IMF warns of rising corporate debt
The IMF, whose fall meetings with the World Bank will begin in Washington this week, also warned that continued trade tensions and political uncertainty remain the main drivers of risk mitigation for the global economy..
A major geopolitical event, such as the UK’s withdrawal from the European Union without a new deal, could lead to a sharp tightening of financial conditions, says the IMF’s biennial report..
The IMF and other policymakers have raised concerns about high levels of risky corporate debt in the past. However, the group said Wednesday that attempts by central banks around the world to lower interest rates to combat immediate economic risks have exacerbated the situation, leading to «disturbing» debt levels with low credit quality and increased financial vulnerability in the medium term.
«As rates remain low for a long time, financial conditions have improved, which helps to eliminate downside risks and support global growth at the moment, says Tobias Adrian, director of capital markets at the IMF. – But poor financial conditions prompted investors to take more risk».
The IMF has warned that 40% of all corporate debt in major economies can be considered «at risk» during another global downturn, exceeding levels seen during the 2008 financial crisis–2009 years.
The IMF has warned that investors may be «overly complacent» due to downside risks at the end of the economic cycle. On Tuesday, the IMF cut its 2019 global growth forecast to its lowest level since the financial crisis, largely due to ongoing trade feuds.
The IMF has highlighted rising risks in the corporate and non-banking financial sectors as a source of concern. Investors facing lower interest rates take on more illiquid investments with weaker commitments for investors seeking higher rates of return.
The US Federal Reserve has cut rates twice this year amid fears that a slowdown in global growth and trade tensions could spill over into the global economy. Meanwhile, central banks in other countries, including the European Central Bank and Bank of Japan, have kept interest rates in negative territory in an effort to stimulate lending..
«The search for profitability amid prolonged low interest rates has led to stretched valuations in risky asset markets around the world, raising the likelihood of sharp, sudden adjustments in financial conditions», – the report says.
Specifically, the IMF said that a global economic downturn, half as severe as that caused by the latest financial crisis, would result in $ 19 trillion in corporate debt. «at risk», which the IMF defines as the debt of firms whose revenues do not cover costs. their interest expenses.
The IMF also warned that market conditions with low interest rates have boosted demand for debt in emerging economies, with external debt rising to 160% of exports, up from 100% in 2008. In the face of a sharp downturn, this can become an obstacle to economic stability or provoke an even greater increase in debt obligations..
To protect against these risks, the IMF has called on policymakers to support «reliable and strict» financial regulation and supervision, and called on policymakers to step up broader macroprudential instruments such as countercyclical capital buffers. The IMF also said that policymakers «urgently» need to develop better tools to monitor risks in the corporate sector.