International Monetary Fund Global Financial Stability Outlook

Transcription

1 International Monetary Fund Global Financial Stability Outlook Fabio Natalucci Deputy Director Monetary and Capital Markets Department 1

2 Financial Stability Risks Could Rise Sharply Since the April 218 GFSR Global financial conditions have tightened somewhat, but remain broadly accommodative Near-term risks have increased modestly, while medium-term risks remain elevated Risks Could Rise Sharply Possible triggers: Broader EM pressures Escalation of trade tensions Political and policy uncertainty Faster monetary policy normalization Vulnerabilities Continue to Build High nonfinancial leverage Stretched asset valuations EM external borrowing Bank exposures & FX funding 2

3 MARKET DEVELOPMENTS 3

4 Financial Conditions Have Diverged Across AEs and EMs Financial conditions in the US eased, despite policy rate hikes US Financial Conditions Index and Federal Funds Rate (z-scores over and percent) offsetting tighter financial conditions in EMs, and Financial Conditions Indices of Other Advanced and Emerging Market Economies (z-scores over 21-18) supporting near-term growth, while keeping medium-term risks elevated Global Growth Forecast Densities (Probability density, 218:Q3) Tighter conditions Last GFSR Tighter conditions Last GFSR Near term Medium term th percentile Federal Funds Rate (lhs) FCI (rhs) AE ex. US China EM ex. China Global growth rate (percent) Note: Assessment of financial conditions is based on findings of the Global Financial Stability Report October 218 4

5 Recent Market Movements Have Contributed to Tighter Conditions The sharp selloff in US stocks triggered a global stock market correction Major Stock Index Performance (index to Jan 1, 218; YTD change in parentheses) leading to a significant fall in equity valuations 12-month Forward Price-to-Earnings Ratio (z-score since 1987; current value in parentheses) US (3.5%) Europe (-8.8%) 8 Japan (-9.3%) EM (-12.2%) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec -1.5 US (15.3) Europe (11.9) Japan (12.3) EM (1.2)

6 YTD Markets Are Pricing in a Benign Macroeconomic Outlook Policy rate expectations point to gradual rate hikes despite relatively benign expectations of future inflation Overnight Indexed Swap (OIS) Forward Rate Curves for Advanced Economies (Percent) Breakeven Swap Rates, 5Y5Y Forward (Percent) Average Maximum Minimum JPY USD Note: Annual average three-month overnight indexed swap (OIS) rates on forward contracts for tenors from six months to five years. The OIS forward curves are constructed from the USD, EUR, JPY, and GBP, and the average, maximum, and minimum are computed for each tenor across the four jurisdictions. -2 EURO

7 In Certain Asset Classes, Valuations Still Increasingly Stretched Term premiums are low, but mostly fairly priced based on fundamentals Deviation from Fitted 1-Year Premium (Percentage points) but corporate spreads remain very low, given creditworthiness of borrowers Credit Spreads on US Investment Grade and High Yield Corporate Bonds (Spread over US Treasury in basis points, Yield on GE bond in percent ) Deviation from weightedaverage fitted value Max-Min of the range 25 2 Bps % US IG Spread US HY Spread GE 5-Yr USD Sr. Secured (RHS)

8 Intensifying Risks in Leveraged Lending Global new issuance of leveraged loans has been growing New Issuances of Leverage Loans (Billion of US Dollars) as has been the issuance of such loans by highly indebted companies Leverage Multiple with fewer investor protections and lower overall quality Covenant Quality US Issuers Non-US Issuers Covenant-lite percent of new issuance (left scale) Moody's Loan Covenant Quality Index score (right scale) Higher Score Equals Weaker Covenants Note: 218 data is through Q3 and annualized to estimate full-year 218 issuance. Note: Leverage multiple is defined as the ratio of total debt-to-earnings before interest, taxes, depreciation and amortization after issuance of the loan. Note: Moody s Loan Covenant Quality Index score is a year average. Data unavailable from 28 to data is through Q3. 8

9 Portfolio Flows to EMs Have Been Under Pressure EM portfolio flows have declined, driven by a reversal in retail fund flows Some moderation in EM portfolio flows is expected due to ongoing US monetary policy normalization EM Portfolio Flows by Investor Type (US$ bn, 3-month rolling sum) Institutional flows Total flows 2-2 Baseline: Estimated Cumulative Impact of External Factors on Portfolio Flows to EMs (US$ bn) Estimates through 218Q Taper tantrum Retail flows Renminbi devaluation U.S. election EM Sell-off Baseline Outlook Risk aversion (assumed to stay at 218:Q3 level) Fed balance sheet (from Federal Reserve) Fed rates (consistent with WEO) 217Q4 218Q2 218Q4 219Q2 219Q4 9

10 Investors Have So Far Differentiated Among EMs Lower-rated EMs have seen larger widening in external debt spreads USD Government Bond Spreads (changes since end-march; basis points) but outsized FX currency moves have been limited to a few countries EM and AE Currencies against the USD (index, 3/3/18=1) China Poland Chile Malaysia A 15 1 Advanced economies All EMs Oil exporters High spread EMs Peru Kazakhstan Philippines Colombia Hungary Russia Indonesia Mexico Brazil South Africa Turkey Egypt Nigeria Ukraine Argentina Lebanon BBB BB B Depreciation against the dollar 65 Apr May Jun Jul Aug Sep Oct Nov Dec Note: Letters refer to foreign currency long-term sovereign credit ratings, as assigned by at least two out of the three major credit rating agencies Note: High spread EMs include Argentina, Brazil, South Africa, and Turkey; Oil exporters include Colombia, Kazakhstan, Mexico, and Russia. 1

11 Brazil China Malaysia Poland Colombia Thailand Chile Romania India Hungary Philippines South Africa Indonesia Mexico Turkey Russia Argentina EM Policy Responses to Market Pressures Have Varied EM policy responses have included policy rate hikes Changes in Actual and Expected Policy Rates (changes from 3/3/18 to 11/7/18; basis points) and foreign exchange market interventions Reserves Operations (US$ bn) Change in forward policy rate for end-219 Change in actual policy rate Latin America -5 EM Asia CEEMEA 14 EMs excluding China -75 Oct-14 Jul-15 Apr-16 Jan-17 Oct-17 Jul-18 Note: In Argentina, the monetary regime was changed on October 1. 11

12 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Frontier Markets Face Challenging External Borrowing Conditions More low-income countries are at risk of distress External borrowing conditions have deteriorated Some countries have large rollover needs over the medium term Low-income Countries Face Debt Challenges (percent share of all LICs) Frontier Market International Bond Issuance and Spread (US$ bn and bps) Frontier Issuers International Bond Redemptions (US$ bn) 6% 5% 4% In debt distress High risk of debt distress Frontier spread (bps, right scale) Africa Latin America Asia Europe Middle East 3% % % %

13 FINANCIAL VULNERABILITIES 13

14 Non-financial Sector Debt Vulnerabilities Continue to Rise Non-financial sector leverage has increased since the global financial crisis and is high in some regions, while banking sector leverage has broadly improved Corporates Leverage Heatmap: 218 (percentile ranks; pooled sample, 2 or earliest available to 218) < 2% 2-4% 4-6% 6-8% > 8% REGIONS United States Euro area Other AEs China Other EMs S E C T O R S Households Sovereigns Banks Insurers Asset managers Note: the heatmap is based on the data for 29 jurisdictions with systemically important financial sectors. 14

15 Banks Exposure to Opaque and Illiquid Assets a Concern G-SIB holdings of illiquid assets have fallen... but these holdings are still large relative to capital of some G-SIBs. G-SIB Holdings of Level 2 and Level 3 Assets (Multiple of Basel III Tier 1 capital) Exposure to Level 2 and Level 3 Asset, 218 (percent) Euro area Other Europe North America Euro area Other Europe Asia and Pacific 5 4 North America Asia and Pacific Level 2 and Level 3 assets to Basel III Tier 1 capital (times) Note: the vertical axis shows the estimated loss (in percent) on Level 2 and Level 3 assets that would result in a 1 percentage point reduction in each bank s leverage ratio. 15

16 EM Vulnerabilities Need to Be Carefully Monitored Emerging Markets: Key Risks and Vulnerabilities Risks Vulnerabilities Buffers Faster monetary policy normalization in advanced economies Strong U.S. dollar Rising interest rates Political risks Trade tensions Policy uncertainty Contagion High leverage Large external financing needs Short-term foreign currency debt Flighty investors Trade exposures Sound policy frameworks Foreign exchange reserves Fiscal buffers Deep and liquid local markets Strong local investor base 16

17 High Public and External Debt Are Key Vulnerabilities for EMs Public debt and external debt ratios have increased across many EMs since the global financial crisis, while FX reserve ratios have remained close to the pre-crisis levels Government Debt to GDP External Debt to Exports Reserves to ARA Metric 1/ 11 9 Global Financial Crisis th 9th Median 75th 9th Median 1th 25th Median Notes: all ratios in percent. Red shades show the weakest percentiles of all EMEs for each vulnerability metric. 1/ The ARA metric reflects potential balance-of-payment FX liquidity needs in adverse circumstances and is used to assess adequacy of FX reserves against potential FX liquidity drains (see IMF Policy Paper, 215 Assessing Reserve Adequacy-Specific Proposals. ) 17

18 China: Deleveraging and De-risking Progress Regulatory tightening has slowed the buildup of risks in financial sector Investment Products and Small-to-Medium Bank Claims on Financial Institutions (Three-month change, trillions of renminbi) and led to tighter credit conditions for weaker borrowers Corporate Defaults and Corporate Bond Spreads (Billions of renminbi, basis points) but the deleveraging process is far from complete. Leverage at Nonfinancial Traded Companies (Top 1 Chinese firms by assets) 8 6 Investment products Bank intrafinancial sector claims Annual defaulted bonds (billions of renminbi, right scale) pace (billions of renminbi, annualized, right scale) Yield spread of AA- bonds to five-year government bonds (basis points, left scale) :Q1 218:Q2 Note: Leverage is measured as the ratio of liabilities to common equity. 18

19 Liquidity Risk in the Chinese Bond Market Trading turnover fluctuates more than in other countries Annual Growth in 3-Month Average Bond Trading Volumes, by Country and Bond Type (Percent) and volumes tend to fall when interbank rates rise. Rolling 6-day Sum of Daily Bond Trading to Outstanding Total and One-Month SHIBOR interbank Rate Trading volumes decline poses risks given growing short-term borrowing Repo Borrowing Outstanding and Trading Volumes (Trillions of Renminbi) US government US corporate China government China corporate 12 1 Interbank yield (left scale) >1.5x standard deviation 6-day move in bond yields Total short-term borrowing Average daily trading volume day bond turnover ratio (right scale)

20 Japanese Banks Cross-Currency Funding Dollar funding conditions remain relatively tight Japanese banks are reliant on crosscurrency funding via swaps... while supply is shifting from banks to nontraditional financial institutions Cross-Currency Basis Swaps (Spread on three-month swaps, basis points) JPY EUR GBP US Dollar Cross-Currency Funding Ratio (Net cross-currency derivatives as percent of total assets) Non-US banks CAN CHE DEU FRA GBR JPN Note: Data as of October 218 Global Financial Stability Report Supply of Foreign Exchange Derivatives to Japanese Financial Institutions (Billions of US dollars) 1,4 Non-Japanese, nontraditional lenders 1,2 1, % Non-Japanese banks 41% 39% 25% 51% 59% 61% 3% 35% 32% 29% 75% 7% 65% 68% 71% 2

21 FINANCIAL STABILITY RISKS 21

22 The Outlook for EMs Remains Challenging A deterioration in the global risk appetite could lead to larger portfolio outflows from EMs 1. Baseline and Adverse Scenarios: Near-Term Debt Portfolio Flows Forecast Densities Adverse scenario assumptions: US corporate bond spreads widen by 1 bps US 1-years bond yields fall 3 bps th percentile Baseline Scenario The US dollar rises 5 percent Portfolio flows in percent of EM GDP 22

23 An Escalation of Trade Tensions Could Raise Financial Stability Risks WEO/GFSR Trade Tensions Scenario: Growth Forecast Densities Near Term Medium Term Baseline.7 Baseline.6 Trade scenario.6 Trade scenario with persistent financial conditions shock ppts Global GDP growth rate (percent) Global GDP growth rate (percent) 23

24 An Increase in Policy Uncertainty Could Trigger A Risk-off Sentiment Markets remain concerned about fiscal policy uncertainty in Italy Italian Sovereign Spreads and Bank Equities and redenomination risk Italy Redenomination Risk (CDS spread difference between ISDA 3 and 14 definitions, bps) year Bond Spread over Bunds (bps, LHS) Italian Banks Price-to- Book (RHS) Italy France Spain French presidential elections Italian general elections Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

25 25Q4 26Q3 27Q2 28Q1 28Q4 29Q3 21Q2 211Q1 211Q4 212Q3 213Q2 214Q1 214Q4 215Q3 216Q2 217Q1 217Q4 Large Financial Sector Exposure to the Sovereign is a Concern Bank balance sheet weaknesses are gradually being addressed Italian Banks: Non-Performing Loans (Percent of total bank loans) but risks from growing sovereign-bank nexus are rising Banking System Exposure to Domestic Governments, 218 (Percent of assets) and these risks are not limited to banking institutions Insurers Exposure to Southern European Sovereigns, 217Q4 (Percent of capital) BEL JPN FRA PRT DEU GBR ESP USA CHE KOR IRL ITA Asia and Pacific Euro area North America Other Europe GRC Domestic sovereign CDS spread (basis points) Domestic Cross-border ITA ESP PRT GRC Note: Based on the latest available data in 218. The size of the circles is proportional to the banking systems exposure to their domestic government (relative to assets) 25

26 Brexit Financial Stability Considerations Short-Term Risks Contractual Risks: Unexpected changes to the legal framework governing financial services (e.g., derivative and insurance contracts) Operational risks: Uncertainties regarding regulatory environment in which financial institutions will operate during the transition Medium-Term Challenges Market liquidity could be fragmented raising cost of funding Onshore and offshore markets: Trading venues could be duplicated Challenges of risk management because institutions could become more complex Recommendations Financial institutions should step up their preparations Authorities should continue to work with private parties to reduce risks of disruption Authorities should provide more clarity on their intention to mitigate cliff-edge risks 26

27 A DECADE AFTER THE CRISIS: ARE WE SAFER? 27

28 Regulatory Reform Agenda Is Yet to be Completed and Fully Implemented Quality of Regulation and Supervision Macroprudential Authorities Powers Liquidity Percent of banking assets Percent of countries, 217 Capital Compliant Largely compliant Materially noncompliant Compel Comply or explain Recommend None 28

29 New Risks Need to Be Actively Monitored The systemic importance of central counterparties has grown CCPs and Other Counterparties in Derivatives Clearing (share of different counterparties, percent ) and the assets of nonbank financial institutions have increased Bank and Other Financial Institutions Assets (percent of GDP) 6 Central counterparties Banks and securities firms Hedge funds Other residual financial institutions Insurance and special purpose vehicles OFIs Banks Note: the remaining two categories, reporting dealers and nonfinancial institutions, are not shown in the chart 29

30 Need to Actively Develop and Apply Macroprudential Tools Availability of Macroprudential Tools for Addressing Key Vulnerabilities Vulnerabilities Corporates Households Banks Non-Bank Financials Insurers Asset Managers Pension Funds AE EM AE EM AE EM AE EM AE EM AE EM Leverage Liquidity Mismatch Maturity Mismatch FX Mismatch Valuation Misalignment Interconnectedness Others Note: Colors depict number of countries reporting at least one macroprudential tool: < 2% 2-4% 4-6% 6-8% > 8% White shading means policy tools are unavailable or not reported. Others includes prudential tools such as risk management requirements, reporting duties, and, less frequently fiscal measures. The tale covers 29 economies with systemically important financial sectors. 3