IMF Global Financial Stability Report Pinpoints Risks Tied to Ukraine War, Inflation

IMF, Global Financial Stability Report, Russia, Ukraine – Talking Points

• Russia-Ukraine conflict may test resiliency of global financial system
• Concentration risk remains in global commodity markets
• Emerging markets are at risk as advanced economies look to tighten policy

The International Monetary Fund (IMF) released its Global Financial Stability Report (GFSR) on Tuesday, with the report highlighting the many risks tied to Russia’s invasion of Ukraine. While no catastrophic event has occurred yet, the IMF believes that risks have increased “on several fronts.” The IMF believes the war in Ukraine could test the resiliency of the financial system, despite the strength that has been shown in recent years.

“A sudden repricing of risk resulting from an intensification of the war and the associated escalation of sanctions may expose, and interact with, some of the vulnerabilities built up during the pandemic, leading to a sharp decline in asset prices.”

Major banks have noticeably cut their exposure to Russia in recent weeks, and overall exposure remains relatively low. According to the report, future pain is most likely to be felt by European lenders. Counterparty risk is another major threat highlighted by the IMF, as many institutions continue to have indirect exposure to Russia. Poor market liquidity, funding strains, cyberattacks, and market disruptions were among other threats the IMF listed in its comments on the Russia-Ukraine conflict.

The IMF stated that central banks around the world are “walking a tightrope” as many look to fight against inflation that sits at multi-decade highs. Central banks are tightening into a period of slowing growth, high inflation, and significant geopolitical tension. The push toward normalization by advanced economies could squeeze emerging markets that are riddled with foreign denominated debt.

Fed Funds Rate Expectations

Courtesy of the CME FedWatch Tool

Specifically, the IMF stated “a disorderly tightening of global financial conditions would be particularly challenging for countries with high financial vulnerabilities, unresolved pandemic-related challenges and significant external financing needs,”

Interestingly, the GFSR pointed to potential instability in commodity markets as a major threat moving forward. With much of the market dominated by a small group of trading houses and dealers, risk of a concentrated market could present a real challenge. Commodity markets have had a volatile year, with nickel stealing the limelight earlier in March.

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— Written by Brendan Fagan, Intern

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