BRICS+ crumbles under war-fueled financial storm

THE International Monetary Fund’s (IMF’s) April 2026 Global Financial Stability Report (GFSR) highlights mounting challenges for South Africa and the broader BRICS+ group of emerging and frontier economies as global financial markets confront heightened risks stemming from the ongoing war in the Middle East and associated amplification channels.

This complex risk environment is testing vulnerabilities across sovereign and corporate sectors, with financial market participants needing to balance risk management with policy responses to safeguard macrofinancial stability.

The GFSR assesses that global financial stability risks are elevated due to multiple factors. Since the conflict erupted in late February 2026, global equity prices have declined, while bond yields have risen sharply — a reflection of rising energy prices and market expectations of sustained inflation.

Measures of market volatility, such as the Chicago Board Options Exchange Volatility Index (VIX) for equities and the Merrill Lynch Option Volatility Estimate (MOVE) for bond markets, have surged, underscoring the rapid increase in uncertainty.

Emerging markets — including BRICS+ economies — have been disproportionately impacted, particularly commodity importers and countries with higher external vulnerabilities.

The report underscores that these countries face pronounced capital outflow risks and currency depreciation pressure, with carry trade adjustments and terms-of-trade shocks amplifying financial instability risks.

The IMF notes that while financial markets have so far functioned in an orderly manner, the risks are asymmetrically skewed toward further tightening and more abrupt disruptions the longer the conflict persists.

The erosion of traditional safe-haven bonds in advanced economies also heightens global fragility, as simultaneous equity and bond sell-offs challenge established hedging relationships, an effect observed in the G4 economies, including the United States, Japan, the Euro Area, and the United Kingdom.

The report’s detailed analysis highlights several structural vulnerabilities that are particularly salient for BRICS+ and other emerging and frontier markets. Key among these are:

• Elevated Sovereign Debt and Rollover Risks: Many emerging economies face persistently high public debt levels compounded by chronic fiscal deficits. This elevates rollover risks, especially in sovereign bond markets where volatility can trigger forced selling and liquidity squeezes. Limited fiscal policy space constrains governments’ ability to respond countercyclically to shock events like the Middle East conflict.
• Nonbank Financial Intermediaries (NBFIs) and Amplification Mechanisms: Since the global financial crisis, there has been a marked shift in cross-border capital flows, with nonbank financial investors (such as portfolio investors, leveraged funds, and hedge funds) playing a growing role. The report emphasises that these investors tend to be highly sensitive to global risk changes, and their leveraged positions could amplify volatility in emerging markets. This trend particularly affects countries within BRICS+ that rely heavily on portfolio debt flows, which are more volatile than traditional bank lending.
• Private Credit and Liquidity Mismatches: Growth in private credit markets, especially in semiliquid credit structures, poses moderate systemic risks but warrants close monitoring given signs of borrower vulnerabilities. Illiquidity or credit deterioration here may cascade into broader corporate credit issues in emerging markets.
• Investment in Artificial Intelligence (AI) and Financial Sector Interconnections: Several BRICS+ economies harbour significant exposure to AI-related investment cycles. The report analyses “hyperscalers”, major AI-focused technology firms, whose capital expenditure and financing structures could influence corporate credit risk through rising debt burdens. Under stress scenarios involving rapid obsolescence of AI capital assets, earnings decline substantially, potentially increasing debt financing needs and corporate risk premiums.

A recurring theme is the constrained policy headroom facing emerging markets and BRICS+. Large sovereign debt issuance to service deficits narrows fiscal manoeuvrability, while persistent inflation pressures limit the ability of monetary authorities to stimulate economies or stabilise financial markets. Monetary policy credibility and inflation expectations are key factors; missteps could exacerbate financial volatility.

To sustain macrofinancial stability under current stress conditions, the IMF stresses the importance of maintaining clear communication from central banks, allowing exchange rates flexibility, and judicious use of foreign exchange intervention where volatility threatens disorderly movements. The IMF’s Integrated Policy Framework provides guidance on deploying capital flow management measures in coordination with sound macroeconomic policies.

Given the heightened risks, the IMF reiterates that policymakers in BRICS+ countries must act decisively to bolster resilience:

• Operational Readiness of Liquidity Facilities: Central banks should ensure liquidity and funding facilities are accessible and operationally ready to respond swiftly to market dysfunctions. Enhancing bilateral and regional currency swap lines is also highlighted as critical for maintaining foreign exchange and funding market stability during periods of geopolitical shocks.
• Fiscal Discipline: A major policy thrust is towards shifting fiscal stances toward tighter positions, to place public debt on a sustainable trajectory amid rising debt-servicing costs and fiscal demands tied to ageing populations and defence spending. Social protection measures should be temporary and well-targeted to mitigate the adverse effects of energy price shocks.
• Financial Regulatory Reforms: Completing the implementation of international prudential frameworks, such as Basel III, remains essential. The IMF advises against uncoordinated regulatory reviews, which can weaken standards and encourage regulatory arbitrage. Instead, reforms should improve the consistency of capital and liquidity requirements relative to systemic importance and risk profiles of financial institutions.
• Closing Data and Oversight Gaps in NBFIs: As leverage and interconnectedness in nonbank financial intermediaries grow, the report calls for closing key information gaps, enhancing cross-border cooperation on data sharing, and strengthening oversight frameworks to preempt amplified systemic risks.
• Enhanced Stress Testing and Scenario Analysis: Banks and, where possible, nonbank entities should be subjected to rigorous stress testing to assess vulnerabilities arising from potential illiquidity and corporate credit deterioration. Early recognition of losses is critical, particularly as retail and semi-liquid credit fund structures gain market share.
• Institutional Governance: The report underscores the necessity of strong institutional governance frameworks, operational independence of central banks and supervisors, and accountability mechanisms to preserve market trust and policy effectiveness.

For frontier markets within the BRICS+ or broader emerging group, the report finds uneven improvement in financial resilience. Sovereign spreads have generally narrowed since the February 2026 conflict onset, but divergence exists based on energy exposure, credit quality, and external vulnerabilities. Countries with weaker credit ratings or constrained market access see deteriorated reserve adequacy and sustained refinancing pressures, although near-term bond maturities remain manageable.

Additionally, the pricing of restructured external debt and upcoming maturities for lower-rated sovereign borrowers suggests the need for continued multilateral cooperation and assistance to manage vulnerabilities and prevent disorderly market episodes.

The IMF’s April 2026 Global Financial Stability Report encapsulates the multi-dimensional challenges confronting BRICS+ nations amid an increasingly complex global risk landscape. The ongoing war in the Middle East has acted as a catalyst revealing and amplifying systemic vulnerabilities. While the global financial system has displayed resilience so far, the report warns that this should be seen as a prompt for renewed efforts to strengthen buffers and close gaps rather than as a conclusion.

For BRICS+ and other emerging and frontier economies, rebuilding fiscal and monetary space, enhancing financial regulatory frameworks, and coordinating policy efforts internationally are imperative to absorb shocks without triggering damaging feedback loops. The IMF’s recommendations aim at enabling these nations to better withstand amplification risks and maintain sustainable growth trajectories in a volatile global environment.

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