The International Monetary Fund (IMF) warns that the war in Ukraine is posing a threat to global financial stability and that its long-term economic effects is remaining unknown. With the slowing down of the post-pandemic recovery, the effects of the war will test the resilience of financial markets.
During the ongoing spring meetings of the IMF and the World Bank, the IMF published the latest update of the Global Financial Stability Report (GFSR).
The report indicated that the global financial system was stress-tested for two shocks. The first is the sharp rise in interest rates related to the monetary tightening period in the world. The second is the shock caused by Russia’s invasion of Ukraine, which caused an increase in commodity and food prices and a further negative impact on supply chains and international trade.
The most important challenge today is rising inflation, well above the target for most countries in the world.
According to the IMF, several factors will affect the stability of the financial system in the world. First, there are financial institutions’ exposures to Russian and Ukrainian assets.
Second, monetary tightening in response to high inflation and volatile commodity prices affects market liquidity and possible funding tensions.
Third, cryptoization and the use of crypto assets in emerging markets to bypass restrictions on capital flows or avoid sanctions.
As a result of the pandemic, the governments of many countries began to pursue an expansionary fiscal policy aimed at mitigating the effects of the health crisis. These activities were largely financed by banks that bought Treasury bonds. This led to the rise of government debt to banks’ assets in emerging markets to 17% in 2021.
The risks to financial stability are greater for emerging countries than for developed countries, as their growth prospects are worse compared to both pre-pandemic and developed economies. Their borrowing costs have increased and the possible further sharpening of global financial conditions could undermine investor confidence in their governments’ debt sustainability.
Milena Kabza, PhD in economics, works at the Narodowy Bank Polski
The author expresses her own opinions and not the official position of the NBP. order