Enhancing market resilience amid global trade uncertainty

Against the backdrop of mounting global trade uncertainties, the International Monetary Fund's Global Financial Stability Report has raised concerns about the resilience of the global financial system in absorbing potential shocks. Jason Wu, Assistant Director for the IMF's Monetary Capital Markets Department, emphasized in an interview with CNBC Africa that the report highlights systemic issues that could pose risks to financial stability and sustained market access by emerging market borrowers. Wu pointed out that the current market conditions have tightened significantly worldwide, with heightened volatility in asset prices, interest rates, and exchange rates, leading to a significant rise in global financial stability risks. According to Wu, previous reports have warned about vulnerabilities such as overvaluation in certain assets, high leverage in parts of the financial system, and escalating policy and trade uncertainties. Wu noted that despite various shocks like the COVID-19 pandemic, global inflation surge, and the Russia-Ukraine conflict, reforms post the 2008 financial crisis have enhanced the resilience of the financial sector. However, concerns remain about eroding resilience, given the persistence of vulnerabilities like asset overvaluation, financial leverage, and increasing sovereign debt. The report underlined the growing role of non-bank financial intermediation and the heightened exposure of banks to these non-bank financial institutions (NBFIs). Wu pointed out that while the shift toward non-banks was anticipated due to regulatory changes within the banking sector, the unregulated nature and risk exposures of these entities pose challenges for regulators. The report recommended greater oversight to understand the nexus between banks and non-banks and assess the risks posed by the growing non-bank sector. Furthermore, the report delved into geopolitical risks and their implications for asset prices and financial stability. Wu highlighted the differential impact of geopolitical shocks on emerging markets and emphasized the need for policy measures to address these disproportionate effects. Despite recent geopolitical events like the Russia-Ukraine conflict, Wu noted that financial markets have demonstrated resilience, attributing the stability to the improved post-2008 crisis reforms. Looking ahead, Wu stated that while the report does not forecast shocks, ongoing geopolitical events are likely to remain a key consideration for market stability. The IMF continues to monitor how markets absorb and respond to geopolitical uncertainties, recognizing the necessity of proactive risk management strategies.