IMF Urges Emerging Markets to Strengthen Buffers Against Shocks

The International Monetary Fund (IMF) has urged emerging market economies to bolster their external buffers to better withstand potential geopolitical shocks, which it warns could disrupt financial markets and threaten global economic stability.

The IMF highlighted that geopolitical risks—such as military conflicts, diplomatic tensions and terrorism—are particularly difficult for investors to assess due to their infrequent occurrence, uncertain duration, and unpredictable scope. Consequently, the Fund anticipates that such events could heighten financial market volatility and increase sovereign risk premiums, particularly in countries with weak fiscal positions and limited capacity to absorb external shocks.

The IMF cautioned that the financial contagion from geopolitical events can extend beyond directly affected nations through trade and financial linkages, leading to broader risk aversion that impacts both sovereign and corporate entities.

Key external buffers identified by the IMF include a strong external position, manageable current account deficits, low reliance on external debt, an independent central bank, and a flexible exchange rate regime.

In its report Geopolitical Risks: Implications for Asset Prices and Financial Stability, the IMF warned that rising geopolitical risks could depress asset prices, weaken financial institutions, and constrain private sector credit, thereby dampening economic activity and posing a significant threat to global financial stability.

While the report does not single out specific countries, it references Mexico in a footnote regarding the impact of US tariffs on other nations. The IMF noted that after the announcement of US tariffs on China, Mexican company stock prices saw an immediate increase. This contrasted with reactions in countries such as Canada, Germany, India, Japan, South Korea, and the United Kingdom, where stock markets generally declined.

US company stock prices, the IMF added, fell by an average of 1.3% following the tariff announcements targeting China.