he International Monetary Fund (IMF) has warned that vulnerabilities building under the surface of the seemingly calm global financial market may derail recovery in the world economy if they are not well managed.
In its October edition of the Global Financial Stability Report, the fund said the world had been seeing good news in the international market that includes a stronger global financial system and rebound of capital flows to emerging economies.
However, these favorable conditions have bred complacency in the financial market that spawns excessive financial activities, triggering vulnerabilities, including an increase in market risk caused by investors’ extravagant search for yields, the IMF says.
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“Institutional investors are being drawn out of their natural habitats in a search for yield, but that exposes their balance sheets to increased credit, maturity and liquidity risks,” said Tobias Adrian, financial counselor and director of monetary and capital markets at the IMF.
External borrowing in emerging market and low-income countries has also increased, creating a greater reliance on foreign inflows that may at some point make emerging economies vulnerable if the resources are not put to good use.
Portfolio inflows to emerging economies are on track to reach US$300 billion dollars in 2017, more than twice the totals over the past two years, IMF data show.
The IMF calls for policymakers to continue providing appropriate monetary policy support, while managing the underlying vulnerabilities.
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