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Monetary policy not the only game in town — IMF

Published:Friday | April 15, 2016 | 12:00 AMMcPherse Thompson


Policymakers need to work collectively to deliver a more balanced and stronger policy mix that goes beyond the continued over reliance on monetary policy in order to strengthen economic growth and financial stability, International Monetary

Fund (IMF) financial controller JosÈ Vinals suggested on Wednesday.

"Monetary policy remains crucial. It still has ammunition, it is still effective, but cannot and should not remain the only game in town," the IMF official said.

"Well-designed structural reforms and growth-friendly and supportive fiscal policies are essential. In addition, stronger financial policies that further enhance the resilience of the financial system must be put in place."

Vinals said that at the global level, the financial regulatory reform agenda must be completed and implemented, including for non-banks, saying all these actions will help bring balance to the policy mix, and make them more potent.

"This is what the world needs urgently to secure stronger growth and financial stability," he said, while presenting the April 2016 Global Financial Stability Report at the Spring Meetings of the IMF.

He explained that earlier this year, markets reacted negatively to rising macroeconomic risks which reflected a weaker and more uncertain outlook for growth and inflation, among other things.

The reactions were also to falling commodity prices and concerns about China's economy which put pressure on emerging and advanced economy credit markets, and a slippage in confidence in policy traction amid concerns about the ability of overburdened monetary policies to offset the impact of higher economic and political risks.

Vinals, the director of the IMF's Monetary and Capital Markets Department, said the result was that global equities plummeted, volatility rose sharply, talks of recession in advanced economies increased, and bank equity prices came under renewed pressure.

"Today, the situation in markets appears significantly better compared to the lows of mid-February," he said, noting that equity markets have recovered much of their losses and oil prices are higher, while volatility has subsided.

The turmoil experienced over the past months, he added, is a warning signal that more needs to be done to secure global stability.

Market turmoil may recur

Vinals said that unless additional measures are taken to deliver a more balanced and potent policy mix - a government's combined use of fiscal and monetary policy - market turmoil may recur and intensify and could create a "pernicious feedback loop" of fragile confidence, weaker growth, tighter financial conditions and rising debt burdens which could tip the global economy into economic and financial stagnation.

"We need to go beyond the status quo. We need a collective approach to policymaking to tackle a triad of global challenges," he said, namely, the overhang of non-performing loans, elevated vulnerabilities in emerging markets, and systemic market liquidity risks.

"The market turbulence we experienced earlier this year is a powerful reminder of this unfinished business," he said.

Vinals said the sharp fall in commodity prices has exacerbated both corporate and sovereign vulnerabilities, keeping economic and financial risks elevated. As the health of the corporate sector deteriorates, especially in commodity-exporting countries and commodity-related sectors, refinancing pressures may become more acute. And, it can generate spillovers to the sovereign as many weaker corporates are state-owned, he said.

Bank buffers are seen by the IMF as being generally adequate in many emerging markets, but may be tested by increasing non-performing loans.

"These interlinkages underscore the importance of close monitoring of corporate vulnerabilities, swift and transparent recognition and management of non-performing assets, and strengthening the resilience of banks," said Vinals.

Among emerging economies, China remains the most important. The stability report estimates that corporate bank loans potentially at risk in that country amount to almost US$1.3 trillion and could translate into potential bank losses of about seven per cent of gross domestic product.

The Chinese authorities are aware of those vulnerabilities and are putting in place measures to deal with the overindebted corporate, the IMF official said.

The magnitude of the vulnerabilities call for an ambitious policy agenda to address the corporate debt overhang, strengthen banks and upgrade the supervisory framework to support an increasingly complex financial system, Vinals said.