In addition to long-standing issues that are awaiting resolution such as conflicts in the Middle East, tensions in the Korean Peninsula, and Brexit, new sources of potentially abiding fragility keep adding on to this list. The US-Russia conflict, Iran nuclear sanction, the militarization of the South China Sea, and the increased cyber-attacks by both state- and nonstate-actors, are some of the issues that have emerged over the past few years. While heightening geopolitical risks have not led to a serious market correction or slowdown in global economic activities, persistent geopolitical risks still warrant close monitoring, as these could heighten volatility in the financial market and commodity prices, especially that of oil. The last source of risk that I would like to highlight is on the domestic front. While financial stability remains sound overall, there are some pockets of risk that might pose vulnerabilities to financial stability going forward. The prolonged period of low 2  interest rate environment leads to search-for-yield and underpricing of risks. This is especially challenging in a multi-regulator environment, since increased regulations by one agency is likely to simply push the potentially risky financial activities out of the agency’s regulatory umbrella. The evidence of this is presented by risk areas that span across all regulatory bodies’ responsibilities: delayed deleveraging of household debts; large expansion of foreign investment funds with high concentration in some emerging economies; saving cooperatives’ rapidly growing deposits; maturity mismatch of corporate borrowers; and rapid growth of corporate bonds, especially unrated bonds.
We have already seen some EME countries with idiosyncratic factors such as Argentina and Turkey experiencing these pressures. The second source of risk is headlined almost daily in the news: the escalating trade protectionism and especially trade tension between the US and China. The back-andforth between the two countries and the unpredictability of the outcome have driven much of the macroeconomic as well as financial volatility in the past few months. Up until now, the impact of the announced tariffs between the two countries on global trade has been limited since it takes time for the effect to be fully passed through. Nonetheless, the full impact of the ongoing trade war is expected to come next year, and the series of trade disputes could be far from over. If further tariffs were carried out, supply chain and production networks across the region could be disrupted. While the trade volume would certainly be directly affected, perhaps the more serious casualty is private investment, which—as we have seen in our recent past— decline under uncertainty. To the extent that uncertainty brings about reduced investment, prolonged trade war will reduce the productive capacity for future growth and delay technological upgrading for firms. Along with the growing trade disputes, the escalation of geopolitical risks—the third source of risk that we are facing—is one of the most pronounced trends of the past few years.