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Build back better: IMF support, strategies to build a sustainable economy and dynamic business environment [part II]
Topic: Looming global recession? A myth or an awakening reality considering the present challenges facing the financial sector and the business environment
Key outcomes of discussions
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Since the beginning of the year, a rapid deterioration of growth prospects, coupled with rising inflation and tightening financing conditions, has ignited a debate about the possibility of a global recession.
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Experience from earlier recessions suggests that at least two developments that either have already materialised in recent months or maybe underway heighten the likelihood of a global recession shortly. First, every global recession since 1970 was preceded by a significant weakening of global growth in the previous year, as has happened recently. Second, all previous global recessions coincided with sharp slowdowns or outright recessions in several major economies.
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The current high inflation, low growth, high debt, and high fragmentation environment reduce incentives for the investments needed to get back to growth.
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Businesses, large and small, face declines in sales and profits in a recession. Their efforts to cut costs may include layoffs and cuts in capital spending, marketing and research. Recessions may curb credit access, slow collections, and spur business bankruptcies.
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The deceleration in economic growth and higher interest rates may hurt asset quality, leading to higher impairment costs and lending volumes, exerting contractionary pressures on income generation capacity.
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The challenging macroeconomic outlook, coupled with elevated geopolitical tensions, underscores the importance of prudent management of credit, market and funding risks in the banking business.
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Vulnerabilities in the non-bank financial sector could trigger asset price corrections and amplify volatility.
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Bank funding costs are on the rise, bringing potential pressure on interest margins. The impact of this is expected to become more pronounced over time and more likely the longer the high-interest rate period continues.
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For firms, higher borrowing and input costs as well as wage pressures may reduce profitability, stifle investment and reduce employment. Firms with larger shares of floating interest-rate debt are directly exposed to higher interest rates.
Options for policy consideration
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Policy-makers need to navigate a narrow path that requires a comprehensive set of demand- and supply-side measures. On the demand side, monetary policy must be employed consistently to restore, promptly, price stability. Fiscal policy needs to prioritise medium-term debt sustainability while providing targeted support to vulnerable groups. Policy-makers need to stand ready to manage the potential spillovers from the globally synchronous withdrawal of policies supporting growth. On the supply side, they need to put in place measures to ease the constraints that confront labour markets, energy markets and trade networks.
· The current high inflation, low growth, high debt and high fragmentation environment reduces incentives for the investments needed to return to growth.
· Non-bank financial institutions need to ensure that their risk management practices adequately reflect the risks they might face. For example, investment funds need to monitor and address possible excessive liquidity mismatches or leverage.
· Regulatory actions and policies toward banks and NBFI intermediaries must aim to preserve shock absorption capacity in the form of capital and liquidity buffers.
· To mitigate risks to financial stability, supervisors need to develop and enforce rules defining acceptable behaviour for banks, monitor emerging risks, and act to address unsafe practices. Fulfilling these tasks requires a sound institutional setting that provides sufficient powers and incentives for prompt supervisory action.
· There will be a need to conduct a comprehensive review of the legal and regulatory framework governing payment and securities settlement systems and the Strategic Payments Roadmap for Ghana.
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Develop and issue disclosure and product transparency rules for all retail products and services, including those delivered through digital means.
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Facilitate the finalisation of the passage of the Regulations for the Corporate Insolvency and Restructuring Act, 2020 (Act 1015).
