IMF warns of AI risks alongside boom

The artificial intelligence (AI) boom is supporting economic growth, lifting corporate profits, and fueling market gains, while creating new risks that could rapidly tighten financial conditions and unsettle global markets, the International Monetary Fund (IMF) said on Oct 13.

In its latest Global Financial Stability Report, released during the IMF and World Bank annual meetings in Bangkok, the fund said financial markets have weathered recent shocks well, even as underlying financial stability risks remain elevated.

The report said core firms in the AI ecosystem have been profitable so far. However, weaker or less durable AI investment and profitability could trigger a correction in AI-related asset prices, exacerbated by rising leverage, concentrated exposures, and circular financing arrangements.

The report added that jurisdictions with financial markets sensitive to global AI developments, as well as those with substantial holdings of AI assets, are likely to be more exposed to negative wealth effects or sharp market corrections.

Athanasios Vamvakidis, deputy director for the IMF's monetary and capital markets department, noted that optimism regarding AI is one reason why global risk appetite is strong.

"When you look at equity prices — directly or indirectly — stocks related to AI have been the drivers (of growth)," Vamvakidis said in a press briefing.

However, an AI-related market correction is also one of the three key risks that could trigger market turmoil and tighten financial conditions. The other two are cyber threats and resurgent inflation.

Vamvakidis said AI has a significant impact on financial markets because of "very optimistic earnings forecasts and very strong investment plans in the sector (and) very heavy reliance of both the real economy and markets on the (AI) sector".

He also cited the "circularity of funding in AI, which right now is a positive feedback loop".

"But if it slows, if it stops, either because the funders decide to slow down or if the revenue promises fail to materialize, this is another channel that will turn into a negative approach. So, this heavy reliance on AI is a risk," Vamvakidis said.

Jason Wu, assistant director at the IMF's monetary and capital markets department, said AI models compete with each other, and this competition helps to manage expectations on what a particular company can obtain in terms of financing value.

"So, there could be a scenario (where) as AI models become more developed, the frontier gets pushed, and at the same time, investors become more realistic about the expectations for AI," Wu said.

Wu also noted "uncertainty" over monetization and whether the investments in AI will generate adequate return.

"This is not a problem by itself because markets go up and down, stock prices go up and down. I think what we are concerned about is the excess amount of leverage and debt that's being used to finance the AI investment when monetization is uncertain," he said.

Besides AI concerns, the IMF also said that resurgent inflation or fiscal concerns could trigger a sharp rise in sovereign bond yields and spark broader market turmoil.

Another key risk is cyber threats, as financial services become more digital and interconnected.

Caio Ferreira, deputy division chief at the IMF's monetary and capital markets department, noted that a country's resilience to cyber threats relies on its specific level of preparation and cyber maturity.

"Typically, in emerging markets, we see some limited capacity to deal with these threats, mostly because of the absence of appropriate resources," Ferreira said.

He added that emerging markets must improve incident reporting, crisis coordination, both domestically and cross-border, and third-party oversight.

prime@chinadailyapac.com