A link to the June 2020 Global Financial Stability Report (GFSR) of the IMF can be found here. The salient points of the GFSR are as follows:
1. Risk asset prices have rebounded following the precipitous fall early in the year, while benchmark interest rates have declined, leading to an overall easing of financial conditions.
2. Swift and bold actions by central banks aimed at addressing severe market stress have boosted market sentiment, including in emerging markets, where asset purchases have been deployed in a number of countries for the first time, helping bring about the easing in financial conditions.
3. Amid huge uncertainties, a disconnect between financial markets and the evolution of the real economy has emerged, a vulnerability that could pose a threat to the recovery should investor risk appetite fade.
4. Other financial system vulnerabilities may be crystallized by the COVID-19 pandemic. High levels of debt may become unmanageable for some borrowers, and the losses resulting from insolvencies could test bank resilience in some countries.
5. Some emerging and frontier market economies are facing refinancing risks, and market access has dried up for some countries.
6. Authorities, while continuing to support the real economy, need to closely monitor financial vulnerabilities and safeguard financial stability.
There will no doubt be lasting changes to the shape of the economy for years to come. How that will pan out will primarily depend on the behavioural changes induced by the pandemic. Even if a vaccine is discovered, it is doubtful whether sectors such as travel and tourism, shopping malls, public entertainment, and other outdoor activities might take a long time to come back to normal. Financial institutions exposed to these sectors will have to take a hit. So does national economies where these economies have a predominant role. On the other hand, certain other sectors might improve their performance, such as home delivery, home entertainment, and so on. It will take some time for structural unemployment will adjust with these new evolving sectors. In my view, too early to take a call on where we will be six months from now, let along another one year.
© G Sreekumar 2021
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