Interview: IMF official warns of market correction, financial risks despite vaccine hopes
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E-mail Xinhua, January 28, 2021
by Xinhua writers Gao Pan, Xiong Maoling, Hu Yousong
WASHINGTON, Jan. 27 (Xinhua) -- While global markets have rallied on hopes of vaccines to end the COVID-19 pandemic, a senior official at the International Monetary Fund (IMF) on Wednesday warned of a possible market correction and other risks that threaten global financial stability.
"Markets have rallied on the vaccine news as it provides a light at the end of the tunnel. So there's the hope that the pandemic and the medical challenges of COVID will finally be conquered," Tobias Adrian, financial counselor and director of the IMF's Monetary and Capital Markets Department, told Xinhua in a video interview shortly after the IMF released its latest update to the Global Financial Stability Report (GFSR).
"But of course there's the risk that the rollout of the vaccines is not as fast or as effective as we would like to see it. There's also the risk that it's unequal across countries," Adrian said.
"It's both a delay, potential questions around effectiveness, and the unequal distributions that are posing threats to market sentiment," he said.
Adrian believes the first worry in the short term is that "there could be a sell-off at some point," which could tighten financial conditions, increase funding costs, and derail the economic recovery.
Uneven vaccine distribution and asynchronous recovery could also imperil capital flows to emerging markets, especially if advanced economies were to begin to normalize policy, and some countries could face daunting challenges, according to the GFSR update.
But Adrian said it is "really too early" to think of any shifts in accommodative monetary policies of major central banks, including the U.S. Federal Reserve at this point, as inflation continues to be below the target.
At a virtual press conference on Wednesday, Fed Chair Jerome Powell pushed back market speculation that the Fed could taper its asset purchases as soon as this year, saying "it's just premature".
With continued easy financial conditions for some time, Adrian urged emerging markets to "get the house in order" to refinance accordingly and build buffers.
"If adverse scenarios about the vaccination or the pandemic realize ... that could make it more difficult for emerging markets to fund their rollover needs in terms of debt," he said.
While there are "pockets of weaknesses in the banking sector" in many countries, Adrian does not see a major banking crisis emerging from the pandemic.
"Banks have entered this pandemic with strong balance sheets, capital has been increased substantially in most banking sectors around the world," he said.
"So we don't see a systemic banking crisis in the baseline. And even in adverse scenarios, banks appear to be fairly resilient," the IMF official added.
Global financial stability risks are in check so far, but action is needed to address financial vulnerabilities exposed by the pandemic, including rising corporate debt, fragilities in the non-bank financial institutions, and market access challenges for some developing economies, according to the GFSR update.
Despite the pandemic and economic contraction, the total number of global company bankruptcies is "surprisingly low" as of today, Adrian noted, attributing it to substantial fiscal support, credit guarantees and easy monetary policy.
"We do expect bankruptcies to rise to some degree. And there's the risk that liquidity concerns turn into solvency concerns," he said, hoping that "large bankruptcies can be avoided."
Noting that China is the only major economy worldwide to achieve positive growth in 2020, Adrian said China has tackled the pandemic "very effectively" and recovered "much more quickly" than other countries.
Adrian also suggested that China focus on small banks, the shadow banking system and the fintech sector to improve financial stability.
"Our view has always been that there are great opportunities in fintech, but that the regulation of the fintech sector should be proportionate to regulation and other sectors as well," he said.
"That is certainly a step that the authorities in China are taking at the moment and that we fully support," said the IMF official. Enditem
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