Financial Conditions Have Eased, but Insolvencies Loom Large –IMF warns

As countries continue to borrow millions of dollars from the international financial institutions the international Monetary Fund has warned in their latest Global Financial Stability Report Update, that there are concerns that credit risks will test the resilience of the banking sector as banks reconsider borrowers’ ability to repay their loans. “Some banks have started preparing for this process. The expectation of further pressure on profitability has led to declining stock prices of banks” said Tobias Adrian, IMF Financial Counsellor and Director of the Monetary and Capital Markets Department.

Tobias who was addressing journalists during the update briefing said that financial stress could worsen an already unprecedented recession, making recovery even more difficult with a wide array of pre-existing vulnerabilities now being starkly revealed. He further pointed out that in economies both large and small, corporate and household debt burdens could become unmanageable in severe economic contraction.

“Corporate debt stands at historically high levels and household debt has also increased in many economies that now face a sharp economic slowdown. The deterioration in economic fundamentals has already led to corporate rating downgrades. There’s a risk of a broader impact on the solvency of companies and households.” The non-bank financial companies he said could become an amplifier of stress. These institutions he said could play a greater role than ever in the financial system, but since appetite for continuing provision of credit during a steep downturn is untested, they could end up being an amplifier of stress.

“A correction in asset prices could lead to large outflows from investment funds, as occurred earlier in the year. Economies that must refinance more debt will run a greater risk that rollover will be more costly.” Some of those countries he said have had low levels of reserves, making it harder to react to portfolio outflows. “Credit rating downgrades could worsen this dynamic. Countries need to strike the right balance among competing priorities in their responses to the pandemic. They must be mindful of the trade-offs and mindful of continuing support for the economy while preserving financial stability so as not to put growth at risk in the medium-term.”

As national authorities seek to stabilize the economies, multilateral institutions he said are committed to support the immediate relief operations and to promote a farsighted policy dialogue. “The IMF is ready to deploy the full weight of our resources, aiming to build a strong foundation for a strong, sustainable, and socially inclusive recovery.” Sub-Saharan Africa has been hit by the COVID-19 crisis just like every other region in the world, and many African countries have taken aggressive containment steps in order to make sure that the populations are safe.

Talking about the situation in Sub-Saharan Africa, Tobias said that some countries do not have as much room as emerging markets or advanced economies to take large fiscal steps, fiscal support actions.

And so it is important for countries in Africa to continue to be able to access global financial markets. Indeed, with the easing of financial conditions, some of the countries that were excluded from borrowing might regain access to global financial markets. At the same time, of course, it remains a priority that continues to be sustainable. “We at The Fund deeply engaged with many countries in the region in order to help to stem the adverse consequences of this pandemic. And, indeed, globally we have just accomplished over 70 rapid financing facilities for countries around the world, many of which are in Sub-Saharan Africa.”

By Zainab Iyamide Joaque