WB urges developing countries to strengthen domestic fundamentals

WASHINGTON: Developing countries should prepare for a long period of volatility in the global economy by re-emphasising medium-term development strategies, while preparing for tougher times, says the World Bank in the newly-released Global Economic Prospects (GEP), June 2012.
A resurgence of tensions in high-income Europe has eroded the gains made during the first four months of this year, which saw a rebound in economic activity in both developing and advanced countries and an easing of risk aversion among investors.

Since 1 May, increased market jitters have spread. Developing and high-income country stock markets have lost some 7%, giving up two-thirds of the gains generated over the preceding four months.
Most industrial commodity prices are down, with crude and copper prices down by 19 and 14%, respectively, while developing country currencies have lost value against the US dollar, as international capital fled to safe-haven assets, such as German and US Government bonds.
So far, conditions in most developing countries have not deteriorated as much as in the fourth quarter of 2011. Outside of Europe and Central Asia and the Middle-East and North Africa, developing country credit default swap (CDS) rates, a key indicator of market sentiment, remain well below their maximums from the fall of 2011.
“Global capital market and investor sentiment are likely to remain volatile over the medium term – making economic policy setting difficult. In this environment, developing countries should focus on productivity-enhancing reforms and infrastructure investment instead of reacting to day-to-day changes in the international environment,” said Hans Timmer, Director of Development Prospects at the World Bank.

Increased uncertainty
Increased uncertainty will add to pre-existing headwinds from budget cutting, banking-sector deleveraging and developing country capacity constraints. As a result, the World Bank projects that developing country growth will slow to a relatively weak 5.3% in 2012, before strengthening somewhat to 5.9% in 2013 and 6.0% in 2014.
Growth in high-income countries will also be weak, 1.4, 1.9 and 2.3% for 2012, 2013 and 2014 respectively – with GDP in the Euro Area declining 0.3% in 2012. Overall, global GDP is projected to rise 2.5, 3.0 and 3.3% for the same period.
This baseline scenario remains the most likely outcome. However, should the situation in Europe deteriorate sharply no developing region would be spared. Developing Europe and Central Asia is especially vulnerable because of its close trade and financial ties with high-income Europe, but the world’s poorest countries will also feel the fall out – especially countries that are heavily reliant on remittances, tourism or commodity exports or that have high-levels of short-term debt.
“Where possible, developing countries need to move to reduce vulnerabilities by lowering short-term debt levels, cutting budget deficits and returning to a more neutral monetary policy stance. Doing so will provide them with more leeway to loosen policy, should global conditions take a sharp turn for the worse,” said Andrew Burns, Manager of Global Macroeconomics and lead author of the report.

Regional highlights
Growth for the East Asia and Pacific region is on a moderately easing trend, with GDP gains for the region dropping to 8.3% in 2011 from 9.7% in 2010. The recent deterioration in global financial conditions is expected to add to pre-existing headwinds, including relatively weak demand from the high-income world, and a slowing phase in China to moderate regional growth to 7.6% in 2012, before broader global recovery lifts exports and growth for the region in 2013 to 8.1%, easing to 7.9% in 2014. China’s GDP is expected to accelerate from 8.2% in 2012 to 8.4% by 2014.
Notwithstanding the economic downturn in the Euro Area in the fourth quarter of 2011, developing Europe and Central Asia posted strong (5.6%) growth in 2011, driven by robust domestic demand and good harvests in countries such as Russia, Romania and Turkey.
However, severe weather conditions in early 2012, capacity constraints in some countries, deleveraging by European banks, and the renewed turmoil in high-income Europe are projected to slow regional GDP growth to 3.3% this year, before a modest recovery begins with growth firming to 4.1 and 4.4% in each of 2013 and 2014.
Growth in the Latin America and the Caribbean region eased to 4.3% in 2011, from 6.1% in 2010, due to the pronounced slowdown in the region’s larger economies. In Brazil, GDP slowed sharply to 2.7% in 2011 (7.5% in 2010), as investment growth and private consumption eased.
The region’s short-term outlook is clouded by a weak external environment, and capacity constraints in select economies. Regional GDP is expected to decelerate to 3.5% in 2012, firming to 4.1% and 4% in 2013 and 2014, respectively, while growth in Brazil is projected to remain below potential at 2.9% in 2012, before accelerating to 4.2% in 2013 and 3.9% in 2014.
Uncertainty, volatility, and political change continue to characterise conditions in the Middle East and North Africa region. Aggregate GDP grew by 1% in 2011, down from 3.8% in 2010. Regional growth is projected to remain weak at 0.6% for 2012, mainly reflecting the influence of sanctions on growth in Iran, and continued GDP declines in Syria and Yemen.
As these elements fade in importance, growth for the region should step up to 2.2% in 2013 and 3.4% in 2014. Egypt’s economy is projected to move out of negative territory to 1.4% growth in 2012, rising to 4.6% in 2014. Growth is also expected to pick up strongly in Jordan and Lebanon, while oil prices, which are projected to average near $107/bbl in 2012, will benefit the region’s oil exporters.
Growth in South Asia slowed to 7.1% in 2011, from 8.6% in 2010, as headwinds from the Euro Area crisis caused a steep deceleration in exports and a reversal of portfolio inflows. Growth in India was particularly weak due to monetary policy, stalled reforms, and electricity shortages, which, along with fiscal and inflation concerns, cut into investment activity.
Policy uncertainties, fiscal deficits, entrenched inflation, and infrastructure gaps will continue to weigh negatively on investment activity and are expected to limit regional growth to a relatively modest 6.4% in 2012, 6.5% in 2013, and 6.7% in 2014. India will see growth (measured at factor cost) increasing to 6.9, 7.2 and 7.4% in fiscal years 2012-13, 2013-14 and 2014-15, respectively.
Economic growth in Sub-Saharan Africa remained robust in 2011 at 4.7%. Excluding South Africa, growth in the rest of the region was stronger, at 5.6%, making it one of the fastest growing developing regions. Higher commodity prices and improved macroeconomic and political stability in recent years has supported increased private investment flows to the region, with promising prospects in the medium term. As global demand firms and domestic demand remains robust, regional growth is expected to strengthen to 5% in 2012, 5.3% in 2013 and 5.2% in 2014.