The International Monetary Fund has said that the 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, not only in late 2020 hope of greater prospects in 2021.
The organization, however, said in its Global Financial Stability Report, released yesterday, that “Until vaccines are widely available, the market rally and the economic recovery remain predicated on continued monetary and fiscal policy support.”
According to the Fund, inequitable distribution of vaccines risks exacerbating financial vulnerabilities, especially for frontier market economies.
It said, “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.”
The IMF therefore advised policymakers to continue to provide support until a sustainable recovery takes hold, warning, “under-delivery may jeopardize the healing of the global economy.”
It said, however, that 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”, the organization said.
It said that financial markets have looked beyond the global resurgence of COVID-19 cases and positive that rollout of vaccines have boosted hopes of a global economic recovery in 2021 and pushed risk asset prices higher.
The IMF added that the speed of the recovery would depend crucially on production, distribution networks, and access to vaccines.
“As discussed in the January 2021 World Economic Outlook (WEO) Update, continued monetary and fiscal support remain vital to lessen lingering uncertainties, build a bridge to the recovery, and ensure financial stability.
“Risks to the baseline could threaten financial stability in some sectors and regions. A delay in the recovery would require prolonged accommodation, further fueling financial vulnerabilities.
“Uneven vaccine distribution and asynchronous recovery could imperil capital flows to emerging market economies, especially if advanced economies were to begin to normalize policy, and some countries could face daunting challenges.
“An asset price correction, should investors suddenly reassess growth prospects or the policy outlook, could interact with elevated vulnerabilities, creating knock-on effects on confidence and jeopardizing macro-financial stability,” the Fund added.
The report said that industries such as airlines, hospitality, and consumer services rebounded in late 2020 as investors rotated into these previously battered sectors in search of value.
It stressed that stock prices of smaller firms, including in clean energy, also benefitted, while in advanced economies, investment-grade and high-yield corporate bond spreads have tightened sharply, while rates have reached record lows, as investors continue to reach for yield.
Spreads of emerging market sovereign debt, it said, have exhibited a similar compression dynamic, financial markets have shrugged off the most recent softening in economic activity.
The Global Financial Stability Report provides an assessment of the global financial system and markets, and addresses emerging market financing in a global context. It focuses on current market conditions, highlighting systemic issues that could pose a risk to financial stability and sustained market access by emerging market borrowers.
The Report draws out the financial ramifications of economic imbalances highlighted by the IMF’s World Economic Outlook. It contains, as special features, analytical chapters or essays on structural or systemic issues relevant to international financial stability.