IMF chief warns risks to financial stability have increased

CurrencyVeda Analysis on International Trade

BEIJING: With the recent volatility in the banking sector, IMF chief Kristalina Georgieva said on Sunday that risks to financial stability had increased and emphasised “the need for vigilance.”
The IMF managing director predicted that 2023 would be “yet another hard year,” with global economy dropping to below 3.0% as a result of the conflict in the Ukraine, tighter monetary policy, and “scarring” from the epidemic.
She told the China Development Forum that the level of uncertainty was “exceptionally high” and that the medium-term picture for the global economy was bleak.
It is also obvious that there are now greater risks to financial stability, she continued.

“At a time when debt levels are higher, the quick change from a protracted period of low interest rates to much higher rates — necessary to combat inflation — inevitably creates stresses and vulnerabilities, as evidenced by recent developments in the banking sector in some advanced economies,” the study concluded.
Her remarks came after the financial industry was rocked by the failure of Silicon Valley Bank and the forcible takeover of rival UBS by Swiss bank Credit Suisse, sparking concerns about a possible contagion.

Friday saw a decline in bank shares as concerns over the state of the financial industry reappeared. German Chancellor Olaf Scholz was compelled to reassure investors about Deutsche Bank as the ailing lender came to the forefront of investor worries.
Georgieva claimed that in response to threats to financial stability, policymakers had taken swift action.

Although the market’s stress has been somewhat reduced by these moves, she noted that there is still a lot of uncertainty, which highlights the need for caution.

But the IMF director cited China’s recovery as a sign of hope for the global economy.

With the country reopening after its epidemic isolation, the IMF projects that China’s GDP will expand by 5.2 percent this year. This growth will be led by a comeback in private spending.

According to her, “the strong resurgence means China is projected to account for about one third of global growth in 2023 — giving the world economy a much-needed boost.”

“A pleasant lift is provided by the fact that, on average, a 1.0 percentage point increase in GDP growth in China causes a 0.3 percentage point gain in growth in other Asian nations.”

Georgieva pleaded with China’s authorities to increase productivity and rebalance the country’s economy away from investment and towards more resilient consumption-driven development.

Investments in education along with market-oriented reforms to level the playing field between state-owned businesses and the private sector will greatly increase the economy’s productivity, according to her.