The International Monetary Fund has warned that while financial stability has improved since April, emerging markets are still not free from danger. It indicated that governments and central banks are soon going to run into another global financial crisis due to the corporate debt debauchery of emerging economies.

According to the Global Financial Report released by the IMF on Wednesday, the companies of emerging economies have already over-borrowed in the last decade by an estimated US$3 trillion (AU$4.2 trillion). This is likely to stir up severe capital crunch and capital outflows in countries that are already dwindling with low commodity prices.

“The global financial outlook is clouded by a triad of policy challenges: emerging market vulnerabilities, legacy issues from the crisis in advanced economies, and weak systemic market liquidity,” the report read. Although many emerging market economies have enhanced their policy frameworks and resilience to external shocks, several key economies face substantial domestic imbalances and lower growth.

Emerging economies have swiftly increased their corporate debts to four times in the past decade and Their over borrowing has reached a level at which it adds up to 15 percent of their own GDP and 25 percent of China’s GDP, according to the IMF.

The Fund has also pointed out that even though it is too early to make any assessment of the recent regulatory changes to the market liquidity, certain changes in the market structure like large corporate holdings by mutual funds appear to have exacerbated the frailty of liquidity.

According to the IMF, the advanced economies may also pose a potent risk to the global economy. The warning comes after the U.S. and Europe failed to revert economic growth to the pre-crisis point despite launching massive stimulus programs. "Monetary policies in key advanced economies must remain accommodative and responsive," the IMF said.

It has advised the U.S. Federal Reserve System to delay its first interest rate hike in nine years and is and urged the Eurozone and Japan to carry on with their unprecedented stimulus measures.

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