phase that in.
In the broader membership of the IMF, there’s also a substantial improvement in the regulation of banks. And I would note that there has also been quite a bit of progress in terms of regulations of non‑banks, including insurance companies but also security markets, though we do think that more needs to be done going forward.
Mr. FERREIRA: We have seen important progress in the post‑crisis. Our baseline is still that all the internationally agreed standards will be implemented. Although, as Tobias was saying, there are some major jurisdictions that are facing some challenges implementing that.
We see this with some concern because when you see a major jurisdiction not implementing any standard or implementing it with substantial deviations from what has been agreed, it kind of jeopardizes the international standard‑setting process. That seems to be working fine, but we still are concerned with the delays in the implementation of these regulations that are important for the banks but also to maintain trust in the international standard setting process.
Mr. MÜLLER: Thank you. We are coming close on time. So let’s take two or three last questions from this side. Then I think we still have one more question online. Can we do the three over here in the front, on the right?
QUESTION: [Through interpreter]
Good day. Jesus Antonio Vargas. Chucho Lo Sabe Newsletter.
This is the ninth time I come to the Annual Meetings of the IMF and the World Bank. Six times in Washington. I come from Medellín, Colombia. I have also been in Lima, in Bali, last year in Marrakech. And it is a pleasure to see Tobias Adrian here. He has been year in, year out heading the endeavors. Congratulations.
First, a surprise positively since there’s measures to come from the effort to the citizens. In Bogota, they’ve been talking about building a Metro system for 60 years, and they’re attempting it yet again now.
Now, leaving that aside, we have spoken about, it is unlikely there will be a global recession, which is a relief.
I was talking about the risk of a recession. You were talking about a positive surprise in terms of the gains. What do you mean exactly by that? Thank you.
Mr. MÜLLER: If we could take two more questions over here.
QUESTION:
You just mentioned there is a disconnect between market volatility and also market economic uncertainties. Could you please just elaborate a little bit more on these risks. And also, more importantly, how will it affect global financial stability if it persists? Thank you.
Mr. MÜLLER: One last question in the back there.
QUESTION:
I’ve got a question on liquidity mismatch, in the world of DC pensions. The report mentions the U.K.’s desire to shift toward unlisted assets as investments. And our current Chancellor has also expressed an interest in this. What are the risks in this? Should the shift toward these assets be limited? And how should we guard against them?
Mr. ADRIAN: Yeah. Let me perhaps start with the question on macro uncertainty, which was the second question.
So yeah, you know, what we’re seeing is that there is leverage and there are maturity mismatches in the financial sector in many different parts. You know, some of those are contained through prudential regulations, but not all institutions are subject to prudential regulations. So when there’s a sudden burst of uncertainty, some institutions may be forced to unwind their positions. So this includes, say, leveraged trades in fixed‑income markets or in equity markets.
We saw some of that in August, when there was a sharp sell‑off in global equity markets but also in some fixed‑income markets, such as the carry trade across countries. And you know, volatility increased very quickly, leading to this forced deleveraging, and that can amplify downward moves in asset markets.
In August, this episode was very short‑lived. So the sell‑off was followed by a buying of longer‑term investors, such as insurance companies and pension funds. But if such a sell‑off persists for more than‑‑or is more sharp, that could lead to financial stability problems or financial sector distress.
Concerning the U.K. situation and the liquidity mismatches, let me just point out that the Bank of England and the FCA are very focused on those issues. And they do have, you know, broad authorities to regulate those mismatches. And I think they’re actively looking at how to model stress and how to make sure that these investments are sort of balancing risks and returns in an appropriate manner. I think Andrew Bailey made some remarks just this morning in that regard, and we’re fully aligned with his views there.
Mr. MÜLLER: I’ll take one last question we have from WebEx, online on the Mexican central bank lowering interest rates. For future adjustments and to maintain financial stability, what should it take into account more, the movements of the Federal Reserve, internal inflation, or the depreciation of the currency?
Mr. ADRIAN: OK. I don’t want to go too specifically into Mexico. Again, there is the Regional Economic Outlook that will speak more closely to specific country issues. So, you know, in general, in the major emerging markets, such as Mexico, that have open capital markets and have inflation targeting regimes, you know, inflation targeting and monetary policy credibility has proven to be very powerful in terms of generating macroeconomic stability, relative to both domestic and external shocks. And you know, in those frameworks, central banks look at both internal and external conditions and are targeting the medium‑term convergence of inflation back to target rates. That has proven very successful. And I would argue that in the major emerging markets, we really see a great deal of improvement in those monetary policy frameworks. So let me stop here.
Mr. WU: Just to quickly complement.
Hence, this is why we have seen major emerging markets come through this rate hike cycle with reasonable resilience across the board. This inflation‑targeting framework has obviously done work, to an extent. Having said that, we are now on the opposite side of the cycle, where interest rates are being cut. That, in theory, should be conducive to emerging markets. Financial conditions could ease. We just want to point out that, as we said in the report, expectations could change. Volatility could be introduced and suddenly surge. So this may have spillovers to emerging market economies, you know, sentiment, financial market sentiment, as well. So policymakers need to remain vigilant on monetary policy and on other aspects of financial sector policies in order to guard against those risks.
Mr. MÜLLER: All right. Great. Thank you.
Unfortunately, that does bring us to a close because we do have to respect the next press briefing in this room.
If you do have any questions that we weren’t able to address, please do send them over to me or someone from our team. We’ll make sure to get back to you as soon as we can.
Meanwhile, the events here at the IMF do continue. We still have a host of press conferences this week, from our Fiscal Monitor tomorrow at 9 a.m. Eastern Time to the Managing Director’s Global Policy Agenda on Thursday to our five regional briefings that we talked about, on Thursday and Friday, not to mention the seminars. We have the Managing Director joining the debate on the global economy. That is on Thursday afternoon, which is always a hit that you won’t want to miss. On Friday, the First Deputy Managing Director Gita Gopinath will participate in a panel discussion on monetary policy in a shock‑prone world on Friday afternoon. And there’s a whole lot more, so do check the full schedule online at IMFConnect or at meetings.imf.org.
With that, Tobias, Jason, Caio, thank you for your insights. And thank you all for joining us for this event. We look forward to seeing you at the next one. Thank you.
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