The COVID-19 pandemic has brought the relationship between sovereigns and banks—the so-called sovereign-bank nexus—in emerging market economies to the fore as bank holdings of domestic sovereign debt have surged. This paper examines the empirical relevance of this nexus to assess how it could amplify macro-financial stability risks. The findings show that an increase in sovereign credit risk can adversely affect banks’ balance sheets and credit supply, especially in countries with less-well-capitalized banking systems. Sovereign distress can also impact banks indirectly through the nonfinancial corporate sector by constraining their funding and reducing their capital expenditure. Notably, the effects on banks and corporates are strongly nonlinear in the size of the sovereign distress.

Chapter 1 looks at the implications of the war in Ukraine on the financial system. Commodity prices pose challenging trade-offs for central banks. Many emerging and frontier markets are facing especially difficult conditions. In China, financial vulnerabilities remain elevated amid ongoing stress in the property sector and new COVID-19 outbreaks. Central banks should act decisively to prevent inflation from becoming entrenched without jeopardizing the recovery. Policymakers will need to confront the structural issues brought to the fore by the war, including the trade-off between energy security and climate transition. Chapter 2 discusses the sovereign-bank nexus in emerging markets. Bank holdings of domestic sovereign bonds have surged in emerging markets during the pandemic. With public debt at historically high levels and the sovereign credit outlook deteriorating, there is a risk of a negative feedback loop that could threaten macro-financial stability. Chapter 3 examines the challenges to financial stability posed by the rapid rise of risky business segments in fintech. Policies that target both fintech firms and incumbent banks proportionately are needed.

Guinea: Selected Issues

West African Economic and Monetary Union: Selected Issues

The gradual alignment of prudential regulations on Basel II/III standards since 2018, as well as improvements in banking supervision and macroprudential surveillance, have contributed to the WAEMU’s banking system’s resilience to recent global and regional shocks. However, while cyclical vulnerabilities have been contained, bank credit portfolios remain highly concentrated, and their exposure to sovereign risks has grown substantially in recent years, together with liquidity risks. Further reforms building on those recently implemented in line with recommendations from the 2022 Financial Sector Assessment Program (FSAP), including to enhance macroprudential policy’s effectiveness and banking supervision frameworks, will help address such vulnerabilities.

Critically analysing methodologies and objectives of capacity building and the practical linkages required to achieve the Sustainable Development Goals, this book looks at whether nexus thinking offers a systematic approach to combat global environmental problems and facilitate enhanced sustainable development. Building effective and sustainable mechanisms to tackle environmental problems requires in-depth understanding of relationships between natural resources, going beyond conventional policy and siloed decision making. The water energy food nexus has been promoted as a conceptual framework and management tool to facilitate integrated planning and practical linkages to support sustainable development. The author opens this book with an overview of capacity building and reviews the significance of the water energy food nexus, bringing in links to the 2030 Agenda. Climate change is highlighted as a key consideration in any conversation about natural resource use and case studies from Japan, India and China are utilised to show that whist long-term sustainable development practices are being implemented the environmental challenges across the region raise concerns about institutional capacity, economic sustainability and future of the region. Finally, through the lens of capacity building, the book suggests that whilst the water energy food nexus may provide a new approach to sustainable development, it will not be enough to achieve long-term sustainability or extend to the lives of those most affected. The book will be interest to scholars and students within the water, energy and agriculture sectors, sustainability governance and sustainable development. It will also be a valuable resource to those working in governmental organisations and NGOs involved in capacity building and development.

This book addresses the urgent need to examine central bank policies in response to the global supply and demand shock brought on by the Covid-19 pandemic, asking whether central banks are doing enough to address inequalities and concerns around climate change and emerging technologies. Adopting an interdisciplinary, critical perspective, the contributors to this volume provide novel theoretical, methodological, and empirical insights on central banks around the world, including in advanced, emerging and developing economies. The chapters in this book explore the evolution of central bank mandates, the policy tools central banks are utilizing, why and how monetary policy takes different shapes (including unconventional monetary policy), the key dynamics influencing central bank policies, how central banks are adapting to the new realities and addressing emerging challenges, and how monetary policy is perceived in the wider economic policy framework. With novel theoretical approaches and diverse empirical evidence from a variety of countries, this book will appeal to readers interested in central banking, monetary policy, the economics of the pandemic and political economy.

CEMAC benefited from favorable hydrocarbon prices in 2022. Economic recovery firmed up and the external position strengthened, with external reserves building up faster in recent months, although still below adequate levels. Monetary policy was tightened to stem rising inflation, and fiscal positions improved owing to higher oil revenues. However, underlying non-oil fiscal positions deteriorated, highlighting the necessity of accelerating reforms and tackling recent fiscal slippages, to help save part of the oil windfalls and bring polices back in line with Fund-supported program objectives and staff advice. This will help cope more effectively with downside risks, including hydrocarbon prices volatility, food insecurity, financial stability risks, higher inflation, funding squeeze, and debt vulnerabilities.

This paper assesses the state and resilience of corporate and banking sectors in the Middle East and North Africa (MENA) in a “higher-for-longer” interest rate environment using granular micro data to conduct the first cross-country corporate and banking sector stress tests for the MENA region. The results suggest that corporate sector debt at risk may increase sizably from 12 to 30 percent of total corporate debt. Banking systems would be broadly resilient in an adverse scenario featuring higher interest rates, corporate sector stress, and rising liquidity pressures with Tier-1 capital ratios declining by 2.3 percentage points in the Gulf Cooperation Council (GCC) countries and 4.0 percentage points in non-GCC MENA countries. In the cross-section of banks, there are pockets of vulnerabilities as banks with higher ex-ante vulnerabilities and state-owned banks suffer greater losses. While manageable, the capital losses in the adverse scenario could limit lending and adversely impact growth.

Uganda: Selected Issues