Risks to financial stability have increased, International Monetary Fund (IMF) chief Kristalina Georgieva warned on Sunday, as she stressed "the need for vigilance" following the recent turmoil in the banking sector.
Speaking at a forum in Beijing, the IMF managing director said she expected 2023 "to be another challenging year," with global growth slowing to below 3% due to the war in Ukraine, monetary tightening, and "scarring" from the pandemic.
"Uncertainties are exceptionally high," with the outlook for the global economy likely to remain weak over the medium term; she told the China Development Forum.
"It is also clear that risks to financial stability have increased," she added.
"At a time of higher debt levels, the rapid transition from a prolonged period of low-interest rates too much higher rates – necessary to fight inflation – inevitably generates stresses and vulnerabilities, as evidenced by recent developments in the banking sector in some advanced economies."
Her comments came after the financial sector was shaken by the collapse of Silicon Valley Bank (SVB) and the enforced takeover of Swiss bank Credit Suisse by rival UBS, leading to fears of contagion.
Bank shares tumbled on Friday as fears about the financial sector's health resurfaced. German Chancellor Olaf Scholz was forced to give reassurances about Deutsche Bank after the long-troubled lender became a focus of investor concerns.
Georgieva said policymakers had acted decisively in response to financial stability risks.
"These actions have eased market stress to some extent, but uncertainty is high, underscoring the need for vigilance," she said.
The IMF chief, however, pointed to China's rebound as a bright spot for the world economy. The IMF forecasts China's economy to grow 5.2% this year, driven by a rebound in private consumption as it reopens after its pandemic isolation.
"The robust rebound means China is set to account for around one-third of global growth in 2023 – giving a welcome lift to the world economy," she said.
"A 1.0% point increase in gross domestic product (GDP) growth in China leads to 0.3% point increase in growth in other Asian economies, on average – a welcome boost."
Georgieva urged China's policymakers to seek to raise productivity and rebalance the economy away from investment and towards more stable consumption-driven growth.
"Market-oriented reforms to level the playing field between the private sector and state-owned enterprises, together with investments in education, would significantly lift the economy's productive capacity," she said.
