Massive artificial intelligence investments that are increasingly being financed with debt could trigger a selloff in equity markets if their expected returns fail to materialize, the International Monetary Fund said in its annual report.
Private sector-driven AI investments could exceed $2 trillion globally this year, turning it into one of the fastest drivers of economic growth, the IMF said, citing external estimates.
"From a business perspective, there's a risk that the payoff from expensive investments in AI, increasingly debt financed, could prove illusory," the IMF said. "This could lead to a sharp reversal in equity valuations, wealth destruction, and layoffs."
AI-related bond issuance topped $250 billion in in the first half of the year, TD Economics said in a note last month.
Major US tech giants Amazon (AMZN), Alphabet (GOOG, GOOGL), Meta Platforms (META) and Oracle (ORCL) accounted for about 70% of the total AI-related bond issuance as "they burn through their free cash at an unprecedented pace and increasingly rely on debt financing," TD Economist Ksenia Bushmeneva wrote.
"Rising leverage among some AI-focused companies and the need for returns on large AI capital commitments require monitoring," Bushmeneva said.
Circular financing arrangements -- whereby a group of firms act as each other's customers and investors -- increase the risks of problems at one company spreading through the entire AI stack, according to the IMF report.
AI adoption is raising concerns about labor market disruptions as automation displaces middle-skilled workers and depresses wages for certain workforce segments, the IMF said. However, productivity gains tied to AI could accelerate across industries and occupations.
"AI offers both opportunity and threat," the IMF said. "To take advantage of the opportunity, countries can help workers to reskill and firms to seize potential productivity gains. To manage the threat, strengthening cyber-resilience is a must."
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