In a report released today by the International Monetary Fund, analysts wrote that while “massive policy support” helped to ease financial conditions and buoy the economy during the past year, actions taken during the pandemic also may offer a longer-term mixed bag of “unintended consequences” for global markets.
IMF analysts noted that these consequences could include stretched valuations and rising financial vulnerabilities. In addition, the recovery is likely to affect advanced and emerging market economies differently, they noted. “Whether the economic recovery will be uneven and will have scarring effects will depend on the ability and willingness of banks to lend once government support is unwound,” analysts cautioned. “Concerns about the credit quality of hard-hit borrowers and the profitability outlook are likely to weigh on the risk appetite of banks.”
They noted that ongoing government support remains necessary, but “a range of policy measures are needed to address vulnerabilities and protect the economic recovery. Policymakers should support balance sheet repair, for example by strengthening management of nonperforming assets.”
The report also flagged the significant effect of the pandemic on the commercial real estate sector, as commercial property transactions and prices “slumped” in 2020. “Part of the adverse impact on the retail, office and hotel segments could be structural, as some activities increasingly take place virtually or are relocating outside of large cities,” they wrote. “In the event of a structural decline in demand, commercial real estate fair values could drop sharply.” The report predicted a permanent increase in the CRE vacancy rate by 5%, resulting, on average, and a drop in fair values by about 15% after five years.
Report authors also explained that nonfinancial firms are emerging from the pandemic overindebted, in some cases with poor earnings prospects and dependent on continuing policy support. “Firm-specific support” may be needed for viable firms facing liquidity or solvency risks, the IMF said. Analysts said helpful measures could include development of distressed debt and nonperforming loan markets to reduce the cost of restructuring and consolidation, particularly among smaller firms. This, in theory, would lower the cost of supporting weaker firms while minimizing the economic cost associated with bankruptcies. Read the report in detail.
