WASHINGTON: The International Monetary Fund (IMF) warned on Wednesday that the current economic environment has increased downside risks, particularly for emerging markets and developing economies.

The report, prepared for the G20 finance ministers and central bank governors’ meetings, which begins in Ankara on Friday, also predicts a moderate global growth and a weak recovery in advanced economies.

The downside factors identified in the report include China’s growth transition, lower commodity prices, potential adverse corporate balance sheet and funding challenges related to a dollar appreciation, and capital flow reversals and disruptive asset price shifts.

The report notes that global growth in the first half of 2015 was lower than in the second half of 2014, reflecting a further slowdown in emerging economies and a weaker recovery in advanced economies.

“In advanced economies, weaker exports, partly reflecting temporary factors, and a slowdown in domestic demand were key factors. Productivity growth has been persistently weak,” the report notes.

“In emerging economies, the slowdown reflects a continuation of the adjustment after the investment and credit boom post-crisis, together with the fallout from declining commodity prices, geopolitical tensions, and conflict in a number of countries.”

In advanced economies, economic activity is projected to pick up modestly in the second half of the year and into 2016.

In emerging economies, growth this year is projected to slow again relative to 2014; some rebound is projected next year, as conditions in distressed economies, while remaining difficult, are projected to improve.

The report warns that financial conditions for emerging economies have tightened. In an environment of rising financial market volatility, dollar bond spreads and long-term local currency bond yields have increased relative to the spring, stock prices have weakened, and capital inflows have declined.

Emerging market currencies have generally depreciated, reflecting weakening commodity prices, concerns about the growth transition in China, an increase in risk aversion, and expectations of a lift-off in policy rates in the US.

In contrast, financial conditions in advanced economies continue to be easy. On the back of weak demand, safe real interest rates remain low, despite some widening of spreads, even as the policy rate lift-off approaches in the US.

Risks are tilted to the downside, and a simultaneous realisation of some of these risks would imply a much weaker outlook.

Published in Dawn, September 3rd, 2015

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