IMF’s Georgieva warns of increased risks to financial stability

IMF managing director Kristalina Georgieva has warned of increased risks to financial stability and the need for vigilance following the recent banking sector turmoil in advanced economies.

Speaking at a conference in Beijing, the IMF head said uncertainties in the world economy remained “exceptionally high”, with global economic growth expected to slow below 3 per cent this year because of the Ukraine war, “scarring” from the Covid-19 pandemic and monetary tightening.

“Risks to financial stability have increased at a time of higher debt levels,” Georgieva told the annual China Development Forum, a gathering for global chief executives and senior Chinese policymakers.

“The rapid transition from a prolonged period of low interest rates to much higher rates necessary to fight inflation inevitably generates stresses and vulnerabilities, as we have seen in recent developments in the banking sector.”

The global financial sector was shaken by the collapse of this month of a midsized US lender, Silicon Valley Bank, which led to the fall of another American regional institution and the takeover of Credit Suisse by UBS.

Bank shares declined again on Friday, this time led by Deutsche Bank, forcing German chancellor Olaf Scholz to insist there was “no reason to be concerned” about the institution.

“We also have seen policymakers acting decisively in response to financial stability risks and we have seen advanced economy central banks enhancing the provision of US dollar liquidity,” Georgieva said. “These actions have eased market stresses to some extent but uncertainty is high and that underscores the need for vigilance.”

The IMF in January estimated global growth would slow from an estimated 3.4 per cent last year to 2.9 per cent in 2023, then rise to 3.1 per cent in 2024. “Even with a better outlook for 2024, global growth will remain below last decade’s average of 3.8 per cent,” Georgieva told the forum.

She also echoed the warnings voiced by several other speakers at the conference about the dangers of the world fragmenting into economic blocs, saying this would be “a dangerous division that will leave everyone poorer and less secure”. 

The most positive development in the world economy this year was the expected strong economic rebound in China after it relaxed its strict Covid controls at the end of 2022, she said. The IMF forecasts growth of 5.2 per cent in China in 2023 compared with 3 per cent a year earlier.

China’s growth would account for about one-third of global growth this year, she said. “A 1 percentage point increase in GDP growth in China leads to 0.3 percentage growth in other Asian economies,” she said.

Several global business chiefs have also attended the conference in Beijing despite rising trade and geopolitical tensions between the US and China.

Among other speakers, Tharman Shanmugaratnam, the chair of the Monetary Authority of Singapore, the city state’s de facto central bank, said the recent macroeconomic challenges were only the “early consequences” of instability caused by a long period of low and negative real interest rates in advanced economies.

He described this extended period of easy monetary policy as the “largest mistake in macroeconomic policy in 70 years” and called for co-operation between the US and China as well as competition.

“How the US and China are able to combine competition . . . economic competition, with the need for co-operation is going to require considerable strategic ambition and strategic skill,” Shanmugaratnam said.

China’s finance minister Liu Kun said the world situation was challenging, with “unprecedented changes unfolding”, including more political tension, without elaborating. This year, China would moderately increase fiscal spending to support the economy, he said.