Emerging market economies are expected to witness a drop in outflows over the next three quarters, which have already declined from 60 percent amid the COVID-19 outbreak crisis to 25 percent in September, according to the International Monetary Fund’s (IMF) report on global financial stability.
The report was released on Tuesday as part of the IMF’s and World Bank Group’s Board of Governors annual meetings that kicked off on Monday.
Advanced and emerging economies alike are expected to suffer deep and broad contractions in their economic growth, with more than 85 percent of countries around the world expected to witness sub-zero growth in 2020, according the report.
On the emerging markets side, financing needs have increased sharply because of the crisis, which has imposed financial challenges that are likely to push some of these economies into debt distress or cause financial instability that could need an official support, said the report.
Accordingly, the report said that concerns about new debt supply and weak domestic fundamentals may have curbed demand for local currency bonds from foreign investors in these economies, especially where they hold large shares of debt and where the domestic investor base may not be sufficiently profound.
On the other hand, hard currency bond issuance in these economies has been strong, as aggregate portfolio flows have recovered from their March declines, despite about half of emerging economies continuing to witness outflows over the past three months amid the ongoing crisis, according to the report.
Concerning global financial stability, the report said that near-term risks have been contained so far, as the unprecedented and timely policy response has contributed to maintaining the flow of credit to the economy and avoiding adverse macro-financial feedback loops, which is actually creating bridges to recovery.
For the recovery process, the report asserted the need for continued monetary policy accommodation and targeted liquidity support in order to sustain the recovery. In addition, a robust framework for debt restructuring is critical for lowering debt burdens and resolving nonviable firms.
After the pandemic is fully controlled, policy support can be gradually withdrawn and policy priorities should centre on rebuilding bank buffers, strengthening stepping up prudential supervision to contain excessive risk taking in lower-for-longer interest-rate environment, the report said.
Financial Counsellor and Director of the Monetary and Capital Markets Department at the IMF Tobis Adrian told Ahram Online that easing monetary policy globally has affected the emerging markets, including Egypt, as these economies have witnessed better financial conditions.
Given that the inflation rates in emerging markets have started to go down, easing monetary policy, which includes introducing more interest cuts, is needed, especially the cuts that have been introduced in the emerging markets, including Egypt, since the onset of the pandemic encouraged individuals and the private sector to borrow, according to Adrian.