IMF-WORLD BANK ANNUAL MEETINGS | MARKETS
The International Monetary Fund warned that rising bond yields, a potential correction in AI-driven markets and growing cyber threats could unsettle global financial markets, despite strong investor appetite and resilient market performance.
In its latest Global Financial Stability Report, the Fund flagged growing vulnerabilities among non-bank financial institutions and warned that emerging markets, particularly lower-rated economies with shrinking financial buffers, could face mounting pressure if the bond-market sell-off deepens, urging policy makers to strengthen financial resilience as inflation and public debt constrain their ability to new shocks
“Given all this, the policy priority should be to strengthen resilience before new shocks hit the economy and to take advantage of the resilience we have seen so far to prepare,” Anthanasios Vamvakidis, Deputy Director, IMF Monetary and Capital Markets Department said in his opening remarks during Tuesday’s press conference in Bangkok following the released of the report.
He added that Inflation remains high in many economies, as new inflation pressures continues to mount. Debt dynamics are worrisome in some cases, and policy room remains much more limited compared with previous periods when responding to earlier shocks.
“It is therefore very important for fiscal policy to focus on addressing fiscal imbalances and bringing debt dynamics back to a sustainable path. While Monetary authorities should focus on their inflation mandates, communicate clearly and, most importantly, preserve their independence, with their credibility being extremely important to anchoring long-term yields,” Vamvakidis underscored.
His remarks echoed similar remarks made by Fund’s chief economist, who also urged policymakers and governments to get their fiscal house in order by building fiscal buffers for when external shocks hit.
The Fund’s broader message was that governments and financial regulators should use the current resilience of markets to address vulnerabilities before another shock exposes them, particularly as high debt, inflationary pressures and limited policy room complicate the response.
Jason Wu, Assistant Director at the Fund, using Thailand as a case in point, added that the impact of an AI correction is not only going to affect the export side of global economy, risk sentiment will begin to tighten. Currency would depreciate, although the currency should act as a shock absorber in that case, and potentially face capital outflow pressures as well.
“For emerging-market economies, including Thailand, it is important to build resilience before such a shock were to happen and, importantly, to allow the exchange rate to act as a shock,” Wu said.
Vamvakidis goes a step further saying there is no doubt that an AI market correction would affect the real economy and have broader implications. How severe those implications would be depends on the scenario that unfolds.
“When you look at equity prices, stocks related to AI, directly or indirectly, have been the drivers [of the global economy]. Interestingly, valuations are not stretched. Price-to-earnings ratios have actually fallen because earnings keep surprising to the upside…If a market correction occurs because earnings disappoint, ambitious investment plans fail to materialize, or the investments are made but do not pay off, the consequences could be broader.”
He cautioned that an AI market correction would affect the real economy with broader implciations, depending on the severity of the shock. Rising bond yields could also weigh on corporate earnings, potentially triggering a correction and tightening financial conditions.
“That is why we emphasize this risk. We are not arguing that a market correction will happen, but it is a risk given the heavy reliance on the sector,” he underscored.
Beyond market valuations and borrowing costs, the Fund also identified AI-related cyber threats as another growing concerns for global financial stability. It pointed sources of vulnerabilities: Digitalization, concentration of financial services software and systems among a limited and technologies and cloud service providers and the threat posed by cybercriminals.
Although these risks affect economies worldwide, the IMF said a country’s exposure would depend partly on the strength of its preventive measures and its ability to respond to cyber incidents.
“Which regions become more vulnerable depends on whether they have appropriate preventive measures in place.” In terms of which individual countries would be impacted, emerging markets particularly are vulnerable because they have fewer resources dedicated to cybersecurity, while a global shortage of cybersecurity professionals is making prevention more difficult.
According to the report, estimates suggest that cybersecurity workforce would need to be about 40 percent higher than it is today to meet demand.
The Fund also urged advanced economies to identify critical points of vulnerabilities in their financial systems while emerging and developing economies, including African countries, should prioritize improving basic cybersecurity practices, increasing supervisory capacity, strengthening incident reporting and improving coordination during crises.
