Government debt in emerging markets –excluding China– is expected to reach 61 percent of GDP in 2021 and gross financing needs are anticipated to remain elevated at 13 percent of GDP in 2021, coming off record levels in 2020, the International Monetary Fund (IMF) announced on Tuesday.
The figures came within the IMF’s updated global financial stability report that was released amdist the IMF’s and the World Bank’s spring meetings, that had launched officially on Tuesday.
The report said that emerging market economies are expected to suffer arduous challenges due to the large financing needs that they require in 2020. This comes as a result of the COVID-19 crisis and its associated implications, adding that they are also exposed to a rollover risk, particularly if domestic inflation rises or global long-term interest rates continue to go up.
“Countries with weaker positions or limited access to vaccines may also face portfolio outflows. For many frontier market economies, market access remains impaired,” said the report.
The report also said that the recovery in emerging markets is expected to be slower than in advanced economies - with significant divergence across countries - driven by the less supportive stance of central banks over the past few months, in response to higher commodity prices; higher domestic inflation; the improved economic outlook and higher US rates.
On the currencies' performance in such economies, the report clarified that currencies of major emerging market economies have gained against the dollar since the last issue of the Global financial stability report - released in October - but have however, faced some notable turbulence in 2021 on the back of rising interest rates in the US.
It also noted that external credit spreads have been relatively insulated from the recent volatility in markets.
“Conditions remain favorable, especially for higher-rated issuers, whereas frontier economies continue to face challenges," said the report. "Over the past few months, markets have priced a shift towards a less supportive stance by central banks, in response to higher commodity prices; higher domestic inflation; the improved economic outlook and higher US rates —and some central banks have already hiked. As a result, local currency government bond yields - for many emerging market economies - have increased since late January.”
As for the recovery process in emerging markets, it is expected to be slower than in advanced economies - with significant divergence across countries - as government financing needs have surged and the resulting increase in public debt loads have become a challenge for policymakers as well as the delay in vaccine deployment in those countries.
More than one year since the onset of the pandemic, global financial stability risks are still contained through the measures that have been taken, which included the combination of progress in health care solutions and continued unprecedented policy accommodation, as according to the report.
Also according to the report, such measures have been remarkably successful in preventing an even more devastating blow to the global economy and has bolstered hope for a forthcoming recovery.
Global recovery from the pandemic is expected to be asynchronous and uneven among advanced, emerging and frontier market economies as well as within regions, economies, sectors and firms.
Accordingly, there is a risk that financial conditions in emerging and frontier market economies may tighten markedly. In the case of policymakers - in advanced economies - taking steps towards policy normalisation, that would then result in a rapid rates rise, the report explained.
On the other hand, an extended period of the unprecedented financial support measures, that the countries have taken globally in order to contain the pandemic repercussions, may lead to overly stretched valuations and fuel financial vulnerabilities that could put global growth at risk and hinder its recovery.
“Vulnerabilities were already elevated before the pandemic in some sectors and are now rising further amid very buoyant financial markets,” said the report.
According to the report, such vulnerabilities could evolve into new structural legacy problems like weighing on global economic growth or disrupting the resilience that the global financial system has shown so far.
The report also highlighted the impact on the commercial real estate sector, which is subject to sector-specific shocks, as well as to economy-wide shocks, with the COVID-19 crisis representing a combination of both.
“An adverse shock — whether sectoral (such as a decline in demand for specific commercial real estate segments), macroeconomic (such as a collapse in aggregate demand), or financial (such as an increase in risk aversion) — could exert downward pressure on this sector’s prices,” said the report.