The biggest risks to the global economy are now in emerging markets, where private companies have racked up considerable debt amid a fifth straight year of slowing growth, the IMF said on Wednesday.
“We estimate that there is up to US$3 trillion in over-borrowing in emerging markets,” IMF official Jose Vinals said in presenting the body’s Global Financial Stability report at its annual meeting.
SHOCKS
He told reporters that an unprecedented lending spree has come to an end with the plunge in prices for oil, minerals and other commodities that economists attribute to China’s slowdown.
The risk is that shocks from bankruptcies in the developing world’s private sector, particularly in heavily commodities-dependent Latin American economies, could be amplified in global financial markets.
The worst-case scenario is “a vicious cycle of fire sales and volatility,” he said.
Vinals said over-borrowing in China, where an August devaluation sent global markets reeling, amounts to nearly 25 percent of the Asian power’s economic output and need to be managed gingerly.
Seven years after the global recession, he said advanced economies still need to address legacies of the crisis.
For European banks, that means getting rid of about 900 billion euros (US$1 trillion) worth of bad loans that Vinals called a continuing drag on the region’s economy.
DOWN PLAYING
Once removed from balance sheets, the report estimates, two-thirds of that amount would be freed up for new lending.
Vinals, director of the IMF’s Monetary and Capital Markets Department, said the fund does not yet consider it time for the US Federal Reserve to raise interest rates, which have been near zero since the crisis.
“We do not see wage and price inflation having the strength that would make it necessary to increase interest rates at this stage,” he said.
Meanwhile, a senior Chinese central bank official on Wednesday downplayed concerns that China’s economic slowdown could further drag down the global economy.
“I would say don’t worry,” People’s Bank of China Deputy Governor Yi Gang (易綱) said after the IMF warned of risks in China’s economic challenges.
“China will still have pretty much middle-to-high growth in the near future,” said Yi, speaking in Lima where the IMF-World Bank annual meetings were beginning.
“A lot of people are considering a slowdown of the Chinese economy,” he said, referring to how the downturn has helped send global commodity prices plummeting, hurting the economies of exporters.
However, he said that Chinese imports of raw materials for its industrial economy could grow steadily in the future.
On Tuesday, the IMF said China’s economy is expected to expand 6.3 percent next year, its lowest rate in 25 years.
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