The recent volatility in global financial markets shows how rapidly risks can spill over from one economy to the next, the managing director of the International Monetary Fund (IMF), Christine Lagarde, said.
“What has been demonstrated in the last few weeks is how much Asia is at the core of the global economy, and how much disruption in one market in Asia can spill over to the rest of the world,” Lagarde said on Wednesday.
World stock markets and the currencies of many emerging markets have seen large swings since China’s decision last month to devalue its currency.
Lagarde said the world economy was facing headwinds from China’s rebalancing, Japan’s slow growth, falling commodity prices and uncertainties surrounding higher US interest rates.
Policies need to be tailored to each country, Lagarde said, but mostly they would involve strengthening defences with prudent fiscal policy, reining in excessive credit growth, aligning exchange rates to act as shock absorbers, maintaining adequate foreign exchange reserves, and strengthening regulation.
“Authorities and the supervisors have to remain vigilant particularly when there are those new and innovative products... be in traditional banking, disruptive banking systems or shadow banking systems,” she added.