The recent Global Financial Stability Report (GFSR) released by the International Monetary Fund (IMF) on April 16, Eastern Time, highlights a pressing concern regarding the 'final mile' of global disinflationThis caution emphasizes the financial vulnerabilities that persist worldwide as economies attempt to stabilize following a tumultuous period of high inflation.

Following the IMF's previous report in October 2023, a notable shift has occurred in the global financial market landscapeDuring that time, there was an optimistic expectation surrounding the prospect of disinflation and an impending relaxation of monetary policiesThis optimistic sentiment acted like a powerful wind at the back of global asset prices, pushing them higherIn the emerging markets sector, numerous economies displayed remarkable resilience, akin to sturdy vessels navigating through turbulent seas, successfully weathering a multitude of external risks.

Additionally, several advanced economies cleverly capitalized on the appetite for risk generated by these positive expectations, re-entering global markets to finance debt issuance activities, thereby seeking additional funding to support their economic growth

From a broader perspective, the global economy appears to be steadily advancing toward a soft landingThe fissures in the global financial markets, which had initially raised concerns due to high interest rates, did not exacerbate as much as feared, providing a sense of relief and hope for global economic recovery.

Against this backdrop, the IMF agrees that according to its framework for measuring growth and risk, short-term risks to global financial stability have indeed recededHowever, the mid-term growth risks appear to be considerably higher, indicating the existence of intertemporal risk trade-offs in the marketplaceThis suggests that the currently relaxed financial conditions might induce excessive risk-taking and the accumulation of financial vulnerabilities, which could pose heightened downward risks to growth in the upcoming years.

Even in the context of short-term risks, the IMF warns that historically speaking, navigating a soft landing following a substantial rise in global inflation is quite an unusual phenomenon

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Since the 1970s, tightening monetary policy to combat inflation often led to economic downturns accompanied by tightening financial conditionsNevertheless, this time around, with inflation returning to target levels, the market appears to anticipate resilient economic growth across most nations.

The IMF does acknowledge that within the 'final mile' of global disinflation, several significant risks remain prevalentOne such concern is the potential for adverse shocks to exacerbate growing pressures in the commercial real estate sector, with signs of credit deterioration emerging for some businesses and residential marketsAnother risk involves the unexpected emergence of stagflation, an occurrence that could astonish investors, leading to a revaluation of global assets and a resurgence in market volatilityDespite the considerable uncertainties surrounding the economy, financial market volatility has been surprisingly low over an extended period.

Beyond these immediate risks, the IMF points out that other mid-term financial vulnerabilities are on the rise, particularly in relation to the persistent accumulation of public and private sector debt

The increase in public debt could hinder certain governments' ability to repay in the future, while the private sector's high leverage exposure to financial assets could indicate a rise in financial stability risks over the coming years.

Moreover, the report raises alarms regarding the potential risks associated with private credit marketsThe IMF indicates that private credit has created immense economic benefits by providing long-term financing to companies that are too large or risky for banks and too small for public marketsHowever, the shift of credit from regulated banks and relatively transparent public markets to less transparent private credit introduces potential risksThese encompass weak borrowers, the increased exposure of pension funds and insurance companies to this asset class, rising market share of semi-liquid investment tools, multi-layered leverage, outdated valuations, and the difficulty in discerning interconnections among participants.

Assessing the overall financial stability risks of private credit assets proves to be particularly challenging, as comprehensive data necessary for such an analysis may not be accessible