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Confidential
Confidential
January
GlobalSUMMARY
2021 EXECUTIVE Financial Stability Update
Vaccines Inoculate Markets, but Policy Support Is Still Needed
The Global Financial Stability Update at a Glance
Approval and rollout of vaccines have boosted expectations of a global recovery and lifted risk
asset prices, despite rising COVID-19 cases and persistent uncertainties surrounding the
economic outlook.
Until vaccines are widely available, the market rally and the economic recovery remain predicated
on continued monetary and fiscal policy support. Inequitable distribution of vaccines risks
exacerbating financial vulnerabilities, especially for frontier market economies.
An ongoing rebound of portfolio flows provides better financing options for emerging market
economies facing large rollover needs in 2021.
Policy accommodation has mitigated liquidity strains so far, but solvency pressures may resurface
in the near future, especially in riskier segments of credit markets and sectors hit hard by the
pandemic. Profitability challenges in the low-interest-rate environment may weigh on banks’
ability and willingness to lend in the future.
Policymakers should continue to provide support until a sustainable recovery takes hold as
underdelivery may jeopardize the healing of the global economy. However, with investors betting
on a persistent policy backstop and a sense of complacency permeating markets as asset
valuations rise further, policymakers should also be prepared for the risks of a market correction.
With monetary policy anticipated to remain accommodative in coming years, policymakers should
contain rising vulnerabilities to avoid putting growth at risk in the medium term.
A Policy Bridge to the Vaccine
Financial markets have looked beyond the global resurgence of COVID-19 cases.
Announcements and rollout of vaccines have boosted hopes of a global economic recovery in 2021
and pushed risk asset prices higher. The speed of the recovery will depend crucially on production,
distribution networks, and access to vaccines. As discussed in the January 2021 World Economic Outlook
(WEO) Update, continued monetary and fiscal support remain vital to lessen lingering uncertainties,
build a bridge to the recovery, and ensure financial stability.
Risks to the baseline could threaten financial stability in some sectors and regions. A delay in
the recovery would require prolonged accommodation, further fueling financial vulnerabilities. Uneven
vaccine distribution and asynchronous recovery could imperil capital flows to emerging market
economies, especially if advanced economies were to begin to normalize policy, and some countries
could face daunting challenges. An asset price correction, should investors suddenly reassess growth
prospects or the policy outlook, could interact with elevated vulnerabilities, creating knock-on effects
on confidence and jeopardizing macro-financial stability.
International Monetary Fund | January 2021 1GLOBAL FINANCIAL STABILITY UPDATE, JANUARY 2021
Figure 1. Equity Market Performance Finally, Some Good News
(Index; November 6, 2020 = 100)
135
Initial vaccine announcements Announcements of earlier-than-anticipated
Vaccine rotation basket
130
US small cap (Russell)
effective COVID-19 vaccines have boosted
125 EM (MSCI) market sentiment and paved the way for the
120 US
Europe global economic recovery. Industries such as
115
airlines, hospitality, and consumer services
110
rebounded in late 2020 as investors rotated into
105
these previously battered sectors in search of value
100
95
Oxford
AstraZeneca (Figure 1). Stock prices of smaller firms, including
90
Moderna
Pfizer
in clean energy, also benefitted. In advanced
85
BioNTech
economies, investment-grade and high-yield
Oct. 2020 Nov. 20 Dec. 20 Jan. 21
corporate bond spreads have tightened sharply—
Sources: Bloomberg Finance L.P.; and IMF staff calculations.
Note: Vaccine rotation basket is an equal weighted index of US hotels close to or even below pre-February 2020 levels—
and real estate and world airline equities. EM = emerging markets. while rates have reached record lows, as investors
Figure 2. US Earnings Revisions and Rate Expectations
(US dollars a share, left scale; percent, right scale) continue to reach for yield. Spreads of emerging
market sovereign debt have exhibited a similar
200 2021 EPS estimates (left scale) 2.6
compression dynamic.
195 Average short-term rate expected over next 2.4
10 years (right scale)
190 2.2 Financial markets have shrugged off the most
185
2.0 recent softening in economic activity. The surge
180
1.8 of COVID-19 infections and associated stringency
175
1.6 measures since late 2020 have adversely affected
170
165 1.4 economic activity in many countries, pointing to a
160 1.2 possible slowdown in the fourth quarter (see the
155 1.0 January 2021 WEO Update). Yet, despite persistent
uncertainties surrounding the economic outlook,
investors appear to remain confident about growth
Source: IMF staff calculations. prospects in 2021, betting that continued policy
Note: Earnings per share (EPS) based on Thomson Reuters
Datastream IBES for the S&P 500; average expected short-term rates support will offset any possible near-term
derived from Treasury bonds and Adrian, Crump, and Moench model.
disappointment. The much discussed disconnect
Figure 3. COVID-19 Infections and Vaccine Preorders
between financial markets and the economy
persists. Despite the recent rise in US long-end
rates, market participants point to expectations of
very low rates over coming years and upward
revisions in earnings expectations since the vaccine
announcements as justification for the market rally
(Figure 2).
Vaccine access is likely to be uneven, and
equitable distribution may take time. Many
advanced economies, such as Canada, some
Source: Duke Global Health Innovation Center. European Union countries, the United Kingdom,
Note: Vaccine preorders refers to confirmed doses as of January 19,
2021. EU = European Union. Data labels use International and the United States, have prepurchased vaccines,
Organization for Standardization (ISO) country codes.
2 International Monetary Fund | January 2021GLOBAL FINANCIAL STABILITY UPDATE, JANUARY 2021
Figure 4. Emerging Market Sovereign Bond Issuance with large per capita coverage. By contrast,
(Billions of US dollars; share in percent)
procurement of vaccine doses for emerging market
B
50
BB BBB A or above Share of HY issuance (3 month moving average, right scale)
50
and developing economies via direct negotiation or
45 45 through the multilateral COVAX pillar lag
40 40
significantly.1 The need for access to vaccines is
35 35
30 30 particularly urgent in countries where cases have
25 25 accelerated recently or remain very high (Figure 3).
20 20
15 15 No Global Financial Crisis to Date: Don’t Turn
10 10
It into One!
5 5
0 0
Delayed access to comprehensive health care
solutions could mean an incomplete global
Sources: Bondradar; and IMF staff calculations. recovery and endanger the global financial
Note: Refers to international hard currency bond issuance. January
2021 is partial data through January 20. HY = high yield. system. With emerging market economies
Figure 5. Portfolio Flows to Emerging Markets accounting for about 65 percent of global growth
(US billions) (about 40 percent excluding China) over 2017–19,
75 Debt Equity
delays in tackling the pandemic in such countries
50
may bode ill for the global economy. Supply chain
25
disruptions could affect corporate profitability even
0
in regions where the pandemic is under control.
-25
And because growth is a crucial ingredient for
-50
financial stability, an uneven and partial recovery
-75
risks jeopardizing the health of the financial system.
-100
Emerging markets have large financing needs.
Large and persistent fiscal deficits in most
Sources: Institute of International Finance; and IMF staff calculations.
emerging and frontier market economies are likely
Figure 6. 2021 Gross External Financing Needs
(Percent of GDP) to persist in 2021, albeit to a smaller extent than in
40
Short-term debt (by remaining maturity) 2020. In the baseline WEO scenario of continued
Current account deficit
36 Total easy financial conditions, market financing will
32
28
remain a significant source of funding, as it has
24 been in recent months (Figure 4). The resumption
20
16 of portfolio flows is central to the stability of many
12 emerging market economies (Figure 5); retaining
8
4 market access is essential. An uneven global
0
-4
economic recovery because of delayed health care
and vaccine solutions may present a formidable
UKR
BRA
PHL
IND
IDN
PER
TUN
TUR
KEN
THA
PAK
ZAF
COL
ROU
MEX
EGY
Investment grade Sub-investment grade challenge for emerging and frontier economies.
Sources: National authorities; and IMF staff calculations. With some countries already constrained by limited
Note: Brazil, Romania, South Africa, Thailand, and Ukraine report
intercompany lending in their gross external financing needs.
1COVAX—the vaccine-focused pillar of the Access to COVID-19 Tools Accelerator, a partnership of the World Health Organization, the European
Commission, and France—is tasked with developing and providing innovative and equitable access to COVID-19 vaccines to all participating countries. It
was launched in April 2020 in response to the pandemic, and it aims to make 2 billion doses available by the end of 2021.
International Monetary Fund | January 2021 3GLOBAL FINANCIAL STABILITY UPDATE, JANUARY 2021
Figure 7. US High-Yield Spreads policy space, especially where access to capital
(Percent)
markets is still not fully restored, the prospect of
25 25
higher long-term rates in advanced economies as
Transportation central banks find themselves closer to policy
20 20
Consumer cyclical normalization may jeopardize the rollover of large
Technology
15 15
external financing needs (Figure 6).
Energy
While solvency pressures have been limited so
10 10 far, risks in the nonfinancial corporate sector
remain. Reflecting unprecedented policy support,
5 5 spreads have recovered almost entirely, even in the
sub-investment-grade sector, although sectoral
0 0 differences persist (Figure 7). Default rates at large
Jan. 2020 Apr. 20 Jul. 20 Oct. 20 Jan. 21
firms have remained well below previous peaks,
Sources: S&P Global; and IMF staff calculations.
Figure 8. Evolution of Potential “Fallen Angels”
and bankruptcies among smaller firms have stayed
(Count, left scale; US billions, right scale) low or even declined in some cases. However,
140 Global count of potential fallen angels (left scale) 250 challenges remain. For example, the number of
120
US fallen angels outstanding (right scale)
potential “fallen angels” (that is, firms with a BBB
Europe fallen angels outstanding (right scale)
200
minus rating and negative outlook) has tripled
100
globally since the beginning of the pandemic, and
150
80 in some jurisdictions (for example, the European
60
100
Union and the United States) the potential for
40
further downgrades is elevated (Figure 8). In China,
50 defaults by state-owned enterprises in the last
20
quarter of 2020 suggest that addressing financial
0 0 vulnerabilities continues to be a priority. Ultimately,
2008 09 10 11 12 13 14 15 16 17 18 19 20
Sources: ICE BAML; S&P Global; and IMF staff calculations.
the health of the global corporate sector will
Note: See text for definition of “fallen angel” companies. depend critically on the evolution of the pandemic
Figure 9. European Bank Performance Metrics and on the extent and duration of policy support.
(Percent)
Should investors reassess the prospects for
21
COVID-19 Vaccine economic growth and the outlook for monetary
19 outbreak announcement
and fiscal policy, liquidity pressures, and the risk of
17
COE (Cost of equity) such pressures morphing into insolvencies, may
15 ROE (Return on equity)
resurface.
13
Household debt may rise, on the back of
11
accommodative financial conditions. So far,
9
strains in the household sectors have been
7
mitigated by significant government support and
5
relief programs as well as by declines in interest
rates, which have reduced the debt service load.
But poorer and marginalized households have been
Sources: Bloomberg Finance L.P.; and IMF staff calculations.
Note: 2022 consensus EPS forecasts are used for the market-implied
substantially more affected than others. This
cost of equity, with consensus expectations used for ROE.
4 International Monetary Fund | January 2021GLOBAL FINANCIAL STABILITY UPDATE, JANUARY 2021
Figure 10. Bank Lending Standards, Nonfinancial Firms suggests that vulnerabilities are unevenly
(Standard deviations from mean; higher is tighter; Q3 2020)
4
distributed among some households, and financial
stress may rise if policy support is withdrawn too
3
early or there is an incomplete economic recovery.
2
Banks have not been part of the problem so far.
1 Banks entered the pandemic with a large amount of
capital and high liquidity buffers and have shown
0
resilience so far, and unprecedented policy support
-1 has helped maintain the flow of credit to
households and firms. However, profitability
-2
POL PHL ESP USA CZE EA DEU CAN GBR JPN HUN KOR THA ITA TUR challenges in the low-interest rate environment call
Sources: CEIC; Haver Analytics; and IMF staff calculations. into question banks’ ability or willingness to
Figure 11. Bank Loan Growth
(Percent)
continue to lend in coming quarters. Banks may be
10 10
concerned about rising credit exposures and
Corporate Household
increasing nonperforming loans once policy
Loan growth 2020:Q3 (quarter on quarter)
8 8
6 6 support measures end, especially where the
4 4 recovery may be delayed or incomplete. Banks may
2 2
also face challenges in generating returns above the
0 0
cost of equity amid continued compression of net
-2 -2
-4 -4
interest margins, a development long evident in
-6 AE -6 Japan and Europe (Figure 9). Underwriting
-8
EM
-8 standards for nonfinancial firms have tightened in
-5 0 5 10 15 20 -5 0 5 10 15 20
Loan growth in 2020:H1 from 2019:Q4
some instances (Figure 10) and bank loan growth in
Sources: Haver Analytics; and IMF staff calculations.
many countries has remained low or slowed in
Note: AE = advanced economy; EM = emerging market. recent months (Figure 11).
Figure 12. Flows into Global Investment Funds
(Billions of US dollars, cumulative since March 2020) Inflows to investment funds have resumed on
Money market Fixed income the back of improving market sentiment. The
1,200
imperative to put cash to work in a buoyant market
1,000
environment have driven investors to reach for
800
yield. Between March and November 2020, fixed
600
income funds registered cumulative inflows of
400
200
about $280 billion, $230 billion of which poured in
0
since the beginning of September (Figure 12).
-200 However, vulnerabilities in investment funds
-400 continue to be a concern: stretched asset valuations
-600 expose investment funds to the risk of a price
correction, and liquidity and maturity mismatches
remain largely unaddressed.2
Source: Morningstar.
2 See Chapter 1 of the October 2020 Global Financial Stability Report and the FSB holistic review.
International Monetary Fund | January 2021 5GLOBAL FINANCIAL STABILITY UPDATE, JANUARY 2021
Figure 13. Global Sustainable Debt Issuance Capital markets are gaining importance as a
(Billions of US dollars)
source of funding to combat climate change
700
Green bond and achieve social goals, and they can play a
600 Green loan
crucial role in greening the recovery. Greater
Social bond
500
Sustainability bond awareness of the need for social spending, likely
400 Sustainability-linked bond
related to efforts to fight the pandemic, led to a
Sustainability-linked loan
300 very large increase in social bond issuance in 2020.
200 Debtors have tapped into sustainable finance
100
sources, with sustainable debt issuance in 2020 set
to surpass the 2019 record at more than
0
2010 11 12 13 14 15 16 17 18 19 20 $650 billion (Figure 13).
Sources: BloombergNEF; and IMF staff calculations.
Note: 2020 is partial data as of November 30. Once More Unto the Breach
Figure 14. Market-Implied Probability of Inflation
Outcomes
Ongoing policy support remains necessary
(Percent, over five years) until a sustainable recovery takes hold to
100%
Less than 1% Between 1% and 2% Greater than 2% prevent the pandemic crisis from posing a
threat to the global financial system. The global
80%
community should strive for multilateral
60%
cooperation in equitable vaccine development and
40% delivery across the world to ensure an even and
20%
complete economic recovery. Policymakers should
safeguard the progress made so far and build on
0%
Jan. 2020 Oct. 20 Latest Jan. 2020 Oct. 20 Latest the rollout of vaccines to return to sustainable
United States European Union
growth. A bridge to the point where vaccines are
Sources: Bloomberg L.P.; and IMF staff calculations. widely available requires preserving monetary
Figure 15. Investor Positioning in Emerging Market policy accommodation, ensuring liquidity support
Assets to households and firms, and keeping financial
(Reported investment position in excess of average in units of
standard deviation) risks at bay.3 Underdelivering on policy action risks
jeopardizing the recovery, and the IMF and other
multilateral institutions stand ready to provider
further support should further downside risks
materialize.
However, policymakers should also be
cognizant of the risks of a market correction
should investors suddenly reassess growth
prospects or the policy outlook. With the
recovery still nascent, and inflation still expected to
Source: J.P. Morgan emerging markets client survey as of December
10, 2020. Note: FX = foreign exchange. be subdued, monetary policy is anticipated to
remain accommodative for years to come
3 See the October 2020 Global Financial Stability Report for a discussion of monetary, fiscal, and financial policies to support the recovery and the policy
priorities once the pandemic is under control.
6 International Monetary Fund | January 2021GLOBAL FINANCIAL STABILITY UPDATE, JANUARY 2021
Figure 16. Financial Conditions Indices (Figure 14). Asset valuations appear to be stretched
(Standard deviations from mean)
in several markets. A sense of complacency
Interest rates House prices Corporate valuations
EM external costs Index
Other
permeating financial markets as investors seem to
United Euro Other
2.5 China
States area advanced emerging bet on a persistent policy backstop and uniform
2.0 market views raise the risk of a price correction
1.5 (Figure 15). A sudden sharp tightening of financial
1.0 conditions from current very low levels—for
0.5
example, as a result of a persistent increase in long-
term interest rates—could be particularly
0.0
pernicious should such tightening interact with
-0.5
financial vulnerabilities (Figure 16).
-1.0
Financial stability risks are in check so far, but
Jun
Jun
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Jun
Jun
Dec
Mar
Dec
Dec
Mar
Dec
Dec
Mar
Dec
Dec
Mar
Dec
Dec
Mar
Dec
Sep
Sep
Sep
Sep
Source: IMF staff calculations. Sep action is needed to address financial
Note: Higher indicates tighter financial conditions. EM = emerging vulnerabilities exposed by the crisis.
market. Series begins December 2019 and ends December 2020.
Policymakers face an intertemporal policy trade-off
between continuing to support the recovery until
Note for all charts where applicable: Data labels use International
Organization for Standardization (ISO) country codes. sustainable growth takes hold and addressing
financial vulnerabilities that were evident before the
pandemic or have emerged since it began. These
include rising corporate debt, fragilities in the
nonbank financial institutions sector, increasing
sovereign debt, market access challenges for some
developing economies, and declining profitability in
some banking systems. Employing macroprudential
policies to tackle these vulnerabilities is crucial to
avoid putting growth at risk in the medium term.
International Monetary Fund | January 2021 7You can also read
