*EPF419 03/14/2002
IMF Forecasts Global Recovery But Cautions Against Complacency
(Weak rebound could worsen financial problems, it says) (380)

By Andrzej Zwaniecki
Washington File Staff Writer

The International Monetary Fund (IMF) says that recent economic statistics support a consensus view that the global economy will recover during 2002.

But in a report released March 14 the IMF said that a weaker than expected recovery might aggravate existing "financial imbalances and some of the underlying weaknesses in the financial sector." The risk of such development, it added, is "not insignificant."

The first edition of a quarterly "Global Financial Stability Report" that covers data received by February 8 points to a potential gap between financial market expectations and corporate performance as the most important risk factor. If the recovery in the economic activity and corporate earnings does not validate market expectations, it said, the likely stock market correction and deterioration in credit quality "could erode the still fragile business and consumer confidence."

During a March 14 briefing in Washington, Hung Tran, one of the report's principal authors, said that stock prices relative to earning reflected expectations for a 20-30 percent increase in corporate earnings over the next two years.

"Financial markets, by pricing in future developments, overshot," he added.

The report pointed to high household and corporate debt levels as another risk factor. Smaller than expected earnings combined with a high debt servicing burden relative to current income could damage the initial rebound by stifling consumer spending and business investment, it said.

The report identified inadequate regulation and information requirements for non-bank financial companies as the third risk area. Referring to the collapse of Enron, a giant U.S. energy firm, it implied that with the increased use of complex financial mechanisms and instruments there is a need to "identify and address the gaps in regulation" that have allowed significant players in the financial markets to operate under different sets of rules.

The report emphasized the resilience of the international financial system showed in response to numerous challenges in 2001 -- global economic slowdown, the fall of technology stocks, Argentina's record debt default and the economic impact of the September 11 terrorist attacks.

It said that emerging markets also weathered adverse developments well with bond markets registering strong performance and equity markets outperforming their counterparts in mature economies.

(The Washington File is a product of the Office of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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