Transcript

Transcript of Global Financial Stability Report April 2024 Press Briefing

April 16, 2024

Speakers: 
Tobias Adrian, Financial Counselor and Director, Monetary and Capital Markets Department, IMF

Fabio Natalucci, Deputy Director, Monetary and Capital Markets Department, IMF

Jason Wu, Assistant Director, Monetary and Capital Markets Department, IMFModerator: Meera Louis, Communications Officer, IMF 

Ms. LOUIS: So good morning, everyone. And welcome to this GFSR conference. Thank you so much for coming and for your interest in this report. 

Before we turn the floor over to you for questions, I would like to turn to Tobias to begin. 

Tobias, we see there are some bumps in the road ahead of us, especially with sticky inflation in some advanced economies, amongst other financial stability issues. So could you set the stage for us on what challenges you see when you and your team put together this report? 

Mr. ADRIAN: Yeah. Thanks so much. And I am really excited to be here to see such an interest in our work.

So let me first start with a baseline as a setting. What we have seen is really a tremendous amount of optimism in financial markets. Our global baseline, as PierreOlivier explained in the previous press conference, is one of a global soft landing  i.e., inflation is expected to return to target in countries around the world, while economic activity slows, but we don’t foresee a global recession in our baseline. And so this optimistic scenario has really fueled asset valuations in recent months. We have seen that credit spreads have compressed, even for riskier borrowers. So many countries that had been shut out of global capital markets for the past year or year and a half have returned to capital markets since the beginning of the year. Issuance has resumed. And, you know, valuations in risky asset marketsstock market, in particularreally have ratcheted up but also in corporate bond markets and sovereign bond markets. 

Now turning to the risks. So there are some shortterm risks and some mediumterm risks. The shorterterm risks are primarily about inflation and how persistent inflation is. So we do forecast inflation to come down. But there’s certainly some differentiation across countries, how quickly inflation is coming down and what central banks have to do going forward in order to get inflation back to target. So this is one risk. And that can certainly impact valuations across asset markets. 

A second shorterterm risk is that we do see fairly compressed volatility, a fairly high correlation across asset markets, while fundamental uncertainty continues to remain somewhat elevated. So there are certainly geopolitical tensions around the world. And there are other economic headwinds that could lead to a reassessment of the economic situation going forward. So this sort of wedge between financial marketimplied volatility and uncertainty in the underlying economic performance is a second issue that we flagged. 

A third issue is about this narrowing of credit spreads and underlying credit quality that is deteriorating in some corners. So broadly, the global economy is very strong. It has surprised to the upside in many countries, particularly in the U.S.; but also, just yesterday China announced strongerthanexpected GDP numbers. So we see a lot of strength, but we do see certain corners where default rates are rising, where there is some weakness. And so this tension in between, you know, credit spreads that are really narrowing but some struggles in some corners is a third shortterm risk. 

In the medium term, it’s really about the buildup of vulnerabilities. Already, the level of debt has come up globally since the pandemic. Governments have stepped in aggressively to cushion the economic fallout from the pandemic. And as a result, we really see sort of like debttoGDP fairly high. And as financial conditions have eased, there is leverage that is rising again in many corners of the financial system, as well as the nonfinancial system. And that’s certainly something we are watching very closely. 

So let me stop here and turn back to Meera. 

Ms. LOUIS: Thank you, Tobias. 

So I just wanted to say, you can ask your questions also via WebEx or via the Press Center. And when you raise your hand, can you pleaseif I call on you, just identify yourself and your outlet. 

OK, the lady here in the red. Wait just one second. We are just getting you the mic. Thank you. 

QUESTION: Thank you so much for the opportunity. My name is Rachel from 21st Century Business Herald, China. 

We have a first question. Given China’s important role in the global economy, as well as you just mentioned, China just announced strongerthanexpected GDP growth in the first quarter, so can you elaborate a little bit more on China’s role in promoting global financial stability, as well as other economic activity? Thank you. 

Ms. LOUIS: Thank you. Before we turn to Tobias, are there any other China questions in the room? I see a gentleman here in the front. 

QUESTION: My name is Jason. I am with Tencent news from China. 

I guess my question is also following up on this lady here. Can you talk about China’sthe role in maintaining its domestic financial stability and really contributing to global financial stability? Thank you. 

Ms. LOUIS: Thank you. Are there any other questions on China? OK. The lady there. Thank you. 

QUESTION: Olena Hrazdan, Ukraine’s The Page, but my question regards China. 

Quite a few years ago, there was a fear that China’s development credits may be a risk for the financial stability. And I wanted to ask, we have just heard on the World Economic Outlook that we have the weakness from the property sector, and the stimulus from the government does not work as effectively as it’s believed to be. And I wanted to ask if there still a risk of China’s development market and real estate market to become this bump for the financial stability, as we thought several years ago? Thank you. 

Mr. ADRIAN: Yes. Thanks so much for your interest in China. Of course, China is the second largest economy in the world, so we are following very closely what is happening in terms of financial stability. 

Let me start with the big picture, and then Fabio can go a little bit deeper on the financial sector issues. 

So as you noted, and as I noted already, you know, the most recent GDP figure was above expectations. Last year, for the whole year, GDP growth was also above 5 percent. So the overall growth rate remains, you know, very strong. 

Now, the challenge that all three of you alluded to is really from the property sector. And I would distinguish two aspects that are very important. So the first one is that investment in the property sector has been an engine of growth for China for many years. And there is a marked slowdown in property investment, in particular, when you look at new construction and housing that has dropped very, very sharply. And that is certainly a transition in terms of the growth model that authorities are very focused on. 

A second aspect is about the valuation of housing prices. And we have seen a decline in housing prices, but it’s fairly moderate to date. And that is certainly a strength from a financial stability perspective. You know, housing investment is the biggest asset for most households; and of course, banks have exposure to the housing market as well. So while there has been a decline in housing prices, it has not been extremely sharp. So most of the adjustment is in quantities, less on prices, and that’s a plus for financial stability. 

Now, in terms of assessing financial sector stability, it’s very important to consider the regional heterogeneity of housing markets. So there are some major cities that continue to perform very strongly from a housing perspective, while other provinces are somewhat weaker. And so we certainly see also this regional disparity in terms of the banking sector. So some of the smaller banks in some of the weaker provinces are more impacted than, say, banks in the stronger provinces. 

So let me turn to Fabio to elaborate a little bit more on these issues.

Mr. NATALUCCI: Maybe what I could do, I could walk you through the different possible channels of contagion that we had in mind when we assessed the financial stability situation in China. 

The starting point is that confidence still has not been restored, despite some measures that have been taken, like lowering mortgage rates or easing the access to purchases, we have not seen a bottoming out in the sector. As Tobias mentioned, prices have not declined as much as other historical episodes, like comparing to the U.S. subprime crisis, for example, but activity has, so sales and other measures of activity, investment. Even in the prices, you can see a differentiation between new prices and existing prices. Existing home prices actually declined much more than new. That less decline in new prices helped banks absorb some of this shock in a more manageable way; but at the same time, it has been an impediment in restructuring. You see this issue about confidence in the property developers sector. 

The access to markets has declined, both banks and nonbanks. And even the sources of resales revenues are coming down. That implies that they have less ability to complete projects. Less ability to complete projects means there’s less revenues from land sales. And that is a channel of contagion to the local governments. Where, for the local government funding vehicles, so these structures that are used to finance investment, they have a wall of maturity coming in. And there’s a clear differentiation point between, for example, weak provinces and strong provinces. 

Another signal in terms of the limited borrowing confidence is in the equity market. From peak to trough, the equity market is down about 45 percent, despite the recent incline. That is another channel of transmission to the wealth management private sector, for example. So the nonbanking financial institution, that sector is pretty large. It’s about 110 trillion renminbi, or 90 percent of GDP. It is in the equitylinked funds that have actually lost quite a bit of value. And trust funds, the trust funds, obviously. That’s more linked to the real estate. But also, the concern now is for the more wealth management products. Those are more tailored toward retail investors. They tend to hold about 80, 90 percent in fixed income. 

So the concern is that, if there are losses in those funds, retails could withdraw money. That implies  because they hold a significant portion of corporate bonds, that corporate bond yields would increase, and that could be a channel of transmission to funding markets to the banks. So those are examples of possible transmission channels. So the policy recommendation, as Tobias has mentioned, is a mix of addressing macroeconomic, if you want, strength, as well as the more structural reforms. 

Ms. LOUIS: Thank you, Fabio. OK. The lady here right in the front. 

QUESTION: Thank you. Laman Zeynalova from Trend News Agency, Azerbaijan. 

My question is about the Caucasus and Central Asia region. As you know, these countries are very reliant, heavily reliant on commodity exports. And given the fluctuations around the world in the commodity markets, how does IMF forecast the financial stability in the countries of this region? And what are your recommendations in order to make those countries less vulnerable in the face of the external shocks? Thank you. 

Mr. ADRIAN: Yeah. Thanks so much for this very important question, and I would recommend two main avenues here. 

So the first one is really about financial sector policies. So we are regularly doing financial sector assessments in countries, including in the region, where we really look at the financial stability in the country, the strength of financial sector oversight, as well as the kind of emergency measures that countries could deploy if adverse shocks were to hitso this is deposit insurance, emergency lending, and resolution powers. And you know, we provide very detailed assessments of the strength of financial sector policies. And, you know, in all of our FSAPs, we have a number of recommendations. And, you know, following those recommendations is really our No. 1 priority for country authorities. So that is really on the financial sector side.

Secondly, in terms of monetary policy and macroeconomic frameworks, of course, some countries in that region have more fixed exchange rates; others are inflationtargeters. You know, so it depends a little bit what the  exchange rate regime is in terms of policy recommendations. But for those that are either inflationtargeting or heading toward inflationtargeting, you know, using the exchange rate as a buffer to absorb shocks is certainly a priority. And, you know, we are also providing granular advice to authorities in this respect. 

Ms. LOUIS: Thank you, Tobias. Yes, the gentleman over there, in the third row. 

QUESTION: Alex Brummer from the Daily Mail in London. 

I wanted to ask about two asset classes which we haven’t discussed very much. 

Firstly, why do we think at the moment that the gold price is so strong? Because equity markets and other markets seem to be very healthy. And normally, the gold price goes in the opposite direction. That’s the first. 

Secondly, do we think that bitcoin might pose a systemic risk in any kind of way to the global economy? 

Mr. ADRIAN: Yeah. Thanks so much for those, you know, importantthose questions about two important asset classes. 

So, indeed, the gold price has reached historically high levels. And, you know, bitcoin has fluctuated but also reached historical highs earlier this year. 

So let me start with gold. We see two, you know, drivers here. So one is certainly some reallocation of reserve asset managers toward commodities that include gold, and that could be one contributor to those valuations. The second one is, of course, you know, speculative behavior. You know, as I pointed out at the beginning, the volatility in financial markets is fairly compressed; but, of course, deeper economic uncertainty still remains fairly high. Geopolitical uncertainty remains high. And gold is oftentimes viewed as a kind of hedge against those broader geopolitical risks. 

In terms of bitcoin valuations, of course, it is difficult to pin down the fundamental drivers of bitcoin valuations. And, you know, one technical factor that has played a role is the development of ETPs, so exchange traded products, that have been allowed in the U.S. So when you look at sort of like allocations to bitcoin since the beginning of the year, there has certainly been, a substantial inflow in those investments through the ETPs. 

I don’t know, Jason, whether you want to complement me? 

Mr. WU: Yes, I do. In this regard, our view is that authorities should encourage and monitor the regulated entities on the exposures, both to the cryptocurrency itself, as well as some of these derivative products thatlike ETPs that Tobias has mentioned. 

Ms. LOUIS: Thank you, Jason and Tobias. Do you want a followup? We need a mic here. 

Mr. ADRIAN: So the followup question was whether it poses a systemic risk. 

So we don’t see it as a systemic risk at this point, but we do view it as a risk and as a potential risk going forward as well. So the IMF has worked closely with the Financial Stability Board to develop a policy framework for crypto assets. And this includes a regulatory approach, as well as a broader macroeconomic policy approach. And we are currently rolling out those policies. And the goal is really to make sure that, you know, crypto assets are regulated and are embedded in a policy framework that contains any broader fallout for the financial system or for economies. So containing systemic risk is certainly a policy objective of this initiative. 

Ms. LOUIS: Thank you. Thank you, Tobias. Yes, the lady right here in the front. 

QUESTION: Thank you for taking my question. 

I wanted to ask about the U.S. Federal Reserve because, right now, there has been some inflation surprises in recent months. And maybe the Fed would consider delaying its rate cut. And if interest rates are held higher for longer, how do you evaluate the impact for the global financial market? Thank you. 

Ms. LOUIS: Thank you. Just on that question, we have another question that came in on a similar topic. Pablo Pardo from El Mundo. And he asks: 

In case the Federal Reserve delays its monetary easing, what would be the impact on the U.S. financial system? 

Mr. ADRIAN: Yeah. Those are, of course, very relevant and very timely questions.

So let me start by pointing out that the U.S. economy has performed very strongly since the pandemic. You know, it has grown extremely well. And there are a number of factors for that. Productivity growth has been strong. There has also been labor force participation that has increased. So a lot of the variation in interest rates is really reflecting the strength of the economic performance in the U.S. So interest rates, longerterm interest rates have, indeed, increased in recent days. And it’s a combination of surprises for inflation but also surprises in terms of economic fundamentals. So, you know, that may have implications for monetary policy. Our forecast remains that inflation will return to target. And our expectation is that the Federal Reserve is going to start cutting at some point, but how many cuts and the exact timing is certainly datadependent. 

Mr. NATALUCCI: I have a couple of things to add. 

One, a slightly different way to answer the question is, it depends on what the economy, the U.S. economy does. So if interest rates remain high, because inflation progress is stalling but the economy continues to grow strong, that is a policy backdrop. So if you think of, like, how equities are valuated, if earnings remain strong, even if interest rates are rising, there could be less of an impact. 

The concern we had in the GFSR would be one where the central banksbecause inflation is stalling, keeps rates for longer, that has an impact on the asset price more broadly, in line with a possible decline in economic activity. That would have a much more meaningful impact on asset price, I think. 

There is also  a second way to answer is, there is a sectoral aspect to this. I can pick an example, which is commercial real estate. Commercial real estate is an example where there are about $1 trillion just in the U.S. coming due in debt over the next year. The estimates of the gap there is about $300 billion. And we start seeing already, despite the economy being strong, a deterioration in asset quality. You can see in default rates in the commercial mortgagebacked security markets. You can see in charges of the banks. And there’s specifically a weak tail of banks, the regional banks that are more exposed to commercial real estate. So we look at various features of those in terms of exposure to commercial real estate, in terms of holdings of securities. That was the cause of the crisis in the banking sector last year in the U.S. There’s about $475 billion owedheld to maturity assets, for example. So where rates end up is going to have an impact there. So if you look through the sectoral lens, there’s also an impact on different sectors. It is going to be different, depending on where the sector is in terms of health. 

Ms. LOUIS: Thank you. So I just wanted to stay on this topic because we’ve got yet another question from a reporter from Forbes México, Sylvia Rodriguez. She asks: 

What are the biggest challenges that emerging economies, like Mexico, will face in the face of a much slower decline in interest rates in the United States than expected? 

Mr. ADRIAN: Yes. Let me start. And perhaps Jason can complement me on the impact on emerging markets. 

So there are really two ways to think about that. We have certainly seen an appreciation of the US dollar in recent days, as the U.S. economy has performed very strongly. And that continues the trend of strong performance of the U.S. economy. And so a stronger dollar can translate into tighter financial conditions under some circumstances to some of the emerging markets. Having said that, there is a second important point to consider, which is that the strength of the U.S. economy also has positive spillovers on emerging markets, such as Mexico. So demand from the U.S. may be stronger. And the easing of financial conditions more broadly can also be transmitted. So the net effect can actually be positive or negative. So just looking at the exchange rate is probably not sufficient. 

Jason, do you want to add to that? 

Mr. WU: Sure, Tobias. Thanks for the question. 

Let’s first recognize that many emerging markets have been quite resilient throughout the past two years in the face of repeated global shocks, including interest rate hikes. One of the reasons why this is the case is because of improved policy frameworks and some central banks having moved early. So in light of potential higher for longer, particularly in the first scenario that Tobias has outlined, emerging markets will surely be tested again. 

Here, it is important for them to maintain appropriate policy frameworks in order to build buffers, both in terms of the monetary  on the monetary side, as well as more medium term on the fiscal side as well, in order to preserve this resilience. We should also probably recognize that there’s a large differentiation across emerging markets. In Latin America, the policy differential visàvis the U.S. in terms of interest rate differential is still positive; but in some other regions, that policy difference is diminishing. So there could be a differentiated impact on emerging markets if we were to continue on in a higherforlonger world. 

Ms. LOUIS: Thank you, Jason. I see, Mehreen, had you a followup on the US dollar? 

QUESTION: Mehreen from The Times. 

Just to follow up. Given the risks of sticky inflation in some countries and inflation falling in others, there’s a risk of monetary divergence. Are you calling on central banks to try to coordinate their loosening to limit the potential for financial volatility? And if they don’t want to coordinate, what are the risks of divergence? And where could we see the channels for that risk being transmitted inside financial markets? 

Ms. LOUIS: Are there any other questions in a similar vein? Talking about sticky inflation and dollar. OK. The gentleman in the front, please. Right here, the gentleman in the front. Thank you. 

QUESTION: Thank you very much. Shiota Kuoka, working from, Japanese news agency. 

Not only emerging markets but also Japan, advanced economy have some pressure from the appreciation of the US dollar. And what is your view on this point? Could the FX market volatility pose some risk at the global level? 

Ms. LOUIS: On the US dollar. OK. Quite a lot of interest in the US dollar. OK. 

QUESTION: My name is Dina Salem. I work with Al Qahera News channel in Cairo, Egypt. Many lowincome countries have been following the global trend of tightening monetary policy in an attempt toobviously, to curb inflation; but this has not been helping on the ground. I mean, I was here last year. And the prices have been blown up, compared to this year, when converted to the local currency. I am sure this is a scenario faced by many lowincome countries. Can you still recommend this policy to be implemented by central banks in lowincome countries? Thank you. 

Ms. LOUIS: I think now we can take it. 

Mr. ADRIAN: Sounds good. Yes. 

Let me start with, you know, monetary policy across countries. And I would point out that central banks, you know, follow very closely what’s going on with other central banks around the world. And so there is certainly an exchange of views. And, you know, the IMF, as well as other international financial institutions, are certainly forums where central bankers exchange views. But, you know, this is not per se coordination, right? Because central banks really have domestic mandates, right? They are mandated to deliver price stability and financial stability in their countries. And so while it’s very important to understand what is going on around the world, the mandates are domestic mandates. 

So, you know, when central banks conduct monetary policy, of course, they are taking many factors into account, which are all influencing how the objectives are going to be attained. And the exchange rate is an important factor for many central banks. 

You know, we have a policy framework called the Integrated Policy Framework that is really mainly aimed at, you know, smaller open economies or emerging markets to think about the interaction of monetary policy, exchange rate policies, as well as macroprudential policies, and how you tradeoff these sort of like multiple tools, so including the interest rate but also FX interventions, capital flow measures, and macroprudential measures, to achieve targets in an optimal fashion. 

So, you know, when we are looking at sort of like exchange rate movements to date, we do find that they are largely driven by interest rate differentials. So as I pointed out at the beginning, longerterm real yields, for example, in the U.S. have been increasing. And that is really reflective of the strong performance of the U.S. economy, relative to other countries. And so that has an impact on the exchange rate. So, you know, first order, that’s a very good proxy for how exchange rates are moving. 

Now, under disorderly market conditions, there can be circumstances where exchange rate volatility is excessive, where some FX intervention could be appropriate, but it really depends on the particular circumstances. 

Mr. NATALUCCI: If I could step back for a second and go back to the pandemic. 

There was a common shock that affected economies across the globe. So there was a very synchronized policy response in terms of monetary policy. Once inflation starts coming back, some emerging markets that actually raising interest rates earlier and that, to Jason’s point, helped the resilience. Some countries used fiscal policy more than others. But more or less, the story was about convergence, if you want.

The story now is about divergence. Different countries are in different parts of the business cycle, some countries being more successful than others in bringing inflation down toward target. So I think it’s appropriate for the policy response to be tailored to the country’s circumstances. So what we suggest, in terms of monetary policy, for example, is that central banks should not ease prematurely and should push back against market expectations if they are already optimistic. But if inflation is actually coming down, gradually and sustainably toward the target, that may actually reduce the tight stance of policy moving gradually to an easya more neutral stance of policy. Similarly for fiscal policy. Fiscal policy can actually help the disinflationary process, but it’s also a function of country circumstances. Some countries, like the U.S., resort to fiscal policy more aggressively than others. So I think the story is about divergence now in terms of performance and in terms of policy response. 

Mr. ADRIAN: Let me just come back to the question about Egypt and lowincome countries more broadly. So, of course, Egypt is a middleincome country. 

So, you know, in many countries, where we have programs or, you know, there are inflationary pressures that are not only related to monetary conditions but also the fiscal conditions. Right? And so monetary policy alone is probably not enough to address the inflation issue; you also need to take strong fiscal measures. And you know, this is where IMF programs can be very helpful in terms of getting countries on a sustainable path for the macro economy in general, which really includes a monetary and fiscal policy mix. But these can be challenging tasks to accomplish and may take some time. 

Ms. LOUIS: Thank you. Thank you very much. The reporter on the last row there. Can you stand up? Right there with the glasses, thank you. 

QUESTION: Thank you. I am from Nepal. In many lowincome countries, such as Nepal, the transmission of monetary policy is weak, especially in terms of inflation control and balance of payments, repair of the bank and financial institutions. In these countries, controlling inflation through monetary policy is challenging because nonmonetary policy drivers of inflation are very powerful. What are your recommendations to tackle this scenario? Thank you. 

Mr. ADRIAN: Yes. So, again, I just talked about that a little bit, right? In many lowincome countries, you know, it’s not only the monetary conditions but also the fiscal conditions that are key drivers of inflation. And so you know. Broader macroeconomic adjustments are really necessary to get to more stable macroeconomic outcomes. 

You know, we are working very closely, of course, with authorities on the monetary policy issues, as well as the fiscal issues and structural economic issues. 

Ms. LOUIS: Larry, the gentleman in the middle over here. 

QUESTION: Larry Elliott of The Guardian. You say that the financial markets are prime for a soft landinginterest rates coming down, inflation coming down, growth remaining positive. We have been here before many times. And you talk about bumps in the road. How big a threat to that soft landing scenario is what’s going on in the Middle East? And could markets be riding for a quite bumpy period? 

Mr. ADRIAN: Thanks so much. We are, of course, very concerned with developments in the Middle East and other parts of the world. You know, so far, since last week, we have seen some selling in risky assets. So stock markets have come down globally. I think on Friday, the broad index is about 2 to 3 percent down globally; and Monday, there was a further decline. 

Oil prices have been fairly stable. And so, you know, the question going forward is really the magnitude of any broadening of uncertainty and downside realizations. So the level of the oil price and commodity prices more broadly are certainly one transmission factor. The other transmission factor is uncertainty. As I pointed out at the beginning, financial market volatility is very compressed, but this underlying uncertainty may be high, and it may be that financial market volatility moves closer to measures of underlying economic volatility. And that could certainly lead to a repricing of assets. 

I would also point out that such a scenario could lead to pressures on inflation. So headline inflation could have upward pressures around the world as commodity pricespotentially food pricescould be pressured up. So that could lead to a repricing of interest rates. And then the kind of channel of pressuring some banks and some other financial markets due to higher interest rates could come back into play. 

Ms. LOUIS: Thank you. The lady here in the white, please. 

QUESTION: Thanks very much. Good morning. Christine from Deutsche Welle. Could you talk a little bit about what your sense is, pertaining to the African continent, the debt levels? We have  a number of countries already in debt distress, and many others are headed in that direction. At what point is this a debt crisis in the region? 

Ms. LOUIS: Thank you. Are there any other questions on Africa? Right here and then

QUESTION: Thank you. My name is Nanoya fromradio in Ghana. 

I would like to know what you anticipate to be the impacts of the geopolitical tensions on financial systems in Africa, especially subSaharan Africa and specifically on Ghana. Thank you. 

Ms. LOUIS: Thank you. Now I will take the gentleman there, on Africa still. 

QUESTION: Thank you. Simon Ateba with Today News Africa in Washington, DC. Two quick questions on Africa. 

What are the key findings and implications of the Global Financial Stability Report for African economies, considering their unique financial landscape and vulnerabilities? 

And finally, how does the IMF assess the potential spillover effects from global financial stability on African markets? And what measures does the IMF recommend for African policymakers to enhance financial resilience and mitigate systemic risk? Thank you. 

Ms. LOUIS: Thank you so much. 

Mr. ADRIAN: Thank you so much for these questions, three questions on subSaharan Africa. 

We work, of course, very closely with many countries in Africa, both in programs, as well as through capacity development. So in our department, Monetary and Capital Markets Department, we are engaged with the majority of countries in capacity building, on central bank issues, debt management issues, as well as financial regulation issues. So, you know, capacity building is, in the medium term, extremely important to really make sure that the banking system, the central banks, and the debt management offices are up to the task to bring a positive growth impulse from financial markets to the countries. 

Of course, subSaharan Africa has been hit very hard by the pandemic, so when you look at sort of like growth performance, relative to precrisis projections, there’s quite a bit of a gap. And that is quite different from advanced economies or emerging markets. And so, many countries in Africa are struggling with debt and low growth. So we are engaged on helping countries to adjust macro performance and debt levels, in particular. So, many countries are in negotiations to restructure debt. And that is an important element in some cases. And, you know, we are workingyou know, it’s a little bit countryspecific as to what the right policy steps are. So I cannot really go too much into detail. There is going to be a regional briefing that goes more into countryspecific issues. But, you know, we are very closely engaged on these issues. 

I don’t know, Jason, whether you want to

Mr. WU: Just a couple of supplements. 

In line with what Tobias said about global financial conditions having eased over the past half year, some subSaharan Africa nations were able to issue debt, as sovereign spreads have declined. That said, in the face of uncertainty, this picture may turn around, and a number of countries still face debt challenges. There is $60 billion of debt coming due over the next two years, external debt. 

If you look across the continent, countries that have better macroeconomic adjustments have, in general, fared better in the international markets. And things like early contact with their debtors is also helpful. 

To the question specifically about Ghana, inflation has, in fact, reduced in Ghana, on the back of tighter monetary policy and fiscal consolidation. So this seems to be the right direction of travel for countries in the subSaharan continent as well. 

Ms. LOUIS: Thank you so much. Are there any last questions in the room? Yeah, the lady here in the orange. 

QUESTION: Hi. And thank you. I want to focus on private credit. 

Your team went out of its way to tell us about the risks, what they are, how much they are growing, by issuing that chapter early. You had a panel last week at NYU where the industry people were saying, yeah, there’s some risk here. They basically think this is a good form of credit. And we are not so worried. So why did you go out of your way to emphasize it? And for everybody, remind us exactly what private credit is, how big are the risks? And what needs to be done? 

And I am Kathleen Hayes. 

Ms. LOUIS: Thank you. There are two last questions. Maybe we can take them in a bunch. So the lady here and then the gentleman. 

QUESTION: Hi. Sue Chung from The Telegraph. 

Back to interest rates and monetary policy. I think Tobias, in your blog, you talked about risks of central banks backpedaling on interest rate cuts by doing them too soon. Could you spell out some of the consequences for financial markets and the economy if that happens? And is that risk greater for the global economy than, say, central banks holding interest rates too high for too long? 

Ms. LOUIS: Thank you. And then we are going to wrap up with a last question there, unless somebody has a followup on this. Yes, the gentleman over there. 

QUESTION: All right. My question is about regional mainly, about the Asian side, south Asian side and primarily about Pakistan. 

When we are looking at the prescription being given by the major organizations, all the transnational institutions, it’s more about increasing the interest rates. And most of the times, and especially the economy, when we are referring to Pakistan, it’s related to the supply side of inflation. Continuously with that very dosage of that very prescription has kind of hurt the middle income and the lower middle income; but, of course, it has not given the results out there. Still, the inflation is 25 percent and beyond for that very country. For the last, I would say, almost two years we have seen the maximum inflation. It is impacting somehow on, like, lowering the inflation but not to the real recipe. Maybe that’s how  one school of such thought. So how would you respond to that? 

Ms. LOUIS: Thank you. Tobias, we had three different questions. You know, private credit first and then take it in the order you would like to. 

Mr. ADRIAN: Yes. I am going to start on all three and then pass it to both Fabio and Jason to complement me on all three. 

On private credit, you know, we really tried to take a balanced view. You know, there are both risks and opportunities. And, you know, in terms of the risks, we do recommend more data collection in this area. You know, it is fairly opaque. And, you know, the market has grown rapidly, and it may grow further. So having a better understanding for policymakers but also market participants to understand the landscape is certainly one key recommendation. And Fabio can go deeper into detail. 

By the way, we always launch these Analytical Chapters in advance. So this is nothing specific to this topic. So, you know, Chapters 2 and 3 are always the week before. 

In terms of, you know, Pakistan and, you know, other countries in the region, so my answer is going to be similar to previous questions. You know, Pakistan is in a program. And there are really macro challenges, which include the financial sector and central bank policies but also broader macro and fiscal issues. And, you know, the adjustments oftentimes take some time to take hold. Again, the regional briefings will go deeper into those specific issues. 

And then the third questionI don’t remember what it was. Backpedaling, yes. 

So when we look across countries, so some countries now have both upside and downside risks to inflation. Other countries have more upside. Others more downside risk. You know, the key message that we have to central banks is to make sure that inflation is heading durably back to target. Right? So, you know, around the world, we do see communication by central banks that expect to cut. Some central banks have already started to cut. Among advanced economies, Switzerland started to cut. Emerging markets have started to cut much earlier. Brazil, Mexico are good examples here. But the key is to make sure that we are durably back to inflation targets and not to sort of cut prematurely. That is really a key message. 

So let me turn to both Fabio and Jason to complement. 

Mr. NATALUCCI: On private credit, maybe for those not into this specific segment, private credit is credit provided by nonbank financial institutions, like investment funds, for example, to firms that are too small to have access to public markets. So traditionally, they would borrow from the commercial banks. Now there’s this growing sector that provides credit directlyit is called direct lending  to these institutions, to these firms. The reason why we looked into this segment is the rapid growth primarily. The sector, globally, it is more than $2 trillion now. About threequarters is in the U.S. So it is the rapid growth, that was the impetus. I think if you step back, it’s part of a broader trend. It is a move to public markets toward private markets that we have seen in equities before. Now we start seeing more in credit. There are other structural factors, like activity shifting from the banking sector toward the nonbank financial institution postGFC due to more stringent regulations, very low interest rates that push institutional investors to seek higher returns. So there are some benefits for investorshigher returns is one  for firms to have more access to alternative forms of funding. So I think for the broad system, a more diversified funding base I think is good from a financial stability perspective. 

The risks that we focus onone is about valuations. Those are not valuated, evaluated very frequently. So the stale valuation during periods of sharp readjustment could actually become an amplifier of a shock. We look at the characteristics of the borrowers. Those are smaller, more than firms in the public markets or that have access to banks. We look at what we call liquidity mismatch, so whether there’s a risk of run from this fund. And I think the answer, generally speaking, is not, with the exception of fastgrowing segment that is being tailored to retail investors. Then we look at layers of leverage. That is a different layer of leverage here at the borrowers’ level, at the private credit fund level, at the investor level. So Tobias’s point, the opacity or lack of information, that’s what made the assessment very hard for us to do. We cannot get a good sense, how this possible deleveraging would work because we don’t have good data. And there are crossborder implications. Some of this is U.S. firms lending in Europe, too. 

So just to conclude, the assessment is that at the present moment, we don’t see an imminent financial stability risk; but given the rapid size and the fact that this sector accounts for about 7 percent of lending to nonfinancial institutions or firms in the U.S., it could be become an amplifier of shocks, if both banks and this sector cut down on lending at the same time in case of prolonged recession. 

Ms. LOUIS: Thank you. 

Mr. WU: Maybe I could add something about inflation in frontier economies. It is, indeed, the case that both the supply and demand side contribute to inflation. So in that sense, policy is needed on both sides. In the case of Pakistan, for example, monetary policy has been tightening over the past two or three years to control inflation. And inflation is projected to come down, but more work needs to be done. And that includes on the demand side; fiscal consolidation needs to be continued. But also on the supply side, including things like, you know, the reform of the energy sector, stateowned enterprises. And I think many economies in the frontier space actually face similar challenges as well. I think Fund staff continues to engage with Pakistan on this issue. And I should echo Tobias that there will be a regional economic briefing from the Middle East and Central Asia Department. 

Ms. LOUIS: Yeah. Thank you very much, Jason, Fabio, Tobias. And thanks very much for attending. 

I just want to say, if you haven’t got the report as yet, it will be online. If you need any followup questions, please reach out to me bilaterally. And as we mentioned here, if you have any specific countryspecific questions, we have regional briefings both on Thursday and Friday. And all that information is on our media center. So, again, thank you so much for attending the press conference. Take care. Thank you.