Amid ongoing global tensions, a new chapter of the IMF’s April 2025 Global Financial Stability Report sheds light on how rising geopolitical risks are increasingly weighing on asset prices and posing systemic risks to financial stability across the globe.
According to the IMF analysis by Salih Fendoglu, Mahvash S. Qureshi, and Felix Suntheim, major geopolitical events—ranging from wars to diplomatic tensions and terrorism—trigger significant declines in asset prices and increase borrowing costs, especially for emerging markets.
Stock prices, on average, decline by about 1 percentage point globally during major geopolitical risk events, but this figure nearly triples to 2.5 percentage points in emerging markets. The steepest declines—up to 5 percentage points—are observed in emerging economies during international military conflicts, highlighting their greater exposure to economic and financial shocks.
Geopolitical risks also increase sovereign risk premiums, with prices for credit default swaps rising by 30 basis points in advanced economies and up to 45 basis points in emerging markets. In vulnerable emerging markets with high public debt, low reserves, and weak institutions, these costs may surge even higher—up to four times as much.
The IMF report warns of cross-border spillover effects, especially when a major trading partner is involved in a conflict. In such cases, stock valuations in connected economies drop by around 2.5%, and sovereign spreads widen, with the impact intensifying in countries with fragile fiscal conditions.
Macroeconomic uncertainty following geopolitical shocks is another major concern. These shocks disrupt investor sentiment, limit bank lending, and hurt investment fund performance, ultimately leading to real economic consequences.
What Can Be Done?
The IMF urges financial institutions and regulators to better integrate geopolitical risk assessments into their strategies. Stress testing, adequate capital and liquidity buffers, and robust market development—especially in emerging markets—are highlighted as critical tools to mitigate the adverse impact of such shocks.
The report also emphasizes the importance of fiscal space and international reserves for countries with limited buffers, enabling them to respond more effectively to sudden financial disruptions triggered by geopolitical instability.
Disclaimer:
This article is based on findings from the April 2025 edition of the International Monetary Fund’s Global Financial Stability Report, authored by Salih Fendoglu, Mahvash S. Qureshi, and Felix Suntheim. For detailed insights and data visualizations, readers are encouraged to refer to the original IMF report.
