The IMF says that the COVID-19 pandemic has caused a unique shock to the global economy but the near-term financial stability risks have been contained for now, thanks to the unprecedented policy measures but the balance of risks is tilted to the downside, the Fund’s Financial Counselor and Monetary and Capital Markets Director Tobias Adrian said at the launch of the Global Financial Stability Report (GFSR) Tuesday in Washington.

“Risks to growth are still tilted to the downside. The probability that global growth will fall below zero in 2021 is close to 5 percent. This “tail risk” suggests that the economic future remains precarious, amid huge uncertainties. Moreover, there is a risk that the recent policy actions may have unintended consequences beyond policymakers’ stated objectives,” said Adrian.

Adrian outlined a series of challenges that face emerging markets as they try to control the pandemic.

“many countries in this crisis are among the emerging markets have eased monetary policy. So the pandemic. Of course, went hand-in-hand with a sharp decline in commodity prices and particularly oil prices. And that has generally led to a downward trend in inflation in many countries.”

“So with inflationary pressures, easing, monetary policy could be eased. And indeed, we have seen many emerging market countries deploying as a purchase programs for the first time. So, you know, countries have not only lowered interest rates, many have also expanded balance sheets via asset purchases. And so that has helped ease financial conditions. That has helped the corporations and individuals in emerging markets to continue to borrow and to continue to have access to credit and to funding.” He added.

He also warned that the resilience of the banking sector will be tested

“The banking sector entered the COVID-19 crisis with stronger capital and liquidity buffers than at the beginning of the global financial crisis. The success of the reforms undertaken over the past decade has allowed them so far to be part of the solution rather than part of the problem. Banks continue to provide credit to businesses and households during the pandemic. Nonetheless, in an address macroeconomic scenario, our analysis shows that some banking systems may suffer significant capital shortfalls”

He voiced a concern about the non-bank-financial-sector institutions which play a growing role in credit markets in the bonds economies. He also stressed that conditions in emerging and frontier markets require policy makers attention

“Looking ahead, policymakers should carefully sequence their response to build a bridge to a sustainable recovery. As the economies reopen monetary policy should remain accommodative to sustain the recovery. Liquidity support should be maintained even if a pricing should be gradually adjusted to encourage the return to market funding.”

A copy of the full report is available at IMF.org/GFSR.