Financial stability risks could trigger recession - IMF

The global lender says the risks are almost at the same level witnessed during the great global recession in 2008

In Summary
  • The risks have occasioned increased repricing in markets, pointing to emerging markets and housing markets as particularly vulnerable.
  • IMF attributes the risks to a number of volatilities including inflation hikes, China’s economic slowdown and the spillover effects of the Russia-Ukraine war.
IMF headquarters
IMF headquarters

The International Monetary Fund has cautioned that global financial stability risks are at over a decade high and indicator to a possible recession.

In its latest Global Financial Stability Report, IMF says the risks are almost at the same level witnessed during the 2008 great global recession. 

The global lender notes that the risks have led to increased repricing in markets with emerging and housing markets particularly vulnerable.

It attributes the increased risks to among others a number of downside unending inflation hikes, China’s economic slowdown and the spillover effects of the Russia-Ukraine war.

“The global environment is fragile with storm clouds on the horizon, the financial stability risks had increased since April this year leaving the balance of risks significantly skewed to the downside,” its says in the report.

The uncertainties have hit both developed and poor nations, with countries like the US, UK and others in Northern Europe registering the highest inflation in 40 years. 

In Kenya, households are feeling the pinch of the disruption in global financial health, with inflation hitting a 63-month high of 9.2 per cent in September. 

The Kenya National Bureau of Statistics (KNBS) attributes this to a sharp increase in the cost of food, fuel and cooking oil over the past 12 months.

This marked the fourth month in a row that the year-on-year cost of living measure crossed the upper limit target of 7.5 per cent.

The rising inflation is expected to continue as the shilling weakens against the strengthening US dollar. 

The Kenyan shilling has been on a losing streak since December last year weakening to a low of 120.91 against the greenback yesterday as the recent US Fed rate hikes continue to impact currencies across the markets.

The IMF says the aggressive monetary policy adopted by countries will heighten the risk of an eventual recession.

The US is expected to raise its benchmark rate to roughly 4.4 per cent by year’s end.

This will pile more pressure on import-dependent nations like Kenya as their local currencies weaken. 

Last month, Kenya was forced to raise its benchmark lending rate by 75 basis points to 8.25 per cent as the top bank fought back against the rising cost of living.  

As a mitigation measure, the IMF urges central banks to act resolutely through policies to bring inflation back to target.

This it says can be done keeping inflationary pressures from becoming entrenched and avoiding de-anchoring of inflation expectations that would damage credibility.

“Clear communication about policy reaction functions, unwavering commitment to achieving mandated objectives, and the need to further normalise policy is crucial to preserve credibility and avoid unwarranted market volatility,” IMF says.

Borrowers in developing economies and frontier markets are being asked to enhance efforts to contain risks associated with their high debt vulnerabilities, including through early contact with their creditors, multilateral cooperation, and support from the international community.

The lender says credible medium-term fiscal consolidation plans could help contain borrowing and refinancing costs hence alleviating debt sustainability concerns.

"Policymakers should contain the further buildup of financial vulnerabilities. While considering country-specific circumstances and the near-term economic challenges,'' says the global lender.

It adds that nations should adjust selected macro-prudential tools as needed to tackle pockets of elevated vulnerabilities.


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