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  • Financial Economics: General x
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Cover Regional Economic Outlook: Middle East and Central Asia, May 2023
Regional Economic Outlook: Middle East and Central Asia, May 2023
Safeguarding Macroeconomic Stability amid Continued Uncertainty.
International Monetary Fund. Middle East and Central Asia Dept.

Abstract

The economies of the Middle East and Central Asia proved resilient in 2022, despite a series of global shocks. However, this year—and potentially next—growth is expected to slow in the Middle East and North Africa as tight policies to fight inflation, reduce vulnerabilities, and rebuild buffers start to dent economic activity in many countries, and agreed oil production cuts curb growth in oil exporters. Inflation is projected to remain persistent. The outlook for Caucasus and Central Asia countries depends heavily on external factors, namely the impact of monetary tightening, and growth in their main trading partners, the pace of private transfers, and inflows of migrants from Russia. Uncertainty is high, and risks to the baseline are tilted to the downside amid financial stability concerns, particularly in advanced economies amid contagion fears. Policy trade-offs are even more complex, and policymakers will need to calibrate the policy mix carefully to reduce core inflation without triggering financial stress and excessive tightening and continue to provide targeted fiscal support to vulnerable groups while preserving debt sustainability and financial stability. Tight monetary and fiscal policies across the region amid tight global financial conditions call for accelerating structural reforms to bolster potential growth and enhance resilience.

Keywords:
Growth outlook; monetary tightening; inflation; downside risks; financial stability concerns; policy priorities; debt sustainability; structural reforms
Cover IMF Working Papers
The Internationalization of China’s Equity Markets
Juan J. Cortina, Mr. Maria Soledad Martinez Peria, Mr. Sergio L. Schmukler, and Jasmine Xiao
China’s equity markets internationalization process started in the early 2000s but accelerated after 2012, when Chinese firms’ shares listed in Shanghai and Shenzhen gradually became available to international investors. This paper studies the effects of the post-2012 internationalization events by comparing the evolution of equity financing and investment activities for: (i) domestic listed firms relative to firms that already had access to international investors and (ii) domestic listed firms that were directly connected to international markets relative to those that were not. The paper finds large increases in financial and investment activities for domestic listed and for connected firms, with significant aggregate effects. The evidence also suggests the rise in firms’ equity issuances was primarily and initially financed by domestic investors. International investors’ portfolio holdings in Chinese equity markets and ownership in firms increased markedly only once Chinese firms’ locally issued shares became part of the MSCI Emerging Markets Index.
Keywords:
equity financing; equity market liberalization; firm investment; foreign investors; international investors; issuance activity; Stock Connect; portfolio holding; internationalization process; unconnected firm; China's equity markets; Stock markets; Stocks; Foreign corporations; Emerging and frontier financial markets; Market capitalization; Global
Cover IMF Working Papers
The COVID-19 Impact on Corporate Leverage and Financial Fragility
Sharjil M. Haque and Mr. Richard Varghese
We study the impact of the COVID-19 recession on capital structure of publicly listed U.S. firms. Our estimates suggest leverage (Net Debt/Asset) decreased by 5.3 percentage points from the pre-shock mean of 19.6 percent, while debt maturity increased moderately. This de-leveraging effect is stronger for firms exposed to significant rollover risk, while firms whose businesses were most vulnerable to social distancing did not reduce leverage. We rationalize our evidence through a structural model of firm value that shows lower expected growth rate and higher volatility of cash flows following COVID-19 reduced optimal levels of corporate leverage. Model-implied optimal leverage indicates firms which did not de-lever became over-leveraged. We find default probability deteriorates most in large, over-leveraged firms and those that were stressed pre-COVID. Additional stress tests predict value of these firms will be less than one standard deviation away from default if cash flows decline by 20 percent.
Keywords:
COVID-19; Corporate Debt; Optimal Capital Structure; Rollover Risk; Distance-To-Default; Default Risk; Stress Tests; over-leveraged firm; default probability; impact of the COVID-19 recession; model-implied optimal leverage; business risk; debt maturity; Asset valuation; Business enterprises; Currencies; Credit risk; Global; asset volatility
Cover IMF Working Papers
Fintech in Latin America and the Caribbean: Stocktaking
Pelin Berkmen, Ms. Kimberly Beaton, Mr. Dmitry Gershenson, Mr. Javier Arze del Granado, Kotaro Ishi, Miss Marie S Kim, Emanuel Kopp, and Mrs. Marina V Rousset
In Latin America and the Caribbean (LAC), financial technology has been growing rapidly and is on the agenda of many policy makers. Fintech provides opportunities to deepen financial development, competition, innovation, and inclusion in the region but also creates new and only partially understood risks to consumers and the financial system. This paper documents the evolution of fintech in LAC. In particular, the paper focuses on financial development, fintech landscape for domestic and cross border payments and alternative financing, cybersecurity, financial integrity and stability risks, regulatory responses, and considerations for central bank digital currencies.
Keywords:
WP; electronic money; Fintech firm; legal tender; private sector; transaction costs; Fintech; cross border payments; financial sector; financial regulation; financial stability and integrity; cyber risk; cyber regulation; monetary policy; central banks; digital currencies; competition.; transmission mechanism; firms in Mexico; beneficial owner; payment startup; value chain; technology company; savings account; Peer to Peer; market structure; investment management firm; Mobile banking; Central Bank digital currencies; Remittances; Global; Caribbean; Asia and Pacific; Africa; South Asia
Cover Staff Discussion Notes
Fintech and Financial Services: Initial Considerations
Mr. Dong He, Mr. Ross B Leckow, Mr. V. Haksar, Mr. Tommaso Mancini Griffoli, Nigel Jenkinson, Ms. Mikari Kashima, Mr. Tanai Khiaonarong, Ms. Celine Rochon, and Hervé Tourpe
A new wave of technological innovations, often called “fintech,” is accelerating change in the financial sector. What impact might fintech have on financial services, and how should regulation respond? This paper sets out an economic framework for thinking through the channels by which fintech might provide solutions that respond to consumer needs for trust, security, privacy, and better services, change the competitive landscape, and affect regulation. It combines a broad discussion of trends across financial services with a focus on cross-border payments and especially the impact of distributed ledger technology. Overall, the paper finds that boundaries among different types of service providers are blurring; barriers to entry are changing; and improvements in cross-border payments are likely. It argues that regulatory authorities need to balance carefully efficiency and stability trade-offs in the face of rapid changes, and ensure that trust is maintained in an evolving financial system. It also highlights the importance of international cooperation.
Keywords:
SDN; cross-border payment; transaction costs; Fintech firm; payment pattern; payments chain; Fintech; cross-border payments; financial sector; market structure; financial regulation; financial stability; monetary policy; central banks; international cooperation; virtual currencies; digital currencies; competition; entry; intermediaries; concentration; market contestability; vertical integration; horizontal integration; product differentiation; network externalities; economies of scale; barriers to entry; sunk costs; fixed costs; information asymmetries; matching; innovation; adoption; payment instruction; fiat money; Emerging technologies; Blockchain and DLT; Global
Cover Staff Discussion Notes
Fintech and Financial Services: Initial Considerations
Mr. Dong He, Mr. Ross B Leckow, Mr. V. Haksar, Mr. Tommaso Mancini Griffoli, Nigel Jenkinson, Ms. Mikari Kashima, Mr. Tanai Khiaonarong, Ms. Celine Rochon, and Hervé Tourpe
A new wave of technological innovations, often called “fintech,” is accelerating change in the financial sector. What impact might fintech have on financial services, and how should regulation respond? This paper sets out an economic framework for thinking through the channels by which fintech might provide solutions that respond to consumer needs for trust, security, privacy, and better services, change the competitive landscape, and affect regulation. It combines a broad discussion of trends across financial services with a focus on cross-border payments and especially the impact of distributed ledger technology. Overall, the paper finds that boundaries among different types of service providers are blurring; barriers to entry are changing; and improvements in cross-border payments are likely. It argues that regulatory authorities need to balance carefully efficiency and stability trade-offs in the face of rapid changes, and ensure that trust is maintained in an evolving financial system. It also highlights the importance of international cooperation.
Keywords:
SDN; cross-border payment; transaction costs; Fintech firm; payment pattern; payments chain
Cover IMF Working Papers
Understanding the Use of Long-term Finance in Developing Economies
Mr. Maria Soledad Martinez Peria and Mr. Sergio L. Schmukler
This short paper reviews recent literature on the use of long-term finance in developing economies (relative to advanced ones) to identify where long-term financing occurs, and what role different financial intermediaries and markets play in extending this type of financing. Although banks are the most important providers of credit, they do not seem to offer long-term financing. Capital markets have grown since the 1990s and can provide financing at fairly long terms. But few firms use these markets. Only some institutional investors provide funding at long-term maturities. Governments might help to expand long-term financing, although with limited policy tools.
Keywords:
WP; finance; institutional investor; capital market; market; maturity; banks; bond markets; firm financing; financial crises; financial intermediaries; institutional investors; issuance maturity; long-term debt; short-term debt; investment finance program; long-term finance; capital market capitalization; economies stock market capitalization; saving needs; finance shift; stock market capitalization; market failure; income economy; investment horizons; Mutual funds; Capital markets; Loans; Pension spending; Insurance companies; Europe; Global; Central America
Cover IMF Working Papers
Bank Solvency and Funding Cost
Christoph Aymanns, Carlos Caceres, Christina Daniel, and Miss Liliana B Schumacher
Understanding the interaction between bank solvency and funding cost is a crucial pre-requisite for stress-testing. In this paper we study the sensitivity of bank funding cost to solvency measures while controlling for various other measures of bank fundamentals. The analysis includes two measures of bank funding cost: (a) average funding cost and (b) interbank funding cost as a proxy of wholesale funding cost. The main findings are: (1) Solvency is negatively and significantly related to measures of funding cost, but the effect is small in magnitude. (2) On average, the relationship is stronger for interbank funding cost than for average funding cost. (3) During periods of stress interbank funding cost is more sensitive to solvency than in normal times. Finally, (4) the relationship between funding cost and solvency appears to be non-linear, with higher sensitivity of funding cost at lower levels of solvency.
Keywords:
WP; funding cost; bank fundamentals; default probability; federal funds; return on assets; solvency shock; Solvency; stress testing; solvency measure; FDIC bank default dataset; Bank solvency; Estimation techniques; Capital adequacy requirements; Financial statements; Global