Yira Mascaró
Practice Manager

Yira Mascaró is a World Bank Practice Manager for the Finance, Competitiveness and Innovation Global Practice in Latin America and the Caribbean (LAC) region. From 2016- end 2020, she was the manager of the global team leading on financial stability and integrity, which engages with standard setters and the IMF.

She works with policymakers and partners (e.g., IMF, IADB) to help countries build stable, efficient, and inclusive financial systems and a stronger private sector that can leverage economic growth and job creation. She is a macrofinancial economist with experience across LAC, Africa, and Europe and Central Asia. Yira received her Ph.D. and Masters’ degrees from the Ohio State University, focusing on economics, development economics and the role of the financial sector, and got her Licenciate degree in economics from the PUCMM in the Dominican Republic, her home country, focusing on international trade.

APPROACHING THE MIDDLE OF THE 2020s WITH A GLASS HALF FULL?

The decade of the 2020s commenced with the unprecedented challenge of COVID-19 to the global economy. This was followed by difficult geopolitical stances, including increased international strife and logistical challenges causing supply chain disruptions affecting energy prices, trade, and market stability. There was also an economic slowdown among major global players, materialising financial risks, and mounting climate change risks along with emerging environmental, social, and Governance (ESG) issues. 

The fiscal and monetary resilience that most countries had prior to this decade has eroded to help address the new emerging challenges. Post pandemic, inflation returned with a vengeance, and central banks worldwide started focusing on managing it through substantial interest rate hikes. These higher-for-longer interest rates have made riskier practices more visible in financial institutions, leading to bank failures during 2023. Simultaneously, insolvency risks of non-financial firms increased as the fiscal support during the pandemic has started to expire just as the economic environment became less favourable. 

Additionally, the increased role of private equity and venture capital funds during the prolonged period of low interest rates earlier in the decade masked heightened risk taking. With the higher interest rates, some risks have materialised, resulting in low returns and flatter investments in some sectors. Meanwhile, countries are facing increasing financing needs to leverage private capital to achieve lower carbon emissions and to advance growth and job agendas. 

While these trends can be discouraging and scary, there is emerging progress that gives hope. Some of these include decreasing global inflation, increased proliferation of alternative financing instruments and broadening of investors pools, increased measurement, disclosure, and management of climate change risks in financial institutions, digital technology adoption, greening of firms, and increased access to digital financial services, among others. All these can make one see a glass half-full, but there is no space for complacency. 

Improved financial institutions’ resolution and liquidity frameworks post the Great Financial Crisis have averted bigger crises since then. However, there is a need for further improvement, particularly in assessing cases wrongly presumed to be non-systemic, addressing excessive moral hazard and bank resolution costs, cross-border challenges, and liquidity pressures that can lead to widespread insolvency. Regulatory and supervisory frameworks need to remain updated and fully implemented to avert crises, including in the non-bank space where timely information on risks is harder to obtain. This is particularly relevant in the current context of growing ties between traditional and non-bank groups which could pose systemic risks. 

Indeed, risk-based supervision activities should constantly calibrate risk criteria to avoid missing new risks but also to avoid shutting down opportunities. For instance, while cybertechnology brings sneaky and elusive risks, it also has the potential to increase the role of financial systems to serve the real economy and help create economic growth and jobs. Post COVID, some industries, such as commercial real estate have been particularly strained with NPLs emerging in affected markets, while innovation is bringing about new promising opportunities in different fields, such as long-lasting batteries, rare metals, semiconductors, and Artificial Intelligence. 

In green and sustainable finance, the pace of labelled bonds and private climate finance has increased substantially –albeit from a low base, energised by the development of frameworks, taxonomies, disclosure standards, and climate risk assessments that help guide capital towards sustainable projects. Importantly, debt sustainability should remain at the centre of these engagements. The need for stronger institutional and regulatory frameworks also applies to carbon credit markets as announced at the COP28 in Dubai, marking an opportunity to reduce carbon emissions at scale in a commercially viable manner, provided countries manage to increase the climate and financial integrity of markets – that is, suitable financial and trading infrastructure, clear legal nature, accounting and reporting of carbon credits, registries, and price transparency, plus climate change rigor to prevent greenwashing. Regulatory bodies are starting to implement disclosure requirements related to ESG factors, leading to stronger consideration of how financial institutions are incorporating these factors into investment decision-making processes. In the coming years, it will be crucial to evaluate the impact, cost, and benefits of these initiatives to coordinate global efforts in a proper and fair manner. 

In sum, these are worrying times, but as we approach the middle of the 2020s there is hope that the second half of the decade could be better by learning from earlier challenges, increasing traditional resilience through prudent fiscal and monetary stances, adopting –and implementing— clever regulation, supervision, and disclosure frameworks, as well as enabling innovation to achieve a greener and brighter future. I choose to see this greener glass as half- full, while hoping it doesn’t turn into half-empty through complacency, or simply because there are much harder shocks to handle.