Beyond the scary headlines and dark predictions about global financial stability that have hung like clouds over the earth in the past year, “short-term risks have declined”, according to Peter Dattels, Deputy Director, Monetary and Capital Markets Department, International Monetary Fund. Meaning: The world’s financial system is not about to throw everyone into a panic as it did when Lehman Brothers chewed more complex mortgage-backed securities than it could swallow in 2008.
Mercifully, the grim outlook over Brexit has come to naught. Markets took the shock fully in the face and have remained standing. Central banks in the developed world have kept policy rate at their lowest in decades, allowing adjustments and relative calm to return to the global market, even though low-growth has persisted. It is more than many analysts had expected.
The question however is: can the world financial system continue to run on the low energy provided by unconventional monetary policies that were put in place in the aftermath of the financial crisis? The US, Europe and Japan do not look ready to normalize policies from the near-zero and negative rates they have maintained these several years in the face of unimaginative fiscal response from governments. The Fund expects financial institutions to maintain balance by adapting to the “new era of low growth and low rates”.
That, analysts and delegates at the meetings agree, will be tough. Banks are finding it difficult to sustain profitability with such ridiculous rates. The Fund, Dattels, and leading experts at the world briefing, also worry that long-term savings institutions such as pension funds and life insurance companies may find it difficult to meet obligations of the current regime if it persists for much longer. European banks are more vulnerable than U.S institutions and the Fund recommends a makeover of their business model to suit the times.
Emerging markets have a different set of challenges. Institutions in Africa are particularly troubled by the crash in commodity prices which has caused significant reduction in investment and therefore, borrowing needs. Banks in Africa are contending with high non-performing loans as global trade dwindles. Nigeria, for instance, is contending with the shocks in its foreign exchange market caused by a precipitous drop in its export earnings. The sharp depreciation of its currency has caused problems to borrowers with obligations denominated in foreign currencies. Massive defaults are causing huge problems for bank stocks and profitability.
China remains an enigma. As its economy continues to rely heavily on state-assisted corporate giants whose activities are still largely shrouded in a measure of secrecy, the country’s huge external reserves will continue to be useful in helping it weather the kind of shocks that would bring down weaker economies just as its tight central control enable it to keep the lid over bubbles and eruptions in the near-term. The Asian behemoth, nonetheless, needs to embark on reforms as it gets pulled deeper into the global system.
The good news is that the current regulatory regimes in most parts of the world would have been able to keep the global financial system from doing a great harm to itself as witnessed almost a decade ago. The Fund maintains its three-pronged strategy of harmonizing structural, fiscal and monetary policies within countries and across national boundaries. Monetary authorities have been acting in sync with one another. The challenge today is for the fiscal end to wake up and give the leadership the world requires to maintain growth and financial stability.
By Joni Akpederi