[Answered] In light of the present conditions, what are the challenges that the world’s financial system is facing?

Introduction: Contextual introduction.
Body: Explain some challenges that the world’s financial system is facing.
Conclusion: Write a way forward.

The Ukraine conflict poses the biggest challenge to growth since the global financial crisis (GFC) of 2007.  As per IMF, the world economy will grow at 3.2 percent in 2022 and 2.7 percent in 2023. Growth in 2023 will be the lowest since 2010, leaving aside the pandemic year of 2020.

According to the IMF’s Global Financial Stability Report 2022, there are following challenges that the world’s financial system is facing:

  • Slow growth and rising interest rates: Rising interest rates translate into losses in the bond market and increase in bad loans.
  • China’s housing market: Stringent lockdowns in China have impacted home sales. Buyers do not want to make advance payments for the purchase of properties. As a result, developers face liquidity pressures and many have gone bankrupt.
  • Poor market liquidity: Central banks are tightening monetary policy and shrinking their balance sheets. When liquidity is limited, the fall in prices can be steep. Investors trying to exit their holdings of securities end up incurring losses that can trigger panic.
  • Corporate debt at risk: Rising interest rates pose challenges for firms with high debt. According to the IMF, 50 per cent of small firms would have difficulty servicing debt.
  • Leveraged finance under pressure: Leveraged finance is of the high-yield variety. In the US today, more than 50 percent of leveraged finance is composed of firms with a B rating or relatively higher risk of default.
  • Declining housing price: Rising interest rates could trigger a steep decline in housing prices worldwide. These orders of declines will have adverse implications for banks.
  • Banks in emerging markets: Banks accounting for a third of banking assets would lack the minimum capital required. Globally, however, banks that fall below the 4.5 percent minimum would account for no more than 5 percent of global banking assets.

Keeping the global trends in mind, India should form relevant policies to avoid the future impacts of the present global financial issues.

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