(Yicai Global) Oct. 14 -- Vulnerabilities have increased in the nonfinancial corporate sector, thus intensifying financial stability concerns in some countries, the International Monetary Fund’s 2020 Global Financial Stability Report released yesterday shows.

The susceptibilities of nonbank financial institutions, which had been in crisis even before the Covid-19 outbreak, are still quite high although they have managed to cope with the turmoil wrought by the pandemic, aided by policy report. Small and medium enterprises, especially in contact-intensive sectors like hotels, restaurants and entertainment, could form significant channels to transmit economic shocks.

The vulnerability of nonbank financial institutions could spread throughout the financial system with its growing role in the credit market, per the report.

Sovereign funds, especially in emerging and frontier markets, face a sharp rise in contingent liabilities, “with six out of 29 jurisdictions with systemically important financial sectors now showing elevated vulnerabilities in the corporate, banking, and sovereign sectors,” the IMF said.

New debt supply and weak domestic fundamentals may have reduced demand for local currency bonds from foreign investors. Central banks in some countries have bought bonds on the secondary market to stabilize market conditions. Frontier market economies face even greater financing challenges, as the COVID-19 shock has pushed borrowing costs for many to prohibitive levels that have necessitated official intervention.

The IMF recommended continued monetary policy accommodation and targeted liquidity support to sustain recovery as economies reopen amid the pandemic.

Policy support can gradually wind down after the coronavirus comes under control, the IMF believes. Policy priorities should focus on rebuilding bank buffers, bolstering regulation of nonbank financial institutions and stepping up prudential supervision to contain excessive risk taking in a lower-for-longer interest-rate environment, the report advised.

Editor: Ben Armour