Thursday, June 22, 2023, at 14:00-15:00 Vienna time (CEST)
Mr. Salih Fendoglu, Senior Financial Sector Expert, Monetary and Capital Markets Department, IMF
Mr. Tatsushi Okuda, Economist, Monetary and Capital Markets Department, IMF
Mr. Maximilian Fandl, Senior Economist, JVI
Rising geopolitical tensions have intensified concerns about global economic and financial fragmentation in recent years. If sustained, these developments could have important implications for international capital allocation and macro-financial risks, as discussed in Chapter 3 of the IMF Global Financial Stability Report April 2023, with a potentially high relevance for countries in the JVI region. Therefore, these issues were at the center of the webinar hosted by the JVI on June 22.
Salih Fendoglu and Tatsushi Okuda from the IMF’s Monetary and Capital Markets Department summarized the main findings and policy recommendations of the IMF’s analysis. Geopolitical tensions, as measured by geopolitical distance based on countries’ voting patterns at the UN General Assembly, imply lower cross-border capital allocation, with heterogeneous impact across economies. Capital flow reversals in response to increasing geopolitical distance could be stronger for countries with inadequate external buffers or less developed financial systems. Moreover, geopolitical shocks are found to adversely affect banks, again with heterogeneous impact depending on their capital positions. Relatively less capitalized banks are found to experience a more pronounced increase in funding costs and lower profitability, and in response reduced lending to the domestic economy by more. The authors also outlined how financial fragmentation may amplify capital flow volatility and countries’ vulnerability to shocks.
The presentation was followed by a lively Q&A session. Regarding the impact of geopolitical factors, the presenters differentiated the short- and long-term impact on various types of cross-border capital flows. They clarified how the analysis on the impact of rising geopolitical risks took into account simultaneous monetary policy tightening and how the direction of dependence was addressed in the analyses. They reiterated the call in the Chapter to supervisors, regulators, and financial institutions to devote adequate resources to identify, quantify, manage, and mitigate these risks. In the discussion, the presenters also touched upon regional financial integration, arguing that strengthening regional relationships in an environment of global financial fragmentation would not necessarily ensure stronger macro-financial stability in affected countries and emphasized the importance of adequate policy frameworks and broader multilateral solutions.
Maximilian Fandl, Senior Economist, Joint Vienna Institute