emerging market downturn could be a huge three percent of global output, warned IMF Financial Counselor Jose Vinals.
"The recommendation is for an urgent upgrade in policies, so as to avoid downside risks," he said. In the worst scenario, corporate default rates could rise, particularly in China, "raising financial system strains, with implications for growth," the report said.
A particular risk is that emerging markets´ state-owned enterprises like those in the energy sector, which have raised huge amounts of funding by issuing bonds, could find themselves falling back on governments to service their debt.
That could raise the risk of governments seeing their credit grades lowered to non-investment grade or junk status, as in Brazil a month ago, the IMF said.
The IMF said China will have challenges dealing with the legacies of its old centrally planned system as it moves to a more market-driven economy.Chinese banks, for example, have only just begun to deal with growing problems on their loan books due to the difficulties many Chinese companies are having, the Fund said.
On Tuesday, the IMF cut its global growth forecasts to 3.1 percent this year and 3.6 percent in 2016, both numbers 0.2 percentage points lower than forecasts just three months ago. The Fund made particular mention of the increasing global challenge from the growth pains in China, whose economy is forecast to expand 6.3 percent next year, its lowest rate in 25 years.
Prices of commodities from oil to metals to grains have slumped over the past two years, taking a strong hit on emerging economies and government budgets around the globe. "Commodity prices are highly volatile and unpredictable, posing significant challenges to policymakers in resource-rich economies," the IMF said.
The Fund said that natural resources should be a blessing for a country, but that many have struggled to leverage such resources to improve living standards and deepen economic strength.