By Peter OBIORA InvestAdvocate
Lagos (INVESTADVOCATE)- Foreign portfolio investors has doubled their investments to $4 trillion, or about 13 percent in emerging market equities and bonds over the last 10 years, the latest International Monetary Fund’s (IMF’s) Global Financial Stability Report (GFSR) said.
‘’Emerging markets have grown in importance as a destination for portfolio investors from advanced economies,’’ the report said.
The IMF says because of closer financial links, shocks emanating from advanced economies will propagate more quickly to emerging markets.
According to the global lender, together, these factors will amplify the impact of shocks on asset prices, resulting in sharper price falls and more market stress. ‘’Such an adverse scenario would hurt the global economy and, at the limit, could even compromise global financial stability,’’ the report noted.
The report added that this chain reaction could be triggered by a wide variety of shocks, including geopolitical flare-ups, or a “bumpy” normalisation of U.S. monetary policy.
To steam this tide, and strengthen global recovery, the IMF said policymakers need to address the new global imbalance between financial and economic risk-taking.
The global lender said though accommodative monetary policies remain essential to support the recovery. ‘’But monetary policy alone cannot accomplish everything. Other policies—including structural reforms, smart fiscal policies, and financial policies—need to play their role,’’ the IMF said.
José Viñals, financial counselor at the IMF focused on two (2) key areas for financial policies which include that economic risk-taking would benefit from an improved flow of bank credit to the economy. ‘’But in order to unclog the credit channel, many banks must fundamentally adjust their business model,’’ Viñals said.
He also suggested that supervisors need to facilitate this structural transformation, which would allow banks to improve their profitability—without taking excessive risks—and to support the economy through lending. ‘’This is particularly important in Europe where banks play a major role in financing the economy,’’ he said.
Viñals said other key area to address issues of financial policies and aid world recovery are that policymakers need to design and implement a range of micro- and macroprudential policies to address financial excesses that can threaten stability.
The IMF’s financial counselor affirmed that there should be greater oversight in the asset management sector, and theneeded to ensure redemption terms are better aligned with underlying liquidity conditions.
He further affirmed that more comprehensive monitoring and reporting of leverage in nonbank sectors and in the corporate sectors of emerging markets will help identify areas of potential vulnerabilities. ‘’To safeguard against global liquidity strains, bilateral and multilateral swap lines could be deepened to mitigate excessive volatility,’’ the financial counselor at the IMF said.
Viñals added that such policies will strengthen the global financial system by making financial institutions more resilient, while helping contain procyclical asset price and credit dynamics.
The IMF says this is highly relevant today to deal with the growing risks in shadow banking, particularly market and liquidity risks.
He called on policy makers to be alert on the growing challenges to financial stability, saying they must take further actions now both to promote economic risk-taking in support of growth, and to address excesses in financial risk-taking to maintain stability.