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Global Economic Prospects Maintaining progress amid turmoil June 2011 3 Acknowledgments This report is a product of the Prospects Group in the Development Economics Vice Presidency of the World Bank. Its principal authors were Andrew Burns and Elliot (Mick) Riordan. The project was managed by Andrew Burns, under the direction of Hans Timmer and the guidance of Justin Yifu Lin. Several people contributed substantively to the report. The modeling and data team was lead by Theo Janse van Rensburg assisted by Irina Kogay, Sabah Zeehan Mirza and Betty Dow. The projections, regional write-ups and subject annexes were produced by Dilek Aykut (Finance), John Baffes (Commodities) Annette De Kleine (South Asia), Allen Dennis (Sub-Saharan Africa, International Trade), Eung Ju Kim (Finance), Theo Janse van Rensburg (East Asia & Pacific), Elliot (Mick) Riordan (Middle-East & North Africa), Cristina Savescu (Latin America & Caribbean, Inflation, Industrial Production), Shane Streifel (Commodities), and Lucio Vinhas de Souza (Europe & Central Asia). Regional projections and annexes were produced in coordination with country teams, country direc- tors, and the offices of the regional Chief Economists and PREM directors. In particular, the draft benefitted from the invaluable insights and inputs offered by our colleagues from the Middle-East and North Africa region during this volatile and uncertain period . The short-term commodity price forecasts were produced by John Baffes, Betty Dow, and Shane Streifel. The remittances forecasts were produced by Sanket Mohapatra, The accompanying online publication, Prospects for the Global Economy, was produced by a team led by Nadia Islam Spivak and Sarah Crow, and comprised of Betty Dow, Augusto Clavijo, Kathy Rollins, and Sachin Shahria with technical support from David Horowitz and Roula Yargiz. The translation process was coordinated by Jorge del Rosario (French and Spanish) and Li Li (Chinese). Rebecca Ong and Merrell Tuck-Primdahl managed media relations and the dissemination. Hazel Macadangdang managed the publication process. Several reviewers offered extensive advice and comments. These included Otaviano Canuto, Jorg deCressin, Doerte Doemeland, Shahrokh Fardoust, Marianne Fay, Kalpana Kochlar, David Rosenblatt, Sergio Schmukler, Phil Suttle, Hans Timmer, Robert Townsend, and Volker Trichiel. 4 Global Economic Prospects June 2011: Maintaining progress amid turmoil Overview & main messages The global financial crisis is no longer the percent in 2012 and 2013, as the negative major force dictating the pace of economic effects of household, banking and activity in developing countries. The majority government budget consolidation begin to of developing countries have, or are close to fade and rebuilding in Japan intensifies. having regained full-capacity activity levels. As Excluding Japan, high-income growth will a result, country-specific productivity and be more stable, slowing only marginally in sectoral factors are now the dominant factors 2011 and strengthening to 2.7 percent in underpinning growth. 2012 and 2013. Macroeconomic policy in developing As output gaps close , aggregate growth in countries needs to turn toward medium-term developing economies is projected to ease productivity enhancements, managing to a still strong 6.3 percent pace in 2011 inflationary pressures re-establishing the through 2013—broadly in-line with these fiscal and monetary cushions that allowed countries’ underlying potential growth rate. most developing countries to come through The good performance is broadly-based with the crisis so well. In contrast, activity in high- non-BRIC countries projected to grow by income and some developing European countries around 4.5 percent (3 or more percent in per continues to struggle with crisis-related capita terms). problems, including banking-sector, fiscal and household restructuring. Robust domestic demand growth in developing countries has supported output in The earthquake and tsunami in Japan and high income countries, but has accentuated the political turmoil in the Middle-East and capacity constraints in some domestic North Africa have contributed to a modest markets and in global energy and metals slowing in global industrial production and markets. Low–and middle-income countries trade. Nevertheless, global activity is expanding were responsible for 46 percent of global growth significantly faster than its long-term trend rate. in 2010. Importantly, they were responsible for Indicators point to some further slowing in the more than all the increase in global oil and second quarter of 2011, as the expansion slows metals demand over the past 5 years, and their toward a more sustainable pace. growth was, therefore, responsible for much of the rise in global inflation. In addition, still Global growth is projected to remain strong loose policies and ample global credit flows from 2011 through 2013. After expanding 3.8 have contributed to domestic inflation pressures percent in 2010, global GDP is projected to slow and asset price bubbles in some middle-income to 3.2 percent in 2011 before firming to a 3.6 countries. percent pace in each of 2012 and 2013, (4.8, 4.3, 4.4 and 4.5 over 2010 to 2013) percent when Both monetary and fiscal policy in developing aggregated using purchasing power parities) countries may have to tighten more quickly to (table 1). curb these pressures. While macro-policy is tightening, a more rapid tightening of fiscal and Policy tightening and the earthquake in monetary policy and more exchange rate Japan, among other factors, are projected flexibility may be required to avoid overheating to reduce growth in high-income countries and keep inflation in check. More discretionary to 2.2 percent in 2011. Subsequently, the tightening would also help re-establish the macro expansion is expected to firm to near 2.6 -policy cushions that enabled countries to Global Economic Prospects June 2011 Table 1 The Global Outlook in summary (percent change from previous year, except interest rates and oil price) 2009 2010e 2011f 2012f 2013f Global Conditions World Trade Volume (GNFS) -11.0 11.5 8.0 7.7 7.7 Consumer Prices G-7 Countries 1,2 -0.2 1.2 1.9 1.7 1.9 United States -0.3 1.6 2.2 2.1 2.5 Commodity Prices (USD terms) Non-oil commodities -24.1 27.6 20.7 -12.0 -9.4 Oil Price (US$ per barrel) 3 61.8 79.0 107.2 102.1 98.7 Oil price (percent change) -36.3 28.0 35.6 -4.8 -3.3 4 Manufactures unit export value -5.6 2.5 4.9 -3.2 0.3 Interest Rates $, 6-month (percent) 1.2 0.5 0.7 1.2 2.2 €, 6-month (percent) 1.5 1.0 1.6 2.1 2.4 International capital flows to developing countries (% of GDP) Developing countries Net private and official inflows 3.9 4.8 Net private inflows (equity + debt) 3.4 4.4 3.9 3.8 3.8 East Asia and Pacific 3.6 5.0 4.2 3.8 3.6 Europe and Central Asia 2.2 3.5 4.0 4.1 3.9 Latin America and Caribbean 3.7 4.8 4.3 4.2 4.1 Middle East and N. Africa 2.7 2.3 0.3 1.7 2.1 South Asia 4.2 3.8 4.8 4.5 4.5 Sub-Saharan Africa 3.9 3.7 3.9 4.2 5.0 5 Real GDP growth World -2.2 3.8 3.2 3.6 3.6 Memo item: World (PPP weights) 6 -0.8 4.8 4.3 4.4 4.5 High income -3.4 2.7 2.2 2.7 2.6 OECD Countries -3.5 2.6 2.1 2.6 2.5 Euro Area -4.1 1.7 1.7 1.8 1.9 Japan -6.3 4.0 0.1 2.6 2.0 United States -2.6 2.8 2.6 2.9 2.7 Non-OECD countries -1.9 4.2 4.3 4.8 4.9 Developing countries 1.9 7.3 6.3 6.2 6.3 East Asia and Pacific 7.4 9.6 8.5 8.1 8.2 China 9.1 10.3 9.3 8.7 8.8 Indonesia 4.6 6.1 6.3 6.5 6.5 Thailand -2.3 7.8 3.7 4.2 4.3 Europe and Central Asia -6.4 5.2 4.7 4.4 4.6 Russia -7.8 4.0 4.4 4.0 4.1 Turkey -4.8 8.9 6.1 5.1 5.3 Romania -7.1 -1.2 1.6 3.7 4.0 Latin America and Caribbean -2.1 6.0 4.5 4.1 4.0 Brazil -0.7 7.5 4.2 4.1 3.8 Mexico -6.1 5.5 4.4 4.1 4.2 Argentina 0.9 9.2 6.3 4.2 4.3 Middle East and N. Africa 2.8 3.1 1.9 3.5 4.0 Egypt 4.7 5.2 1.0 3.5 5.0 Iran 0.1 1.0 0.0 3.0 3.0 Algeria 2.4 3.3 3.7 3.6 3.5 South Asia 6.2 9.3 7.5 7.7 7.9 India 7, 8 9.1 8.8 8.0 8.4 8.5 Pakistan 7 3.6 4.1 2.5 3.9 4.3 Bangladesh 7 5.7 5.8 6.2 6.4 6.6 Sub-Saharan Africa 2.0 4.8 5.1 5.7 5.7 South Africa -1.8 2.8 3.5 4.1 4.4 Nigeria 6.7 7.9 7.1 7.5 7.3 Angola 2.4 3.4 6.7 8.1 7.8 Memorandum items Developing countries excluding transition countries 3.1 7.8 6.5 6.4 6.5 excluding China and India -1.8 5.5 4.5 4.5 4.6 Source: World Bank. Notes: PPP = purchasing power parity; e = estimate; f = forecast. 1. Canada, France, Germany, Italy, Japan, the UK, and the United States. 2. In local currency, aggregated using 2005 GDP Weights. 3. Simple average of Dubai, Brent and West Texas Intermediate. 4. Unit value index of manufactured exports from major economies, expressed in USD. 5. Aggregate growth rates calculated using constant 2005 dollars GDP weights. 6. Calculated using 2005 PPP weights. 7 In keeping with national practice, data for India, Pakistan and Bangladesh are reported on a fiscal year basis in Table 1.1. Aggregates that depend on these countries, however, are calculated using data compiled on a calendar year basis. 8 Real GDP at market prices. GDP growth rates calculated using real GDP at factor cost, which are customarily reported in India, can vary significantly from these growth rates and have historically tended to be higher than market price GDP growth rates. Growth rates stated on this basis, starting with FY2009-10 are 8.0, 8.5, 8.2, 8.5, and 8.6 percent – see Table SAR.2 in the regional annex. 2 Global Economic Prospects June 2011 counteract so effectively the cyclical effects of in the euro-zone should prevent an acute the financial crisis. crisis, a loss of confidence such as envisioned in ECB stress-test scenarios Although solid growth led by developing- could have large (but manageable) negative countries is the most likely outcome going implications for developing countries. forward, high food prices, possible additional Further financial stresses may emerge, as oil-price spikes, and lingering post-crisis monetary policy in high-income countries difficulties in high-income countries pose begins to tighten. As short– and long-term downside risks. interest rates and re-financing costs rise, both banks and firms may find their balance Further increases in food and fuel prices sheets coming under renewed pressure — cannot be ruled out. Although prices are requiring additional measures to address expected to moderate, supply conditions shortcomings. remain tight. A worsening of conditions in the Middle- The remainder of this report is organized as East and North Africa could derail global follows. The next section discusses recent growth. If oil prices were to rise sharply developments in global production, trade, and durably — either because of increased inflation, and financial markets, and presents uncertainty or due to a significant updates of the World Bank’s forecast for the disruption to oil supply, global growth global economy and developing countries. This could be reduced by around 0.5 percentage is followed by a more detailed discussion of points. some of the risks and tensions in the current A poor harvest during the 2011/12 crop environment, and a short section of concluding year, or a second substantial increase in oil remarks. Several annexes address regional and prices could cause domestic food prices in sectoral issues in much greater detail. developing countries to rise much higher, with dire consequences for poverty. Recent economic developments Domestic food prices may come under The global recovery continued robustly during upward pressure in many countries. Since the final months of 2010 and into early 2011. June 2010, local food prices in developing Vibrant domestic demand in developing countries increased 7.9 percent—much countries, still loose macro policy, reduced drag less than the 40 percent surge in on growth from a recovering financial sector, international dollar prices. International and improved labor market conditions in several high-income economies helped to overpower the prices are expected to moderate in the influence of a gradual tightening of monetary second half of 2011 and into 2012/13. and fiscal policies, rising commodity prices, the However, if crops disappoint or oil prices political turmoil in the Middle-East and North (an important cost-side determinant of Africa, and the natural disaster and nuclear food prices) rise, lagged pass through of catastrophe in Japan high international prices could see local food prices increase further — with The recovery in industrial activity is important negative impacts for poverty in progressing at a moderate pace many developing countries. Recent developments in industrial production is Concerns about fiscal sustainability in described in more detail in the industrial production high-income countries persist. High fiscal annex (http://go.worldbank.org/6J3VPK07S2). deficits and rising sovereign debt pose medium-term challenges to a wide-range of After marking a pause in the third quarter of OECD countries (gross sovereign debt is 2010, industrial production in both high-income- projected to reach 103 percent of OECD and developing countries expanded at a more- GDP in 2012). Although steps being taken than 15 percent annualized rate (3m/3m, saar) by authorities to resolve short-term problems toward the end of 2010. Output once again 3 Global Economic Prospects June 2011 Figure 1 Industrial production has been more volatile than global demand Inventory cycle in manufactured goods makes IP more volatile Global industrial production slowing once again than underlying demand industrial production, ch% 3m/3m, saar 6 20 20 4 15 15 GDP left 10 10 2 5 5 0 0 0 -2 IP right -5 -5 -10 Developing -4 High-income -10 -15 World -6 -15 -20 World real GDP growth, quarterly ch% q/q saar. -25 -8 Sample of 50 high-income and developing countries -20 -30 -10 -25 2009M01 2009M05 2009M09 2010M01 2010M05 2010M09 2011M01 Q1-08 Q3-08 Q1-09 Q3-09 Q1-10 Q3-10 Q1-2011 Source: World Bank, Thomson/Reuters. began to slow in the first quarter of 2011 (first Based on the limited recent data available for panel, figure 1). The recent fading in world industrial production in the Middle-East and industrial production growth from a 15 percent North Africa, the political turmoil in the region 3m/3m annualized pace in February to 8.5 has had a notable impact on activity. In Tunisia percent in March reflects the 15 percent decline production dropped 18.8 percent between in Japanese production in March, and similar December 2012 and February 2011, but has declines in Egypt and Tunisia. Excluding these picked up 8 percent in March; still, output stands countries, momentum growth in the rest of the 9 percent lower in the first quarter of 2011 world was 10.3 percent, well above the longer- versus year earlier levels. As of February 2011, term trend growth rate of just under 3 percent. industrial activity in Egypt was down 20 percent from December 2010 levels and 14.4 percent Among developing countries, the pickup in from a year earlier. production has been broadly-based, but also Post-earthquake data for Japan indicate a sharp quite differentiated, with output expanding 19 contraction of activity in that country. Industrial percent in East Asia & the Pacific during the production declined 15.5 percent in March on a first quarter of 2011 (saar)—this rate seasonally adjusted basis, while consumer subsequently slipped to 15 percent in April; in demand has also drawn back as individuals Latin America & the Caribbean, growth has conserve energy and moderate consumption in maintained a 10 percent pace. In contrast, solidarity with disaster victims. Retail sales in developing Europe & Central Asia has seen March were 8.5 percent lower than a year before, momentum dip from 10 percent in March to 3.8 while machinery and equipment sales were off percent by April (saar). Though production in 17 percent. Overall, preliminary estimates South Asia was weak in the fourth quarter of suggest that GDP declined by 3.7 percent in the 2010, it picked up pace into the first quarter — first quarter of 2011 (saar), although much of expanding at a 9 percent rate. Data for Sub- that decline appears to reflect a fall in Saharan Africa are sparse, but industrial inventories (box 1). production was increasing at a modest 2.1 percent pace at the end of 2010 in the 4 Sub- Saharan African countries for which industrial production data are available. 4 Global Economic Prospects June 2011 Box 1 Short-term impact of the disaster in Japan Official estimates place the damage from the March 11 earthquake and tsunami at between 3 Impacts of the 1995 Kobe and 2011 Tohoku earthquakes and 5 percent of Japanese GDP, directly affect- Kobe Tohoku ing a region that represents about 4 percent of 17-Jan-95 11-Mar-11 Japanese GDP and 4.5 percent of its population. Dimension of tragedy Some 450 thousand people have been left home- - size of tremor (Richter scale) 7.3 9.1 - Lives lost 6434 15,202 less, and more than 20,000 may have died. Al- - Missing 8,718 though in some respects, the disaster is similar - people left homeless 300,000 450,000 in scale to the Kobe earthquake of 1995, notable - Estimated Property Damage (% of GDP) 2.5 4-5 differences include the nuclear crisis, the addi- - Initial disruption to power system (% of generating capacity) 7.3 tional loss of life and property damage attribut- - Medium-term disruption to power system (% gen. cap.) 3.8 able to the tsunami (see box table). In particular, - Industrial production growth (month of disaster) -0.1 -15.3 - Quarterly GDP growth (quarter of disaster) 2.9 -3.7 the disaster has damaged an estimated 7.3 per- cent of Japan’s power supply, about 3.8 percent Source: World Bank; Various press reports and official estimates. due to disrupted thermal generation and 3.5 per- cent from nuclear. In addition about 2 percent of the county’s distribution substations were damaged (table). The lost thermal capacity is expected to be fully restored by May, while lost nuclear capacity may be permanent. Cur- rently, generating capacity in the Tokyo area, which represents about 40 percent of Japanese GDP, exceeds de- mand levels by almost 20 percent— partly because of voluntary conservation efforts. At the peak of the crisis ca- pacity was reduced by 40 percent. TEPCO now expects to have 55m KW-hours of capacity in place by the end of July, approximately 87 percent of peak summer demand. For Japan as a whole, the projected shortfall represents 3.8 percent of generating capacity (TEPCO, 2011). Kobe had no noticeable impact on growth Although the Kobe disaster had little impact on Japan’s GDP growth, the current crisis is expected to cut into 7 Percent Japanese GDP growth before and after Kobe growth more sharply. Following Kobe, industrial produc- 6 Kobe earthquake, January 11 1995 tion fell marginally. Both imports and exports declined by 2 5 Quarterly growth (saar) y-o-y growth 4 percent for two months, but bounced back in the third, and 3 GDP growth in the quarter of the earthquake was subdued 2 but positive — in part because of a sustained increase in 1 government spending of between 1 and 2 percent of GDP. 0 -1 As a result, GDP growth came in at 1.9 percent, a full per- -2 cent point higher than the preceding year, and about 0.4 -3 percent above estimates of the economy’s productive poten- -4 Q1 1993 Q3 1993 Q1 1994 Q3 1994 Q1 1995 Q3 1995 Q1 1996 Q3 1996 tial at that time (figure). Source: Japanese statistical bureau. The impacts from this year’s disaster are more serious. In- dustrial production in March was down 15.5 percent from February, in part because of electricity disruption and the pull-back in consumer spending that has been associated with the first weeks of the post-crisis period. Retail sales during March were down 8.5 percent from a year ago, while machinery and business equipment sales were down 17 percent. For the car industry, disruptions are expected to last until the end of the second quarter of 2011, potentially reducing output by one-half. GDP is estimated to have fallen 3.7 percent in the first quarter and uncer- tainty is large, many are now expecting second-quarter GDP to decline by a further 3-7 percent (annualized rates), before reconstruction efforts overcome the effects of economic disruption and cause growth to rebound. Regional impacts so far have been limited, with slower growth in the initial quarter of at most 0.5 percentage points for countries with closest trade ties (Malaysia, Vietnam and Thailand). Should the nuclear situation deteriorate, or if nuclear pollution already having occurred requires an extended clean -up effort, longer-term impacts could be envisaged. Using Chernobyl as a model (a 50 km exclusion zone was put in place, some 400 thousand people would be permanently displaced, and some 3 percent of Japanese agricultural production lost (4 percent of Japanese and 0.1 percent of global rice production). 5 Global Economic Prospects June 2011 The expansion of global demand has been export and import volumes also paused during more stable the middle of 2010, but is now expanding at a moderate to strong pace across economies. Recent developments in trade is described in more detail in the prospects for trade annex (http:// Importantly, demand from developing countries go.worldbank.org/2OPGGNPVD0). was responsible for more-than 50 percent of the The recovery in aggregate demand has been increase in global import volumes (first panel, more stable than that of industrial production figure 2). Strong developing-country import (second panel, figure 1). GDP for the 50 high- expenditures partly reflect robust domestic income and developing countries for which demand growth in these economies. Global retail quarterly data are available indicates that sales have posted positive growth rates for the aggregate demand continued to expand during past 20 months of between 7 and 10 percent the last half of 2010 and into the first quarter of (3m/3m, saar), outstripping that of high-income 2011 — albeit at a slower and more sustainable countries by a factor of 2 (second panel, figure pace than earlier. The relative stability of 2). The main beneficiaries of expanding demand demand viz-a-viz industrial production, partly for tradables have been high-income countries, reflects the concentration of the real-side effects whose exports were expanding at a still strong of the crisis in durables consumption and 15 percent annualized rate in the first quarter of investment goods, but the mid-2010 pause in 2011, down from close to 20 percent at the end industrial activity is also consistent with a sharp of 2010. inventory cycle. An initial period of de-stocking during the acute phase of the crisis forced a rapid Developing country exporters also benefitted resumption of activity to meet gradually from the uptick in global demand, with their strengthening demand and to rebuild inventories. export volumes expanding at a 12.1 percent This re-stocking may have overshot demand, annualized rate in the three months ending resulting in a pause in industrial activity growth March 2011. South Asian exports have been at mid year. But by the final quarter of 2010, particularly strong, with volumes up more than demand had caught up and industrial activity 30 percent from their year-earlier levels, driven growth accelerated once more. by sales to China and the rest of East Asia. Exports from Europe and Central Asia have World trade has also bounced back grown rapidly, notably in Russia, where they have expanded at more-than a 17 percent Reflecting the high content of manufactures in annualized pace (supported by energy exports), global trade, the recovery in world merchandise and in Romania and Turkey (reflecting stronger Figure 2. Robust domestic demand causes Developing country imports to lead the rebound in trade Contributions to global merchandise import growth, % change 3m/3m saar Retail sales growth, GDP-weighted 3m/3m saar Contributions to global merhcandise import growth. % change 3m/3m, saar percent, y/y 35.0 Rest of Developing countries 25 30.0 China 20 Developing countries, Germany 25.0 excl China USA 15 China 20.0 Rest of HIY World 10 15.0 10.0 5 High-income 5.0 0 0.0 -5 -5.0 -10.0 -10 2010M01 2010M03 2010M05 2010M07 2010M09 2010M11 Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Source: World Bank. Thomson Datastream. 6 Global Economic Prospects June 2011 Figure 3. Industrial production has recovered pre-crisis trends in many developing countries industrial production, August-2008=100 median percentage difference from long term trend 120 and within-region range 60 115 Developing countries 40 110 105 20 100 2.5 3.2 4.4 0 0.7 -9.2 -11.9 95 -13.8 -20 90 DEV excluding China -40 High-income countries 85 -60 80 Developing Europe & Middle East & Sub-Saharan Latin Am. & South Asia East Asia & Jan-06 Aug-06 Mar-07 Oct-07 May-08 Dec-08 Jul-09 Feb-10 Sep-10 Central Asia N. Africa Africa Caribbean Pacific Source: World Bank, Thomson/Datastream. high-income European investment and consumer production now stands 2.5 percent below. demand). In Latin American and the Caribbean, Brazilian exports had been growing briskly in Compared with levels of output that might have response to continued strong East Asian demand, been expected had there been no crisis2, but growth has eased to 12 percent as of April significant gaps remain. Gaps are especially (saar). And the expansion has been less robust in large among high-income countries because Argentina and Chile. Overall exports from the these economies were most directly affected by region have been expanding at a 9.3 percent the financial crisis (second panel, figure 3). annualized pace during thee three months ending Among developing regions, the gap with pre- March 2011 (saar). crisis trends is largest for Europe & Central Asia (13.8 percent), partly reflecting unsustainably Both trade and industrial production have high pre-crisis growth rates and the severity of reached — or are close to recovering — the post-crisis adjustment underway in those trend levels economies. The shortfall in both the Middle East & North Africa and Sub-Saharan Africa is Recovery in industrial production has brought estimated to be close to 10 percent (partly developing country output more-than 20 percent reflecting the recent political turmoil), while the above its pre-crisis August 2008 levels (first gap has closed in East Asia & the Pacific, South panel, figure 3), while production in high- Asia, and Latin America & the Caribbean. income countries is now about 2.5 percent below that level, and some 9 percent below peaks of Overall, the recovery is well advanced in many February 2008 (trade volumes have also developing countries and industrial capacity recovered pre-crisis levels)1. constraints have become increasingly binding. Whole economy output gaps for 2011, the Industrial output in China is more than 40 difference between actual and potential GDP, are percent above its pre-crisis peak, and 36 percent expected to be less than one percent in 72 higher for the East Asia region considered as a countries, 64 percent of the developing whole. After booming during the first half of economies outside of Europe and Central Asia 2010, output growth in South Asia slowed for which data exist (figure 4). Output gaps toward the end of 2010. Nevertheless, output among high-income countries are larger, with 45 stands 24 percent higher than before the crisis. percent of high-income countries facing a Among other developing regions, Europe and negative output gap of more-than 2 percent. Central Asia had eclipsed pre-crisis levels by 5 percent as of March; while Sub-Saharan African 7 Global Economic Prospects June 2011 Figure 4 Growing capacity constraints are contributing to rising inflation in some countries (Estimated % difference between actual and potential GDP in 2011) Source: World Bank. The rise in international fuel, metals and second half of 2010 in the face of only gradually food prices rising demand (box 3). Recent developments in, and prospects for, these As of early 2011, prices of internationally traded markets are described in more detail in the commodity annex (http://go.worldbank.org/5KM5S6POA0 ). food commodities reached levels just below peaks observed during the 2008 food crisis. Strong GDP growth and the elimination of spare However, the overall price of grains — the most capacity in major developing economies has critical food component from a poverty contributed to a sharp increase in the prices of standpoint3— did not increase as much as in metals and oil (box 2) during the second half of 2008, mainly because international rice prices 2010 (first panel, figure 5) and into the first remained broadly stable (second panel, figure 5). months of 2011. Higher energy prices have in Since February, commodity prices have turn contributed to increased fertilizer and stabilized or declined, reflecting weakening agricultural production costs, which in demand and perhaps profit taking by institutional combination with supply shortfalls in several investors. Prices are off earlier peaks by between markets caused food prices to spike in the 3 and 10 percent for the main aggregates. Figure 5 Commodity prices have recovered much of the losses observed since the financial crisis Real commodity pruices, index Jan 200-5=100, USA Real grain prices, January 2005=100 CPI def latedtext 350 300 Energy 325 Food Metals and Minerals 300 250 275 250 Rice 200 225 Wheat 200 150 Maize 175 150 100 125 100 50 75 0 50 Jan-05 Sep-05 May-06 Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Source: World Bank. 8 Global Economic Prospects June 2011 Box 2 Strong demand from developing countries driving up prices of extractive commodities Strong demand by developing countries (notably China) is shaping the markets for extractive commodities, and has contributed to the rise in their prices during the post-crisis period. Developing countries now account for almost 1/2 of global crude oil demand More than all of the net increase in global oil demand over the past 5 years has come from developing countries (oil demand in high-income OECD countries peaked in 2005:Q4 and has since declined by 3.7 mb/d), with de- mand for oil by developing countries growing by more than 4.1 percent per annum over the past 5 years. Non- OECD countries now consume 47 percent of global oil production, up from 25 percent in 1970, with more than two thirds of that amount going to countries other than China and India (their global shares are 10.4 percent and 3.8 percent, respectively). Crude oil prices began rising during the fourth quarter of 2010 despite ample supplies and spare capacity, boosted by strong demand from developing countries, declining stocks and expectations of future supply tightness. This trend was exacerbated toward the end of the year and into 2011, as political turmoil in the Middle East and North Africa disrupted oil deliveries from the region (notably the shutting out of some 1.3mb/d of sweet, distillate-rich Libyan crude-oil exports4) and fears of further possible disruptions in the region. Although fraught with uncertainty, estimates suggest that the supply loses in North Africa added about $15 to the price of a barrel of oil. Assuming no further supply disruptions and a gradual reduction in uncertainty arising from the political situation in the Middle-East and North Africa, oil prices are expected to ease in the second half of 2011, averaging $107/bbl for the year as a whole, before declining further in 2012 and 2013 toward a real price of 80 2011 U.S. dollars per barrel, consistent with long-term demand and supply conditions. Chinese demand dominates metals markets In 2009, China overtook the OECD as the world's largest metal consumer, now consuming more than 40 percent of global metal supplies. Chinese metal demand growth over the past decade has served to single-handedly the metals intensity of global GDP (tons of metals used to produce a unit of GDP). As of 2004, increased metals de- mand had reversed 30 years of declining metal content of global GDP due to technological change and increased consumption of services (World Bank, 2008). Although metals and minerals prices declined sharply with the financial crisis, many now exceed their pre-crisis peaks. Prices have risen the most for supply-constrained metals, such as copper and tin (up 460 and 590 percent from their average levels in 2000/03), while despite stronger demand growth, other metal prices have increased less rapidly due to ample supply (aluminum for example, is up 86 percent over the same period despite stronger demand growth). Prices for a number of metals appear to have peaked in February 2011, reflecting weaker demand growth, rising inventories and strong supply. In those few cases where future prices exceed spot prices, a large portion of stocks are tied up in warehouse financing arrangements and not available to the market — which has given an appearance of market tightness that has helped support prices5. Mainly reflecting price increases already observed, metals prices in 2011 are expected to average 17 percent higher than in 2010 before they begin to decline in 2012, as additional supply and demand-side substitution eases market pressures. While metals markets are generally less concentrated than oil markets (and therefore less open to cartel-like pricing) future supply and prices will remain sensitive to labor disputes and energy costs. While supply shocks played a central role in Typically, a sustained 10 percent increase in explaining the sharp rise in grain prices in the energy prices yields a 2-3 percent increase in the second half of 2010 (box 3), the trend rise in long-run price of most foods (Baffes, 2010), food and other agricultural prices since the turn with this relationship being stronger in high- of the century reflects among other things rising income countries that use particularly energy– fuel, transportation and fertilizer costs as well as intensive technologies and lower in countries increased demand from biofuels (Timilsina and where less fuel and fertilizer is used, e.g. in Sub- Shresha, 2010). Saharan Africa. Bearing these relationships in 9 Global Economic Prospects June 2011 Box 3 Understanding the recent rise in global agricultural prices The rapid rise of global agricultural prices in the latter half of 2010 and into 2011 reflects a combination of factors. Some agricultural commodities are used as raw materials, and demand and capacity constraints for these picked up in the second half of 2010, leading to sharp increases in, for example, cotton (up 147 percent since June 2010) and rubber (up 158 percent). The rise in food prices was broadly based. Unlike the 2008 Fats and oils were responsible for the majority of food-price spike, when almost half (48 percent) of the increase the increase in global food prices in 2010/11 in the overall food index was due to rising grain prices, this Contribution of grains, f ats & oils and other f ood to y-o-y growth in the World Bank's International Food index (%) time rising fats and oils prices were responsible for the bulk 80 (40 percent) of the increase in the aggregate index. The main Other Foods 60 drivers of the run-up in internationally traded food prices in the Fats & Oils second half of 2010 were poor grain crops and low inventories. 40 Grains While demand for food continued to rise, thereby contributing to market tightness, there was no major change in this trend, 20 and indeed demand growth for most major food groups is 0 slowing (see box 4). -20 World wheat production in the 2010/11 crop year is estimated to have declined by 5.3 percent, mainly due to a 25 percent -40 2005M01 2006M01 2007M01 2008M01 2009M01 2010M01 2011M01 shortfall in Russian output; and stock-to-use ratios in major exporting countries have fallen to 25 percent, well below the Source: World Bank. 30 percent average of the past decade.6 Maize prices also came under pressure as global production increased just 0.2 percent in 2011 and by only 2.5 percent over the past 3 years combined. Rice prices in contrast, have remained relatively subdued, ranging within a fairly narrow band of $450-$550/ton over the past two years. International food prices have declined somewhat in recent months, partly reflecting expectations of a normal 2011/12 crop-year — although volatility remains a concern, as crops are not expected to be large enough to restore stocks to comfortable levels. Market tightness has been accentuated by demand for biofuels, notably maize for ethanol use in the United States, and edible oils (mostly rapeseed oil) for biodiesel in Europe. Approximately 30 percent of U.S. maize production now goes to biofuels, reducing availability for food and feed and contributing to a fall in stock-to-use ratios to 15 percent (from the historical average of 20 percent).7 mind, most of the 58 percent increase in the average price of food between the periods Figure 6 Higher energy prices explain most of the 58 percent increase in agricultural prices since the 1990s. 1986/03 and 2004/10 can be explained by the 245 percent increase in the price of oil during commodity prices, index average 1986-2003=100 600 that period (figure 6). Historically, a 10 percent increase in oil prices has increased food prices by 2-3%. Once the short-term supply-shortage induced 500 On this basis, the 245% increase in oil prices since 2003 would be expected to increase food prices by between 50 and 73%. component of current high food prices 400 dissipates; and assuming (i) that energy prices ease as discussed in box 2, and (ii) that 2011/12 300 Oil is a normal crop year, then long-run equilibrium 245% up 200 food prices should also tend to decline over the next few years. Nevertheless, food prices are 100 Food anticipated to remain substantially higher than 58% up during the late 1990s — largely reflecting higher 0 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 fuel and fertilizer costs. In the baseline projection, wheat, maize and rice prices are Source: World Bank expected to decline in 2012 to roughly the same 10 Global Economic Prospects June 2011 level as in 2010. domestically produced and consumed foods enters in local price indexes with a bigger Local food prices in developing countries weight than in the international food price have not increased as much as index. Most important for local food price international food prices indices are grains prices, including the price of rice (which has not increased much), Notwithstanding the 40 percent increase in the cassava and other products whose prices are dollar price of internationally traded food only loosely connected to international commodities since June 2010, and food-price markets. unrest in several countries, overall food price indexes in developing countries have risen by Finally, although 2010/11 was a bad crop much less (7.9 percent through January 2011) year for several major exporters of (figure 7). Lower food price increases in internationally traded foods, it was a good developing countries reflect a variety of factors crop year for many developing countries — (see commodity annex). actually driving down domestic prices for some of these goods (notably maize in much International prices are quoted in dollars, but of Africa) even as internationally traded food the dollar is depreciating against most prices rose rapidly. developing country currencies (down 9 percent in nominal effective terms since June Overall, pass-through of world prices to local 2010)— so even if all of the price increase prices (even of the same commodity) is weak were passed through, the price rise in local (see commodity annex for a fuller discussion). currency terms would be smaller. On average, only about one quarter of international price increases are passed on to In addition, local transport costs, price local prices in the space of a year, although over controls and other market imperfections the long-run this ratio tends to rise in those introduce significant gaps and lags between instances where local prices are not controlled. international and local prices. Countries where pass-through is stronger tend to either be major importers or exporters of the The weights used to calculate international commodity in question, and have limited food price indexes are those of commodities regulations or price controls. Pass-through is in international trade, not in consumption. weaker or even non-existent among countries Because the vast majority of food is not that are more self-sufficient and have weak traded internationally, the price of infrastructure. Local grain prices change rapidly Figure 7. Domestic food prices in developing countries Figure 8 Biggest changes in food inflation have not increased as much as international food Change in local f ood price inf lation, December 2010/ Dec 2009, percentage points index, January 2005=100 Uganda 210 Ghana Egyp International $ food prices India 190 (US CPI deflated) Fiji Algeria Tunisia 170 South Af rica Mexico Bangladesh 150 Lithuania Indonesia 130 Morocco Iran Venezuel 110 Developing country food prices (nominal, Bolivia Consumer demand weighted) Honduras Seychelles 90 El Salvador Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Togo -30 -25 -20 -15 -10 -5 0 5 10 15 20 Source: World Bank. Source: World Bank, ILO food price database. 11 Global Economic Prospects June 2011 Box 4. Trends in the global demand for food Demand for food tends to be relatively stable, responding Global food demand trends, 1960-2030 to slowly evolving factors (principally, population and in- Population Grains Edible oils Meats come growth), and its rate of growth has not accelerated in 1961-70 2.0 2.9 4.6 3.8 the recent past. Indeed, global demand for major food 1971-80 1.8 2.3 4.4 3.2 1981-90 1.7 2.3 3.9 2.7 groups has been slowing over the past half century. This 1991-2000 1.4 1.3 2.4 2.7 trend is expected to continue to do so as global population 2000-08 1.4 1.1 2.7 2.0 growth slows, and the increment to per capita demand from 2009-19f 1.4 1.4 2.9 2.1 rising incomes declines. f) FAO-OECD forecast (meat = simple average of chicken growth 2.4 percent and other meats 1.7 percent). Per capita demand for food tends to rises with incomes, Source: World Bank, FAO, OECD. although after income reaches a certain threshold per capita food demand tends to level off. For grains (including indi- Per capita grain consumption (direct and indirect) rect demand to produce meat), most of the world’s popula- rises as income rises tion has already reached the point where per capita demand 1,000 has leveled off. Demand for meat is still rising faster than is population, but the differential is declining as meat con- sumption of most of the world’s population approaches 367 peak levels. Only demand for edible oils continues to rise China Brazil Russia much more rapidly than population, and is expected to con- India tinue to do so over the next twenty years or so, as poorer 135 populations are increasingly able to afford the packaged and prepared foods that are heavy in edible oil content. 45 The somewhat higher growth rates for grains and edible oils projected for this decade reflect the diversion of some 18 of these products to biofuels7 — biofuel-related demand for 0.4 1.1 2.9 8.1 GDP per capita (1,000 PPP $) 22.0 59.8 food products is expected to grow rapidly over 2010-2019. Note : Curve fitted on a log scale. Source: World Bank, FAO. in response to international prices in only a very In countries with price controls on food, rising few developing countries, for example South prices have put enormous pressure on fiscal Africa and Argentina (see the Commodity budgets (for example Bangladesh, Egypt and Annex for more on food price pass through). India). Moreover, several cases where the authorities sought to raise controlled prices in Of course, some countries are much more line with market developments resulted in dependent on imported food, and therefore more significant political turmoil and even rioting (for sensitive to fluctuations in international food example, Egypt, Tunisia, Mozambique, and prices. Many island states and countries in the Uganda). Middle-East and North Africa import large proportions of their food (import ratios for some High and rising commodity prices imply grains exceed 80 percent in 12 of 14 Middle-East varied terms-of-trade effects across & North African countries for which data are developing countries available). Partly reflecting this, the Seychelles and Togo were among the developing countries A sharp increase in fuel and food prices during (for which data are available) that experienced the course of 2010 has imposed large changes in the largest increase in food inflation rates the terms of trade of many developing countries between December 2009 and December 2010 (see below and the commodity annex for more (figure 8). Overall, food inflation in 2010 on the implications of higher food and energy exceeded 10 percent in 33 of 80 developing prices). Gains have been concentrated among oil countries for which data are available. exporters, and losses among resource and food- 12 Global Economic Prospects June 2011 Figure 9 Largest terms of trade effects generally less than 6 percent of GDP, and Estimated, ex ante terms-of-trade effects (% of GDP) in 2010 included significant impacts in small island Angola states such as Seychelles, Cape Verde and St. Oman Vincent and Grenadines — all of which are oil Azerbaijan importers and dependent on imported food Nigeria Iran (figure 9). Yemen Venezuela Remittances and tourism are important sources Algeria of foreign currency, representing inflows of 10 Honduras or more percent of GDP for several developing Nicaragua countries (figure 10). The dollar value of Fiji St. Lucia remittances received by residents of developing Kenya countries increased a modest 5.6 percent in Jordan 2010. However, because of inflation and dollar Lebanon Dominica depreciation the local market purchasing power St. Vincent and the Grenadines of these remittances is estimated to have Cape Verde declined by 3.6 percent in the year. Flows to Moldova Seychelles South Asia and East Asia increased the most (8.2 -10 -5 0 5 10 15 20 and 7.4 percent respectively), with inflows to Europe and Central Asia and Latin America and Source: World Bank. the Caribbean (the two regions having been hit hardest in 2009) rising by just 1.3 and 1.7 poor oil-importing countries. Despite oil prices percent respectively. expected to average about $107/bbl, terms of trade impacts for many oil importers are not as In 2010 world tourism recovered more strongly large as might be expected, because other than expected following the global recession. commodity prices (food, as well as metals and Tourism arrivals increased by an estimated 7 minerals) are also high and rising, which tends to percent and the dollar value of receipts increased generate offsetting effects. The ten countries 6.6 percent (World Tourism Organization, experiencing largest positive terms of trade 2011), with emerging economies serving as the effects saw gains exceeding 8 percent of GDP, engine for growth. Among developing regions, and were concentrated among oil exporters. The the Middle-East, East Asia, and South Asia saw largest negative effects were smaller in scale, the biggest increases in volumes, up 14-, 13-, Figure 10 Tourism and remittances are important sources of foreign currency for many developing countries Remittances in 2010, % of GDP Tourism receipts in 2010, % of GDP Kyrgyz Republic Maldives Haiti Seychelles Lebanon Cape Verde Honduras Lebanon Jamaica Fiji Jordan Jamaica Philippines Jordan Bangladesh Tunisia Malaysia Armenia Morocco Vietnam Thailand Morocco Egypt Fiji Costa Rica Pakistan Philippines Sudan 0 10 20 30 40 50 0 10 20 30 % of GDP Source: World Bank, UN International Tourism Organization 13 Global Economic Prospects June 2011 and 10 percent respectively, with intra-regional Europe and Central Asia, while flows as a share tourism in the Middle-East and North Africa of GDP for other developing regions have been playing a big role. much more stable. However, the political turmoil in the Middle East For 2011 as a whole private capital inflows are and North Africa at the end of 2010 and in the expected to increase only 5 percent, as the more first months of 2011 has cut into the tourism volatile flows that led the sharp recovery in 2010 business sharply. As of mid May, 2011 tourist are expected to stabilize or weaken. In particular, arrivals have declined sharply in Bahrain, Egypt, portfolio equity flows into developing countries Jordan, Syria and Tunisia. According to the are projected to decline 20 percent, with the World Travel and Tourism Council, first quarter sharpest falloffs expected in the Middle-East and tourist arrivals in Egypt and Tunisia were off North Africa, reflecting political turmoil in the about 45 percent compared with the like period region. In contrast, firms in developing countries of 2010. If tourism receipts decline 18 percent in continue to rely on international bond markets Egypt during 2011, that would imply a direct 1.5 for debt financing, as they are faced with percent of GDP foreign currency shortfall. ongoing tightening in domestic credit markets Jordan, Syria and Tunisia could experience and limited recovery in international bank- negative impacts of similar magnitude, while the lending. fall-off in other countries in the region is likely to be less pronounced. The dollar value of FDI8 is expected to rise by a further 14 percent in 2011, but will not regain its Of course some of this tourism spending will pre-crisis level in absolute terms until 2012, show up as an increase in tourism in other when it is projected to reach $604 billion (vs. countries — although for the moment data do $615 billion in 2008). Overall, net private capital not indicate which developing countries might flows to developing countries are anticipated to be the most significant beneficiaries. During the reach more than $1 trillion by 2013, but their first two months of 2011, tourism arrivals were share in developing country GDP will be falling up in all regions except the Middle East (-10 from an estimated 4.4 percent in 2010 to around percent y/y) and North Africa (-9 percent). Latin 3.8 percent at that time, in part reflecting an America & the Caribbean and South Asian expected tightening of short-term debt flows as destinations saw volumes rise by 15 percent interest rates begin to rise and regulatory compared with the same period in 2010, while conditions tighten (figure 11). arrivals were up 13 percent in both Sub-Saharan Africa and developing Europe and Central Asia. Arrivals to East Asia & the Pacific were up 6 percent. Overall, the U.N. World Tourism Figure 11 Net private capital flows to developing coun- Organization expects tourism arrivals to rise by tries about 4-5 percent in 2011. ST Debt flows Capital flows to developing countries have $ trillion Bank Bond 1.2 9 recovered 1.0 Portfolio Equity FDI 8 7 0.8 Recent developments in finance is described in more 6 detail in the financial markets annex (http:// 0.6 5 go.worldbank.org/II5NRC07Z4). 0.4 4 3 0.2 Capital flows to developing countries recovered 0.0 2 1 substantially in 2010, reaching about 4.6 percent -0.2 0 of developing country GDP (table 2). Flows 2005 2006 2007 2008 2009 2010p 2011f 2012f 2013f remain well below their peak levels of 2006 and 2007, with most of the compression endured by Source: World Bank. 14 Global Economic Prospects June 2011 Table 2 International capital flows to developing countries rebounds, surpassing 2008 levels $ billions 2003 2004 2005 2006 2007 2008 2009 2010e 2011f 2012f 2013f Current account balance 138.3 195.2 318.8 450.3 469.1 440.6 284.4 264.5 219.6 159.9 163.1 as % of GDP 2.0 2.4 3.3 4.0 3.4 2.6 1.7 1.4 1.0 0.6 0.6 Financial flows: Net private and official inflows 264.1 342.2 502.9 656.3 1132.1 771.1 633.8 930.2 Net private inflows (equity+debt) 276.1 366.3 567.0 725.9 1132.1 743.3 557.4 857.8 892.7 963.5 1065.3 Net equity inflows 180.6 243.6 379.2 497.0 664.9 561.2 498.1 633.2 674.1 733.9 839.8 ..Net FDI inflows 154.3 206.7 311.7 389.3 529.8 614.4 390.0 485.4 555.0 603.6 696.2 ..Net portfolio equity inflows 26.3 36.9 67.5 107.7 135.1 -53.2 108.2 147.8 119.1 130.3 143.6 Net debt flows 83.6 98.6 123.8 159.3 467.2 209.9 135.6 297.0 218.6 229.6 225.5 ..Official creditors -11.9 -24.1 -64.0 -69.6 0.0 27.8 76.4 72.4 ....World Bank -2.5 2.4 2.7 -0.2 5.2 7.3 17.7 19.3 ....IMF 2.4 -14.7 -40.2 -26.7 -5.1 10.0 26.5 16.3 ....Other official -11.8 -11.8 -26.6 -42.6 0.0 10.6 32.2 36.8 ..Private creditors 95.5 122.7 187.8 228.9 467.2 182.1 59.2 224.6 218.6 229.6 225.5 ....Net M-L term debt flows 38.3 69.8 113.3 145.0 283.0 196.1 52.8 104.1 ......Bonds 23.1 34.3 48.3 31.7 88.2 24.1 51.1 66.5 ......Banks 19.5 39.7 70.3 117.9 198.5 176.8 3.2 37.6 ......Other private -4.4 -4.1 -5.3 -4.7 -3.7 -4.8 -1.6 0.0 ....Net short-term debt flows 57.2 52.9 74.5 83.9 184.2 -14.0 6.4 120.5 Balancing item /a -116.9 -137.5 -406.9 -458.6 -509.5 -733.5 -271.1 -524.4 Change in reserves (- = increase) -285.5 -399.9 -414.8 -647.9 -1091.7 -478.2 -647.0 -670.3 Memorandum items Net FDI outflows 23.6 46.1 61.6 130.5 148.7 207.5 153.9 210.0 Workers' remittances 137.5 159.3 191.8 226.3 278.2 325.0 307.6 324.7 348.6 374.5 As a percent of GDP 2003 2004 2005 2006 2007 2008 2009 2010p 2011f 2012f 2013f Net private and official inflows 3.9 4.3 5.3 5.8 8.1 4.6 3.9 4.8 Net private inflows (equity+debt) 4.1 4.6 5.9 6.4 8.1 4.4 3.4 4.4 3.9 3.8 3.8 Net equity inflows 2.7 3.0 4.0 4.4 4.8 3.3 3.1 3.3 3.0 2.9 3.0 ..Net FDI inflows 2.3 2.6 3.3 3.4 3.8 3.7 2.4 2.5 2.4 2.4 2.5 ..Net portfolio equity inflows 0.4 0.5 0.7 1.0 1.0 -0.3 0.7 0.8 0.5 0.5 0.5 ..Private creditors 1.4 1.5 2.0 2.0 3.3 1.1 0.4 1.2 1.0 0.9 0.8 Source: World Bank. Note: e = estimate, f = forecast /a Combination of errors and omissions and transfers to and capital outflows from developing countries. Global imbalances are expected to remain Figure 12. Global imbalances have declined and are ex- well below 2007 levels pected to remain at much lower than in mid-decade % Global GDP Reflecting offsetting terms-of-trade effects for 7 High-income USA Oil importers Oil exporters most developing countries and modest Developing China oil importers Oil exporters 6 improvements in remittance and tourism flows, few 5 countries are expected to run into extreme current account problems in 2011, and most developing 4 countries are expected to be able to finance 3 additional current account shortfalls that may arise. 2 1 Higher oil prices will increase the current account 0 surpluses of oil exporting countries, which ex ante 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 serves to increase global imbalances (which Source: World Bank. 15 Global Economic Prospects June 2011 rebounded from decade lows in 2009 to reach of May 2011). Following a relatively weak about 5 percent of global GDP in 2010). The weather-influenced first quarter GDP results, and combined balances of the United States and some flagging in the pace of the recovery in the China have halved from 2.6 percent of global second quarter, GDP growth is expected to pick GDP in 2006 to 1.3 percent in 2010 (figure 12). up in the second half of the year, with whole year gains of 2.6 percent in 2011 and 2.9 percent Looking forward, a lagged step-up in imports by in 2012, and with growth easing to 2.7 percent oil exporting economies; policy tightening in by 2013. high-income countries and continued reliance on The recovery in Europe continues to face domestic demand for growth among developing substantial headwinds from uncertainty countries, are expected to combine and maintain surrounding sovereign debt in several Euro Area global imbalances at levels well below those of members, and a wide-reaching but necessary 2007, when persistent increases were a cause for process of fiscal consolidation. Nevertheless, genuine policy concern. The absolute value of outturns in Germany and France have shown current account imbalances among developing increasing strength, with unemployment in oil importers (including China) are expected to Germany now well below pre-crisis levels. But moderate slightly as these economies have in many other countries, growth is becoming already returned to close to full capacity levels constrained by fairly austere fiscal consolidation of demand. In contrast, further recovery is programs, ongoing banking-sector restructuring expected in high-income countries, which may and by a skepticism regarding the financial be reflected in a decline in private-sector savings sector that is serving to raise borrowing costs. As and therefore increased deficits. However, this monetary policy has entered a renewed effect is expected to be offset by increased tightening phase additional stresses in the public-sector savings from fiscal tightening — financial sector—may become more apparent, with the result that imbalances for this group of presenting further challenges for these countries are also projected to decline modestly, economies. Overall, after expanding 1.7 percent from about 3 to 2.8 percent of global GDP in 2010, Euro Area GDP is expected to repeat between 2011 and 2013.9 that performance in 2011, strengthening to 1.8 percent in 2012 and 1.9 by 2013, as financial- Growth will slow but remain robust sector headwinds to growth begin to fade. The global recovery has broadened to encompass The horrible natural disaster and ensuing nuclear more firms, more countries and more challenge in Japan will shape economic and components of aggregate demand. Improving human developments in that country for years to labor market conditions in high-income come (see box 1). Despite the very real human countries, and strongly expanding domestic and wealth losses associated with the crisis, its demand in developing countries augurs well for impact on GDP growth is expected to be a continued maturation of the recovery that is temporary. While second quarter GDP could now almost two years old (global industrial decline at a 3 percent annualized rate, the pace of production began picking up in March 2009). activity is expected to pick up to a 3 or 4 percent annualized rate in the final two quarters of the The recovery in the United States has gained year — bringing whole year growth to around strength over the past 6 months and shows signs 0.1 percent in 2011. GDP is likely to increase of becoming more self-sustaining. Significant to 2.6 percent in 2012, before settling at 2 gains in levels of manufacturing and services percent in 2013 — broadly in line with the activity, business investment have helped to country’s growth potential. improve conditions in U.S. labor markets (employment has been growing by more than Overall, global growth is projected to ease from 115 thousand per month since March 2010, and 3.8 percent in 2010 to 3.2 percent in 2011, the unemployment rate dropped to 9.1 percent as before picking up to 3.6 percent in each of 2012 16 Global Economic Prospects June 2011 Box 5. Synopsis of regional outlooks The regional annexes to this report contain more detailed accounts of regional economic trends, including country-specific forecasts (for more details, http://go.worldbank.org/OBY9F2CJV0) Growth in developing East Asia and the Pacific (http://go.worldbank.org/Q2V3HPR0F0) is projected to slow from 9.6 to 8.5 percent between 2010 and 2011, reflecting the shorter term adverse consequences of the Japanese earthquake for regional exports, as well as a tightening of both monetary and fiscal policies within the region (figure). China’s expansion is projected to slow from the its 10.3 percent pace of 2010 to 9.3 in 2011 and around 8.7 per- cent in each of 2012 and 2013, as the effects of government’s policy tightening take stronger effect. Output in the remainder of the East Asia region is also projected to slow, from 6.8 percent in 2010 to 5.3 percent in 2011, before strengthening gradually to 6.4 and 6.5 percent in 2012 and 2013. Economic activity in developing Europe and Central Asia (http://go.worldbank.org/C4P2GZR0P0) is projected to con- tinue to recover — albeit at slower rates than during 2010—as the very large adjustment costs of the financial crisis begin to fade. High oil prices should boost demand in regional oil exporters (notably Russia) increasing remittances and exports for other countries in the region. Continued weakness in the banking sector in several countries, and household exposures to foreign currency debt remain significant sources of risk. The region is also among the most exposed to problems that may arise from the Euro-Area fiscal sustainability crisis. Aggre- gate GDP is expected to ease from the 5.2 pace of 2010 to 4.7 percent in 2011, before a modest easing to 4.5 percent sets in for 2012-13, in-line with underlying fundamentals. With output gaps for some of the larger countries in Latin America and the Caribbean (http:// go.worldbank.org/1S4SNDR160) largely closed, continued robust growth in several economies will come head-to-head with increasing inflationary pressures and a tightening of policy. As a result, growth is projected to diminish from the 6 percent pace of 2010 to 4.5 percent in 2011. Activity is projected to remain solid, but to ease toward 4 percent over 2012-13 as policy measures dig deeper. Exchange rate appreciation due to capital inflows and high commodity prices has put a dent in competitiveness, also expected to contribute to the softening of growth. Countries in Central America and the Caribbean will face headwinds from higher commodity prices, offset to varying degrees by a more favorable outlook for tourism and remittances as labor market conditions improve in the United States. The political turmoil in developing Middle East and North Africa (http://go.worldbank.org/IU7FS7QXE0) is projected to cut into near-term growth for a large number of economies in the region. Output already forgone- and continued uncertainty are expected to cause growth to slow in the economies most directly touched by the crisis by be- tween 3 and 4 percentage points in 2011 relative to what would have been observed otherwise. Growth in the remainder of the region will be reduced by 1 to 2 points. Many countries are projected to see tourism revenues, worker remittances, foreign direct investment and other international capital flows decline, further tightening Developing country growth rates to stabilize at historically elevated rates Real GDP growth , ch %, 2009 to 2013 12 2009 2010 2011 2012 2013 10 8 6 4 2 0 -2 -4 -6 -8 East Asia and Europe & Central Latin America & Middle East & South Asia Sub-Saharan Pacific Asia Caribbean North Africa Africa Source: World Bank. 17 Global Economic Prospects June 2011 Box 5. Synopsis of regional outlooks (cont.) conditions for regional oil importers. Activity is expected to pick up slowly as turmoil resolves over time, with growth among developing countries in the region rising from 1.9 percent in 2011 to 4 percent by 2013. GDP growth in 2011 in South Asia (http://go.worldbank.org/VFFA8EDQF0) is expected to slow from the robust 9.3 per- cent pace set in 2010 to 7.5 percent, as policy tightens in response to higher inflation and an unsustainably loose fiscal policy stance. These negative factors and high import costs due to commodity prices are likely to be par- tially offset by strong trade, notably in India, which is reorienting its exports toward China and East Asia. Though investment spending is projected to remain robust (buoyed by infrastructure projects), consumer demand is antici- pated to come under pressure due to reduced fuel and food subsidies. Turmoil and economic weakness in the Middle East and North Africa is expected to be a negative for remittances to the region, further dampening house- hold incomes and outlays. Regional growth should revive toward an 8 percent pace by 2013 on the back of do- mestic reforms and an improved global environment. GDP growth in Sub-Saharan Africa (http://go.worldbank.org/PHW504QYG0) is projected to register 5 percent in 2011— the only developing region projected to enjoy an acceleration of growth in the year—buoyed by favorable terms of trade for oil exporters, and continued large inflows of FDI from China and elsewhere. Activity is expected to continue to firm with growth reaching 5.7 percent by 2013. The region has avoided the worst effects of higher food prices due to strong local crops, but should international prices remain at current or higher levels, local food prices could begin rising in the second half of 2011 and into 2012, with negative consequences for consumer demand and poverty. Inflation pressures may go hand and hand with this development, especially as elections are expected in 13 countries in the region. and 2013. The slowdown for high-income to prevent a more serious downturn. countries (from 2.7 percent in 2010 to 2.2 percent in 2011) mainly reflects very weak For developing countries growth is projected to growth in Japan due to the after-effects of the decline from 7.3 to 6.2 percent between 2010 earthquake and tsunami (see earlier box 1). and 2012 before firming somewhat in 2013, Growth in the remaining high-income countries reflecting an end to bounce-back factors that is expected to remain broadly stable at around served to boost growth in 2010 and the 2.5 percent through 2013, despite a gradual tightening of monetary and fiscal policies as withdrawal of the substantial fiscal and monetary capacity constraints become increasingly binding stimulus introduced following the financial crisis (see box 5 and the regional annexes to this Figure 13 Headline inflation pressures have picked up since mid-2010 Median headline inflation rates Distribution of increase in developing country inflation rates Headline inflation, ch%, 3m/3m, saar # of countries 12 14 12 9 10 6 8 3 6 4 0 2 Developing -3 High-income 0 -6 -4 -2 0 2 4 6 8 10 12 14 More -6 Jan-05 Oct-05 Jul-06 Apr-07 Jan-08 Oct-08 Jul-09 Apr-10 Jan-11 Change in year-over-year inflation rate over past 12 months, percentage points Source: World Bank. 18 Global Economic Prospects June 2011 Figure 14 Regional changes in inflation Year-over-year inflation Quarterly inflation (3m/3m saar) Headline inflation rate, y-o-y percent change 20 18 16 15 Jan 2009 14 Jan 2010 12 Apr 2011 or latest 10 Jan-09 10 Jan-10 Mar 11 or latest 8 5 6 4 0 2 -5 0 High-income East Asia & Europe & Latin America Middle East & South Asia Sub-Saharan High-income East Asia & Europe & Latin America Middle East & South Asia Sub-Saharan Pacific Central Asia & Caribbean N. Africa Africa Pacific Central Asia & Caribbean N. Africa Africa Source: World Bank. document for more details on recent economic with inflation having increased by 10 percentage developments and the outlook for low– and points or more over the past 12 months in the middle-income countries — including country Democratic Republic of Congo, Ethiopia, the specific forecasts). Kyrgyz Republic, Bolivia, and Mongolia. Year- over-year headline inflation increased during this Rising inflation poses period by 3 or more percentage points in 33 of macroeconomic policy challenges the 93 developing countries for which data are available (second panel, figure 13). However, the Recent developments in inflation is described in more extent of the pickup in inflation in most countries detail in the inflation annex (http://go.worldbank.org/ has been modest. Inflation rates in 55 percent of FA0QD707X4). developing countries remain below their average The rise in commodity prices, combined with the rate of the pre-crisis period (January 2000 rapid closing of output gaps and strong capital through August 2008). And inflation is less than inflows has contributed to an acceleration of 2 percentage points higher than that average in inflation throughout the developing world. 80 percent of countries. Headline inflation in developing countries neared 7 percent (year-over-year) in April 2011, a more The biggest acceleration has been in the East than 3 percentage point increase since low points Asia and Pacific- and Middle-East and North in July 2009, when concerns of deflation were African regions, reflecting capacity constraints in paramount. Headline inflation (y-o-y) in high- the former and food prices in the latter (first income countries has also picked up, reaching panel, figure 14). While on a year-over-year 2.8 percent in April 2011. basis inflation has eased in South Asia and Europe and Central Asia, monthly data suggests Monthly inflation accelerated more starkly, that price pressures remain strong in South Asia reaching a 9.1 percent annualized pace among and are rising in Africa, with the pace of developing countries in the 3 months ending in increase in the first quarter of 2011 exceeding 15 January 2011. Since then, the pace of inflation percent in South Asia and close to 10 percent in has eased to around 6.7 percent in April, and to Sub-Saharan Africa (second panel, figure 14). 4.3 percent in high-income countries (first panel, figure 13). Rising food and fuel prices have also been associated with significant increases in food and The extent of the increase and its main fuel subsidies—both implicitly as the gap determinants varies markedly across countries, between market and controlled prices increases 19 Global Economic Prospects June 2011 Box 6 Should developing countries accommodate external price shocks? Several OECD countries produce estimates of core inflation that either exclude food and fuel prices or exclude the most volatile components from the overall consumer price index, and prefer to guide monetary policy with these measures rather than headline inflation. Currently, even as headline inflation is rising rapidly, so-called core inflation indexes remain low at 1.3 percent in high-income Europe and 1.1 percent in the United States. Most developing countries do not publish separate core inflation measures and, recent research (Walsh, 2011) suggests that in some cases, policy in developing countries may be better advised to focus on headline not core measures. According to this line of argument, the high weight of food and fuel prices in the overall consumption basket of developing countries (more than 50 percent in many cases) means that price increases in these goods spread more easily into other prices than in high-income countries. As a result, accommodating such price in- creases runs the risk of allowing a second round of price increases to occur — potentially yielding an inflation- ary spiral. A second strand of logic argues that because food prices are such a large component of the overall basket, not accommodating them (even if they do pass through to other prices) would pose too harsh an adjustment on real wages. In this case, a credible monetary authority might be better-off to announce that they would accommodate the price increase and allow some second round increases (thereby reducing the real wage shock), but would seek to firmly re-establish its inflation targets within a well specified period of time. Of course, the success of such a strategy lies in the credibility of the monetary authority. If inflationary expecta- tions adjust upward despite the monetary authority’s declaration to re-establish inflation targets by a given date, then the long-term costs of bringing expectations back down may exceed the short-term benefits of easing the real -wage adjustment to permanently higher food prices. and because of the imposition of new policies to subsidy spending in several Asian economies, alleviate the impact of the price hikes. Several including India, Pakistan and Indonesia. countries in the Middle-East and North Africa increased food and/or fuel subsidies (Algeria, Responding to the rise in inflation and the Egypt, Jordan, Morocco, Syria and Tunisia), with closing of output gaps, authorities in many associated increases in government deficits developing countries have begun the process of exceeding 2 percent of GDP in many instances. adjusting macroeconomic policy, which had been Rising food and fuel prices have also increased loosened in the wake of the financial crisis, to a Figure 15 Policy tightening has begun and markets suggest more is to be expected Rates are on the rise in many developing regions And markets expect further increases policy interest rates in percent change in offical policy rate, basis points Developing 14 Asia Europe & Central Asia 500 Latin America & the Caribbean 13 Sub-Saharan Africa/ Middle East & North Africa 450 Change since 2009 low 12 400 Market expected between May 20 and 11 350 end of 2011 10 300 9 250 200 8 150 7 100 6 50 5 0 4 Brazil Chile Colombia Russia China India Indonesia Malayisa Thailand 01/01/2008 07/01/2008 01/01/2009 07/01/2009 01/01/2010 07/01/2010 01/01/2011 Source: World Bank, Thomson/Reuters, Bloomberg. 20 Global Economic Prospects June 2011 Figure 16 Gross capital flows to, and credit growth in, developing countries eased toward the end of 2010 billions $, 3 month moving average 30 y-o-y Credit growth, CPI def lated Brazil 35 China Bond issuance Colombia 25 Indonesia Equity placement 30 India Syndicated bank loans Malaysia 20 25 Turkey 20 15 15 10 10 5 5 0 0 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 2009 Jan 2009 Jul 2010 Jan 2010 Jul 2011 Jan Source: World Bank using Dealogic, IFS. Note: Data refer to gross flows of new bond and equity issues and syndicated bank loan commitments. more neutral stance. Despite the increase in nominal interest rates, real rates (nominal deflated by actual inflation) Monetary policy interest rates in much of the remain low and even negative in many developing world have been rising (first panel, developing countries. Expected real rates (which figure 15). In Latin America, the median policy is what matters for monetary policy) may not be rate has increased from 7.9 percent in March negative if expectations are that the current 2010 to 9.6 percent by May 2011, and in Asia it pickup in inflation in transitory. However, if has increased by 106 basis points to 6.31 some of the recent increase is deemed permanent percent. Reflecting much larger output gaps, then additional monetary tightening may be policy rates in Europe and Central Asia have called for (see box 6 for a fuller discussion of been broadly stable (up only 50 basis points how monetary policy in developing countries since February 2011). In the Middle East and should respond to increases in commodity North Africa and Sub-Saharan Africa rates prices). Indeed, expected inflation has increased continue to decline. in several developing countries where data exist, for example in Argentina, Belarus, Brazil, Chile, Ethiopia, and India among others. Figure 17 Upward pressure on middle-income currencies and reserve accumulation also eased in 2010Q4 real effective exchange rate indices, Jan 2009=100 Annualized rate of increase in USD reserves 150 50.0 2010Q1 2010Q2 2010Q3 2010Q4 Brazil South Africa Turkey India 40.0 140 Indonesia Thailand China 30.0 130 20.0 120 10.0 110 0.0 100 -10.0 90 -20.0 2009M01 2009M05 2009M09 2010M01 2010M05 2010M09 2011M01 2011M05 East Asia & Europe & Central Latin America & Middle East & N. South Asia Sub-Saharan Pacific Asia Caribbean Africa Africa Source: World Bank, IFS. 21 Global Economic Prospects June 2011 As discussed in length in the previous edition of much of the developing world, East Asia Global Economic Prospects, efforts to tighten forming a notable exception (figure 17). monetary policy and rein-in credit growth were complicated in 2010 by strong capital inflows. Fiscal policy will likely have to do more Some of these flows (mainly short-term debt and going forward equity flows) were perceived as having an important speculative and temporary component. Looking forward, policymakers in developing As a result, many countries (notably several countries will need to make fuller use of all of large middle-income countries with relatively the tools at their disposal to keep inflation under deep capital markets) sought to resist the control. While the more unstable capital inflows associated upward pressures on their currencies, that characterized the third quarter of 2010 have putting into place a wide range of administrative abated, many of the underlying conditions that and regulatory measures designed to reduce the attracted those flows remain in place (low short- attractiveness of short-term financial investments term interest rates in high-income countries; or reduce the extent of credit expansion stronger growth prospects in developing associated with reserve accumulation. countries; strong commodity prices, and a long- run tendency for developing–country currencies Measures employed included sterilizing inflows to appreciate). Moreover, countries are now through government bond sales, and interest rate confronted with additional pressures from hikes. Many countries employed non-traditional growing capacity constraints and rising measures that did not increase domestic interest commodity prices. rates in order to avoid increasing the returns to foreigners of making short-term investments in If countries are to deal with these (and other as these countries. These included raising reserve yet unknown) challenges, they may need to take requirements10, and imposing taxes on short- fuller advantage of both fiscal and exchange rate term foreign capital investments. Turkey even policies. To this point in the recovery, went so far as to lower domestic interest rates withdrawal of the fiscal stimulus that was put in (and therefore risk a rapid expansion in domestic place during the acute phase of the crisis has credit) in order to discourage foreign capital been limited. Although government deficits have inflows. declined in many developing countries, this mainly reflects improved revenues as activity Partly as a result of these steps, foreign capital has recovered and output gaps returned to near inflows into—and credit growth in—many of these countries eased toward the end of 2010 and Figure 18 Modest expected improvement in fiscal into 2011 (figure 16). However, attributing deficits in some developing regions causality is difficult because renewed concerns about fiscal sustainability in high-income general govt balance as a share of GDP (%) Europe; political turmoil in the Middle East and 4.0 North Africa; rising oil prices, and the crisis in 2.0 Japan may also have been playing a role. Indeed, 0.0 profit-taking on the part of investors, and concerns that perhaps emerging market -2.0 currencies and local stock-markets had reached -4.0 unsustainably high levels may also have been factors at play.11 -6.0 -8.0 Whatever the reason for the reduced inflows, 2007 2010 2011 2012 2013 -10.0 they were reflected in an easing in the upward High Income East Asia & Europe & Latin Middle East South Asia Sub-Saharan pressure on the currencies of many middle- Countries Pacific Central Asia America & & N. Africa Caribbean Africa income countries, and a slowing in the pace of international reserve accumulation throughout Source: World Bank. 22 Global Economic Prospects June 2011 zero levels. Discretionary cuts to spending have Similarly, countries that have sustained large been limited. Government deficits have declined current account surpluses for an extended period by less than might have been expected given that of time may well be better off allowing their output gaps in most countries will be close to, or currencies to float more freely, rather than above zero—suggesting that almost all of the continuing to resist upward pressure— cyclical component of government deficits has especially when domestic inflationary tensions been eliminated and that remaining budgetary are building. shortfalls are structural in nature (figure 18). Risks to the global economy Importantly, even by 2013 no region is anticipated to see fiscal balances return to the pre The recovery is mostly complete in developing -crisis levels of 2007. They will therefore not countries, with prospects in individual countries have in place the kind of fiscal buffers that increasingly dependent on local conditions and allowed policy in developing countries to medium-term productivity growth rather than the respond counter-cyclically to the financial crisis. large, global-level forces that dominated Until such buffers are restored, countries will be economic activity during and immediately after more vulnerable to future domestic or external the financial crisis. While the robust growth shocks. outlined in the baseline remains the most likely outcome, several tensions and external events A more assertive tightening of fiscal policies in have the potential to disrupt that process. developing countries would also allow a given level of macroeconomic tightening to be On the upside, output could come in more achieved at lower interest rates. Lower domestic strongly than anticipated, or the very strong interest rates would both reduce the financial speculative capital flows that characterized the incentive for potentially destabilizing short-term third quarter of 2010 could return. Either debt inflow, but might also increase investment scenario could potentially accentuate inflationary rates and overall activity by lowering the cost of pressures in the global economy — both those capital for local entrepreneurs. stemming from commodity markets and those coming from increasingly binding capacity Some countries should consider introducing constraints in a number of emerging markets. In more flexible exchange rate regimes. When such a scenario, which pre-supposes that policy countries face temporary and or speculative tightening efforts underway are not sufficient to pressures on their currencies, reserve rein in demand, the authorities would be obliged accumulation and other strategies to resist to tighten more aggressively in 2012, provoking unwarranted exchange rate appreciation (or a more pronounced slowdown in 2013. depreciation) may well be warranted. However, There are several potential downside risks. when those pressures are persistent and enduring, a policy that resists exchange rate A much more severe slowing of the global adjustment may well be counter-productive. economy could come about if the political turmoil in the Middle East and North Africa For example, while Brazil faced strong inflows were to result in a prolonged period of high of short-term debt flows, the authorities were oil prices — either through increased arguably correct in resisting the upward pressure uncertainty, or an enduring disruption to they caused on their currency. However, Brazil global oil supply. has also been—and continues to be a major Conditions in global food markets represent destination for FDI, which has in large measure a more focused risk for the poor in been attracted to the country’s long-term developing countries. Another year of poor fundamentals. In this context, the authorities harvests could see prices rise still higher — decision to not resist upward pressures stemming especially if combined with higher oil prices from FDI inflows is equally appropriate. — with potentially serious consequences for 23 Global Economic Prospects June 2011 Table 3 A further increase in oil prices due to political turmoil in the Middle-east could cut further into growth (Change in the level of GDP (%) from baseline and change in current account balance (% of GDP) Impact of a $50/barrel price hike (11q2-12q2) due to uncertainty Re a l GDP Curre nt a ccount (% of GDP) 2010 2011 2012 2013 2010 2011 2012 2013 World 0.0 -0.5 -1.0 -0.4 0.0 0.0 0.0 0.0 Oi l e xporti ng 0.0 0.2 0.5 0.9 0.0 1.5 1.4 -0.2 Oi l i mporti ng 0.0 -0.6 -1.3 -0.7 0.0 -0.2 -0.2 0.1 Hi gh i ncome 0.0 -0.6 -1.2 -0.6 0.0 0.1 0.2 0.2 Oi l e xporti ng 0.0 -0.4 -0.6 0.3 0.0 1.4 1.7 0.1 Oi l i mporti ng 0.0 -0.6 -1.2 -0.7 0.0 -0.1 0.0 0.2 Developing countries 0.0 -0.1 -0.4 0.0 0.0 0.3 0.1 -0.3 Oi l e xporti ng 0.0 0.9 1.6 1.5 0.0 1.5 1.2 -0.4 Oi l i mporti ng 0.0 -0.7 -1.5 -0.8 0.0 -0.5 -0.6 -0.2 Mi ddl e -i ncome 0.0 -0.1 -0.4 0.0 0.0 0.3 0.1 -0.3 Low-i ncome 0.0 -1.3 -2.4 -0.6 0.0 0.0 0.3 0.1 Ea s t As i a a nd Pa ci fi c 0.0 -0.8 -1.7 -1.0 0.0 -0.8 -1.1 -0.3 Oi l e xporti ng 0.0 -0.4 -0.3 0.7 0.0 -0.5 -0.4 0.3 Oi l i mporti ng 0.0 -0.8 -1.9 -1.2 0.0 -0.9 -1.2 -0.4 Europe a nd Ce ntra l As i a 0.0 -0.2 -0.2 0.8 0.0 1.6 1.8 0.1 Oi l e xporti ng 0.0 0.1 0.7 2.0 0.0 2.3 2.4 -0.1 Oi l i mporti ng 0.0 -0.5 -1.2 -0.6 0.0 0.1 0.4 0.1 La ti n Ame ri ca a nd Ca ri bbe a n 0.0 0.5 0.7 0.5 0.0 -0.2 -0.4 -0.2 Oi l e xporti ng 0.0 1.2 1.8 0.9 0.0 -0.4 -0.9 -0.1 Oi l i mporti ng 0.0 -0.3 -0.4 0.2 0.0 -0.1 -0.1 -0.2 Mi ddl e Ea s t a nd N.Afri ca 0.0 0.8 1.3 1.1 0.0 3.3 3.2 -0.9 Oi l e xporti ng 0.0 1.5 2.4 1.4 0.0 3.7 3.4 -1.2 Oi l i mporti ng 0.0 -1.4 -2.3 0.0 0.0 0.4 1.2 0.4 South As i a 0.0 -0.9 -1.7 -0.7 0.0 -0.1 0.3 0.2 Sub-Sa ha ra n Afri ca 0.0 1.0 1.7 1.4 0.0 3.3 2.7 -1.3 Oi l e xporti ng 0.0 3.7 6.6 4.4 0.0 6.2 4.4 -3.6 Oi l i mporti ng 0.0 -0.9 -1.6 -0.7 0.0 0.0 0.3 0.2 Source: World Bank. the poor. prices could remain high or even increase further — with serious consequences for global growth. The market nervousness over fiscal sustainability in high-income Europe — During the Iranian revolution and the Iraq/ although less acute than in the past, still has Iran War, crude oil prices more-than doubled the potential to disrupt growth in developing from $14/bbl in 1978 to $35/bbl by 1981. countries if it begins to weigh on confidence. When Iraq invaded Kuwait in 1991, oil Continued turmoil in the Middle-East and prices increased sharply from $20/bbl to a North Africa could push oil prices even peak of $44/bbl five months later, with the higher average price rising by one-third to $28/bbl. The recent turmoil in the Middle East and North During the extended conflict in Iraq, prices Africa lifted oil prices to $112/bbl in late April increased by 40 percent. 2011 (World Bank average), a 40 percent The current turmoil in the Middle East and North increase on the average price of $79.60/bbl in Africa has been associated with a $22/bbl 2010. In the baseline, oil prices, which have increase in oil prices, from $90/bbl in December since declined to around $107/bbl, are expected 2010 to $112/bbl by late April 2011. Prices to gradually moderate toward a long-run could increase further on additional disruption to equilibrium price of about $80/bbl in constant supplies, notably if this involved a larger 2011 dollar terms. This implies annual price exporting country. levels of $107/bbl in 2011 drifting to $96.7/bbl by 2013. However, if current uncertainties Preliminary simulations suggest that a further persist, or a major supply disruption occurs, oil $50/bbl increase in the price of oil for a period of 24 Global Economic Prospects June 2011 1 year (beginning in the second half of 2011, for at any price; in the former oil would be available example) could shave off 0.5 and 1.0 percentage — but at higher cost. points from global output in 2011 and 2012 (table 3). This overall result masks significant A poor crop or higher oil prices could see differences between countries and regions. domestic food prices in developing countries increase further in 2011-2012 Oil exporting countries experience significant gains (6.6 percent of GDP in Sub-Saharan Africa The surge in international food prices during the and 2.4 percent in the Middle East and North second half of 2010 provoked concerns of a Africa),12 while oil importing countries “second food crisis”, of similar magnitude to that experience losses. The largest losses are of 2007-08. Indeed, international food prices expected to be among oil-importing countries in increased to levels close to their 2008 peaks. the Middle East and North Africa (-2.3 percent) as well as in East Asia and Pacific (-1.9 percent However, effects on the ground have been in 2012), reflecting both the direct effects of mitigated by a number of factors— notably, the higher oil prices on incomes in these regions, as fact that not all major grain prices have increased well as their greater reliance on exports to other as much as they did in 2008. International rice negatively affected oil-importing regions prices remain relatively low, 46 percent lower (Europe and Central Asian oil-importers benefit than peak prices in 2008 — although still twice from strong Russian imports). their average level between 2000 and 2007. GDP declines in oil importers reflect real income Moreover, 2010 was a good crop year for many losses as the cost of oil and related goods and developing countries — especially in Africa — services rise, which leads to lower demand, so that local prices increased by much less than reduced competitiveness, and output declines — international prices; and local food price indexes with intensive oil-importing economies rose by an average of 9.7 percent in the 12 experiencing the biggest declines (for example months ending December 2010. Of course, much Jamaica and Guyana). Negative impacts among larger increases were observed in some countries with close economic ties to oil economies with 33 of 80 countries experiencing exporters (for example those in Europe and food price increases of 10 percent or more in Central Asia) tend to be reduced by increased 2010. export demand from oil exporters. Simulations suggest that if the June 2011/May In terms of external balances, current account Figure 19 Another poor crop or higher oil prices could balances (as a share of GDP) are expected to rise push food prices even higher by up to 6.2 percent of GDP in oil exporting Sub Saharan Africa, and by about half that much in (Nominal Wheat price, US$/ton) the Middle East and North Africa, while in East 350 Baseline Forecast Asia and Pacific, external balances decline by 5% production shortfall 300 about 1 percent of GDP. 5% production shortfall and 50% incerase in energy prices 250 Should the turmoil result in a large and sustained (say 10-15mb/d) reduction in global oil supply, 200 adverse effects could be more than twice as large. Prices might initially rise as high as $200/ 150 bbl, cutting sharply into household incomes and firm-level profitability. Moreover, supply 100 2000 2002 2004 2006 2008 2010 2012 shortages could directly constrain production in a way that uncertainty-based price rises would Source: DEC Prospects Group, World Bank. 8 not. In the latter case, oil would not be available Source: World Bank. 25 Global Economic Prospects June 2011 2012 crop year is of normal size, then GDP in 2011 and gross debt to exceed 230 internationally traded grain prices should decline percent. in 2012 (significant price relief is unlikely to be observed until towards the end of 2011, as At the same time in Europe, despite substantial information on harvests becomes clearer). steps to reduce deficits in several countries, and However, if the crop is poor (i.e. 5 percent—or 1 the multiple financial rescue-packages brought to standard deviation—less than normal), then bear, markets remain concerned that one or more wheat prices could rise by a further 3.5 percent Euro Area economies might have to restructure (figure 19). its debt. The price of ensuring against default of the sovereign debt of Greece has surged to Given the importance of oil and natural gas as record highs for the Euro Area, and credit default inputs to food production, food prices could rise swap rates for Ireland and Portugal have also an additional 16 percent should oil prices given up earlier declines (figure 20). Even the increase by the $50/bbl outlined in the earlier oil risk premium for traditional “safe haven price scenario. countries” such as the United Kingdom and Germany have edged upwards. Persistent euro-area uncertainty, and rising high-income country interest rates For developing countries, the situation in Europe as monetary stimulus is withdrawn, could is of concern because a serious deterioration in reveal further weaknesses in the global financial and economic conditions could weaken economy. demand for developing country exports. In addition, banks could be forced to reduce credit The fiscal situation in high-income countries growth, or even repatriate funds from foreign continues to concern markets. Despite recently affiliates — with more direct impacts on credit announced and anticipated spending cuts, fiscal and economic growth in developing countries— policy in the United States remains loose due to notably in Europe and Central Asia. tax measures introduced or extended in December 2010. The Congressional Budget A restructuring of the sovereign debt of one or Office (2011) projects a U.S. federal deficit of more European countries could adversely affect 9.8 percent of GDP in fiscal year 2011 based on the capital of some Euro-area banks. Data from current policies, and a debt-to-GDP ratio that the Bank for International Settlements (BIS) could climb to 77 percent of GDP by 2021, from suggests that the sovereign debt of Greece, its current 62 percent of GDP level. In Japan, the Ireland, Portugal and Spain held by Euro-area fiscal deficit is expected to exceed 11 percent of banks may represent more than 20 percent of the Figure 20 Renewed pressure on high-income coun- tier-1 capital of euro area banks. If a try debt restructuring caused capital adequacy ratios to 5-yr sovereign credit-default swap rates, basis points fall below regulatory thresholds, this could have 1600 Greece Italy Ireland LMICs with Median < 200 Table 4 Results of ECB stress test 1400 Portugal LMICs with Median > 200 1200 Spain 2011 2012 1000 Euro Area -2.0 -2.0 European Union -2.1 -2.0 800 Russia -2.0 -1.3 600 China -1.0 -0.1 400 Rest of Asia -1.4 -0.1 Brazil -2.1 -0.1 200 Mexico -2.0 -0.5 0 Rest of Latin America -2.0 -0.7 Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Non-EU, Rest of the World -1.5 -0.3 Source: World Bank, Thomson/Datastream.. Source: ECB (2011). 26 Global Economic Prospects June 2011 wider implications, given the extensive cross- are reflected in a less capital-intensive growth holdings between banks globally. In such a path—an effect that is incorporated into the scenario, European banks (but potentially other baseline forecast. banks as well) could be forced to re-consolidate balance sheet in a second round. Concluding remarks In such scenario, banks might be compelled to The recovery from the unprecedented global draw on resources of affiliates and subsidiaries in recession that followed the September 2008 developing countries (mainly in Europe & financial crisis has gathered strength, and, despite Central Asia and Latin America & the significant tensions and hurdles ahead, appears Caribbean), with negative effects on lending and likely to continue to mature over the coming activity in those regions that extend beyond the three years. pure trade impacts of a slowing in European growth. While the dynamic of recovery appears well established and has spread from developing Table 4 reports the results of an ECB simulation13 countries to high-income economies, significant where an increase in risk aversion and an ensuing challenges and risks remain. Strong growth in decline in investor and business confidence cuts developing countries, coupled with political into European growth by around 2 percentage tensions in oil producing regions have once again points, and generates similar impacts on GDP in pushed oil prices to levels where further increases many developing countries as a result of reduced could significantly curb economic growth. exports and increased financial costs from Monetary policy has responded, but fiscal and increased risk premia and falling asset values. exchange-rate policy may need to play a bigger role if inflationary pressures are to be contained. While authorities are taking steps to ensure against a negative outcome, these persistent risks High oil prices have contributed to high food are a reminder that the global economy has yet to prices, with important negative consequences for fully recover from the excesses of the pre-crisis real incomes of the urban poor. So far, the worst financial boom. of these impacts has been avoided because domestic food prices in developing countries Indeed, additional problems and issues may not have not increased as much as international food have been revealed as yet. The very low long- prices. But if the 2011/12 crop year disappoints, term interest rates engineered by high-income as did the 2008/09 and 2010/11 years, then central banks through both orthodox and pressures on the incomes and nutrition of poor extraordinary measures such as quantitative families can be expected to intensify. easing, may have allowed some firms and banks to survive and prosper in some cases, even if not The maturation of the cycle, and the gradual all underlying structural problems have been withdrawal of the extraordinary measures put in resolved. As central banks stop intervening in place to prevent a collapse of the global Treasury-, mortgage- and corporate bond markets economy, suggest that both short- and long-term and stricter financial regulations kick-in, long- interest rates will rise. As they do, they are likely term interest rates are expected to rise, increasing to increase pressure on governments, firms- and financing costs. Such higher costs may expose bank finances, potentially revealing weaknesses vulnerabilities that until now have remained that have remained hidden, given the ready hidden. availability of cheap money. Should some of these weaknesses emerge in economically Moreover, as outlined in the January edition of sensitive corners of the global economy, they Global Economic Prospects 2010 (World Bank, could bring serious consequences. 2010), higher long-term rates may be associated with a temporary slowing of trend growth rates in developing countries, as higher borrowing costs 27 Global Economic Prospects June 2011 Notes production is returned to the food cycle as feed grain. 1. Global export volumes regained pre-crisis 8. Relative valuation measures (price-earnings, levels, and stood 2.4 percent above pre-crisis price-to-book, price -to-sales, and dividend peaks as of February 2011. This has largely yield) in developing countries had been reflected strong gains by developing trading at a substantial discount relative to countries where merchandise exports stood 9 high-income countries during 2009 and part points above pre-crisis peaks in February. of 2010. However, the discount vanished by High-income economies regained August the third quarter of 2010, when developing 2008 levels in December 2010, and exports countries even traded at a small premium are now on par with pre-crisis peaks. over high-income countries. Since then, the 2. See World Bank (2011a) for a description of pace of initial and secondary public the methodology used to estimate “no-crisis” offerings in developing countries (and their levels of activity. Note that these capacity take-up by high-income investors) has eased. utilization rates are statistically derived and In addition developing country stock will differ from officially published sources. markets have stabilized. They refer only to industrial production and 9. New data for China suggest that the decline are distinct from the similar but “whole- in FDI in 2009 was less pronounced (37 economy” output gap. percent) than earlier thought, and that the 3. Grains are the most important source of rebound in 2010 was somewhat stronger (25 calories in the diet of the poor, providing percent). between 80 and 90 percent of calories. 10. The IMF in its latest World Economic 4. An additional 0.1mb/d of oil production was Outlook (2011) projects that global shut in March due to unrest and strikes in imbalances will rise somewhat over their Yemen, Oman, Gabon and Côte d’Ivoire, but projection period, both reflecting an market anxiety attaches the possibility of assumed nominal depreciation of the larger disruptions to major oil producing renmimbi viz-a-viz the dollar and a countries, including Nigeria in the run-up to significant pickup in Chinese exports as elections in April (about 1mb/d was output gaps in high-income countries disrupted during the 2007 election decline. campaign). 11. For example, the Chinese Central Bank has 5. IMF (2011) argues that loose monetary raised its reserve requirements eight times policy may have contributed to these since November 2010. conditions by lowering interest rates and 12. In the World Bank, Global Simulation thereby reducing the cost of warehousing Model (GSM), the initial effect of an oil stocks to facilitate speculation when future price shock mainly impacts on the system as prices are higher than spot prices. a terms of trade shock. For oil exporting 6. Stock to-use ratios in major exporting countries, there is a gain in real income, as economies are used here to control for prices of merchandise exports rise. The distortions caused by large fluctuations in impact is strongest in counties where oil recent years in the stocks of major exports represents a large share of GDP (for producing/consuming countries, but which example in Angola and Nigeria), and where do not participate in global commodity import propensities are relatively low. markets. Among oil exporting countries, the import propensity is significantly higher in Vietnam 7. Not all of the food content of maize and and Papua New Guinea, than in Gabon and sugar used in biofuel production is lost. Venezuela, RB - thereby reducing the net About 1/3 of maize that is used in biofuel GDP impact in the latter for a similar size 28 Global Economic Prospects June 2011 income gain. International Monetary Fund. 2011. World In high-income oil exporting countries, the Economic Outlook. April. overall GDP impact is negative due to Timilsina, Govinda R. and Shrestha, Ashish. negative impacts in Canada and the UK, 2010. “Biofuels: Markets, Targets and whose non-oil exports are negatively Impacts”. World Bank Policy Research affected by slowing global demand. Working Paper. No.6534 Excluding these two countries, the impact on the remained of the high-income oil TEPCO. 2011. Power Supply and Demand exporting countries is positive, due to their Outlook in this Summer and Measures (3rd high import intensities. A similar factor Release). May 13 explains the negative impact for East Asia and Pacific oil exporters as the negative United Nations. World Tourism Organization. impact on Malaysian non-oil exports 2011. “UNWTO World Tourism Barometer”. overwhelms the positive impact of higher oil February 2011. [www.unwto.org] revenues on Malaysian GDP (excluding Malaysia, the net impact is positive). Walsh, James P. 2011. “Reconsidering the Role of Food Prices in Inflation”. IMF Working 13. The ECB scenario assumes a spike in risk Paper. WP11/71. premia on European sovereign debt, higher short-term and long-term interest rates, and a World Bank. 2010. Global Economic Prospects: reduction in European business and Finance, Crisis and Growth. consumer confidence World Bank. 2011a. Global Economic References Prospects: Navigating Strong Currents. World Travel and Tourism Council. 2011 Baffes, John. 2010. “More on the Energy/Non- Tourism Impact Data and Forecast. May Energy Commodity Price Link.” Applied 2011. [www.wttc.org] Economics Letters. 17: 1555-1558 Congressional Budget Office. 2011. The Budget and Economic Outlook: Fiscal years 2011 to 2021. January. Downloaded April 29, 2011 http://www.cbo.gov/doc.cfm?index=12039 Dalsgaard, Thomas, Chirstophe André and Pete Richardson. 2001. “Standard Shocks in the OECD Interlink Model”. OECD Economics Department Working Paper. No. 306. European Central Bank. 2011. “Macroeconomic adverse scenario for the 2011 EU-wide Stress test: Specification and results”. Annex 2 in European Banking Authority. 2011. Overview of the EBA 2011 banking EU-wide stress test. http://www.eba.europa.eu/cebs/media/ Publications/Other%20Publications/2011% 20EU-wide%20stress%20test/EBA-ST-2011- 003--%28Overview-of-2011-EBA-EU-wide- stress-test%29.pdf 29 Global Economic Prospects June 2011: Subject Annex Industrial Production Annex Global industrial production has rebounded in and Pacific (18.7 percent in March before easing the fourth quarter of 2010 following the pause in to 15 percent in April), and Latin America and global growth in the third quarter, only to the Caribbean (10.3 percent). Growth in moderate again by the end of the first quarter of industrial production in Europe and Central Asia 2011. The growth slowdown in the third quarter regions was 9.8 percent in the three months to appears to have mainly reflected an inventory March before decelerating to 3.8 percent by cycle, as underlying demand growth (proxied by April, while production rose to 8.7 percent in GDP) continued to expand at a more-than 1.5 South Asia in the three months to March, and to percent annualized rate (figure IP.1). In 6.8 percent in the three months to February in developing countries output accelerated the 4 Sub-Saharan African countries reporting beginning in the fourth quarter of 2010, and by data. the end of the first quarter of 2011, industrial activity in developing countries was expanding The good performance in industrial production at a 13.4 percent annualized pace. In high- has been underpinned by buoyant domestic income countries industrial production growth demand in developing countries and a moderate decelerated sharply to 6.4 percent in the three recovery in high-income consumer spending. month to March, from 15.3 percent in the three Slowly improving labor markets in several high- months to February, on account of a sharp 15.5 income countries have contributed to a return to percent month-on-month decline in Japanese solid retail sales volume growth. At the same industrial production in March. Excluding Japan, time, the expiration of various incentive growth in high-income countries was 7.9 percent programs in both high-income and developing in the three months to March, up from 6.7 countries has contributed to volatility. For percent in the fourth quarter of 2010. example, Chinese retail sales volumes growth slowed to 11.4 percent by March 2011 from 17.8 The acceleration in the seasonally adjusted percent a year earlier, in part because of the annualized rate of growth in developing expiry of new-car sales tax incentives. countries was broadly-based, with the strongest Nonetheless, global retail sales has posted pace recorded among countries in the East Asia positive annual growth for the last two years, with gains in developing countries (in a range of Figure IP.1 Recent rebound in Industrial pro- 7 to 15 percent annualized) while growth in high duction following mid-year pause reflects inven- -income countries remained subdued (figure tory cycle Quarterly GDP growth, % (saar) Monthly industrial production growth, Figure IP.2 Retail sales support growth % (3m/3m saar) 6 20 percent, y/y GDP left 4 25 10 2 20 Developing countries, 0 0 excl China 15 China -2 IP right -10 10 -4 -20 5 High-income -6 0 -30 -8 World real GDP growth, quarterly ch% q/q saar. Sample of 50 high-income and developing countries -5 -10 -40 Q1-08 Q3-08 Q1-09 Q3-09 Q1-10 Q3-10 Q1-2011 -10 Jan-06 Nov-06 Sep-07 Jul-08 May-09 Mar-10 Jan-11 Source: Thomson/Reuters Datastream; World Bank. Source: Thomson Datastream and World Bank. 31 Global Economic Prospects June 2011: Subject Annex IP.2). industrial production reportedly dropped 9.2 percent in the first quarter of 2011 over the same Many economies are now close to their pre-crisis period of 2010, and on a seasonally adjusted peaks in industrial production, with emerging annualized basis, output contracted 38 percent. economies faring better than high-income In Egypt industrial production was down 8.3 countries (first panel, figure IP.3a). Industrial percent year-on-year in the first two months of production in China is now more than 40 percent 2011, and 51.5 percent on a seasonally adjusted above its pre-crisis peak, and 36 percent higher annualized rate relative to the previous two for the East Asia region considered as a whole. months. Industrial production is likely to begin Production in South Asia continues to grow to recover only modestly in following months. strongly, and stands 21.4 percent higher than before the crisis peak, while Latin America and Accounting for the impact of the Japanese the Caribbean, Europe and Central Asia, and the Earthquake, Tsunami and nuclear crisis Middle East and North Africa have yet to exceed earlier peaks levels. The earthquake and Tsunami in Japan have also disrupted global industrial production. Current Manufacturing capacity is now close to or above estimates suggest that damage from the Tohoku trend levels in East Asia & Pacific, Latin earthquake and Tsunami is significantly larger America and South Asia. In these regions the than that sustained following the Kobe recovery has entered a new more mature phase earthquake in 1995. The impact of the Kobe where additional investment in productive earthquake on Japanese and global economic capacity will be necessary to sustain growth activity was relatively modest (a one-month ahead. Ample spare capacity remains in Europe decline of 1.6 percent in Japanese industrial & Central Asia and the Middle East & North production and of 8.4 percent in exports— Africa, with gaps estimated to be 14 percent and followed by a 14 percent increase—and no around 12 percent respectively. Spare capacity discernible effect on quarterly GDP). If for the four countries in Sub-Saharan Africa for anything, the boost to private and public which data is available is also large at 9.2 investment associated with the reconstruction percent (second panel, figure IP.3b). effort was a net positive for GDP growth (table IP.1). To date only limited data (through February) are available for industrial production in the Middle- The current crisis is different because of the East and North Africa region. In Tunisia much larger disruption to Japan’s electrical Figure IP.3a Most countries are yet to reach their Figure IP.3b Industrial capacity utilization in Asia pre-crisis industrial production peak and Latin America approaches trend rates pre-crisis peak = 100 median percentage difference from long-term trend and within-region country sample-variation 140 60 130 China 120 40 Other developing countries 110 Other high-income 20 countries 100 3.2 2.9 1.4 0 90 USA 9 -9.2 1 -11.9 1 -14.4 -20 80 Japan 70 -40 60 -60 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 South Asia East Asia & Latin Am. & Sub-Saharan Middle East Europe & Pacific Caribbean Africa & N. Africa Central Asia Source: Thomson Datastream and World Bank. 32 Global Economic Prospects June 2011: Subject Annex Table IP.1 Impacts of the 1995 Kobe and 2011 affecting exports of automobiles, electronics, and Tohoku earthquakes other industrial products. The disaster and Kobe Tohoku repeated large aftershocks appear to have cut 17-Jan-95 11-Mar-11 into the demand side as well. Partly out of Dimension of tragedy solidarity for those most immediately affected by - size of tremor (Richter scale) 7.3 9.0 the crisis, many Japanese have cut back on - Lives lost 6434 14,435 consumer demand (including electrical demand). - Missing 11,601 - people left homeless 300000 450000 Japanese auto sales declined 30 percent - Estimated Property Damage (% of GDP) 2.5 4-5 immediately following the quake, and output - Initial disruption to power system (% of generating capacity) 7.3 was down 49.2 percent month-on-month in - Medium-term disruption to power system (% gen. cap.) 3.8 March. Disruptions in the auto industry are expected to last until the end of the second Source: World Bank; Various press reports and offi- quarter, and could result in a halving of output. cial estimates. The disruption to industrial production has been generating and distribution capacity, which has deep, but is likely to be relatively short-lived. forced Japanese utilities to institute rolling GDP is expected to decline in the second quarter blackouts that have contributed to plant due to damaged infrastructure, closure of major shutdowns. About ½ of the disruption to industrial plants, disruptions in energy supply, electrical generating capacity concerns shortages, and consumer restraint, before geothermic generating capacity and is expected bouncing back strongly in the third and fourth to be fully restored in May, while lost nuclear quarters, as reconstruction efforts start (see main capacity may be permanent. Currently, text). The all-industry PMI has increased to 46 generating capacity in the Tokyo area, which in May, suggesting a rebound in industrial output represents about 40 percent of Japanese GDP, from a very low base. Japanese output is exceeds demand levels by almost 30 percent— expected to pick up in H2 2011 (the Tankan partly because of voluntary conservation efforts. survey showed improved business sentiment for At the peak of the crisis capacity was reduced by May after a plunge in April). Nevertheless, 40 percent. TEPCO now expects to have 52m activity for the year will be flat, according to the KW hours of capacity in place by the end of latest Consensus forecast. July, approximately 84 percent of peak summer demand. For Japan as a whole, the projected International impacts are limited so far but shortfall represents 3.8 percent of generating sectoral impacts are being felt. In the U.S., capacity. difficulties in securing parts caused total motor vehicle production to decline 12.2 percent month March data suggest that the economic impact of -on-month in April. A sharp decline in activity the earthquake and tsunami was larger than would be expected to have an important impact initially expected. Industrial production declined on Japan’s main trading partners, both as Japan- a sharp 15.5 percent in March, retail sales sourced supplies become scarce and as demand contracted an annual 8.5 percent, and machinery from Japan declines. Emerging Asia will be the and business equipment sales plunged 17 region most affected by the loss in economic percent, while overall GDP declined 3.7 percent activity in Japan, as these countries trade heavily (saar) in Q1. with Japan and depend heavily on manufacturing. The most affected economies After having declined 6.5 points in March to will be the ASEAN countries, followed by Korea 46.5 the all-industry PMI plunged further in and Taiwan, China. China and India will also be April to 35 suggesting a sharp decline in output. affected but less intensely (indeed, following the This reflects port closures, supply-chain quake, China’s purchasing manager index disruptions and suspended production at major actually improved –reflecting domestic plants due to uncertain electricity supply— conditions). 33 Global Economic Prospects June 2011: Subject Annex Outlook Industrial production in the euro area is expected to perform well, supported by strengthening Both manufacturing and services purchasing consumer spending, robust business confidence manager indexes1 (PMIs) have been rising and accommodative monetary policy. strongly at the beginning of 2011, but have Nevertheless growth is expected to ease this weakened starting in March reflecting, we quarter, as indicated by recent PMI readings, believe, temporary and one-off factors, including reflecting a slowdown in global trade expansion, the developments in Japan and weaker than the effects of a stronger euro, and fiscal austerity expected growth in the United States. The lower measures, and debt concerns among some PMI readings suggest that industrial production members. Industrial output is expected to expand growth will ease markedly in the current quarter at a rate close to 5 percent in the second half of before reaccelerating in the second half of 2011, 2011, before easing to a more trend-like pace in on account of reconstruction efforts in Japan and the outer years of the forecast horizon. a lift from lower oil prices. More importantly, outside Japan industrial production is expected Among developing countries the latest PMI to grow at an above-trend pace, albeit readings suggest robust growth in manufacturing decelerating. output in India and South Africa, with more moderate growth in Russia, Turkey, China, and The sharp retreat in global PMI in March and Brazil. April to its lowest level since July 2009 comes after very strong readings in January and Although industrial production growth is February. Global PMI outside Japan has also projected to surge in Japan during the second declined, down 4 points to 54.1 by May, a half of the year due to reconstruction efforts, reading still consistent with near-trend growth. elsewhere food and fuel inflation is cutting into The global new orders component excluding real incomes and is expected to contribute to an Japan fell an even sharper 4.7 points in April, easing in consumer demand growth and a but inched up 0.5 points in May. Most slowing of the industrial expansion. These components of the global manufacturing index influences are already observable in recent data. declined, and the employment index is now The annualized pace of real retail sales growth in higher than both the new orders and output the United States slowed to 5.2 percent in the components. The services PMI indexes have also first quarter of 2011 from 9.6 percent in the declined sharply to 51 in April, after having fourth quarter of 2010. surged to 59.2 by February but has picked up again in May to 52.5 (figure IP.4). Risks to the outlook The overall outlook is subject to significant Figure IP.4 Global manufacturing PMI points risks, notably the possibility that the situation in to deceleration in the broad global recovery the Middle East and North Africa deteriorates, points causing oil prices to remain high or rise even 65 further. In this scenario rising input costs and 60 weaker consumer spending would likely lead to 55 weaker growth in industrial output in most 50 developing and high-income economies. 45 Manufacturing output Growing capacity utilization ratios in many 40 New orders developing countries may also restrict growth, 35 Employment especially if inflationary pressures become more 30 marked – forcing an even more pronounced Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11 tightening of monetary and fiscal policies moving into 2012. Source: JPMorgan. 34 Global Economic Prospects June 2011: Subject Annex Finally, though the disruptive capital inflows to several middle-income developing countries have eased, they could return in force – potentially resulting in further appreciation of currencies and additional reductions to competitiveness (and therefore growth) of industry in these countries. Notes 1. J.P.Morgan, Global All-industry PMI, May 2011 survey. 35 Global Economic Prospects June 2011: Subject Annex Trade Annex (figure Trade.1). The outlook for global trade The rapid pace of trade growth partly reflects the International trade has been volatile during the depth of the decline observed during the current recovery, reflecting the wider inventory recession. Despite faster growth rates, trade cycle in global industrial production (see Main volumes regained pre-crisis peak levels 32 text and Industrial Production annex). The months after the crisis, something achieved in recovery in trade has been dominated by strong only 16 months following the previous major import demand from developing countries, slump in world trade in 2001 (figure Trade.2). which has accounted for more than half of the As of March 2011, global trade was 8.9 percent increase in global imports. As the recovery above its pre-crisis peak, compared with 10.6 matures, support for trade is shifting from percent higher at the same stage in the previous temporary factors (government stimulus and re- recovery. And in spite of recovery, global trade stocking of inventories) to more sustainable volumes remain below trend levels (the level of drivers, notably a rebound in private sector trade would have been if the crisis did not occur spending on capital goods and consumer and trade grew at its pre-boom average), though durables. Looking forward, world trade is developing countries have regained their trend expected to continue expanding at close to 8 levels. percent annual pace, above average in historical context. Developing country demand is at the heart of the recovery in global trade. Import demand Trade volumes are surging again. After a from developing countries was responsible for blistering pace of growth in the first half of more than half of the growth of global trade 2010, global trade growth ground to a halt in the during the first half of 2010, and again during third quarter, only to pick-up again strongly in the fourth quarter of 2010 and the first quarter of the fourth quarter. By March 2011 (latest data), 2011. Like other regions (with the exception of global merchandise trade volumes were the United States) developing countries’ support expanding at a 30 percent annualized rate petered out in Q3-2010, but then rose strongly in (3m/3m, saar), the fastest pace in over a decade the fourth quarter (while U.S. imports declined). Figure Trade.1 After decelerating in Q3, the Figure Trade.2 Recovery in current crisis lags trade recovery has gathered pace again behind previous crisis volumes, percent growth Peak volume = 1 3m/3m saar 50 1.2 40 1.1 30 20 1.0 10 0.9 0 -10 High Income 0.8 From peak of April 2008 -20 Developing From peak of January 2001 0.7 -30 Developing ex. China World -40 0.6 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 -50 Months 2008M01 2008M07 2009M01 2009M07 2010M01 2010M07 2011M01 Source: World Bank. Source: World Bank. 36 Global Economic Prospects June 2011: Subject Annex For the first quarter of 2011, developing commodities in recent months, the dollar value countries accounted for nearly 50 percent (of of exports has not recovered as far as volumes, which China’s contribution alone was 25 because many prices remain below their pre- percentage points) of the increase in global crisis peaks of 2008. As of January 2011, global import demand (figure Trade.3). exports were 6.3 percent above their pre-crisis peak in volume terms, but remained 5.7 percent Developing country export performance has below earlier highs in dollar terms. Nevertheless, shown considerable heterogeneity. Trade price developments have favored commodity volume growth in Asia has been extremely rapid. exporters, in particular oil. metals and mineral Buoyed by strong growth in Pakistan and India, exporters. For example, the terms of trade the annualized pace of export growth in South improvement for oil exporters in Europe and Asia reached a record 81.7 percent (3m/3m, saar) Central Asia amounted to about 1.8 percent of in February 2011 and moderated to 74.9 percent GDP, compared with a deterioration of 1.1 in March 2011 (figure Trade.4). Spurred by percent for oil importers in the same region strong performance in China, export volumes in (figure Trade.5). East Asia and the Pacific expanded at a 64.0 percent annualized pace in the 3 months to World trade growth is on more solid footing. January 2011 and moderating to 45 percent in Capital goods exports have continued to March 2011. Strong exports in Russia drove strengthen as the recovery matures, a sign of the volume growth in Europe and Central Asia to an increasingly self-sustaining nature of the eight month peak of 15.5 percent (3m/3m saar) recovery (figure Trade.6). During the recession, by March 2011. And reflecting exchange rate capital goods imports fell by more than imports appreciation, export growth in the Latin America of consumer durables and agricultural products and Caribbean region lags other developing (although less than oil imports), as falling regions, having expanded at a 12.2 percent demand and increasing uncertainty led annualized rate in the three months ending businesses to cut investment and run down March 2011. stocks. During the initial phases of the recovery, growth in capital goods imports was driven by massive government stimulus programs (most of The recovery in the dollar value of exports is which had a heavy infrastructure component) as less advanced than that of volumes. Notwithstanding the sharp rise in the price of well as a need for businesses to replenish their Figure Trade.3 Contributions to global import Figure Trade.4 South Asia leads in second phase demand from selected regions and countries rebound in global trade Percent growth, 3m/3m, saar 100 Europe and Central Asia volume, percent growth 3m/3m saar 30 East Asia and Pacific Rest of Developing countries Latin America and Carribbean 25 China 80 Germany South Asia USA Middle East and North Africa 20 Rest of High income countries 60 Global 15 40 10 20 5 0 0 -5 -20 -10 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 2010M01 2010M08 2011M03 Source: World Bank. Source: World Bank. 37 Global Economic Prospects June 2011: Subject Annex stocks. Since that time, these temporary factors higher than their pre-crisis peak levels, while have waned, and imports of capital goods by capital goods imports remain 11.5 percent below businesses surged in the fourth quarter of 2010. pre-crisis peak levels, partly reflecting the much In the United States, for example, business deeper trough they experienced (capital good spending on equipment and software rose at a demand declined 35 percent during the crisis). 7.7 percent annualized pace in the fourth quarter – although it eased to just 1.8 percent growth in The global recovery also is becoming more the first quarter of 2011. broadly based. High-income country exports are now growing rapidly, though, consistent with Recently, slowly improving labor market lower potential growth rates, not as quickly as conditions in high income countries have among developing countries. By March 2011 boosted consumer goods imports, with trade in export volumes for high-income countries were these goods exceeding that of capital goods. increasing at a 28.1 percent (3m/3m, saar) rate, Consumer goods imports are now 4.6 percent up from the 2.7 percent (3m/3m, saar) in July 2010. In contrast, developing countries’ export Figure Trade.5 The Recovery in Prices has Fa- volumes advanced at 33.4 percent (3m/3m, saar) vored Oil Exporters in March 2011, compared to a decline of 4.6 Terms of Trade Changes as a Share of GDP, percent percent (3m/3m, saar) in September 2010. South Asia Europe and Central Asia Oil exporters Outlook and Risks East Asia Pacific Global trade is expected to continue to grow Sub Saharan Africa Oil Importers as the recovery matures. Though a moderation Latin America and the Carribean of growth from the high first quarter figures is in order, the expansion in global trade is projected Middle East and North Africa to remain above pre-crisis averages over the Europe and Central Asia Oil Importers forecast period. Overall, global merchandise Sub Saharan Africa Oil Exporters trade is anticipated to grow at about an average -2 0 2 4 6 8 10 of 7.6 percent over the forecast horizon (2011- (%) 2013). Developing countries, which were at the Source: World Bank. forefront of the global trade revival, will continue to be important sources of demand. However, with improvements in high-income Figure Trade.6 Strong recovery in capital goods imports but still below pre-crisis levels country labor markets, ongoing lax monetary policy, and a rise in business and consumer Values, 3mm imports confidence, demand from high income countries 1.1 Agriculture Capital and Industrial goods is expected to provide increasing support to 1.0 Consumer goods global trade growth. Oil 0.9 Recent business surveys support the view that global trade will continue to expand, at least for 0.8 the near term. Though the Global Purchasing 0.7 Manager’s Index, as reported by JP Morgan and Markit, has fallen from its peak level in March, 0.6 it still remained in expansion territory in May, including the sub-index for new export orders. 0.5 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 Moreover, the latest OECD Composite leading indicators survey, designed to anticipate turning points in economic activity relative to trend, Source: World Bank. continues to point to expansion in most OECD 38 Global Economic Prospects June 2011: Subject Annex countries even if at a lower pace- this should include parts supplies in the semiconductor, inevitably provide support to further trade auto, camera recorders and office equipment growth. industries (figure Trade.7). Already in the U.S, recent industrial production figures released The risk of a faltering in global economic show that the total motor vehicles assembled recovery. Nonetheless, significant risks to the dropped from an annual rate of 9.0 million units continued expansion in global trade remain. The in March to 7.9 million units in April mainly on most significant risk is a faltering of the global account of disruptions to part supplies resulting economic recovery. As outlined in the main text, from the Japan earthquake. a key risk to the global recovery is the possibility of higher oil prices – either due to continued While in the short-run Japanese industrial uncertainty in the Middle East, or because of a production and exports are likely to fall, in the major disruption to supplies. Though this medium term reconstruction will require a ramp remains a “tail-probability” event, should it up in demand for capital goods and for the occur, it could derail the recovery, since higher industrial metals necessary to repair capital stock oil prices would reduce incomes in oil-importing and build new infrastructure. This new demand countries, cutting into consumer and business from Japan could significantly boost exports demand. A further $50/bbl increase in oil prices from the high-income countries that dominate could shave global GDP by 0.3 percent in 2011 global exports of capital goods, as well as from and 1.2 percent in 2012. These could in turn developing country metals exporters. reduce global trade by 0.5-1.5 percent in 2011 and by between 1.9-6.0 percent in 2012. Other Global Imbalances. The onset of the global risks to the global recovery include a possible crisis accelerated the narrowing of global slowdown in growth from a tightening of imbalances that had already begun in 2006. monetary policy in some of the large fast Global imbalances (measured as the absolute growing developing economies and a resurgence value of national current account balances in the euro area sovereign debt crisis (see main divided by global GDP) peaked at 5.6 percent of text). global GDP in 2005 and fell to 3.9 percent in 2009 and to an estimated 3.3 percent in 2010. Ramifications of the Japan earthquake on The question is whether this is a short-run global trade. The recent disaster in Japan is change or a structural change brought about by another source of concern. Japan’s share of the crisis. global trade is less than 5 percent, so even a Figure Trade.7 Share of Japan’s exports in recession there is unlikely to derail global trade World exports growth. However, individual countries could be significantly affected. Non-oil exporting (average 2008-09) countries whose exports to Japan account for a Cargo vessels nes&oth vessels (HS8901090) sizeable share of their total exports and GDP, for Tankers (HS890120) example Malaysia, Papua New Guinea, Vietnam, Machines for making semiconductor devices Singapore, Thailand and the Philippines, will be (HS848620) Excavators with a 360 revolving superstructure most affected. In addition, disruptions in the (HS842952)) global supply chain due to the situation in Japan Tansmissions for motor vehicles (HS870840) could affect trade in many products, which could Television, digital, and video camera recorders (HS852580) have major implications for industry (especially Automobiles piston engine > 3000 cc where switching to other suppliers requires (HS870324)) Parts of printers, copiers and facsimile (HS significant re-tooling). Against this backdrop, 844399) Automobiles piston engine > 1500 cc to 3000 cc industries whose global supply chains are very (HS870323) much dependent on critical supply of parts from Parts for spark-ignition type engines nes (HS840991) the North East part of Japan (Miyagi prefecture) 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% are likely to be the hardest hit. These could Source: Comtrade 39 Global Economic Prospects June 2011: Subject Annex The future evolution of global imbalances temporary ones, thereby leading to an increasing depends on a constellation of real and financial share of trade affected by restrictive measures. forces, including exchange rate movements, the extent to which developing country domestic demand remains a major source of growth, and the extent to which high-income countries rein in Notes government deficits and low interest rates as their economies recover. To the extent that 1. WTO, 2010. Overview of Developments in surplus countries do not experience real effective the International Trading Environment. WT/ appreciations of their exchange rates, and that TPR/OV/13, World Trade Organisation, recovering high-income countries maintain Geneva. current levels of government dis-saving and low- interest rates, which encourage low private- 2. Chad P.Bown and Hiau Looi Kee (2010) sector savings rates, the global imbalances that “Developing Countries, New Trade Barriers, characterized the early 2000s through 2007 and the Global Economic Crisis” in Mona could return. Haddad and Ben Shepherd (eds), Managing Openness, The World Bank, Washington, Increased Protectionism. High unemployment D.C. rates, global imbalances, and perceptions of exchange rate undervaluation among trading partners puts pressure on governments to take a more protectionist stance on international trade, with the potential to slow the expansion of trade. These pressures have only heightened in the aftermath of the global recession. The WTO reports that between November 2009 and October 2010, new trade restrictive measures covering some 1.2 percent of global imports were introduced.1 New trade restrictions introduced since the commencement of the crisis in 2008 have affected some 1.9 percent of total trade. Though some of the measures were meant to be temporary, so far only 15 percent of the measures introduced have been removed. Most of the measures that have been introduced affect trade in base metals and products, machinery and mechanical appliances, and transport equipment, all of which are important in helping to rebuild productive capacity to help sustain the recovery. Further, Bown and others (2010), find that increasingly such measures are being applied within the context of South-South trade.2 They observe that protectionism has been imposed disproportionately by developing world importers on developing world exporters, notably China. Though the current application of such protectionist measures remains limited, the greater threat lies in the continued accumulation of new restrictions, without repealing earlier 40 Global Economic Prospects June 2011: Subject Annex Financial Markets Annex Recent trends in capital flows continued to dominate bonds with about 80 percent of year-to-date volume, with most issues International capital flows to developing coming from companies in China, Emerging countries have slowed since October… Europe and Latin America. Chinese companies issued a record volume of international bonds in Gross capital flows (international bond issuance, the first quarter of 2011, partly reacting to the cross-border syndicated bank loans and equity increased cost and rationing of domestic finance placements) to developing countries totaled $175 following the government’s policies to curb billion in the first four months of 2011, 24 credit growth. The pace of issuance has slowed percent less than the last four months of 2010 considerably since January, partly reflecting the (figure FIN.1). Most of the decline was in equity impact of increased uncertainty in global placement (foreign investment in IPOs and markets. follow-on offerings), which plummeted by 35 percent. There have been no major IPOs from …as have the hot money flows, easing some of developing countries this year, after the record the pressures for currency appreciation. breaking equity issuance of 2010. International syndicated bank-loans remained subdued Portfolio investment—equity placement, foreign compared with pre-crisis levels—although there investment in existing stocks and foreign was a modest rebound in lending to Europe and investors’ purchase of local debt securities, also Central Asia (notably, Russia and Turkey) and referred to as “hot money”—has eased since Sub-Saharan Africa (Nigeria and South Africa). early 2011 (figure FIN.2). Most of the decline was in equity placements and foreign investment In contrast to equity placement and bank- in stock markets, as there were considerable lending, international bond issuance by stock-market sell-offs during January and developing countries was strong in the first February, aside from the sharp fall in equity quarter, attaining the highest monthly level on placement. record in January. A combination of relatively favorable pricing conditions and investor’s Growing concerns about sovereign debt in high- continued search for yield led to a near record income countries, inflation, political turmoil in pace of borrowing activity. Corporate borrowers the Middle-East and North Africa, and high Figure FIN.2 Hot money flows slowed down since Figure FIN.1 Gross capital flows have eased since October November Foreign portfolio investment flows* - 3-month moving average ($ billion) % of GDP Brazil Turkey 35 Bond issuance 8.0 South Africa 30 Equity placement* 6.0 India 25 Syndicated bank loans 4.0 20 2.0 0.0 15 -2.0 10 -4.0 5 -6.0 0 2007 Q1 2008Q1 2009Q1 2010Q1 2011Q1e Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 *Equity placement, foreign investment in existing stocks and foreign investors’ *Foreign investment in IPOs and follow-on offerings purchase of local debt securities Source: Dealogic. Source: Central Banks and World Bank. 41 Global Economic Prospects June 2011: Subject Annex commodity prices have combined to slow the local debt securities rose to a record $4.8 billion pace of portfolio equity inflows to developing in March. While Brazil increased the tax on countries. In addition, investors may also have foreign investments twice in October, the fall-off considered that market equity valuations had largely reflected at drop in IPO activity reached maximum levels and started to take following the record sale of Petrobras in profits. During the first quarter of 2011, there September 2010 that attracted large foreign was a net outflow of nearly $25 billion from participation. emerging market (EM) equity funds, compared with a net inflow of $85 billion in 2010. Several middle income countries experienced Similarly, foreign investors’ interest in emerging sharp appreciation of their currencies in 2010 market bonds (both in local and other currencies) following the surge in capital inflows. With the has also diminished considerably since October easing of these flows during the first quarter of 2010 (figure FIN.3). And the EM fixed income 2011, the upward trend in real effective funds registered a net outflow in February with a exchange rates also moderated (Thailand) or little improvement in March. Most of the decline even reversed (South Africa and Turkey) (figure was in flows to EM local currency funds, which FIN.4). Brazil (due to large FDI inflows) and have become quite popular in recent years, and Mexico (flows into local debt securities) did not experienced record inflows in 2010 (see box experience large depreciations. Consistent with FIN.1: Domestic debt market developments in the initial slowing of capital inflows, the pace of emerging markets). The outflows from both EM reserve accumulation among developing equity and fixed income funds do not necessarily countries also slowed from 8 percent in 2010Q3 imply a net outflow in terms of balance of to 5 percent both in 2010Q4 and 2011Q1. payments financing, but highlights the easing in these types of flows to developing countries. The fundamental conditions that underpin capital flows to developing countries remain Country specific factors also played an important strong… role in the slowing of capital inflows. South Africa (in November) and Turkey (in December Emerging markets entered 2011 with an and January) cut their policy interest rates— improved risk profile, as well as higher growth reducing the attractiveness of the carry-trade prospects vis- -vis the high income countries, with these countries. The impact of the rate cuts and policy interest rates that were rising. Despite turned out to be temporary in Turkey, however. some recent increases (the ECB raised its After a slow down, foreign purchases of Turkish Figure FIN.4 Real effective exchange rate ap- preciation in selected economies Figure FIN.3 Inflows to EM fixed income funds have slowed down since October Index , January 2010 =100 "Blended" funds 125 Brazil India $ billion Local currency funds South Africa Turkey 6 Hard currency funds 120 Mexico 5 115 4 3 110 2 1 105 0 100 -1 -2 95 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 2010M01 2010M06 2010M11 2011M04 Source: EPFR Global. Source: International Monetary Fund. 42 Global Economic Prospects June 2011: Subject Annex official rate by 25 basis points (bps) to 2 percent markets, including Russia and Thailand, making in April 2011), policy interest rates in high- local bond less attractive—though yields remain income countries remain low, while those in positive in real terms if adjusted for the developing countries are rising. The rates in expectation of currency appreciation. emerging economies are expected to go up further as these countries tighten monetary …and developing countries continue to struggle policy in the face of heightening inflationary with mitigating the impact of high capital flows. pressures. This will likely increase interest rate differentials in favor of developing country In an attempt to limit the high levels of capital assets—although this effect will be reduced if inflows and currency appreciation, Turkey and when high-income countries begin reduced its policy interest rate twice in withdrawing quantitative easing measures and December 2010 (by 50 bps) and later in January tighten more traditional monetary policy. 2011 (by 25 bps) bringing the rate to an all time low. While this move surprised the markets and Policy interest rates for a number of developing led to portfolio equity outflows in December and countries have been raised since mid-2009 as January, cross-border flows to local debt markets strong economic activity has signaled a rapid remained strong. Nevertheless, Turkey’s real closing of output gaps and inflation has been effective exchange rate eased by 7 percent moving up. As the inflationary effects of higher between December and April 2011. Similarly, oil prices are more evident, policy makers will South Africa lowered its policy rate by 50 bps on undoubtedly look toward tightening monetary November 13th, with some impact on portfolio policy. This is especially likely in Asia and Latin investment and the real exchange rate. Both America, where central banks are already countries will find it difficult to maintain low grappling with higher inflation amid stronger rates however, as they are facing increasing growth and record food prices. Market-estimated inflationary pressures. changes in policy rates point to further hikes in official rates for most of emerging market Other policy responses to mitigate the short-term countries this year (figure FIN.5). Rising impacts of hot money flows have included the inflation rates have been pushing real yields introduction of capital controls, higher foreign down in countries with increasing inflation. Real currency reserve requirements for banks, yields turned negative in several emerging minimum holding periods, or withholding taxes on foreign investment in order to discourage Figure FIN.5 Accelerating inflation could lead to inflows; and improvements in the enforcement a further monetary tightening of existing restrictions on cross-border inflows. For example, Brazil raised its financial operations (IOF) tax on foreign investment in Change in of f icial interest rates (basis points) fixed income securities twice in 2010. The 350 impact of these hikes was limited and short- Change since 2009 low 300 lived, and they were followed by a further 250 Market estimated change increase in April. Brazil also announced that it between now and end of 2011 will extend the high tax rate on the renewal of 200 foreign loans with maturities of up to a year, 150 while a reintroduction of a 15 percent 100 withholding tax on federal securities is under 50 consideration. 0 Indonesia imposed a 1-month minimum holding period on central bank money market certificates in July 2010, and introduced new regulations on Source: Bloomberg and World Bank staff calcula- the net foreign exchange positions of tions. 43 Global Economic Prospects June 2011: Subject Annex Box FIN.1. Domestic debt market developments in emerging countries Domestic debt markets in developing countries have grown markedly over the past decade as many countries shifted from external to local currency financing to lower the volatility of their debt service given their more flexi- ble exchange rate regimes. This shift is particularly true for government bond issuers as domestic public debt now accounts for more than 80 percent of the total public debt for developing countries (box figure FIN.1). In Box figure FIN.1 External and domestic public recent years, local-currency bond markets have ex- debt in developing-countries panded considerably in several countries—among them Brazil, Colombia, China, India, Malaysia, Mexico, % of GDP South Africa, and Turkey (World Bank 2009). Growing 40 interest from local investors—particularly from pension funds—has played a key role in the development of do- 30 mestic debt markets in developing countries. With extraordinarily easy monetary policy in the high- 20 income countries, international investors are also in- creasingly drawn to emerging market local currency 10 bonds, with higher yields and prospects of capital gains arising from currency appreciation. As a result inflows 0 to fixed-income funds focusing on developing countries 2000 2002 2004 2006 2008 2010e reached a record $65 billion in 2010, with the overall allocation biased toward local currency funds (figure Domestic External FIN.3 in the text). Despite the recent fall-off, foreign purchases have continued in Latin America, with Mex- Source: JP Morgan. ico posting record $12 billion inflows through March this year. commercial banks. And Thailand implemented a should be withdrawn when they are no longer 15 percent tax on interest income and capital needed; and importantly, that countries should gains earned by foreign investors. And rather bear in mind the costs of using them. than new measures, China announced that it will intensify enforcement of the existing measures FDI inflows have gained momentum since the on capital inflows. last quarter of 2010... The IMF published a report in April 2011 Foreign Direct Investment (FDI) inflows gained providing a framework for managing the impact momentum in the last quarter of 2010 (figure of high capital flows (IMF, 2011a). The report FIN.6). FDI flows in early part of 2010 were suggests that, if possible, countries should first likely restrained by uncertainty concerning the respond to higher capital inflows by letting their global recovery. This uncertainty has since exchange rates appreciate, easing monetary eased—especially concerning growth in policy and tightening fiscal policy. If that is not developing countries—and cross-border mergers possible, countries are urged to first use controls and acquisitions (M&A) transactions (which that do not discriminate between foreign and react more quickly to changing economic domestic investors, for example limits on foreign conditions than greenfield investment) in currency borrowing by local banks or minimum developing countries accelerated in the second holding periods. According to the framework, half of the year. measures that discriminate against foreign investment, such as taxes on foreign capital FDI inflows to developing countries increased inflows imposed by Brazil, should be a last line by 24 percent in 2010, a relatively modest gain of defense. At the same time, the report (less than the rise in other capital flows to recommends that the use of controls should be developing countries) considering its 36.5 proportional to the economic risk, that they percent decline in 2009. The rebound in FDI 44 Global Economic Prospects June 2011: Subject Annex inflows in 2010 was much stronger than the The implicit yield on emerging market sovereign World Bank’s January estimate of 15 percent bonds (EM spread + U.S. 10 year treasury yield) growth (Global Economic Prospects 2011a), has risen 50 bps since September 2010, mainly mainly because of large revisions by China to its due to upward movements in high-income historic and 2010 FDI numbers (box FIN.2). For country long-term sovereign yields (figure developing countries excluding China, the FIN.7). Long-term interest yields for rebound in 2010 was slightly above 10 percent. government bonds rose since early September 2010 in the United States (60 bps), Japan (25 Most of the increase in FDI inflows in 2010 bps) and the European Union (74 bps), reflecting came from higher reinvested earnings. Income rising government debt, higher inflationary generated by FDI projects in developing expectations and perhaps reduced demand as the countries increased 26 percent in 2010, impact and extent of quantitative easing slows. compared to its level in 2009. Multinationals invested 30 percent of this income back into Figure FIN.6 FDI inflows for selected economies developing country operations in 2010, accounting for 35 percent of FDI inflows. FDI $ billion was also supported by increased South-South 120 flows—particularly from Asia. With the sharp decline of FDI outflows from high-income 100 countries since the crisis, investment from other 80 developing countries rose to 34 percent of total 60 inflows in 2010, up from 25 percent in 2007. 40 Cost of borrowing is on the rise 20 Long-term yields in developing countries are 0 facing pressures from rising long-term rates in 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1p high-income countries… Source: The World Bank. Box FIN.2 China revised up capital account numbers for 2005-2010. China’s State Administration of Foreign Exchange (SAFE) revised the capital account in their balance of pay- ments report following implementation of a new accounting method. Much of the adjustment is in FDI inflow numbers, which are revised up between 20-75 percent for the period 2005-2010 (see Box figure). SAFE cited better accounting for reinvested earnings by multina- tionals as the main reason for the upward revision. This Box figure FIN.2 FDI inflows to China portion of FDI does not cross the border, and hence may not be fully recorded in government reports. $ billion 200 According to the new estimates, FDI inflows to China rebounded strongly by 62 percent in 2010, reaching 150 $185 billion. The largest increase was in the financial sector (300 percent) followed by the real estate sector 100 (78 percent), reaching $12 billion and $21 billion, re- 50 spectively. Nonetheless, the manufacturing sector re- mains the main recipient of FDI inflows to China. 0 Manufacturing received $70 billion in 2010, 50 percent 2005 2006 2007 2008 2009 2010 Old Revised more than in 2009. With the revisions, China now ac- counts for 30 percent of total FDI inflows to develop- Source: China’s State Administration of Foreign Ex- ing countries, compared to an estimated one-fourth in change. previous statistics. 45 Global Economic Prospects June 2011: Subject Annex Developing country spreads have remained in a in high-income countries. Spreads for tight range despite ongoing geopolitical unrest developing countries might also widen, as the and economic uncertainties. The events in the trend decline in risk premiums partly reflects the Middle East and North Africa region led to a very low policy rates and quantitative easing in widening in spreads only within the region and high-income countries (Hartelius et al 2008). among the most affected countries. Credit risk These easy monetary conditions have suppressed (as reflected in 5-year CDs spreads) for Egypt, the price of risk in both high-income and Bahrain and Saudi Arabia widened between 50- developing countries, and prompted a search for 150 bps immediately after the turmoil in late yield similar to that observed in the pre-crisis January and February, but most stabilized in period. Developing country spreads are sensitive March. Meanwhile, concerns related to the to U.S. Treasury yields. A jump in Treasury European debt crisis reemerged in early March, yields, for example because of a sudden phase- when International Credit Rating Agencies out of quantitative easing, could spark a sharp downgraded ratings of Greece, Spain and widening of spreads on emerging market debt. A Portugal, citing worries about their ability to more gradual policy tightening is likely to result reach their fiscal adjustment targets, in some in a more modest and short-lived widening of cases linked to political stability concerns. CDs spreads. spreads for these economies rose following the downgrades. Tighter financial regulation may also contribute to higher long-term interest rates, and will likely While Japanese stocks plummeted following the increase the cost of capital, potentially hindering March 11 earthquake, the impact of the crisis on trade finance in the medium term. world financial markets has been limited. Developing countries were little affected by Changes in the financial regulatory landscape increases in risk aversion owing to the that have been implemented, and that are being difficulties in Europe and Japan—sovereign discussed both at the national and global level, bond spreads for the emerging markets as a would tend to raise the cost of bank lending and group remained within a tight range through the should be reflected in higher long-term interest end of April 2011 (figure FIN.8). rates. In the United States, the June 2010 Dodd- Frank bill forbids future government bailouts of ...and are expected to go up further. banks; places limits on risk-taking by financial institutions, and introduces new clearing and Going forward, emerging market yields are expected to increase amid rising long-term yields Figure FIN.8 EMs spreads have remained in a Figure FIN.7 The implicit yield on EM sovereign tight range despite the rising geopolitical risk bonds is up EMBIG Spread (basis points) Yield on 10-year US treasury note 380 Percent 12 Implicit yield on EM sovereign bonds 360 340 10 320 8 300 6 Bond spread (EMBIG composite index ) 280 4 260 240 2 220 0 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Source: JP Morgan. Source: JP Morgan. 46 Global Economic Prospects June 2011: Subject Annex trading requirements for CDS markets. A revised rate of growth of potential output in the economy international agreement (Basel III) seeks to will slow. strengthen banks’ resilience to systemic stresses, by raising capital requirements and imposing Simulations suggest that higher capital costs stricter definitions of what constitutes bank could lower developing country GDP growth by capital. While the proposals incorporate a between 0.2 and 0.7 percentage points over a generous phase-in period, with capital ratios to period of between 3 and 5 years. Global be raised gradually, and linear phasing out of Economic Prospects 2010 estimated that the ineligible securities between 2013 and 2019, substitution away from capital intensive there remains uncertainty related to the techniques would reduce potential output in implementation of these requirements across developing countries over the medium term by countries. The impact of Basel III on trade between 3 and 5 percent and potentially by as finance is expected to be significant (box FIN.3 much as 8 percent—depending on how much Impact of Basel III: Trade finance may become a long-term interest rates rise. casualty). Developing countries can mitigate the costs of Higher borrowing costs could reduce both the the tightening of global financial conditions level and the growth of GDP. through strengthening regional and domestic institutions. Higher capital costs due to increased long-term interest rates and less abundant capital are likely Inefficiency of domestic financial sectors to cause firms to invest less, which will reduce resulting from corruption, weak regulatory the amount of capital employed in the economy institutions, poor protection of property rights, and lower GDP levels from what they would and excessive limits on competition can make have been had capital costs remained low. borrowing costs in developing countries 1,000 During the transition period from a high capital bps higher than in high-income countries. usage regime to a lower capital usage regime, the Improvements in the policies and institutions Box FIN.3. Impact of Basel III: Trade finance may become a casualty The Basel Committee on Banking Supervision, which sets rules that national banking regulators implement, an- nounced a comprehensive reform package in September 2010 that raises capital requirements and, for the first time, sets global standards for overall borrowing, known as leverage, and liquidity. The “Basel III” rules are de- signed to make banks more resilient and prevent a repeat of the financial crisis, but several provisions combine to make trade finance, already a low-margin business, much less profitable. Basel III’s implementation could have unintended consequences for trade financing through the proposed leverage ratio, which would require banks to set aside 100 percent of capital for any off-balance-sheet trade finance instruments, such as letters of credit. This is five times more than the 20 percent credit conversion ratio used for trade finance in Basel II. New capital regula- tions would also require banks to set aside capital for one year for any instrument, even though that security may carry a maturity of under a year. Most trade finance instruments have maturities of about 90 days: this would triple the capital cost of such instruments. Such higher capital requirements are likely to depress trade finance. According to Standard Chartered Bank, the new regulations would lead to trade finance becoming 15 to 37 percent more expensive, with volumes falling by 6 percent—which implies a $270 billion a year reduction in global trade and a 0.5 percent fall in global gross do- mestic product. Developing countries would be particularly affected by a fall in trade finance. Trade finance is an important source of working capital, particularly for small and medium-sized enterprises. And developing coun- tries rely heavily on international banks for trade finance. In 2010, the largest rebound in capital flows was in short -term debt, which reached $122 billion, and was for the most part trade finance (World Bank 2011). There is some question as to whether this rise in capital requirements is necessary for trade finance, which is usu- ally collateralized and has low default risk. The International Chamber of Commerce has published a study that examined the trade finance activity of nine global banks from 2005 to 2009, which together arranged 5.2 million transactions accounting for $2.5 trillion. It found that only 1,140 of those transactions defaulted. Of the 2.8 million transactions arranged during the crisis in 2008 and 2009, only 445 defaulted (0.02 percent). 47 Global Economic Prospects June 2011: Subject Annex governing the financial sector can thus have a come to an end. However, bank lending is significant impact on domestic borrowing and expected to remain lower than pre-crisis levels capital costs in developing countries. Such due to approaching regulatory changes. changes have the potential to outweigh any negative effect of higher costs for internationally Other capital inflows that led the initial rebound sourced capital. Simulations suggest that if in 2010 have started to stabilize (or even decline) developing countries continue to improve as the expected monetary tightening in high- policies and other fundamentals, so that their income countries and inflationary pressures in interest spreads fall by an average of 25 bps a emerging markets dampens demand for year, they would more than offset the long-term emerging market assets. Short-term debt and effects of the financial crisis—potentially portfolio investment flows in particular, may yielding a 13 percent increase in long-term face considerable weakening or sudden reversals potential output and increases in potential output (table FIN.1). When quantitative easing in growth of about 0.3 percent per year by 2020. advanced countries is phased out and global Developing countries may also further increase liquidity conditions begin to tighten (or risk domestic savings by following closely their aversion rises), developing country local bond comparative advantages in their industrial markets could be adversely affected, as carry- upgrading and diversification (Lin 2007). trade related flows to developing countries slow. Similarly, there may be a contraction in short- Prospects term debt flows by 2013 with speculative flows falling, and with trade-related portion hindered Despite their recent moderation, international by regulatory changes. capital flows to developing countries are projected to rise further over the forecast period. Downside risks for the outlook are still considerable, however. First and most immediate Cross-border flows to developing countries are is the European debt crisis. While its impact on projected to increase further in nominal terms developing countries has been limited and over the medium-term, but at a slightly slower temporary so far, an unexpected or disorderly pace than GDP growth, reaching $1.1 trillion resolution of the debt problem might prompt (3.8 percent of GDP) by 2013 (figure FIN.9). broad-based risk-aversion in global financial Much of the increase is expected to be in FDI markets driving capital flows toward safe-haven inflows. FDI inflows to resource rich economies assets. This could lead to a sharp reversal in and to developing countries with rapidly capital flows to developing countries, with a expanding domestic markets are expected to potentially disproportionate impact on countries recover more firmly in 2011. Bank flows might in developing Europe and Central Asia, whose also rise as the deleveraging cycle has largely economies are more closely tied to those in high- income Europe. Second, international capital Figure FIN.9 Further increase in capital flows flows are sensitive to the policy stance in high- income and developing countries. If high-income countries shift toward tighter policy more quickly, or if markets become increasingly concerned by the buildup of debt and central bank liabilities, longer-term interest rates may begin to rise quickly—raising the cost of capital for developing countries and likely weakening flows faster than expected. In fact, a recent IMF study shows that an unanticipated 5 bps rise in U.S. real interest rates might cause a 1/2 percentage point (pp) reduction in net flows (inflows minus outflows) in the first quarter and Source: The World Bank. 48 Global Economic Prospects June 2011: Subject Annex 1.25 pps cumulative reduction in two years (IMF import bills and current account deficits. In 2011b). The impact is projected to be larger in addition, developing countries issued countries with higher financial linkages with international bonds valued at $180 billion in United States. 2010, and entered 2011 with $855 billion in short-term debt. As a result, external financing With higher oil prices and increased debt- needs (current account projections and financing requirements, several oil importing amortization of external debt) for developing economies will remain vulnerable to sudden countries increased from $0.8 trillion (3.5 changes in global markets percent of GDP) to $0.9 trillion (3.9 percent of GDP). Although the impact on credit risk was limited, the events in the Middle East and North Africa While international debt market conditions have resulted in a sharp increase in oil prices. And been robust so far in 2011, high external many oil importing countries now face higher financing needs make countries vulnerable to Table FIN.1 Net capital flows to developing countries $ billions 2004 2005 2006 2007 2008 2009 2010e 2011f 2012f 2013f Current account balance 195.2 318.8 450.3 469.1 440.6 284.4 264.5 219.6 159.9 163.1 as % of GDP 2.4 3.3 4.0 3.4 2.6 1.7 1.4 1.0 0.6 0.6 Financial flows: Net private and official inflows 342.2 502.9 656.3 1132.1 771.1 633.8 930.2 Net private inflows (equity+debt) 366.3 567.0 725.9 1132.1 743.3 557.4 857.8 892.7 963.5 1065.3 Net equity inflows 243.6 379.2 497.0 664.9 561.2 498.1 633.2 674.1 733.9 839.8 ..Net FDI inflows 206.7 311.7 389.3 529.8 614.4 390.0 485.4 555.0 603.6 696.2 ..Net portfolio equity inflows 36.9 67.5 107.7 135.1 -53.2 108.2 147.8 119.1 130.3 143.6 Net debt flows 98.6 123.8 159.3 467.2 209.9 135.6 297.0 218.6 229.6 225.5 ..Official creditors -24.1 -64.0 -69.6 0.0 27.8 76.4 72.4 ....World Bank 2.4 2.7 -0.2 5.2 7.3 17.7 19.3 ....IMF -14.7 -40.2 -26.7 -5.1 10.0 26.5 16.3 ....Other official -11.8 -26.6 -42.6 0.0 10.6 32.2 36.8 ..Private creditors 122.7 187.8 228.9 467.2 182.1 59.2 224.6 218.6 229.6 225.5 ....Net M-L term debt flows 69.8 113.3 145.0 283.0 196.1 52.8 104.1 ......Bonds 34.3 48.3 31.7 88.2 24.1 51.1 66.5 ......Banks 39.7 70.3 117.9 198.5 176.8 3.2 37.6 ......Other private -4.1 -5.3 -4.7 -3.7 -4.8 -1.6 0.0 ....Net short-term debt flows 52.9 74.5 83.9 184.2 -14.0 6.4 120.5 Balancing item /a -137.5 -406.9 -458.6 -509.5 -733.5 -271.1 -524.4 Change in reserves (- = increase) -399.9 -414.8 -647.9 -1091.7 -478.2 -647.0 -670.3 Memorandum items Net FDI outflows 46.1 61.6 130.5 148.7 207.5 153.9 210.0 Workers' remittances 159.3 191.8 226.3 278.2 325.0 307.6 324.7 348.6 374.5 As a percent of GDP 2004 2005 2006 2007 2008 2009 2010p 2011f 2012f 2013f Net private and official inflows 4.3 5.3 5.8 8.1 4.6 3.9 4.8 Net private inflows (equity+debt) 4.6 5.9 6.4 8.1 4.4 3.4 4.4 3.9 3.8 3.8 Net equity inflows 3.0 4.0 4.4 4.8 3.3 3.1 3.3 3.0 2.9 3.0 ..Net FDI inflows 2.6 3.3 3.4 3.8 3.7 2.4 2.5 2.4 2.4 2.5 ..Net portfolio equity inflows 0.5 0.7 1.0 1.0 -0.3 0.7 0.8 0.5 0.5 0.5 ..Private creditors 1.5 2.0 2.0 3.3 1.1 0.4 1.2 1.0 0.9 0.8 Source: The World Bank Note: e = estimate, f = forecast /a Combination of errors and omissions and transfers to and capital outflows from developing countries. 49 Global Economic Prospects June 2011: Subject Annex sudden reversals in capital markets and to a References: possible increase in borrowing costs. Countries such as Russia, Brazil, Indonesia and Turkey are Hartelius, K., K. Kashiwase, and L.E. Kodres susceptible to these types of risks (the first three (2008), “Emerging market Spread Compression: because of high debts, the last because of its high Is it Real or is it Liquidity?”. IMF working paper debt and large current account deficit). These 08/10, January, Washington DC. risks are further accentuated when a large share of external financing comes in the form of International Monetary Fund (2011a), “Recent relatively volatile portfolio equity and debt flows Experiences in Managing Capital Inflows— (Brazil, Indonesia, and Turkey) (figure FIN.10). Cross-Cutting Themes and Possible Policy Framework”, Washington DC. Figure FIN.10 External vulnerability International Monetary Fund (2011b), “World Economic Outlook: Tensions from the Two- Speed Recovery: Unemployment, Commodities, Portfolio and Banking (%GDP) 2010 6 and Capital Flows” April 2011, Washington DC. PH 4 IN BR TR CN 2 TH ID PL Lin, Justin Yifu (2007) “Economic ZA 0 Development and Transition: Thought, Strategy MY RU PE -50 -2 0 50 100 and Viability,” Marshall Lectures (Cambridge -4 University), October 31-November 1, 2007. BG -6 World Bank (2009), “Global Development -8 CL Finance 2009: Charting a Global Recovery”, -10 Washington DC. External financing needs to FX reserve ratio (%) World Bank (2011), “Global Economic Prospects: Navigating Strong Currents” January Source: International Monetary Fund and World Bank. 2011, Washington DC. 50 Global Economic Prospects June 2011: Subject Annex Global Commodity Markets Annex Overview following the loss of 1.3mb/d of Libyan oil exports (and smaller losses elsewhere). Fears of Commodity prices have surged since their lows further disruptions in major oil producing during the depth of the financial crisis (figure countries have also underpinned prices. The loss Comm.1). Since end-2008, energy prices have of Libyan light/sweet crude tightened distillate more- than doubled, but still remain well below markets, which were further aggravated by the their former peaks. Metals prices are up almost loss of distillate exports from Japan following 170 percent while agriculture and food prices are the earthquake that damaged refineries. OPEC’s 77 and 60 percent higher, respectively. spare capacity is mainly medium-sour crude, thus the challenge will be to replace light/sweet The 2010/11 spike in commodity markets has crude to manufacture sufficient distillate to meet been driven by a recovery in demand and increasingly stringent low-sulfur regulations. numerous supply constraints. Adverse weather Crude oil prices are expected to remain elevated (droughts and heavy rains) in many regions has in the near term until product markets are in affected several agriculture markets, as well as better balance to meet summer demand, and coal and metals production. Political unrest, fears of further crude oil disruptions subside. mainly in North Africa and the Middle East, has resulted in a loss of oil supply—and fears of Metals and minerals prices recovered sharply in further disruptions have pushed oil prices even 2009 due to strong demand and restocking in higher. And in so far as these commodity China. While Chinese demand growth slowed in indexes reflect dollar prices, the depreciation of 2010 it was offset by stronger growth elsewhere, the dollar has also contributed to their rise. mainly in the OECD. By February, prices of Between July 2010 and April 2011, the dollar metals exceeded their May 2008 peak by 4 has depreciated 12.9 percent against the euro and percent, with tin and copper reaching all-time 7.7 percent against a broader group of trading highs due to supply constraints. Other metals partners. markets have been less supply constrained, in particular aluminum, where China is a net Crude oil prices, which were stable during the exporter. Prices are expected to strengthen first three quarters of 2010 (averaging $77/bbl), further in 2011 as demand recovers, notably began to rise as demand growth accelerated and from China. stocks fell late in the year. In 2011, prices rose sharply and exceeded $116/bbl in April Agricultural prices began to rise sharply in mid- 2010 due to adverse weather conditions (notably Figure Comm.1 Key price indices drought conditions in Central Europe which saw $US nominal, 2000=100 Russia’s wheat crop decline by 25 percent), and 500 in the case of raw materials, strong demand. High energy prices have also played a role, both 400 by diverting agricultural land to biofuel 300 production, but also as higher fuel and fertilizer prices pushed up production costs. 200 Overall, agricultural prices increased 45 percent 100 Energy Metals Food between June 2010 and February 2011 and as of May 2011, they were 6.4 percent above their 0 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 June 2008 peak. By May, raw materials prices were 33 percent above their 2008 peak due to Source: World Bank. 51 Global Economic Prospects June 2011: Subject Annex record high prices for cotton and rubber on further aggravate markets. Given low stock strong demand and supply shortfalls. Beverage levels, agricultural (and especially food) prices prices were almost 30 percent above peaks will remain sensitive to adverse weather owing to weather-related shortages of Arabica conditions and energy prices. Moreover, at coffee supplies and political disruption of cocoa current or higher oil prices, biofuels production supplies in Côte d’Ivoire. High sugar prices have becomes an increasingly attractive use of land pushed the “other” food category to 12 percent and produce, likely increasing the sensitivity of above its earlier peak. Grains and edible oils food to oil prices. Downside risks mainly entail prices remain below their former peaks on slower demand growth and more favorable improving supply conditions for many of these supplies. commodities, although stocks remain relatively low. Energy: overview and outlook Most commodity prices are set to remain high in Crude oil prices were fairly stable through the 2011 and to weaken only modestly through to first three quarters of 2010, averaging $77/bbl, 2013, reflecting continued robust demand, low reflecting ample stocks and OPEC production stocks and ongoing supply constraints in some restraint amid strong demand growth (3.3 cases. Crude oil prices are expected to average percent or 2.8mb/d for 2010) versus an average $107/bbl in 2011 and weaken slightly over 2012- 1.3mb/d over the past decade. In the fourth 13, assuming that political unrest in North Africa quarter of 2010, prices began to rise due to an and the Middle East is contained. Metals prices acceleration in demand growth to 3.8 percent are expected to rise by 20 percent in 2011 on and declining stocks; prices averaged $90/bbl in persistently strong demand, led by China, and December. weak supply response for some metals, notably copper and tin. Food prices in 2011 are expected Oil demand in high-income OECD countries to average 20 percent above 2010 levels as well, which had been declining since the fourth on the assumption of a normal crop year and no quarter of 2005, advanced by 1.2 percent or further rises in oil prices (table Comm.1). 0.6mb/d; while demand in non-OECD countries increased 5.7 percent or 2.3mb/d–with Chinese The risks to this price forecast are mostly to the demand representing about 1mb/d. In the first upside. The spread of political unrest in the quarter of 2011, global oil demand was 2.3 Middle East and North Africa could push crude percent higher than a year earlier, with year-over oil prices much higher in the shorter term, -year growth rates expected to ease to near 1.5 especially if there is disruption to a major oil percent (1.3mb/d) consistent with the long-term producer. Stronger demand from China could trend of the past decade (figure Comm.2). boost metals prices by more than currently expected, and continued supply constraints could Figure Comm.2 World Oil demand Table Comm.1 Key nominal price indices mb/d (Actual and forecasts, 2000=100) 4 3 Actual Forecast 2005 2006 2007 2008 2009 2010 2011 2012 2 Energy 188 221 245 342 214 271 362 345 1 Non-Energy 149 190 233 275 209 267 321 284 0 Agriculture 133 150 180 229 198 231 277 230 -1 Other Food 134 147 185 247 205 224 265 222 Beverages 137 145 170 210 220 254 286 238 -2 Other Asia Raw Materials 131 160 175 196 169 237 304 247 China -3 Metals & Minerals 179 275 339 336 222 337 406 395 -4 OECD Fertilizers 163 169 240 567 293 280 349 283 MUV 110 112 117 125 118 121 127 123 1Q03 1Q05 1Q07 1Q09 1Q11 Source: IEA and World Bank Source: World Bank 52 Global Economic Prospects June 2011: Subject Annex Most of the increase in oil demand was met from exports. Some damage to facilities and oil fields increased production by non-OPEC producers occurred, and it is widely expected that exports and through reductions in inventories. OPEC will be curtailed for some time. In addition more output growth in recent months has been limited than 0.1mb/d of crude oil production was shut as the cartel has sought to support prices at down in March from unrest and strikes in below their recent amplified levels. Yemen, as well as smaller volumes in Oman, Gabon and Côte d’Ivoire—all non-OPEC Non-OPEC output increased 2.0mb/d since countries. Just as importantly, oil prices were bid 2008, reflecting both the exploitation of new up by fears of larger supply disruptions in major fields and more intensive production from OPEC oil producers. existing ones made more profitable by higher prices. The biggest increases came from the The supply response from other OPEC countries United States, Russia, China, Brazil, Colombia, has been limited—mainly because of weak Kazakhstan, Azerbaijan, Canada, and Oman, as demand for the medium-sour crude that OPEC well as from a sizeable increase in biofuels. has in spare capacity (the lost Libyan production Partially offsetting these gains were large is light, sweet and distillate-rich crude oil), and production losses in the North Sea and Mexico. because the supply disruption occurred during the seasonal downturn in demand due to refinery OPEC production increased 1.9mb/d since April maintenance. 2009 (prior to the loss in Libya), but still remains below its peak levels of 31.9mb/d in mid-2008.1 Nevertheless, the pickup in global demand has Most of the increase has taken place in Saudi drawn-down OPEC’s spare capacity (excluding Arabia, Iraq, the UAE, and Nigeria (figure Libya, Iraq, Venezuela and Nigeria) to 4mb/d, Comm.3). down from more than 5mb/d at the end of 2010. Because of the loss of Libyan distillate-rich Despite a drawdown of inventories, global sweet crudes, distillate markets worldwide has stocks remain high—though outside of the tightened. As refinery demand picks up in the United States, inventory levels at the end of second quarter to meet summer demand, further winter were at the lower end of their 5-year upward pressure on high-quality crudes is likely. range (figure Comm.4). Outlook Political turmoil adds to price volatility Oil prices are expected to remain elevated as The spikes observed in 2011 mainly reflect long as physical supplies are disrupted and fears political developments in North Africa and the persist of larger disruptions from political unrest Middle East, which resulted in the loss of 1.6mb/ in oil producing countries. The loss of Libyan d in Libyan oil production and 1.3mb/d in light sweet, crude will continue to affect product Figure Comm.3 World oil production Figure Comm.4 OECD oil inventories and oil price mb/d days forward consumption $/bbl 55 65 130 50 110 Non-OPEC 60 45 90 Inventories 40 55 70 35 50 50 30 OPEC Brent (right axis) 30 25 45 10 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 1Q00 4Q02 3Q05 2Q08 1Q11 Source: IEA Source: IEA, World Bank 53 Global Economic Prospects June 2011: Subject Annex markets, especially as increasingly stringent 2013. Yet, individual prices may move within a regulatory rules on refined products further wide range from each other, as has been the case intensify demand for light, sweet crude. during the past six months (box Comm.1). In the baseline projection, oil production is At these prices, there are no resource constraints assumed to normalize toward the end of 2011, far into the future. At $80/bbl in real terms, and oil prices are anticipated to decline gradually production of Canadian tar sands are profitable toward $80/bbl in real terms by 2020. This and reserves from this source are second only to implies a nearer-term price profile of $107.2/bbl those of Saudi Arabia in crude oil. Such elevated in 2011, easing only modestly to $98.7/bbl by prices should also serve to both foster production Box Comm.1 Different prices for different fuels The recent run up in crude oil prices has been associated with an unusual divergence between the price of West Texas Intermediate oil (WTI) and Brent and Dubai crude oil prices. Historically, WTI has traded at a premium of about $1.30/bbl to Brent, but toward the end of 2010 the WTI price began falling below the Brent price because of a build-up in crude-oil inventories in Cushing Oklahoma, the delivery point for WTI oil in NYMEX futures con- tracts. Currently WTI oil is trading at about 90 percent of the Brent price (box figure Comm.1a). The increase in inventories was mainly due to the inflow of Canadian crude through the new Keystone pipeline, and has little outlet except through refinery processing in Cushing. Bottlenecks are likely to continue until new pipeline capacity to the Gulf coast is available (2013), and from Alberta to the Pacific coast (2015). The other major price divergence, which has been more durable, has been between oil prices and natural gas prices. Whereas the former have increased nearly fourfold since 2000, natural gas prices linked to oil (in Europe and Japan) have increased only 160percent, while those in the fully competitive U.S. market are essentially un- changed. Relatively lower natural gas prices reflect increases in supply from both new liquefied natural gas (LNG) capacity and unconventional shale gas. LNG capacity, which allows gas to be transported by sea, is projected to increase more than 50 percent between 2009 and 2013. In the United States, natural gas from shale-gas reserves has been growing rapidly due to new extraction techniques, which have not only pushed down U.S. natural gas prices, but also reduced prospective global demand for LNG. Growing supplies of unconventional gas are expected to keep U.S. natural gas prices well below oil prices. Al- ready, U.S. natural gas now costs less than coal. Contract prices in Europe and Japan, which are tied to oil prices, are expected to come under downward pressure as end-users increasingly push to tie these prices more closely to spot prices for natural gas (box figure Comm.1b). Over time, these large gaps between oil and natural gas prices can be expected to induce shifts in consumption from oil to natural gas, reducing demand for oil, and as a result reducing price pressures. Box figure Comm.1a Brent/WTI price differential Box figure Comm.1b Energy prices US$/bbl $/mmbtu $20 25 Crude oil $15 20 LNG Japan Europe Gas $10 15 US Gas Coal Australia $5 10 $0 5 -$5 0 Apr-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Dec-10 Mar-11 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Source: World Bank Source: World Bank 54 Global Economic Prospects June 2011: Subject Annex of alternative renewable energies and induce natural gas and nuclear power. A combination of demand-side substitution toward other less reduction in the share of nuclear and the likely expensive forms of energy. environmental pressures in crude oil and coal may indeed exert additional pressure in energy The main impediments to supply growth are prices over the longer term. above-ground policies and conditions, i.e., taxation, access, environmental constraints, and Metals: overview and outlook geopolitical risk. Metals and minerals prices have recovered Risks to the oil outlook strongly in the last two years due to robust demand, with the aggregate price index in May On balance, short term risks are on the upside 2011 up 155 percent since its recession-induced likely to emanate from further supply lows of December 2008. Strong price increases disruptions. Large supply-shocks can have were observed in markets that experienced significant impacts on oil prices and economic supply constraints. For example, copper and tin activity, as in the past. Environmental issues reached all-time nominal highs in 2011 (up 220 may curb non-OPEC production growth in bio- and 200 percent, respectively from their 2008/09 sensitive or resource-intensive areas, e.g., lows) (figure Comm.5). Most metals prices have offshore, oil sands, and shale-rock fracturing at least doubled, but price increases were more (these sources account for more than one-third of moderate for those where supplies were ample as global oil supplies). in the case of aluminum.2 OPEC production policies can also affect price levels. In the past, the group has taken Figure Comm.5 Copper and aluminum prices aggressive action to rein-in production when $/ton prices fall, but has taken only limited action 10,000 when prices rise, choosing instead to accept the windfall gains. 8,000 Copper 6,000 Aluminum An additional risk to energy prices is the longer term impact of the Fukushima nuclear accident. 4,000 Nuclear energy has played a key role in global 2,000 energy consumption. Its contribution increased from of 1.6 percent during the 1970s to 6.3 0 percent during 2000-08 (table Comm.2). During Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 this period crude oil’s share declined from 44.7 Source: .World Bank. to 35.0 percent. In effect, the decline in crude oil was compensated almost equally by increases in Figure Comm.6 World metals consumption Table Comm.2 Shares of global energy consumption (percent of total) '000 tons 40,000 1971-80 1981-90 1991-2000 2001-08 30,000 Crude Oil (total) 44.7% 38.3% 36.6% 35.0% Natural Gas 16.3% 18.2% 19.9% 20.8% 20,000 Coal and Coal Products 24.5% 25.5% 23.7% 24.9% 1.6% 4.8% 6.5% 6.3% 10,000 Nuclear OECD China Rest of world Combustible Renewables and Waste 10.6% 10.7% 10.5% 10.0% 0 Hydro/Other 2.3% 2.5% 2.8% 2.9% 2000 2002 2004 2006 2008 2010 Source: IEA and World Bank Source: World Metal Statistics 55 Global Economic Prospects June 2011: Subject Annex The recovery in metals during 2009 was led by required for new mines. Because of years of low large restocking in China, world’s largest metal prices and limited expansion, the industry also consumer (figure Comm.6). As can be seen for suffered shortages of skilled labor, equipment aluminum (which accounts for nearly half of and materials during the upturn—which have world consumption of the six base metals), pushed up costs. In addition, technical problems, China’s demand growth surged in 2009, with strikes, and geopolitical risk prevented new significant volumes for restocking, providing the projects form moving ahead quickly. key driver to prices. Demand in China slowed in 2010 but this was offset by strong demand Looking forward, supply is expected to be more elsewhere, particularly in developed countries, elastic—partly because of higher prices, which also for restocking (figure Comm.7). have boosted the industry’s large cash flow, and is expected to generate record capital Most metals inventories in 2011 are relatively expenditures in 2011. high, and have increased as China’s import demand has slowed (figure Comm.8). For some In the copper sector, where supply has been metals, prices are in ‘contango’ (future prices very tight, development of new ‘greenfield’ and above near-by prices) and a large portion of ‘brownfield’ projects is expected to deliver stocks are tied up in warehouse financing sufficient capacity to meet moderate demand arrangements and not available to the market— growth over the medium term. Much of the which gives an appearance of market tightness incremental supply will be in South America and and has helped support prices. Inventories are in Africa’s copper belt, i.e., Zambia and the expected to remain high until China’s import Democratic Republic of Congo. High copper demand strengthens. prices have also increased recycling and induced substitution toward other, cheaper products Outlook (mainly aluminum and plastics). These trends are expected to push the copper balance into Over the past decade, global metals markets surplus later in 2012 and beyond. have struggled to meet the strong demand particularly from China, especially in the copper The global market for aluminum is expected and nickel markets (box Comm.2). As a result to remain in surplus for the foreseeable future. prices have increased to ration demand and The addition of new capacity and prospects for balance the market. the reactivation of idle capacity threatens prices in the near term. New plants in China, India, the The causes of the supply shortfall are numerous. Middle East and Russia are expected to exploit Inadequate investment early-on has played a low-cost power sources and minimize the role, especially given the long lead times upward pressure on aluminum prices from Figure Comm.7 Aluminum consumption growth Figure Comm.8 Copper prices and LME stocks thousand tons $/ton '000 tons 1,000 12,000 600 LME stocks (right axis) 750 500 Other China 10,000 copper price 500 400 8,000 250 300 0 6,000 200 -250 4,000 -500 100 -750 2,000 0 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Source: CRU Source: Datastream 56 Global Economic Prospects June 2011: Subject Annex higher oil prices. A key uncertainty for supply projects elsewhere, are coming on line that are concerns Chinese authorities’ efforts to restrain the lagged result of earlier price hikes. In power consumption in the sector, which may addition, supply will be bolstered by recovering slow the pace of new aluminum plants or result production from strikes in Canada and the steady in the closure of older plants. growth of nickel pig iron in China. One potential uncertainty for the nickel industry comes from The nickel market is expected to move into new plants ‘High Pressure Acid Leach’ (HPAL) surplus this year and beyond as a wave of new processes, a complex technology that has capacity hits the market. Several large-scale resulted in severe production problems in the projects in Brazil, Madagascar, New Caledonia, past. and Papua New Guinea, as well as smaller Box Comm.2: China, global metal demand, and the super-cycle hypothesis Chinese demand has been the key driver of metal demand over the past decade (see figure Comm.8). China is clearly in an extremely metals-intensive phase of its development. Compared with other developing countries at similar income levels, the metals intensity of China’s GDP is well above average (for example, China’s copper and aluminum intensity were 1.8 and 4.1 kgs per $1,000 of real GDP for 2007-09, compared with world averages of 0.4 and 0.7, respectively.) Between 2000 and 2010 Chinese consumption of the main base metals (aluminum, copper, lead, nickel, tin, and zinc) rose by 16 percent per annum. Consumption for the rest of the world was flat for the decade. Currently China accounts for 41 percent of global refined metal consumption (box figure Comm.2a). Indeed, metal consumption by China during the past decade has been so strong that it effectively reversed the global metal intensity (metal consumption per unit of GDP), a turnabout that continues today. For example, global metal intensity in 2010 was the same as in the early 1970s (box figure Comm.2b). On the contrary, food and en- ergy intensities continued their downward trend. Many observers looking at the extremely robust demand for commodities over the past decade, and the rapidly rising metals intensity of the Chinese economy, argue that commodity demand will continue to outstrip supply resulting in a super-cycle where prices stay very high for an extended period (perhaps for a few decades). Such risk seems particularly acute if China continues to increase its metals intensity, or if other developing countries begin to follow a metals intensive development strategy – something that has not as yet occurred. Super-cycles of this nature have taken place in the past rather albeit infrequently (e.g., the industrial revolution in the United Kingdom. and the early 1900s in the United States). Several authors have argued that some metals (especially copper and iron ore) may be going through a super-cycle period because of Chinese demand (see Heap 2005 and Jerrett and Cuddington 2008). If such a super cycle endures, high prices will be needed to curb demand and generate sufficient supplies to bring the market into balance, and also to stimulate alternative technologies and materials. Box figure Comm.2a Global metal consumption Box figure Comm.2b Global commodity intensity growth, 2000-10 '000 tons Commodity intensity index 20,000 Rest of world China OECD 16,000 1.05 12,000 0.95 Metals 8,000 Food 0.85 4,000 0.75 0 Energy -4,000 0.65 Alum Copper Lead Nickel Tin Zinc 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 Source: World Metal Statistics and World Bank Source: World Bank 57 Global Economic Prospects June 2011: Subject Annex Overall, metals prices are expected to rise in 30 percent of the increase in wheat prices 2011 compared with 2010, owing to increasing during the 2007/08 price spike was due to demand, but are expected to ease thereafter, as insulating trade measures. new capacity comes on line and keeps markets in surplus. A key risk to the forecast is continued Grain prices, especially maize and wheat, began difficulties within the industry delivering rising in the summer of 2010 when it became adequate supply to the market, whether related to apparent that wheat production in Eastern operations, technology, labor, or government Europe and Central Asia and was going to be policy. seriously affected by the heat wave running through the region at that time. In the event, Agriculture: overview and outlook countries in the region—which between 2005- 2009 accounted for almost a quarter of world By early 2011 most agricultural prices either wheat exports—were only to supply half of that reached or exceeded their summer 2008 peaks. amount. Later maize prices rose as it became In April 2011, the agricultural price index clear that the U.S. crop would disappoint. As a averaged 12 percent above its June 2008 peak, result, the maize stock-to-use ratio declined to while the food index has just matched its 2008 0.15 from the 0.18 average of 2007-09. peak. Beverages (tea, cocoa, and coffee) and raw materials are 31 and 57 percent above their 2008 By April 2011, maize prices had surpassed their highs. June 2008 highs by 12 percent while wheat prices were just 4 percent short of their 2008 Yet, the 2010/11 price spike differs from the one peak. Rice prices, however, have been relatively in 2007/08 in a number of respects. stable, trading in a band of $450-$550/ton during the past two years—a wide band by historical 1. It is more uniform in terms of commodities standards but narrow when comparing rice to involved, in that it includes most food other commodities during 2008. commodities (grains and edible oils, except for rice), beverages, and raw materials. The Edible oils prices rose more than 40 percent in 2007/08 spike (led by crude oil and the first quarter of 2011 from a year earlier, fertilizers) saw food and grains prices almost reaching their June 2008 all time highs in increase, largely reflecting the surge in rice. February 2011. In addition to suffering sporadic weather-induced production shortfalls 2. The current increase is less steep in the sense (especially soybean oil in South America and that the percent change in 2011:Q1 from a palm oil in South-East Asia) and diversion for year ago are much smaller than occurred in biodiesel production in Europe, a key factor 2008:Q2 when measured over the same behind the price rally has been strong demand. period (figure Comm.9). Figure Comm.9 The price spikes of 2007/08 and 2010/11 3. The supply conditions for grains that led to the 2010/11 spike were less binding than the Energy conditions that led to the 2007/08 spike. The Non-energy 2010/11 2007/08 rice market has been very stable—rice is a Agriculture Food thinly traded commodity and politically Grains sensitive for food security, especially in East Beverages Asian countries. Raw material Metals 4. The recent price spike did not trigger as broad Fertilizer a policy reaction—apart from the Russian wheat export ban in the summer of 2010. 0 50 100 150 200 Martin and Anderson (2011) estimated that 45 percent of the increase in rice prices and Source: World Bank 58 Global Economic Prospects June 2011: Subject Annex Unlike grains, where demand tends to be anticipated to remain almost unchanged. relatively stable after incomes reach a certain Soybean and palm oil prices are expected to be level, per capita demand for edible oils continues 18 and 22 percent higher, respectively. to rise even in high income countries, as a rising share of food consumed is prepared in A number of assumptions underpin this outlook. professional establishments and in packaged First among these is that crude-oil prices form, both of which are oils consuming stabilize and begin to decline. Second, it is processes. assumed that the 2011/12 crop year is a normal one. Actual outturns will depend importantly on Beverage prices increased in 2010/11, unlike in Figure Comm.10 Global balance of key grains 2008 when their prices were relatively stable. 40% 900 The coffee market—especially arabica coffee— Maize experienced tight supplies and strong demand 800 30% while the hike in cocoa prices reflected political instability in Côte d’Ivoire (which accounts for 700 20% almost 40 percent of global cocoa supplies). 600 The cotton market suffered from tight supplies 10% 500 (in addition to a partial export ban imposed by India to protect its domestic textile industry). 0% 400 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Strong demand, especially by middle income countries, contributed to high price as well. Stock-to-use ratio - Lef t axis Production (1000 MT) Cotton prices experienced, perhaps, the sharpest increase in history of the sector; they exceeded 40% Rice 500 $5.00/kg in March 2011, up 350 percent from two years ago. And natural rubber prices 30% 450 reached historic highs due to weather-related supply disruptions in South-East Asia rubber 20% 400 producing countries (accounting for almost all global production), strong tire demand from 10% 350 emerging markets, and high oil prices (natural rubber competes with synthetic rubber) a by- 0% 300 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 product of crude oil. Stock-to-use ratio - Lef t axis Production (1000 MT) Despite high oil prices, fertilizer prices—a key input to the production of food commodities— 40% Wheat 700 declined 5 percent in 2010 due to ample supply and relatively stable natural gas prices (nitrogen 30% fertilizer is made directly from natural gas). 600 20% Outlook 500 10% Agricultural prices increased 17 percent in 2010, slightly exceeding their 2008 levels. They are 0% 400 expected to gain an additional 20 percent in 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2011; such increase assumes that prices will ease Stock-to-use ratio - Lef t axis Production (1000 MT) somewhat during the second half of 2011. Specifically, for 2011 wheat and maize prices are expected to average 34 and 45 percent higher Source: U.S. Department of Agriculture (May 11, 2011 update). than 2010 levels, while rice prices are Note: years refer to crop years (e.g., 2011 refers to 20011/12 59 Global Economic Prospects June 2011: Subject Annex oil prices and weather. Either another poor crop and (iii) via competition for land and produce year or a further hike in oil prices could result in from biofuels—maize in the United States, significantly higher prices for many edible oils in Europe and sugar cane in Brazil commodities. (Box Comm.3). Indeed, agriculture is more than four times more energy intensive an activity than During its first assessment for the 2011/12 crop manufacturing, with the ratio varying across year (published in early May), USDA projected countries depending on crops raised and that global production of maize will rise 6.4 intensity of fertilizer use (figure Comm.11). percent, wheat by 3.3 percent and rice by 1.4 percent (figure Comm.10). Yet, because of Econometric estimates suggest that for every 10 continued tight inventory positions, the USDA percent increase in energy prices, food prices argued that prices may remain “volatile with will rise by between 2 and 3 percent (Baffes tight exportable supplies of corn and wheat. In 2009). In fact, this is almost exactly what has contrast, the rice world supplies are relatively been observed: with the 223 percent increase in abundant.” The report also noted that uncertainty the average oil price between the period 1986- continues to cloud these projections because of 2002 and 2003-2010 is associated with a 50 delayed maize plantings in the United States, percent increase in the average food prices index reduced U.S. winter wheat production, continued (figure Comm.12). dryness in the EU, and wet conditions in Canada. Risks to the food price outlook Energy is a particularly important determinant of agricultural prices and hence an important risk In an effort to evaluate the sensitivity of food for higher food prices. While low stocks and price forecasts to the quality of future crops and poor crops were the major factors underpinning oil prices, several simulations were run. Table last year’s price hikes, the nearly 60 percent Comm.3 reports results based on a reduced form increase in food prices since the 1990s has more econometric model that explains grain prices as a to do with the 3-fold increase in energy prices function of cost factors (including oil), and that has occurred during that time. weather events (proxied by deviations of output from trend increases and stock-to-use ratios to Energy feeds into food prices through three main allow for non-linear effects when stock levels are channels: (i) as a cost of production (fuel for low). Other variables include exchange rates, agricultural machinery and transporting produce interest rates, time trend as a proxy for technical to markets); (ii) indirectly through fertilizer and change, and income growth. other chemical costs (e.g., nitrogen-based fertilizers are made directly from natural gas), This work suggests that a weather-induced Figure Comm.11 Energy intensity of agriculture Figure Comm.12 Energy and agricultural prices: and manufacture 1986-2010 Cost of energy component measured in 2007, percent nominal indices, 2000=100 400 WORLD HIGH INCOME Manuf acture Energy DEVELOPING 300 Agriculture 223 % up SSA US 200 Canada EU-12 Agriculture China 100 Brazil 50 % up India Turkey 0 1986 1989 1992 1995 1998 2001 2004 2007 2010 0 5 10 15 20 Source: GTAP preliminary release 0, version 6. Source: World Bank 60 Global Economic Prospects June 2011: Subject Annex production shortfall on the order of 5 percent importing countries as well as poverty (equivalent to one standard deviation reduction implications for consumers who spend a in global output) can be expected to induce an substantial part of their disposable income on increase in grain prices of between 2 and 8 food. Consider, for example, that the 2010/11 percent. And a 50 percent increase in crude oil grain price increases may have pushed as many prices above the baseline of $107/bbl, would as 44 million people into poverty according to induce grain prices increases on the order of 6 World Bank latest estimates (World Bank, and 14 percent. Under a scenario where the 2011a). 2011/12 crop year proves disappointing and oil prices rise by $50/bbl, grain prices could rise In addition to higher prices, volatility in between 9 and 22 percent above the baseline commodity prices, especially food commodities, scenario. is an issue of increasing concern. For example, during the November 2010 summit, leaders of If any of these scenarios materialize, it will have the G-20 requested that all international financial important budgetary implications for food institutions and research organizations to work with key stakeholders “to develop options for Table Comm.3 Food Prices: History, baseline, and G20 consideration on how to better mitigate and upside risks ($US per ton) manage the risks associated with the price Year Wheat Maize Rice Soybeans Palm oil volatility of food and other agriculture Historical Prices commodities, without distorting market 2006 192 123 305 269 478 behavior, ultimately to protect the most 2007 255 164 326 384 780 2008 326 223 650 523 949 vulnerable” (see G-20 Report on Price Volatility 2009 224 166 555 437 683 2011). 2010 224 186 489 450 901 Baseline Although it is analytically challenging to 2011 300 270 500 530 1,100 distinguish factors that affect price volatility 2012 250 230 480 450 900 from those affecting price levels, the increasing 5% production shortfall (compared to baseline) 2011 306 279 518 547 1,186 role of investment fund activity during the past 2012 255 238 497 464 970 few years (sometimes referred to as the 5% production shortfall and 50% increase in energy prices (compared to baseline) “financialization of commodities”) is often cited 2011 336 294 573 602 1,337 as a key factor behind the price variability 2012 280 251 550 511 1,094 observed during the past few years. It has been estimated that as of the end of 2010 as much as Source: World Bank $380 billion was invested in commodities, three Box Comm.3 The role of biofuels The mandated increase in the quantity of high-income crops and cropland dedicated to biofuel production (chiefly ethanol-based corn in the United States, and edible oil-based biodiesel in Europe) and the more or less simultane- ous rise in food prices, suggests another mechanism by which energy prices are affecting food prices. During 2010/11, 28 percent of the U.S. maize crop went to biofuel production (in fact, 40 percent of the US maize crop went for biofuel use; however, 30 percent of that went back to the feed industry, resulting in a net of 28 per- cent). Although that corresponds to about 11 percent of global maize production, it’s magnitude is comparable to the global exports of maize. Indeed, most studies concur that the U.S. biofuel mandate was the largest demand-side factor in the run up of grain prices during the 2007/08 price spike (Timilsina and Shrestha 2010). Perhaps more important than their historic role in shaping the rise in food prices—to the extent that important food crops like maize are economically viable alternative sources of energy―their comportment will cease to be that of a typical agricultural product, where price fluctuations are mainly the result of supply shocks (demand remaining relatively stable), and become more like an industrial commodity, especially at current high energy prices. For example, estimates suggest that maize-based ethanol and edible oil-based biodiesel biofuels may become profit- able even without mandates at oil prices between $80-$100/bbl (U.S. Government Accountability Office 2009). 61 Global Economic Prospects June 2011: Subject Annex quarters of which in energy markets, compared post-financial crisis low price) and 2010:Q4, (the to less than $20 billion at the beginning of the most recent data available for 35 countries). In decade. addition to maximizing the numbers of countries included in the sample, the period was chosen in The relationship between investment fund order to capture most of the 2010/11 food price activity and commodity prices is a hotly debated spike. topic. Some have argued that such funds have sufficiently large weight to unbalance the market During this period, the real (U.S. CPI-deflated) thus impairing the price discovery mechanism U.S. dollar-based World Bank food price index (e.g., Soros 2008, Berg 2011). However, others increased 34 percent. Yet, the results show have praised these investment vehicles claiming that—with the exception of Asian countries that they inject liquidity in commodity markets where real wholesale prices moved in synch with (e.g., Verleger 2010, Sanders and Irwin 2010). world prices—in both Latin America and the Despite such contrasting views, the empirical Caribbean and Sub-Saharan Africa regions, real evidence is, at best, weak. Figure Comm.13 Price changes—2009:Q1 to 2010:Q4 As was discussed in the January 2011 edition of GEP (World Bank 2011b, p. 26), “Despite the Africa Benin ‘smoking gun’ … most studies have failed to WORLD Sudan establish a link between these investment and Burundi Cape Verde rise in commodity prices.” The report also noted Djibouti Mali that more recent academic papers and analysis Cameroon Nigeria are increasingly leaning towards the view that Uganda Niger these new investment vehicles may have been Mozambique Burkina Faso responsible for at least part of the post-2005 Rwanda Kenya volatility in commodity prices. Indeed, a number Chad of academic studies have shown just that (see, -40 -20 0 20 40 60 80 100 for example, Singleton 2011, Silvennoinen and Thorp 2010, Tang and Xiong 2010). Latin America and the Caribbean Argentina WORLD Movements in domestic food prices Brazil Panama Mexico The discussion so far has focused on price Peru Colombia movements in US$ terms. However, what Dominican Republic matters most to consumers is the price they pay Bolivia Guatemala for their food basket. It is not uncommon for Nicaragua prices paid by consumers to differ considerably Honduras from international prices, at least in the short -20 0 20 40 60 80 100 run. Reasons include exchange rates movements, trade policies that often insulate domestic Asia markets, large distances of domestic trading Bangladesh centers form ports adding considerably to Thailand WORLD marketing costs, quality differences, and Azerbaijan different composition of the food basket. India China Figure Comm.13 depict changes in domestic Armenia wholesale prices of key food commodity price Cambodia indices (weighted by the country’s caloric intake Belarus from such commodities). The period chosen is -5 0 5 10 15 20 25 30 35 40 based on a comparison between 2009:Q1 (the Source: World Bank 62 Global Economic Prospects June 2011: Subject Annex prices either increased modestly or declined. It commodity angle. From a country policy should be noted that results do not necessarily perspective, the results suggest that, to the extent imply that domestic price movements move possible, policy responses should not focus independently of world prices. The apparent entirely on short run price movements observed weak correlation between world and domestic in international markets. Instead policies should prices most likely reflect low pass-through. target specific commodity sectors and, above all, target the portions of the population with the To identify the degree of pass-through, an error- highest probability of being affected. correction model was used to estimate the pass- through price elasticities for wheat, rice, and The policy dimension of low pass-through maize. The countries included in the analysis were categorized into three groups: little pass Low pass-through may reflect the fact that some through, where less than 10 percent of countries insulate their domestic food (and fuel) international price variability is transmitted into markets by introducing or increasing existing domestic prices, moderate pass through, with subsidies or taxes. In addition to their transmission between 10 and 40 percent, and distortionary impact on both domestic and world high pass-through, with more than 40 percent market level, subsidies in these countries may transmission (figure Comm. 14). face fiscal sustainability issues. Indeed, taxpayer -funded subsidies in OECD countries increased A number of interesting results emerged from considerably—between 2000-04 and 2005-09, the analysis. First, more countries exhibited very transfers from taxpayers to consumers of little pass-through compared to moderate or high agricultural products increased by more than 25 pass-through combined; this is consistent with percent (from $24.6 to $31.0 billion). From a the results discussed earlier. Second, price pass- fiscal sustainability perspective, however, more through is higher in rice than maize and wheat. important are fuel subsidies which during 2010 Third, countries that exhibited high pass-through reached globally an estimated $250 billion, up in one commodity are likely to have high pass- from $60 billion in 2003 (Coady et al 2010). through in the other commodities as well (e.g., Argentina, South Africa, Thailand, Uganda). From a policy perspective, addressing insulating trade policies should be a priority, for at least To summarize, pass-through results based on two reasons. In addition to constraining domestic both econometric estimates and the ones based supply response at the time it is most needed, on simple price change calculations gave a rather such policies amplify the cycles in world prices, mixed picture from both a country and a thus destabilizing global markets with negative consequences to countries that play by the rules Figure Comm.14 Domestic prices of key commodi- ties do follow world price signals in many countries and, more importantly, the ones that do not have the fiscal space to protect the poorest segments Number of countries 25 of their populations. less than 10% between 10% and 40% higher than 40% 20 Other avenues to pursue should include adequate funding for research and development in order to 15 arrest the decline in productivity growth observed during the past decade as well as 10 minimizing post-harvest losses, very common in poor countries, especially in Sub-Saharan Africa. 5 Policies and investments addressing the likely impact of permanent shifts in weather patterns, 0 and improving food aid are areas of concern as Rice Maize Wheat well. Detailed policies and investment strategies Source: World Bank addressing some of these issues were discussed 63 Global Economic Prospects June 2011: Subject Annex at the Development Committee meeting during Correlation Dynamics.” Mimeo, Queensland the 2001 joint World Bank/IMF Spring meetings University of Technology and University of (World Bank 2011c). Technology, Sydney. References Singleton, Kenneth J. (2011) “Investor Inflows and the 2008 Boom in Oil Prices.” Mimeo, Baffes, John (2010). “More on the Energy/Non- Graduate School of Business, Stanford Energy Commodity Price Link.” Applied University. Economics Letters 17: 1555-1558. Soros, George (2008). “Testimony before the U.S. Berg, Ann (2011). “The Rise of Commodity Senate Commerce Committee Oversight: Speculation: From Villainous to Venerable.” In Hearing on FTC Advanced Rulemaking on Oil Safeguarding Food Security in Volatile Global Market Manipulation.” Washington, DC, June 3. Markets, ed. Adam Prakash. Food and http://www.georgesoros.com/files/SorosFinal Agriculture Organization of the United Nations: Testimony.pdf Rome. Tang, Ke and Wei Xiong (2010). “Index Coady, David, Robert Gillingham, Rolando Investment and the Financialization of Ossowski, John Piotrowski, Shamsuddin Commodities.” Mimeo, Renmin University Tareq, and Justin Tyson (2010). “Petroleum and Princeton University. Product Subsidies: Costly, Inequitable, and Timilsina, Govinda and Ashish Shrestha (2010). Rising.” IMF Staff Position Paper. “Biofuels: Markets, Targets, and Impacts.” International Monetary Fund: Washington DC. Policy Research Working Paper 5364. Heap, Alan (2005). “China—The Engine of a Washington, DC: The World Bank. Commodities Super Cycle.” Citigroup Smith US Government Accountability Office (2009). Barney, New York City. Biofuels: Potential Effects and Challenges of G-20 Report on Volatility (2011). “Price Required Increases in Production and Use. Volatility in Food and Agricultural Markets.” Report GAO-09-446. Washington, D.C. Policy report with contributions by FAO, Verleger, Phillip (2010). ”Don’t Kill the Oil IFAD, IMF, OECD, UNCTAD, WFP, the Speculators.” International Economy: The World Bank, the WTO, IFPRI, and the UN- Magazine of International Economic Policy HLTF. May 3. Winter 2010, 64-66. Jerrett, Daniel and John T. Cuddington (2008). World Bank (2011a). Food Price Watch. April “Broadening the Statistical Search for Metal 14. Price Super Cycles to Steel and Related Metals.” Resources Policy 33: 188-195. World Bank (2011b). Global Economic Prospects: Navigating Strong Currents. Martin, Will and Kym Anderson (2011). “Export Washington DC: World Bank. Restrictions and Price Insulation during Commodity Price Booms.” Policy Research World Bank (2011c). “Responding to Global Working Paper 5645. Washington DC: The Food Price Volatility and its Impact on Food World Bank. Security.” Development Committee Paper, DC2011-0002. Washington DC: World Bank. Sanders, Dwight R. and Scott H. Irwin (2010). “A Speculative Bubble in Commodity Futures World Bank (2009). Global Economic Prices? Cross-Sectional Evidence.” Agricultural Prospects: Commodities at the Crossroads. Economics 41:25-32. Washington DC: World Bank. Silvennoinen, Annastiina and Susan Thorp (2010). “Financialization, Crisis, and Commodity 64 Global Economic Prospects June 2011: Subject Annex Notes 1. OPEC countries account for 72 percent of the world’s known oil reserves (Oil and Gas Journal, Dec. 6, 2010). However, OPEC’s production share of total world liquid fuels is just below 40 percent and its share of crude oil production is 33.5 percent. With OPEC’s spare capacity at about 6 mb/d (December 2010) and substantial known reserves, the oil market does not appear afflicted by resource scarcity. Indeed, oil production continues to grow in both OPEC and non-OPEC regions. 2. The divergence between copper and aluminum prices during the past decade has been driven mainly by China, world’s largest copper importer. Because of various operational and project development problems, the industry has struggled to keep pace with demand. Meanwhile China has developed substantial aluminum smelting capacity and is a net exporter of aluminum. Bauxite, the raw material to produce aluminum, is one of the most abundant minerals. 65 Global Economic Prospects June 2011: Subject Annex Inflation Annex Rising commodity prices have made a major number of developing countries over the past contribution to the increase in headline inflation year. More than half of developing countries rates, which are close to- or have breached the now have annual inflation in excess of 5 percent, upper limit of central banks’ targeted bands in with one in five countries reporting inflation in many countries. excess of 10 percent. Meanwhile the share of countries with inflation rates in the range of 2.5 However local food prices in developing percent to 5 percent has also increased. countries have not increased as much as international food prices. Notwithstanding the 47 Headline inflation accelerated by more than 3 percent increase in the dollar prices of percentage points in one in four developing internationally traded food commodities between countries between March 2010 and March 2011, June 2010 and February 2011, local food price compared to more than one in five during the indexes in developing countries have risen by previous year (figure INFL.2). One in five only 7.9 percent over the same period. In part, countries have also seen inflation decline by this discrepancy reflects the depreciation of the more than 1 percentage point over the March dollar; the wider range of food commodities 2010 to March 2011 period. consumed locally; and weak pass through of internationally traded food prices to local prices. However, the extent of the pick up in inflation In developing countries in Sub-Saharan Africa for most countries has been relatively modest, and South America the pass through was less with inflation rates in more than half of than 10 percent in: 67 percent of countries for developing countries still below average rice, 69 percent for maize, and 70 percent for inflation recorded in the pre-crisis period wheat. Government subsidies, price controls, (January 2000 through August 2008). Inflation is weak infrastructure, and low import dependency less than 2 percentage points higher than that impede pass through, while it tends to be higher average in 80 percent of countries. in countries with closer links to international markets and limited government intervention Inflation in high-income countries is rising (e.g. South Africa). but remains at relatively low levels. Prices in high-income OECD countries were 3.2 percent Annual inflation rates have increased in a large higher in April 2011 than a year earlier, an Figure INFL.1 Headline inflation has accelerated in Figure INFL.2 Change in inflation rate over the developing countries over the past year past year # of countries # of countries 60 30 50 25 20 40 15 30 10 20 5 10 0 0 0 2.5 5 7.5 10 More -1 0 1 2 3 More y/y, percent percentage points March-11 March-10 March-11 March-10 Source: The World Bank. Source: The World Bank. 66 Global Economic Prospects June 2011: Subject Annex increase of 1.3 percentage points. The energy The rise in headline inflation in high-income price component of the CPI index was up 10.4 OECD countries has had a limited impact on percent, down slightly from the 10.6 percent inflationary expectations to date, and core increase recorded in March, while the food price inflation has increased gradually to 1.9 percent component was up 3 percent (year-on-year in as of April 2011, from 1.1 percent in the year- April, 2011) (figure INFL.3). In the euro area, earlier period (to 1.3 percent in the United States headline inflation was 2.8 percent (y-o-y) in and 1.5 percent in the euro zone). April, well above the 2 percent ECB targeted rate, in part due to rising energy prices. In the Headline inflation in developing countries has United States, headline inflation was 3.2 percent accelerated recently to 6.9 percent by April by April, pushed higher by energy prices up 19 2011, from a 6 percent in April 2010, as percent and a weaker dollar (down by more-than international food and fuel prices stabilized 9 percent in nominal effective terms since June recently. Food inflation exceeded 9 percent by 2010). Headline inflation was up yet more February 2011 in developing countries.1 Median strongly in other high-income countries, headline inflation for these countries was slightly including Australia, Canada, Korea and Sweden. lower at 5.6 percent, reflecting the fact that Figure INFL.3 Core inflation in high-income inflation momentum in some of the larger OECD countries remains contained as inflation- middle-income countries, whose inflation rates ary expectations remained anchored have larger weights in the overall index is close Median, ch% (y/y) to 6.9 percent (figure INFL.4). In developing 8 25 countries, rising food and fuel prices, and in 20 some cases tightening manufacturing capacity Food and lagging policy normalization, have 15 4 combined to push headline inflation higher. But, 10 most recently, monthly inflation rates have eased 5 in both high-income and developing countries. 0 0 All items -5 Inflation momentum is strong. From a three Core inflation Energy month over three month perspective, the pace of -10 annualized inflation in both high-income and -4 -15 developing countries has been accelerating until Jan-00 Sep-01 May-03 Jan-05 Sep-06 May-08 Jan-10 just recently and exceeded year-over-year Source: OECD. Figure INFL.5 Headline inflation pressures have picked up since mid-2010 but are easing Figure INFL.4 Inflation accelerates in most devel- Headline inflation 3m/3m saar oping regions on higher food and energy prices 16 Annual headline inflation, median 16 Developing Sub Saharan Africa 12 14 Middle East and High income North Africa South Asia 12 8 10 4 8 Europe and 6 Central Asia 0 4 Latin America and 2 the Caribbean East Asia and -4 Pacific 0 -2 -8 Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Jan-05 Dec-05 Nov-06 Oct-07 Sep-08 Aug-09 Jul-10 Source: The World Bank. Source: The World Bank. 67 Global Economic Prospects June 2011: Subject Annex measures. At the global level, the annualized has eased in developing countries, with a broad- pace of monthly inflation was 5 percent (3m/3m based deceleration across income groups and saar) in the three months to April 2011, with regions. Among developing regions, the easing prices rising at a 4.3 percent annualized rate in of inflationary pressures is most pronounced in high-income countries and a 6.7 percent rate in the East Asia & Pacific, and the Europe & developing countries (figure INFL.5). Although Central Asia regions. The deceleration is less this momentum measure of inflation is lower in well established in South Asia and in Latin high-income countries than in developing America and the Caribbean, while monthly countries, it has accelerated more quickly in high inflation is rising in the Middle-East & North -income countries (up 4.7 percentage points Africa and Sub-Saharan Africa (figure versus 1.8 percentage point). This stronger INFL.7b). acceleration likely reflects quicker pass-through of higher international fuel prices in high-income In addition to the inflationary pressures coming countries, and is observed despite the lower from higher international commodity prices weight of food and fuel in the CPI basket in capacity constraints in many middle-income these economies (figure INFL.6 and figure countries have added to price pressures. In INFL.7a). More recently however momentum Brazil, headline inflation accelerated to 6.5 percent in April, while in China inflation was Figure INFL.6 Weight of food in the CPI basket more than 5.3 percent (y-o-y), up 2.2 percentage Parts per 100 points from a year earlier, as food inflation spiked to over 10 percent. Recent decisions to allow domestic gasoline and diesel prices to rise could push inflation as much as 0.5 percentage High income points higher. In India, year-on-year inflation SAS continues to remain elevated and has surprised to MNA the upside in March and April 2011 (9 and 8.7 ECA percent respectively) due to accelerating non- food inflation and higher energy prices, and a EAP surge in coal prices in April. There have been sharp upward revisions for three consecutive 0 10 20 30 40 50 months, suggesting that actual inflation in March and April could be even higher. Source: IMF. In Thailand, core inflation surprised to the Figure INFL.7a Headline inflation rates, ch%, Figure INFL.7b Headline inflation rates year-on-year Headline inflation rates, ch%, 3m/3m saar Headline inflation rates, ch%, year-on-year 16 20 Jan 2009 12 Jan-09 15 Jan 2010 Jan-10 Apr 2011 or latest Apr 11 or latest 10 8 5 4 0 0 High-income East Asia & Europe & Latin Middle East South Asia Sub-Saharan Pacific Central Asia America & & N. Africa Africa -5 Caribbean High-income East Asia & Europe & Latin America Middle East & South Asia Sub-Saharan Pacific Central Asia & Caribbean N. Africa Africa Source: The World Bank. Source: The World Bank. 68 Global Economic Prospects June 2011: Subject Annex upside in May as well, rising to 2.5 percent year- turn may increase pressure on wages, especially on-year, suggesting that higher energy and food in the emerging economies, where labor markets prices are starting to have second round effects, are tightening (figure INFL.7). If policy while tighter labor markets are also putting tightening fails to bring inflationary expectations upward pressure on producer prices. In (figure INFL.8) down, we could see the Indonesia, annual headline inflation stood at 6.2 beginnings of an inflationary spiral. percent in April, before easing to 6 percent in May, while core inflation rose to a 19-month Figure INFL.8 Expectations for inflation rates high of 4.6 percent in April and remained at that twelve months forward are rising level in May. While policy is being tightened in all of these countries, both fiscal and monetary Percent policy remain accommodative, leading to higher 8 40 Argentina risks that headline CPI changes seep into core Brazil 35 inflation, given strong domestic demand and 30 elevated capacity utilization rates (see Walsh, 25 2011 for a discussion, suggesting that 4 Mexico 20 commodity prices should not be excluded from 15 core measures of inflation in developing 10 countries). USA Chile 5 UK 0 0 Outlook Jan-08 Sep-08 May-09 Jan-10 Sep-10 May-11 Jan-12 Prospects for inflation in developing countries will vary depending on industrial capacity Source: Datastream, Banco central do Brasil. utilization rates, exchange rate movements and the policy stance. However, risks to inflation are Notes to the upside, and inflation could overshoot the upper limits of central-bank targeted ranges in a 1. For example, the weight of food in the CPI number of countries-- that show signs of basket is 40 points of 100 parts in South overheating and where monetary and fiscal Asia, and over 30 in East Asia and Pacific policy tightening are behind the curve. Even if (median value for Thailand, Malaysia, and the prices of internationally traded food and oil the Philippines) and MENA. Data for Sub- stabilize in the second half of 2011, domestic Saharan African countries is not available food and fuel prices are expected to continue to but for example in Ghana the weight of food rise in many developing countries, reflecting in the CPI basket is 44, while in Cote delayed pass-through to local markets and d’Ivoire it is 24.8. In comparison in high- increased pressures from higher fuel prices from income countries the median weight of food the costs of fertilizers and transportation. As in the CPI basket is 16 parts per 100 parts. outlined in the main text, in the current economic context it is entirely possible that both food and fuel prices rise further. Headline CPI momentum suggests that inflation will accelerate further in most developing regions, in particular in South Asia, Sub Saharan Africa, the Middles East and North Africa; and to a lesser degree in Latin America, Europe and Central Asia and East Asia and the Pacific. Moreover, high food and fuel prices are starting to impact inflationary expectations, which in 69 Global Economic Prospects June 2011: Regional Annex East Asia and the Pacific Recent developments the region where GDP had contracted in 2009. Real GDP is estimated to have grown by 7.8 and High frequency indicators suggest that growth in 7.2 percent respectively in these countries in the East Asia and Pacific region growth has 2010, driven equally by domestic demand started moderating as most economies in the (supported by expansionary fiscal and monetary region are operating at—or near full capacity, policies) and external demand. In the and a gradual withdrawal of monetary and fiscal Philippines, a surge in consumer and business stimulus combined with a moderation in growth optimism, in part due to the presidential of high-income countries will dampen growth elections, and stronger and more robust growth going forward. Real GDP growth of 8.3 percent in worker remittances were additional factors a year is anticipated over 2011-13 for East Asia that underpinned the country’s fastest growth in (rates of 8.5, 8.1, and 8.2 percent respectively). more than three decades. Much of the region’s This follows growth of an estimated 9.6 percent rebound reflected the solid macroeconomic in 2010. Excluding China, the rebound was even foundations that existed before the crisis: more pronounced, increasing from 1.5 percent in plentiful fiscal space, low external and 2009 to an estimated 6.8 percent in 2010; but government debt, and strong balance sheets of growth is expected to stabilize at slightly lower companies and commercial banks. rates of around 5.5 percent over 2011-2013.1 The pace of recovery in GDP (which was A strong recovery in GDP, production and particularly strong during 2010) is forecast to trade. The post-crisis rebound in 2010 was slow over 2011-2013. This growth cycle has faster than the recovery from previous crisis been accentuated by the evolution of industrial episodes in East Asia, including after the 1997- production activity, but with important 98 Asian financial crisis (figure EAP.1). It was differences in the depth of post-crisis troughs also broadly based, with five countries in within the region, and the extent to which output developing East Asia growing by 7 or more has recovered to pre-crisis levels or growth percent during 2010, including Thailand and trends (figure EAP.2). As of April 2011 Malaysia, the only middle-income countries in industrial production levels in the region stood Figure EAP.1 The post-crisis rebound in 2010 was faster Figure EAP.2 China leading recovery in industrial pro- than the recovery from East Asian crisis duction East Asia crisis, 1997 = 1 and Global crisis, 2008 = 1 Percent, 3m/3m saar 1.6 80 GDP f ollowing the 1997-98 Asian f inancial crisis 1.5 60 GDP f ollowing the 2008-09 Global f inancial crisis 1.4 40 1.3 20 1.2 0 1.1 China -20 EAP (excl China) 1.0 Thailand 0.9 -40 Indonesia 0.8 -60 1997/2008 1998/2009 1999/2010 2000/2011 2001/2012 2002/2013 2007M01 2007M07 2008M01 2008M07 2009M01 2009M07 2010M01 2010M07 2011M01 Source: World Bank. Source: World Bank. 71 Global Economic Prospects June 2011: Regional Annex 34.2 percent higher than the 2008-peak (defined robust capital inflows. However, with the as the maximum monthly industrial production exception of Indonesia, the real appreciation has level attained during calendar 2008) (figure been more or less in line with real changes in the EAP.3). Compared with the level of production Chinese Renminbi, hence the impact on external that would have been observed in the absence of competitiveness has been relatively limited. a boom and bust cycle between 2005 and 2009, the region’s production is now about 3 percent As in the case of industrial production, above underlying trend levels (figure EAP.4). commencing from the final quarter of 2010, Thailand represents an important exception to trade entered a second rebound phase. This this trend, as industrial production there has interval differs somewhat from the previous struggled to catch up with underlying trend rebound, in that recovery is being driven less by growth due to structural impediments. temporary factors (stimulus, restocking etc.) and more by stronger consumer demand (including The regions’ good performance in production from high-income countries). Latest figures has been supported by buoyant domestic demand indicate that, although economic growth might in most developing countries, moderate recovery be slowing somewhat, export growth rates were in high-income consumer spending, and nearly as strong as the exceptional pace restocking that started at the end of 2010. Even experienced in phase I of the recovery. though there is a lot of noise in the January- February data due to the Chinese Lunar New China’s export performance is to a large degree Year, there are indications that growth is shaped by high-income country import demand, slowing, as Chinese retail sales softened in while the rest of developing East Asia’s exports February – largely on the back of weaker auto tends to respond to Chinese demand (figures sales as incentives were withdrawn. East Asia is EAP.5 and EAP.6). The Japanese economy operating near full capacity, which means remains a very important trade partner for the industrial production growth is bound to developing East Asia region and the impact of moderate to potential growth rates; while further the Japanese earthquake/tsunami/nuclear crisis is downside pressures may arise from monetary expected to cut into growth more sharply than tightening in countries where inflationary the 1995 Kobe disaster, as electricity disruption pressures are building, such as in China and and the pull-back in consumer spending that has Indonesia. Several countries (e.g. Indonesia, been associated with the first weeks of the Malaysia and Thailand), also experienced strong current post-crisis period will negatively impact currency appreciation as a result of rapid and on Japan’s growth. Retail sales during March were down 8.5 percent from a year ago, Figure EAP.3 Industrial production has surpassed previ- Figure EAP.4 But remains below trend in Thailand ous peaks Percent Percent 15.0 50 EAP 10.0 China 40 Thailand 5.0 Indonesia 30 0.0 20 -5.0 10 -10.0 -15.0 0 -20.0 EAP -10 China -25.0 Thailand -20 -30.0 Indonesia -30 -35.0 2008M01 2008M06 2008M11 2009M04 2009M09 2010M02 2010M07 2010M12 2011M05 2008M01 2008M06 2008M11 2009M04 2009M09 2010M02 2010M07 2010M12 2011M05 Source: World Bank. Source: World Bank. 72 Global Economic Prospects June 2011: Regional Annex machinery and business equipment sales were economies are concerned, U.S. import growth down 17 percent. For the car industry, has recently tapered off, but fortunately, demand disruptions are expected to last until the end of conditions in Europe have been improving (see the second quarter, potentially reducing output trade annex). Notwithstanding the global by one-half. So far, regional impacts have been recovery and demand for Chinese goods, the limited, with slower growth in the initial quarter Chinese trade balance declined rapidly from a of at most 0.5 percentage points for countries surplus of $40 billion in January 2009 to deficit with closest trade ties (Malaysia, Vietnam and of about $2.1 billion in February 2011, but Thailand). As discussed in the main text and in recovered to a surplus of $22.6 billion in April the industrial production annex, the impact of 2011. With demand in high income countries this disaster could be substantial and potentially returning toward levels consistent with output long(er) lasting. following the global crisis, the Chinese current account surplus is expected to remain at much As far as demand in other high-income lower levels than in the recent past (figure EAP.7). Figure EAP.5 Chinese exports strongly correlated with high-income country import demand Inflationary pressures building. Consumer Percent, 3m/3m saar price inflation accelerated in East Asia during 80 Chinese exports the second half of 2010, due to a surge in food High-income countries imports and other commodity prices, robust domestic 60 demand and the lagged effects of a still loose 40 (though tightening) monetary policy (figure EAP.8). International food prices (see 20 commodities annex) have increased significantly 0 as have local prices of vegetables and other produce. For example, despite a drop in -20 international rice prices, local rice prices have -40 risen in Indonesia and Lao PDR. Nonetheless, with international food prices forecast to ease -60 toward the second half of 2011 and into 2012, 2007M01 2007M07 2008M01 2008M07 2009M01 2009M07 2010M01 2010M07 2011M01 food inflation should slow later in the forecast Source: World Bank. period. But even with (food) inflation forecast to slow, prices will remain high, negatively Figure EAP.6 Chinese imports (mostly processing and/ or consumption related) drives East Asia and the Figure EAP.7 Chinese current account surplus to stabi- Pacific (excl China) exports lize at lower levels as global imbalances subside Percent, 3m/3m saar Percent 100 Chinese imports 12 4.0 Chinese Current Account Balance (% of GDP) 80 EAP (excl China) exports 10 3.0 Global output gap (RHS) 60 8 2.0 40 6 1.0 20 4 0.0 0 2 -1.0 -20 0 -2.0 -40 -60 -2 -3.0 -80 -4 -4.0 2007M01 2007M07 2008M01 2008M07 2009M01 2009M07 2010M01 2010M07 2011M01 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: World Bank. Source: World Bank. 73 Global Economic Prospects June 2011: Regional Annex impacting on the poor—because of food’s billion in 2010, with the bulk of the inflow substantial weighting in the region’s consumer destined for China (table EAP.1). Net FDI basket. inflows to China increased by 62 percent in 2010, with the surge driven by buoyant growth Although non-food inflation has remained prospects, strong investor sentiment and large moderate, there is a risk in some countries that if interest differentials between China and high- the current loose monetary policy setting income countries. According to revised estimates continues for an extended period, inflationary from China’s State Administration of Foreign pressures from food may instigate a wage-price Exchange (SAFE), FDI inflows into China spiral, which over time could push up non-food rebounded strongly from $114 billion in 2009 to inflation, hamper competitiveness and slow $185 billion in 2010. The largest increase was in growth. the financial sector (300 percent) followed by the real estate sector (78 percent), reaching $12 Moderate improvement in fiscal balances. billion and $21 billion, respectively. Historically, counter-cyclical fiscal policy Manufacturing remains the main recipient of management has been well executed, with fiscal FDI inflows into China. The sector received $70 balances tending to moderate the business cycle billion in 2010, 50 percent more than in 2009. (figure EAP.9). In the current context, however, With the revisions, China now accounts for 30 fiscal balances in the region improved by only percent of total FDI inflows to developing 0.2 percent of GDP during 2010. Discretionary countries compared with one-fourth previously. expenditures added to boost demand during the Aggregate portfolio flows to the region remained crisis have by and large not been withdrawn, due relatively stable between 2009 and 2010, but to concerns about the strength of the global private debt flows more-than doubled from $58 recovery, and adherence to earlier spending billion in 2009 to $116 billion in 2010, partly commitments. As a result, almost all of the small reflecting private borrowers in the real-estate improvement in fiscal balances has been cyclical sector turning to external lenders after been shut and related to improved revenues, while rough out of domestic credit markets as the authorities estimates suggest that structural fiscal balances tightened domestic credit conditions. have actually deteriorated during 2010. Pace of exchange rate appreciation has Sharp rebound in foreign direct investment. slowed. Despite exchange rate market Net foreign direct investment (FDI) inflows to intervention, and measures to deter inflows and East Asia increased by more-than 60 percent from $138 billion in 2009 to an estimated $225 Figure EAP.9 Counter-cyclical fiscal management has Figure EAP.8 Food inflation exerting upward pressure been well executed, but more tightening might have been on total inflation needed in 2010 Percent (y-o-y) Percent EAP: Fiscal balance (% of GDP) 20 1.0 6 EAP: Food EAP: Output gap (RHS) EAP: Non-Food 0.5 5 EAP: Total 0.0 4 15 -0.5 3 10 -1.0 2 -1.5 1 -2.0 0 5 -2.5 -1 -3.0 -2 0 -3.5 -3 -4.0 -4 -5 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2005M01 2005M10 2006M07 2007M04 2008M01 2008M10 2009M07 2010M04 2011M01 Source: World Bank. Source: World Bank. 74 Global Economic Prospects June 2011: Regional Annex encourage capital outflows, the region’s global financial and economic crisis normalizes. currencies appreciated sharply during 2010. As The projected slowing in growth mainly reflects capital inflows have slowed somewhat since late economies operating at or near full capacity and in that year (see Finance Annex), the pace of an expected gradual tightening of monetary and nominal appreciation for the recipients of the fiscal policies over the coming 18-24 months, largest capital inflows has also subsided. which should temporarily slow growth to However, with inflation on the rise, real slightly below potential, before GDP appreciation pressures remain, albeit also reaccelerates marginally again towards potential subsiding somewhat. Thus far, currency growth by 2013. appreciation has not hampered the recovery, as the region continues to benefit from strong The direct contribution of net trade to overall productivity growth. GDP growth is anticipated to be only marginally positive over the forecast period – a sharp Medium-term outlook turnaround from negative 4.1 percent in 2009, but significantly smaller than the 2.6 percent net Growth in the East Asia and Pacific region is trade contribution observed over the 2005 – projected to remain strong, with GDP gains 2008 boom period. These earlier net trade easing from 9.6 percent in 2010 to 8.5 and 8.1 benefits were largely associated with percent in 2011 and 2012 respectively, before unsustainable global excess demand, particularly increasing somewhat to 8.2 percent by 2013 in high income countries. As global economic (table EAP.2). The region has benefitted from activity normalizes and global disequilibria the global economic recovery and the baseline unwind, the net trade contribution to regional forecast provides for further benefits – growth is forecast to be smaller going forward. particularly as activity in high-income countries that were severely affected by the 2008-09 Aggressive policy stimulus underpinned private Table EAP.1 Net capital flows to East Asia and the Pacific $ billions 2003 2004 2005 2006 2007 2008 2009 2010e 2011f 2012f 2013f Current account balance 69.8 87.9 174.8 297.5 426.3 467.2 360.8 358.3 320.2 358.9 401.1 as % of GDP 3.1 3.3 5.8 8.2 9.3 8.1 5.8 4.8 3.6 3.6 3.5 Financial flows: Net private and official inflows 76.4 127.0 209.0 238.4 303.9 210.5 226.5 378.2 Net private inflows (equity+private deb 83.6 132.2 212.3 247.7 307.8 211.6 222.8 374.5 371.1 383.7 413.5 ..Net private inflows (% GDP) 3.7 5.0 7.0 6.8 6.7 3.6 3.6 5.0 4.2 3.8 3.6 Net equity inflows 69.3 89.7 168.1 207.9 233.9 206.6 168.2 262.2 282.1 300.7 342.5 ..Net FDI inflows 56.8 70.4 142.4 151.7 198.8 213.9 138.4 225.2 255.1 267.7 305.5 ..Net portfolio equity inflows 12.5 19.3 25.7 56.2 35.1 -7.3 29.9 37.0 27.0 33.0 37.0 Net debt flows 7.1 37.3 40.9 30.6 70.0 3.9 58.3 116.0 ..Official creditors -7.2 -5.2 -3.2 -9.3 -3.8 -1.1 3.7 3.7 ....World Bank -1.5 -1.9 -0.6 -0.4 -0.3 1.2 2.2 1.8 ....IMF -0.5 -1.6 -1.6 -8.5 0.0 0.0 0.1 0.1 ....Other official -5.2 -1.7 -1.0 -0.4 -3.5 -2.3 1.4 1.8 ..Private creditors 14.3 42.5 44.2 39.9 73.9 5.0 54.5 112.3 89.0 83.0 71.0 ....Net M-L term debt flows -9.8 9.1 9.3 14.8 18.5 16.2 -0.8 22.9 ......Bonds 1.8 9.6 10.1 3.9 0.7 0.2 8.4 16.4 ......Banks -8.5 1.7 1.6 12.2 18.1 18.3 -8.7 6.5 ......Other private -3.1 -2.1 -2.3 -1.3 -0.3 -2.3 -0.5 0.0 ....Net short-term debt flows 24.1 33.4 34.8 25.1 55.4 -11.2 55.4 89.4 Balancing item /a -6.4 22.2 -166.1 -240.8 -189.2 -245.3 -52.5 -397.0 Change in reserves (- = increase) -139.8 -237.1 -217.7 -295.1 -541.0 -432.4 -534.8 -339.5 Memorandum items Workers' remittances 32.3 40.0 50.3 57.4 71.0 85.4 86.2 92.5 98.8 106.7 Source: World Bank. 75 Global Economic Prospects June 2011: Regional Annex consumption, which advanced by an estimated backed stimulus package that boosted 7.1 percent in 2010. With policy expected to investment.2 However, growth momentum become a bit tighter, household consumption slowed throughout 2010, with year-on-year growth is likely to remain at around 7 percent in growth falling from 11.9 percent in the first 2011, before recovering to around 8 percent quarter to 9.6 percent in the third quarter, before towards the end of the forecast period. Similarly picking up somewhat to initial estimates of 9.7 government spending contribution to growth will percent in the first quarter of 2011. The wane somewhat, as policy stimuli are contribution of net external trade to GDP growth withdrawn, while private investment spending eased in the fourth quarter. Export volumes eases in response to slower aggregate demand. outpaced import volumes substantially in the first three quarters of 2010, but as domestic China’s real GDP expanded by 10.3 percent in demand accelerated, import volumes have risen, 2010, up from 9.1 percent in 2009 (table EAP.3). which along with high oil and other imported Stronger growth was driven by rising activity in commodity prices has reduced the Chinese trade most segments of the economy, in part as a result balance. The slowing GDP growth trend is of loose credit conditions and a government- expected to continue, with growth viewed to Table EAP.2 East Asia and the Pacific forecast summary (annual percent change unless indicated otherwise) Est. Forecast 98-07a 2008 2009 2010 2011 2012 2013 GDP at market prices (2005 US$) b 7.9 8.5 7.4 9.6 8.5 8.1 8.2 GDP per capita (units in US$) 7.0 7.6 6.6 8.7 7.7 7.3 7.4 PPP GDP c 7.8 8.4 7.4 9.6 8.5 8.0 8.5 Private consumption 5.9 7.5 7.3 7.1 7.0 7.3 7.7 Public consumption 7.9 8.6 6.6 7.1 6.8 6.7 6.6 Fixed investment 9.3 9.1 19.2 11.9 11.0 9.2 9.9 Exports, GNFS d 13.6 7.1 -10.1 21.9 11.4 10.5 12.0 Imports, GNFS d 11.8 4.6 -1.8 18.8 12.6 10.9 13.3 Net exports, contribution to growth 1.4 1.6 -4.1 2.2 0.4 0.6 0.3 Current account bal/GDP (%) 4.4 8.1 5.8 4.8 3.6 3.6 3.5 GDP deflator (median, LCU) 5.2 7.8 2.0 4.6 5.5 4.5 4.2 Fiscal balance/GDP (%) -2.1 -0.5 -3.1 -2.8 -1.9 -1.3 -0.9 Memo items: GDP East Asia excluding China 4.6 4.7 1.5 6.8 5.3 5.6 5.7 China 9.1 9.6 9.1 10.3 9.3 8.7 8.8 Indonesia 4.1 6.0 4.6 6.1 6.3 6.5 6.5 Thailand 4.5 2.5 -2.3 7.8 3.7 4.2 4.3 a. Growth rates over intervals are compound average; growth contributions, ratios and the GDP deflator are averages. b. GDP measured in constant 2005 U.S. dollars. c. GDP measured at PPP exchange rates. d. Exports and imports of goods and non-factor services (GNFS). e. Estimate. f. Forecast. Source: World Bank. 76 Global Economic Prospects June 2011: Regional Annex slow to 9.3 percent in 2011, as stimulus spending be buoyed by rising employment and wages, comes to an end and policy tightening leads to a even as higher (food) inflation will suppress slowdown in growth in property investment. purchasing power to a degree. Growth of 8.7 and And as strong growth acceleration in high- 8.8 percent is anticipated for 2012 and 2013 income countries moderates, it will dampen respectively. Such slower growth (when China’s export growth. But consumption should compared to the average 11.2 percent over 2005- Table EAP.3 East Asia and the Pacific country forecasts (annual percent change unless indicated otherwise) Est. Forecast 98-07 a 2008 2009 2010 2011 2012 2013 Cambodia b GDP at market prices (2005 US$) 8.8 6.7 -1.9 6.7 6.5 6.5 6.6 Current account bal/GDP (%) -4.2 -10.2 -8.3 -11.0 -11.8 -10.9 -11.0 China b GDP at market prices (2005 US$) 9.1 9.6 9.1 10.3 9.3 8.7 8.8 Current account bal/GDP (%) 4.4 9.6 6.0 5.1 3.6 3.8 3.8 Fiji b GDP at market prices (2005 US$) 2.0 0.2 -3.0 0.6 1.3 0.7 1.2 Current account bal/GDP (%) -6.3 -18.3 -8.4 -6.8 -7.9 -7.7 -8.2 Indonesia b GDP at market prices (2005 US$) 4.1 6.0 4.6 6.1 6.3 6.5 6.5 Current account bal/GDP (%) 3.1 0.0 1.9 0.9 1.4 0.5 0.1 Lao PDR b GDP at market prices (2005 US$) 6.4 7.3 6.4 8.4 8.6 7.6 7.3 Current account bal/GDP (%) -10.6 -18.7 -13.5 -8.6 -9.4 -10.6 -11.1 Malaysia b GDP at market prices (2005 US$) 5.1 4.7 -1.7 7.2 4.8 5.0 5.1 Current account bal/GDP (%) 12.5 17.5 16.5 13.6 14.2 13.5 13.9 Mongolia b GDP at market prices (2005 US$) 6.4 8.9 -1.3 6.1 10.3 7.6 22.9 Current account bal/GDP (%) -2.9 -12.9 -9.0 -15.2 -15.1 -13.6 1.9 Papua New Guinea b GDP at market prices (2005 US$) 1.7 6.7 4.5 7.6 5.8 5.1 5.3 Current account bal/GDP (%) 3.3 8.8 -8.5 -6.5 0.0 -2.3 -2.7 Philippines b GDP at market prices (2005 US$) 4.4 3.7 1.1 7.3 5.0 5.4 5.5 Current account bal/GDP (%) 0.7 2.2 5.5 5.0 4.2 3.2 1.7 Thailand b GDP at market prices (2005 US$) 4.5 2.5 -2.3 7.8 3.7 4.2 4.3 Current account bal/GDP (%) 4.7 0.8 8.3 4.8 3.6 3.2 3.6 Vanuatu b GDP at market prices (2005 US$) 2.5 6.3 4.0 4.5 4.1 4.2 4.3 Current account bal/GDP (%) -9.3 -9.0 -8.1 -7.3 -6.4 -6.6 -7.1 Vietnam b GDP at market prices (2005 US$) 6.6 6.3 5.3 6.8 6.0 6.8 7.2 Current account bal/GDP (%) -1.4 -11.9 -6.3 -4.0 -2.7 -3.7 -3.9 World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time. Samoa; Tuvalu; Kiribati; Korea, Democratic People's Republic; Marshall Islands; Micronesia, Federate States; Mongolia: Myanmar; N. Mariana Islands; Palau; Solomon Islands; Timor-Leste; and Tonga are not forecast owing to data limitations. a. Growth rates over intervals are compound average; growth contributions, ratios and the GDP deflator are averages. b. GDP measured in constant 2005 U.S. dollars. c. Estimate. d. Forecast. Source: World Bank. 77 Global Economic Prospects June 2011: Regional Annex 2010), is largely due to weaker contributions 6.1 percent in the year as a whole and by 6.9 from net exports (when compared to the boom percent year-on-year in the fourth quarter, the period) and slower investment growth. fastest quarterly growth pace in six years. Private consumption will remain a major driving force Consumer price inflation in China reached 5.4 over the forecast period, while investment percent (y-o-y) in March 2011, before declining strength is set to be supported by the shift in marginally to 5.3 percent in April. About two- government spending towards capital thirds of this increase was attributable to food expenditures and the real impact of the recent prices, which have been driven by problematic FDI upsurge. weather domestically and by hikes in international food prices. Going forward, Quarterly growth in the Thai economy upstream price pressures may continue to build rebounded strongly in the second half of 2010, because of the hikes in oil and industrial helping to register growth of 7.8 percent in the commodity prices. As discussed in the year. But with the rebound in the past, the pace Commodity Annex, international food prices are of growth is expected to slow to a more subdued forecast to moderate. The baseline forecast 3.7 percent in 2011. Although domestic political therefore incorporates a moderation in food price uncertainty will continue it is not expected to inflation in the coming 12 months, which should greatly influence the growth outlook. Japanese offset the rise in non-food inflation, resulting in multinational corporations plays a significant a slowdown in headline CPI inflation. role in the Thai economy, and the impact of the Japanese earthquake on auto and electrical and Indonesian inflation also started to rise in mid- electronics supply chains (these two sectors 2010, as consumer prices reflected food supply account for over 40 percent of Thai exports) shocks and an accommodating policy stance could hamper Thai exports and overall economic (figure EAP.10). Inflation in domestic grain performance. Rising commodity prices – prices, primarily rice, reached almost 30 percent particularly those of agricultural produce - have year-on-year in December 2010. Headline raised export earnings, while the rising farm inflation moved up to 7 percent while the rate of incomes have supported growth in domestic increase of prices in a "poverty basket" of goods demand. But fuel (diesel) and fertilizer costs consumed by the poor rose to 13 percent. With have also risen sharply, thereby eroding the the onset of the harvest season and imports of income gains, while rising costs have put upward rice by the State Logistics Agency, domestic rice pressure on inflation. In order to accelerate and food prices have declined. Bank Indonesia growth to structurally higher levels, Thailand has also embarked on a process of normalizing rates, following earlier increases in reserve Figure EAP.10 Food price increases have contributed requirements, and the rupiah has continued to to rising inflation in Indonesia appreciate. While headline inflation has come Percent (y-o-y) down, core inflation has been increasing 25 Indonesia: Food gradually. Inflation is anticipated to rise to an Indonesia: Non-Food 20 average of 6.3 percent in 2011, slightly above Indonesia: Total Bank Indonesia’s 4-6 percent target range. 15 10 Indonesia was less severely affected by the 2008 -09 global recession than many East Asian 5 countries largely because of a relatively limited 0 exposure to external trade shocks (plus the commodity focus of the export mix) along with -5 strong initial conditions and supportive monetary -10 and fiscal policy responses. Economic growth 2001M01 2002M09 2004M05 2006M01 2007M09 2009M05 2011M01 accelerated in 2010, with real GDP expanding by Source: ILO, World Bank. 78 Global Economic Prospects June 2011: Regional Annex will have to raise the share of fixed investment supported by strong FDI, and a strong revival in in GDP, and improve education outcomes. exports as global demand recovered. Looking forward, GDP growth is forecast to average 6.7 Economic growth in Malaysia is expected to percent over 2011-2013. But despite the remain strong and on a sustainable growth path encouraging growth outlook, policymakers will in the forecast period. After real GDP gains of face stiff challenges in the near term, as they will 7.2 percent in 2010, growth is expected to come need to ensure that the recovery remains on track in around 5 percent per annum over 2011-2013. as expansionary fiscal measures are withdrawn Fiscal policy played a key role in the post-crisis amidst building inflationary pressures. The recovery, but GDP growth sputtered in the third consumer price index has risen by more than 10 quarter of 2010 as domestic demand growth percent year-on-year in the past four months, slowed – largely due to intensified fiscal with the most recent (February, 2011) figure at consolidation efforts, which dampened public 12.3 percent. Although the Central Bank (State consumption. Fixed investment spending also Bank of Vietnam) tightened monetary policy in came under pressure, reflecting public February 2011, increases in subsidized retail expenditure cutbacks as well as uncertainties prices for fuel and electricity are likely to about economic prospects. Private consumption, continue to put upward pressure on inflation, as however, remained strong, underpinned by a will the recent devaluation of the dong. vibrant job market, high commodity prices and consumer lending. Although inflationary Growth in Cambodia is expected to remain pressures have been rising in Malaysia, CPI strong, as the country’s exports benefit from gains remain moderate, and monetary policy European Union preferential tariffs, while continues to renormalize. Continued current consumption picks up and investment benefits account surpluses and a positive interest rate from the continued rebound in FDI. Growth in differential with the United States over the Fiji, which has become increasingly dependent forecast period should support the ringgit. on tourism, has been disappointingly slow over the last four years, and the government needs to The Philippine economy rebounded sharply in move ahead with several structural reforms to 2010, as GDP expanded by 7.3 percent - the accelerate growth. In Lao PDR, real growth is fastest pace since the mid-1970s, with both forecast to remain robust over the forecast industry and services recording strong growth. period, with both natural resources (hydropower The pace of economic expansion is expected to and sustained mining extraction) and slow to 5.0 percent in 2011, as global growth manufacturing sectors to drive growth over the moderates, and to average 5.4 percent over 2012 forecast period. Papua New Guineas’ strong and 2013. Growth will benefit from increased economic performance since 2007 is forecast to remittances from Filipinos working overseas continue, albeit at slower rates than the estimated which will support private consumption. Despite 7.6 percent in 2010 over the forecast period with the remarkable growth turnaround, domestic growth averaging 5.4 percent over 2011-2013, unemployment remains structurally high, and with growth benefitting from resurgent minerals there have been some (though inadequate) trickle production and investment in new projects. -down benefits to the poor, with the depth of poverty and income distributions improving Risks between 2006 and 2009. Despite a generally optimistic assessment for After growing 5.3 percent in 2009, Vietnam’s East Asia’s economic prospects, and though the economy expanded 6.8 percent in 2010—the region’s improved immune system has passed fastest pace in 3 years. The rapid recovery has the test during the global financial crisis, there been bolstered by robust domestic demand, are still a number of risks that have the potential which benefitted from a healthy increase in to derail the growth outlook. remittances, higher levels of investment 79 Global Economic Prospects June 2011: Regional Annex Developments in the Middle East have countries, most notably in China. This is contributed to higher oil prices and still have the contributing to social tensions and those left potential of further disruption on commodity behind represent a significant waste of human price volatility than is currently appreciated in potential. Policies to broaden access to higher the baseline. And given the links between energy levels of education, facilitate labor mobility, and and food prices, these developments in the connect leading and lagging regions will serve to Middle East could have implications that extend simultaneously stem rising inequality and well beyond energy. accelerate the pace of economic development and poverty reduction. In several countries rising food and fuel prices and the pass through to inflation remains a Over the longer term the region faces concern – particularly if these increases spill fundamental challenges related to environmental over to other sectors. Already, inflation is now sustainability, energy security and climate above central bank targets and/or official change. As a result of fast economic growth and projections in China and Indonesia, while it has rapid urbanization over a prolonged period of surged to double digits in Vietnam. Although time, energy consumption has more than tripled monetary stimulus is gradually been withdrawn over the past three decades and is likely to in the region, there is a risk that inflationary double in the next 20 years. As a result, the pressures may be building faster than provided region is home to some of the world’s most for in the baseline. polluted cities. To sustain growth, policy will need to actively encourage a shift towards the As authorities in the region tighten monetary usage of clean(er) energy by increasing energy policy and interest rates rise, many currencies efficiency, low-carbon technologies in power will continue to experience pressure for generation and the building of low-carbon cities. appreciation. And still strong capital inflows (albeit lower than recent highs) in response to Notes: higher interest rate differentials could lead to excess credit expansion, complicating the task of 1 For a more detailed discussion and a combating inflationary pressures. complete overview of regional and country developments, see “Securing the present, The region’s public finances have emerged from shaping the future”, East Asia and Pacific the global downturn in relatively good shape. Economic Update 2011, Volume 1. The But the strong rebound in growth and the rapid World Bank, March 2011. closing of output gaps to the extent that domestic demand surpasses potential output in many 2 China is discussed in more detail in the countries is putting additional stress on monetary China Quarterly Update—see “Quarterly authorities in combating inflationary pressures. Update” The World Bank, April 2011. Furthermore, an over-reliance on the region’s central banks to rein-in inflation is likely to attract even more (potentially destabilizing) capital inflows. A better balance between monetary and fiscal policy tightening will not only be more effective in preventing overheating of some economies, but will also be less disruptive to economic activity in tradable sectors. Among the longer term risks, (see March 2011 East Asia and Pacific Update for a more detailed discussion), inequality is on the rise in several 80 Global Economic Prospects June 2011: RegionalAnnex Europe and Central Asia GDP growth in developing Europe and Central Asia1 rebounded to an estimated 5.2 percent in Figure ECA.1 A deep recession followed by a rela- 2010, following a 6.5 percent contraction in tively modest recovery 2009 (table ECA.1 and figure ECA.1). Limited Yearly percent GDP Growth (in volume terms) credit growth, the deleveraging of household- 10.0 sector balance sheets and continued industrial 8.0 sector restructuring following the easy-credit excesses of the boom period are expected to 6.0 continue weighing on GDP. Because of that, 4.0 output is projected to expand at a relatively 2.0 subdued (by developing countries’ standards) growth rate of 4.7 percent in 2011 and averaging 0.0 4.5 percent during 2012 and 2013. These -2.0 aggregate figures hide significant variation Europe and Central Asia across countries within the region, with those -4.0 High Income Countries Developing Countries most affected during the above-average credit -6.0 growth period performing least well, while -8.0 resource-rich economies are benefitting from 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 high commodity prices. Source: World Bank. Table ECA.1 Europe and Central Asia forecast summary (annual percent change unless indicated otherwise) Est. Forecast 98-07a 2008 2009 2010 2011 2012 2013 b GDP at market prices (2005 US$) 5.4 4.0 -6.4 5.2 4.7 4.4 4.6 GDP per capita (units in US$) 5.4 3.9 -6.5 5.2 4.7 4.3 4.5 PPP GDP c 5.6 4.5 -6.6 5.0 4.5 4.5 4.5 Private consumption 6.3 6.6 -5.7 3.9 4.9 4.3 4.1 Public consumption 2.5 3.2 1.8 1.1 2.8 2.6 2.1 Fixed investment 8.8 6.6 -16.7 7.6 9.5 8.4 8.1 Exports, GNFS d 7.2 3.1 -7.3 9.5 6.6 5.9 6.3 Imports, GNFS d 10.2 8.7 -24.3 9.2 9.2 7.3 6.9 Net exports, contribution to growth -0.3 -2.0 6.4 0.4 -0.5 -0.3 0.0 Current account bal/GDP (%) 2.6 0.6 0.7 0.9 -0.1 -1.8 -1.4 GDP deflator (median, LCU) 11.2 12.4 3.5 7.8 10.9 5.8 6.4 Fiscal balance/GDP (%) -2.1 1.7 -5.4 -3.2 -0.5 -0.2 -0.4 Memo items: GDP Transition countries e 6.2 5.3 -7.0 3.8 4.2 4.1 4.3 Central and Eastern Europe f 4.7 6.1 -7.1 0.0 2.4 3.8 4.0 g Commonwealth of Independent States 6.5 5.2 -7.0 4.5 4.5 4.2 4.3 Russia 6.3 5.2 -7.8 4.0 4.4 4.0 4.1 Turkey 3.7 0.7 -4.8 8.9 6.1 5.1 5.3 Romania 4.3 7.1 -7.1 -1.2 1.6 3.7 4.0 a. Growth rates over intervals are compound average; growth contributions, ratios and the GDP deflator are averages. b. GDP measured in constant 2005 U.S. dollars. c. GDP measured at PPP exchange rates. d. Exports and imports of goods and non-factor services (GNFS). e. Transition countries: f + g below. f. Central and Eastern Europe: Albania, Bosnia and Herzegovina, Bulgaria, Georgia, Kosovo, Lithuania, Macedonia, FYR, Montenegro, Romania, Serbia. g. Commonwealth of Independent States: Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyz Republic, Moldovia, Russian Federation, Tajikistan, Turkmenistan, Ukraine, Uzbekistan. h. Estimate. i. Forecast. Source: World Bank. 81 Global Economic Prospects June 2011: RegionalAnnex Recent developments increase in Lithuania for the 12 months ending March 2011 to a 5.3 percent contraction in The recession in Europe and Central Asia was Kazakhstan (for the 12 months ending April much deeper than elsewhere in the developing 2011). world, because substantial trade and financial market linkages with high-income Europe. Much of the initial impetus for recovery in Overall, regional industrial production, which Europe and Central Asia reflected the region’s had been growing at a 6.2 percent pace in the strong export performance, that saw real four years before the crash, fell 10 percent in merchandise exports expanding at a 25 percent 2009–more than three times as much as in other annualized pace during the final three months of developing regions. Partly as a result of this, 2010. Lithuania and Romania, exporters of output only regained pre-crisis levels at the end manufactured goods to the EU market, recorded of 2010, versus mid-2009 for the rest of the some of the fastest growth rates (a more than 40 developing world. percent increase during the final 3 months of 2010), while economies in the Southern As of the first quarter of 2011, industrial Caucasus and Central Asia sub-region, such as production in the region was expanding at a 9.3 Armenia and Uzbekistan, reported the slowest percent annualized pace. If sustained, such an export growth rates (figure ECA.3). expansion should begin to close the still large 20 percent gap between current activity levels and The acceleration in regional trade reflects the those that might have been observed if the boom Figure ECA.3 Regional exports outpaced other and bust not occurred. Progress at the sub- developing countries, reflecting growing market regional level has been mixed, with Russian share in high-income and Chinese markets (which represents over 50 percent of the region’s Exports index, in constant USD, seasonally adjusted (2008:06=100) total industrial product) growth of 8.3 percent 130 during 2010 underperforming the regional 120 aggregate, and well below the impressive performance of Turkey, up 13.2 percent in 2010 110 (figure ECA.2). As a whole, seasonally adjusted 100 industrial production in the region grew almost 8.0 percent, ranging from an over 19 percent 90 Developing Countries Europe and Central Asia 80 Figure ECA.2 Only by end-2010 industrial pro- High Income Countries World duction regained pre-crisis activity levels and re- 70 mains well below earlier trends 60 2008M06 2008M09 2008M12 2009M03 2009M06 2009M09 2009M12 2010M03 2010M06 2010M09 2010M12 Industrial production index, in constant USD, seasonally adjusted (2008:06=100) 120 Share of total Europe & Central Asia exports to specific markets 50 115 45 110 2005 40 Jan-Nov 2010 105 35 100 30 95 25 90 20 85 Developing countries (ex. ECA) Europe and Central Asia 15 80 Romania 10 Russia 75 5 Turkey 70 2008M06 2008M09 2008M12 2009M03 2009M06 2009M09 2009M12 2010M03 2010M06 2010M09 2010M12 0 EU -of which, to Germany China Source: World Bank Sources: World Bank. Source: World Bank, IMF. 82 Global Economic Prospects June 2011: RegionalAnnex global recovery, but also the increased trade ties Despite the depth of the recession and the of several countries in the region towards faster massive disruption to the construction industry growing economies inside and outside the and still large industrial sectors of the regional region. Between 2005 and 2010, the share of the economy, unemployment rose relatively little exports of countries going to the Commonwealth from 7 percent in 2007 to a peak of 9.3 percent of Independent States2 (CIS) and Russia was in 2009 and has fallen relatively rapidly, coming broadly stable, while shares going to Turkey, the in at 8.6 percent at the end of 2010, a EU (notably, Germany) and China increased nevertheless still elevated level that makes it a significantly (by more than 55 percent in the ongoing cause for concern. The regional case of China: figure ECA.3).3 aggregate is significantly influenced by developments in Russia, Turkey and Ukraine This overall pattern has particular sub-regional (figure ECA.5), which represent two thirds of dimensions. The EU is a more important trading the region’s total population. Unemployment in partner for the western CIS, the Southern these countries rose by 2.6 percentage points Caucasus and countries like Albania, Bosnia and between 2008 and 2009, before falling by 1.5 Herzegovina, FYR Macedonia, Kosovo, percentage points between 2009 and 2010. In Montenegro and Serbia, while China is a the remaining countries of the region relatively more relevant trade partner for unemployment averages 15.6 percent of the countries in Central Asia (albeit the EU still labour force (ranging from close to full formal remains, on aggregate, the largest trade partner employment in places like Belarus and of this sub-region). Tajikistan4 to as much as 45 percent unemployment in Bosnia and Herzegovina). The combination of growing exports volumes Developments in these countries have been and rising commodity prices, especially oil, has equally varied, but there not only the average contributed to a large fall in the region’s trade unemployment rate was considerably higher deficit, from $3.6 billion at end 2010 to $0.7 previous to the crisis, it actually rose somewhat billion in early 2011. Higher oil prices were during 2010. reflected in a sharp increase in the trade surplus of oil exporters, from $10 billion in August 2010 As observed elsewhere (see main text and to $14 in December, and a deterioration among Financial annex), private capital inflows into oil importers, from a $-13 to $-16 billion trade Europe and Central Asia, which were strong in deficit over the same period (figure ECA.4). the second and third quarters of 2010 eased in the fourth quarter of that year and into 2011 (for Figure ECA.4 Rising commodity prices improve Figure ECA.5 Unemployment down oil exporter’s trade balances Umployment, percent 3 month moving average of trade balance, billions of $ 18 25 Oil importers 20 16 Oil exporters Romania Russia 15 Turkey 14 10 12 5 10 0 -5 8 -10 6 -15 4 -20 2 -25 M6 2008 M8 2008 M10 2008 M12 2008 M2 2009 M4 2009 M6 2009 M8 2009 M10 2009 M12 2009 M2 2010 M4 2010 M6 2010 M8 2010 M10 2010 M12 2010 M2 2011 2000M01 2002M01 2004M01 2006M01 2008M01 2010M01 Source: World Bank Sources: World Bank. Sources: IMF. 83 Global Economic Prospects June 2011: RegionalAnnex the year as a whole they were still up 88 percent, prices fades (figure ECA.7). However, the recent table ECA.3). The decline in portfolio flows was rise in oil prices is likely to yield a second most evident in Turkey, and roughly coincided acceleration, which may be exacerbated by with the authorities’ decision to lower interest planned increases in regulated prices in Belarus rates in an effort to deter capital inflows being and Ukraine (and, in the case of Belarus, by a attracted by high-interest rate differentials, while devaluation of the currency). restricting credit growth by simultaneously raising reserve requirements. Russia experienced Remittances are both an important source of significant outflows, despite high and rising foreign currency for several countries in the energy prices (figure ECA.6). FDI flows region and an important source of income for increased the most in Ukraine, reflecting the households, and therefore an important recapitalization of banks, while they declined determinant of domestic demand. Remittances more in Kazakhstan and Romania. Significant are around 10 percent of GDP for countries like improvements will likely be delayed until the Armenia and Bosnia and Herzegovina, and regional recovery matures further and until there between 18 and 35 percent of GDP for Albania, are substantial improvements in the region’s the Kyrgyz Republic, Moldova and Tajikistan. investment climate.5 After falling by almost a quarter between 2008 and 2009, they rose by a meager 1.3 percent in Rising food prices following the extreme 2010. Looking forward, high commodity prices drought in the summer of 2010 contributed to a and stronger growth in migration destination pickup in inflation in the region during 2010.6 countries are expected to contribute to a 7.5 Food prices rose at a 12 percent annualized pace percent increase in remittances in 2011 and a in the three months ending September 2010, 9.4 percent increase in 2012 (table ECA.2). which contributed, with a lag, to an acceleration in overall inflation to a 7.6 percent annualized Fiscal and monetary policy rate in the fourth quarter of the year. Year-over- year, all-goods inflation picked up from 6.3 Monetary authorities in the region have percent in June 2010, to 7.6 percent in the fourth responded to the uptick in inflation by tightening quarter of the year. Inflation now exceeds 10 monetary policy via both higher interest rates percent in almost forty percent of the countries (Belarus, Russia, three times in the case of the in the region, but it has been easing as the later, and four times already in the case of the inflationary impact of the 2010 higher food former) and increased reserve requirement (Turkey). Despite rising policy rates, foreign Figure ECA.6 Hot money flows easing Figure ECA.7 Inflationary impulse from food Net foreign portfolio investment flows, % of GDP prices appears to be easing 5.0 Rate of inflation 18 All 3m/3m saar 4.0 Turkey All Year-over-year 3.0 Russia 16 Food y-o-y Food 3m/3m saar 2.0 14 1.0 12 0.0 10 -1.0 8 -2.0 6 -3.0 4 -4.0 2 -5.0 2007 Q1 2007 Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1e 0 2005M01 2005M07 2006M01 2006M07 2007M01 2007M07 2008M01 2008M07 2009M01 2009M07 2010M01 2010M07 2011M01 Source: World Bank, CBR. Source: World Bank. 84 Global Economic Prospects June 2011: RegionalAnnex Table ECA.2 Workers’ remittances, compensation of employees, and migrant transfers, credit (US$ mil- lion) , p p y , g , ( ) 2003 2004 2005 2006 2007 2008 2009 2010p 2011f 2012f All developing countries 137,500 159,258 191,779 226,297 278,181 324,972 307,569 324,714 348,576 374,501 Europe and Central Asia 11,597 15,998 23,262 28,397 39,332 45,832 35,433 35,879 38,681 42,308 % of developing countries 8.4 10.0 12.1 12.5 14.1 14.1 11.5 11.0 11.1 11.3 Growth (%) All developing countries 23.9% 15.8% 20.4% 18.0% 22.9% 16.8% -5.4% 5.6% 7.3% 7.4% Europe and Central Asia 8.2% 37.9% 45.4% 22.1% 38.5% 16.5% -22.7% 1.3% 7.8% 9.4% LDCs (UN-classification) 13.9% 12.9% 11.0% 18.5% 22.9% 32.8% 5.2% 5.8% 10.9% 7.3% Fragile States 26.5% 8.4% 8.2% 12.6% -2.1% -9.1% 7.5% 6.7% Small States 12.6% -1.3% 22.8% 27.8% 31.3% -11.4% 8.4% 7.8% Source: World Bank capital inflows to the region have declined and digit deficits in post-conflict Kyrgyz Republic. A upward pressure on exchange rates eased (figure few countries bucked the deficit reduction trend ECA.8). Domestic bank credit has started to (figure ECA.8), like Belarus, but the country’s grow again, but so far at moderate rates. stock of public debt to GDP is still low, at around 25 percent in 2010 (the largest share in The rebound in commodity prices during the the region is to be found in the Kyrgyz Republic, course of 2009 and 2010 helped to reduce at 63 percent). Bulgaria also experienced an government deficits among regional energy increase in the cash fiscal deficit, nevertheless exporters from -5.4 percent of GDP in 2009 to - fiscal adjustment in that country continued 2.4 percent in 2010. Declines among importers through a reduction in previously accrued and were also noticeable, as increased activity helped unpaid obligations. restore government coffers at the same time as initial attempts towards discretionary fiscal Outlook consolidation were announced (especially among EU members). These broad aggregates hide GDP in developing Europe and Central Asia significant differences at the national level, grew an estimated 5.2 percent in 2010, a modest where government balances range from double rebound given the steep decline in activity that digit surpluses in Azerbaijan to almost double preceded it, but one which nevertheless served to Figure ECA.8 Exchange rates begin to fall, at the same time that the budgetary position becomes more sustainable Nominal exchange rate to the USD (index, January 2009=100) Budget balance as a % of GDP 125 20.0 120 Georgia Moldova 15.0 Romania 115 Russian Federation Serbia 110 Turkey 10.0 2009 105 2010 5.0 100 95 0.0 90 85 -5.0 80 M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 M11 M12 M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 M11 M12 M1 M2 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2011 2011 -10.0 Azerbaijan Kazakhstan Russia Uzbekistan Lithuania Romania Turkey Ukraine Belarus Bulgaria Source: World Bank, IMF. 85 Global Economic Prospects June 2011: RegionalAnnex reduce unemployment and improve fiscal export volumes is expected to continue positions. Ongoing household and banking- outpacing imports among oil importing sector restructuring is expected to continue to countries. constrain growth, with GDP projected to expand by 4.7 percent in 2011, and by around 4.5 Higher commodity prices will increase current percent in 2012 and 2013. While these growth account balances for commodity-rich countries rates are close to estimates of the region’s in the region, while having the opposite effect potential growth rate, growth is not likely to be among importers. However, revenues are strong enough to make significant inroads into projected to leak into additional spending and the spare capacity generated by the crisis. As a imports relatively quickly such that by 2013 result, unemployment, although declining, is current account surpluses of oil exporters, which projected to remain relatively high throughout reached 5.5 percent of GDP in 2010, are the projection period. projected to return to 2.3 percent of GDP. Current account deficits among oil importers are Overall, the external sector is projected to projected to exceed -6 percent of GDP in 2011 contribute between -0.5 and 0 percent to overall and to improve only slightly to around -5.7 growth during the projection period. Among oil percent of GDP in 2013. exporters, the additional revenues from higher prices are expected to boost domestic demand Higher commodity prices should boost and imports, such that in volume terms the government revenues in resource-rich countries external sector subtracts somewhat from growth in the region, reducing government deficits from in the economy. On the other hand, given strong -2.5 of GDP in 2010 to a surplus of 1.1 of GDP growth in other developing regions and the by 2013. At the same time, improving activity projected firming of the recovery in high-income levels and ongoing fiscal consolidation measures Europe, the pick-up in regional manufacturing are projected to reduce government deficits in oil Table ECA.3 Net capital flows to Europe and Central Asia $ billions 2003 2004 2005 2006 2007 2008 2009 2010e 2011f 2012f 2013f Current account balance 20.3 36.7 48.5 37.6 -14.1 13.3 14.1 22.3 -8.3 -76.9 -69.6 as % of GDP 2.0 2.8 2.9 1.8 -0.5 0.4 0.5 0.7 -0.2 -1.8 -1.4 Financial flows: Ne t private and official inflows 81.0 99.9 127.8 218.2 410.4 262.1 89.8 132.1 Ne t private inflows (e quity+private de b 85.8 107.2 156.2 248.9 413.5 251.0 57.6 108.4 146.9 176.1 190.4 ..Net private inflows (% GDP) 8.5 8.0 9.3 12.0 15.5 7.6 2.2 3.5 4.0 4.1 3.9 Net equity inflows 25.3 43.7 57.8 104.6 160.2 145.0 90.0 83.4 96.9 116.1 135.4 ..Net FDI inflows 23.8 41.9 51.1 92.3 133.2 160.1 85.1 76.4 90.9 107.1 124.4 ..Net portfolio equity inflows 1.5 1.8 6.7 12.3 27.0 -15.1 5.0 7.0 6.0 9.0 11.0 Net debt flows 55.8 56.2 70.0 113.6 250.2 117.1 -0.2 48.7 ..Official creditors -4.7 -7.3 -28.4 -30.7 -3.0 11.1 32.2 23.7 ....World Bank -0.2 1.0 -0.7 0.2 0.2 0.7 2.8 2.2 ....IMF -2.0 -5.9 -9.8 -5.8 -5.0 6.2 20.2 10.5 ....Other official -2.5 -2.5 -18.0 -25.1 1.8 4.2 9.3 11.0 ..Private creditors 60.5 63.5 98.4 144.3 253.3 106.0 -32.5 25.0 50.0 60.0 55.0 ....Net M-L term debt flows 34.0 52.2 80.0 108.9 177.5 121.3 5.3 24.0 ......Bonds 7.3 14.4 16.6 32.3 55.9 16.2 -1.7 13.5 ......Banks 27.1 39.0 64.7 77.5 122.6 105.7 7.3 10.5 ......Other private -0.4 -1.3 -1.3 -0.8 -1.0 -0.6 -0.4 0.0 ....Net short-term debt flows 26.5 11.3 18.4 35.4 75.7 -15.3 -37.7 6.9 Balancing item /a -52.3 -67.7 -89.3 -84.2 -170.2 -333.3 -77.9 -107.2 Change in reserves (- = increase) -49.1 -68.8 -87.0 -171.6 -226.1 57.8 -26.0 -47.2 Memorandum items Workers' remittances 11.6 16.0 23.3 28.4 39.3 45.8 35.4 35.9 38.7 42.3 Note : e = estimate, f = forecast /a Combination of errors and omissions and transfers to and capital outflows from developing countries. Source: World Bank. 86 Global Economic Prospects June 2011: RegionalAnnex importers from -4.4 percent of GDP in 2010 to countries have so far not been affected by about -2.1 percent of GDP in 2013. concerns about high-income Europe fiscal sustainability, contagion via financial sector Russia, the largest regional economy, is set to links remains a possibility — placing a premium grow by around 4.2 percent yearly over the on restoring an adequate degree of fiscal space to forecast period, fueled in part by higher oil their public finances. revenues. Improving employment prospects are projected to bring unemployment down to The countries of the Western part of the around 6 percent in 2013 and this, together with Commonwealth of Independent States (Belarus, higher oil revenues, should be reflected in a Moldova and Ukraine) are projected to grow by larger contribution from domestic consumption an average of 4 percent between 2011 and 2013. and investment demand to growth. Parliamentary However, these economies face significant elections in late 2011, and Presidential ones potential downside risks, given their large during the first quarter of 2012 may result in current account deficits (Belarus and Moldova), some election-year spending that could reduce and their relatively undiversified economies the large but mainly cyclically induced expected (and, in the case of Belarus, by its over-reliance improvement in the general government balance. on the Russian market for its exports). Ukraine The limited diversification of the economy and is also susceptible to external shocks, notably constraints to the increase of energy-related from higher energy prices. Medium-term growth exports remain key medium-term challenges that is expected to be constrained to around 4.3 are expected to prevent output from expanding percent because of weak productivity growth much more than 4 percent per annum over the tied in part to the undiversified nature of the projection period. As a result, much of the economy and lack of competition. additional oil-revenue is expected to fuel an increase in demand that will be met by increased In Central Asia, GDP in Kazakhstan (over two imports, so that the country’s current account thirds of the sub-regional GDP) is set to expand surplus is projected to decline to around 1.4 by around 5.7 percent yearly during the next percent by 2013. three years on the back of high commodity prices and deepening links with other developing Growth in Turkey, the second largest developing Asian economies. The sub-region will do even economy in the region, which rebounded better, growing by 6.1 percent. Strong sharply in 2010 when the economy grew by 8.9 commodity prices should contribute to improved percent, is forecast to grow by a still robust 5.5 public and external balances among the sub- percent average over the forecast period. regional resource exporters — Kazakhstan, Turkey's large current account deficit, and its Turkmenistan and Uzbekistan (Tajikistan is also high oil import bill, at around 5 percent of GDP, a significant cotton exporter). The Kyrgyz represent a source of vulnerability, should Republic and Tajikistan are projected to make investor sentiment sour or oil prices rise (see inroads into their large external and fiscal scenario in main text). deficits, thanks in part to significant remittances receipts and official aid, linked in the Kyrgyz Growth among the European Union’s members Republic to post-conflict reconstruction efforts. in developing Europe (Bulgaria, Lithuania and Romania) is projected to accelerate to around 3.4 Albania, Bosnia and Herzegovina, FYR percent during the projection period, aided by Macedonia, Kosovo, Montenegro and Serbia are the relatively diversified nature of these anticipated to grow by around 4.5 percent during economies, significant EU and IMF support the next three years, supported by their close programs, and the recovery in the euro area. economic ties with the recovering EU, including Lithuania is also projected to benefit from the significant financial and technical support. robust performance of the Polish economy (now Despite improved growth, these economies are a high-income country). Although these expected to continue to suffer on average from 87 Global Economic Prospects June 2011: RegionalAnnex Table ECA.4 Europe and Central Asia country forecasts (annual percent change unless indicated otherwise) Est. Forecast 98-07a 2008 2009 2010 2011 2012 2013 Albania b GDP at market prices (2005 US$) 5.5 7.7 3.3 3.5 4.0 4.5 5.0 Current account bal/GDP (%) -6.2 -14.6 -16.0 -12.4 -10.8 -9.5 -7.9 Armenia b GDP at market prices (2005 US$) 9.6 6.8 -14.1 2.1 4.6 4.3 4.2 Current account bal/GDP (%) -8.6 -11.6 -15.8 -13.9 -11.6 -10.3 -9.3 Azerbaijan b GDP at market prices (2005 US$) 14.2 10.8 9.3 5.0 4.2 4.1 4.4 Current account bal/GDP (%) -7.2 35.6 21.6 25.7 25.8 22.4 21.5 Belarus b GDP at market prices (2005 US$) 6.9 10.2 0.2 7.6 2.5 3.0 4.0 Current account bal/GDP (%) -3.9 -8.6 -13.0 -15.6 -9.3 -9.1 -9.3 Bulgaria b GDP at market prices (2005 US$) 4.8 6.2 -5.5 0.2 2.9 3.4 3.9 Current account bal/GDP (%) -8.7 -22.9 -8.9 -1.0 -2.1 -2.4 -2.7 Georgia b GDP at market prices (2005 US$) 6.6 2.3 -3.8 6.4 5.5 5.3 5.0 Current account bal/GDP (%) -9.8 -25.3 -11.2 -9.6 -10.8 -9.7 -8.1 Kazakhstan b GDP at market prices (2005 US$) 8.3 3.3 1.2 7.0 5.7 5.5 5.8 Current account bal/GDP (%) -2.7 4.7 -3.8 2.9 5.2 4.4 3.9 Kosovo b GDP at market prices (2005 US$) 6.9 2.9 4.0 5.7 5.2 4.9 Current account bal/GDP (%) -22.8 -25.0 -24.8 -28.8 -29.3 -26.9 Kyrgyz Republic b GDP at market prices (2005 US$) 3.9 8.4 2.3 -1.4 5.0 6.0 6.4 Current account bal/GDP (%) -8.4 -14.6 2.0 -3.6 -10.8 -9.2 -5.0 Lithuania b GDP at market prices (2005 US$) 5.8 2.9 -14.7 1.3 3.8 3.9 3.5 Current account bal/GDP (%) -8.5 -12.3 4.4 1.9 -1.0 -2.6 -2.5 Moldova b GDP at market prices (2005 US$) 4.1 7.8 -6.0 6.9 4.2 4.5 4.8 Current account bal/GDP (%) -8.4 -17.3 -9.3 -10.5 -10.7 -10.3 -10.8 Macedonia, FYR b GDP at market prices (2005 US$) 2.6 4.8 -0.7 0.8 2.9 3.7 4.2 Current account bal/GDP (%) -5.3 -12.8 -6.7 -2.9 -4.9 -5.1 -4.7 Romania b GDP at market prices (2005 US$) 4.3 7.1 -7.1 -1.2 1.6 3.7 4.0 Current account bal/GDP (%) -7.0 -11.9 -4.3 -4.2 -5.1 -5.4 -5.7 Russian Federation b GDP at market prices (2005 US$) 6.3 5.2 -7.8 4.0 4.4 4.0 4.1 Current account bal/GDP (%) 9.5 6.2 3.9 5.0 3.5 0.5 1.4 Serbia b GDP at market prices (2005 US$) 3.3 5.5 -3.1 1.8 3.0 5.0 5.5 Current account bal/GDP (%) -7.4 -17.6 -6.9 -7.1 -7.3 -6.5 -5.7 Tajikistan b GDP at market prices (2005 US$) 8.1 7.9 3.8 6.5 5.7 5.0 5.0 Current account bal/GDP (%) -3.8 -7.6 -5.9 2.2 -4.3 -6.4 -6.1 Turkey b GDP at market prices (2005 US$) 3.7 0.7 -4.8 8.9 6.1 5.1 5.3 Current account bal/GDP (%) -2.4 -5.7 -2.2 -6.6 -7.7 -7.3 -6.9 Ukraine b GDP at market prices (2005 US$) 5.9 2.1 -14.8 4.2 4.0 4.5 4.6 Current account bal/GDP (%) 3.2 -7.1 -1.5 -2.0 -3.1 -3.4 -3.6 Uzbekistan b GDP at market prices (2005 US$) 5.2 9.0 8.1 8.5 8.0 7.8 7.5 Current account bal/GDP (%) 7.8 13.0 3.1 8.3 13.2 11.1 11.4 World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time. Bosnia and Herzegovina, Turkmenistan, Montenegro are not forecast owing to data limitations. a. Growth rates over intervals are compound average; growth contributions, ratios and the GDP deflator are averages. b. GDP measured in constant 2005 U.S. dollars. c. Estimate. d. Forecast. Source: World Bank. 88 Global Economic Prospects June 2011: RegionalAnnex very large and persistent formal unemployment, developing Europe and Central Asia—with limited state capacity and relatively fragile fiscal spreads having increased relatively little and and external positions (covered by remittances capital flows recovering in line with domestic and FDI inflows), which are set to improve only conditions. Should events in high-income slightly through the forecast horizon. Europe force banks to repatriate capital or just reduce the pace at which regional profits are The economies of the South Caucasus sub- reinvested, capital flows to the region could dry region are expected to expand by an average of up —with potentially large negative effects on 4.5 percent over the next three years, due to those countries with high-levels of debt and/or higher commodity prices and on the back of the large current account deficits. recoveries in the EU and in Russia. Oil-fueled Azerbaijan is project to grow by a robust 4.2 and Finally, the region was buffeted by a very poor to experience improvements in its external and crop year in 2010. If domestic production does fiscal positions. Although both Armenia and not improve, a second year of disappointing Georgia are projected to enjoy growth of, harvests could reinforce recent upticks in respectively, around 4.3 and 4.9 percent going inflation —possibly even resulting in second- forward, both these economies will remain round effects that would increase inflation sensitive to changes in sentiment given persistent expectations, especially if combined with the double-digit current account and budget deficits. direct effects of the energy price shock, forcing a further tightening of monetary policies and Risks increasing the already daunting challenges of recovering from the excesses of the boom Although the forces of recovery in the global period. economy and in developing Europe and Central Asia are well established, there are a number of Notes: important evolving tensions that have the potential to disrupt the relatively robust recovery 1. For the purposes of this report, the that is projected for the region. developing Europe and Central Asia region is comprised of only low- and middle- Continued uncertainties and political tensions in income countries (22 in total). Thus the the Middle-East and North Africa or a further aggregate excludes high-income Western disruption to oil supplies could send oil prices European countries (among which Croatia, even higher. Simulations reported in the main the Czech Republic and Hungary), but text suggest that growth among regional oil includes low- and middle-income EU exporters could accelerate by between 0.1 and member states (Bulgaria, Lithuania and 2.0 percentage points in the 2011-2013 period if Romania). tensions were to give rise to a sustained $50 increase in oil prices. The estimated 0.5 to 0.6 2. The CIS is a loose organization that includes percentage point reductions in regional oil most of the countries from the former Soviet importers growth between 2011 and 2013 is Union, notably Armenia, Azerbaijan, somewhat less severe than for oil importers Belarus, Georgia, Kazakhstan, Kyrgyz elsewhere, partly because of offsetting benefits Republic, Moldova, Russia, Tajikistan, of higher remittances and increased imports from Turkmenistan, Ukraine and Uzbekistan. regional oil exporters, which represent around 60 Turkmenistan discontinued its membership percent of the regional economy. of the CIS as of 26 August 2005, and is now an associate member, while Georgia has left A second major risk for the region centers on the the group in August 2009. Ukraine has never evolution of the fiscal sustainability crisis in ratified the CIS Treaty, high-income Europe. So far, these challenges have had limited impact in countries in 3. The ongoing creation process of a Customs 89 Global Economic Prospects June 2011: RegionalAnnex Union between three members of the so- called “Eurasian Economic Community” (EurAsEC), namely Belarus, Kazakhstan and Russia may conceivably increase the regional share of intra-CIS trade (albeit possibly at the cost of welfare- reducing trade diversion). 4. Low measured unemployment likely reflects hidden unemployment due to limited economic restructuring in Belarus, and imperfect official statistics in Tajikistan 5. The World Bank’s “Doing Business” indicator, a useful proxy for investment climate, shows that, while the region broadly stagnated between 2010 and 2011 (the average value for the aggregate indicator remained at 78, or over twice the EU average), each of the three largest regional economies worsened their relative positions (and Russia by a significant 7 slots). 6. See also “Rising Food and Energy Prices in Europe and Central Asia” (World Bank 2011) for an analysis of the regional effects of increasing commodity prices. 90 Global Economic Prospects June 2011: RegionalAnnex Latin America and the Caribbean Recent developments expanded 5.2 percent in 2010 after a 5.5 percent contraction in 2009. The rebound in growth in The Latin American and Caribbean region has Central America reflects mainly a strong rebounded strongly from the global crisis of rebound in the Mexican economy, which is 2008-09, growing 6.0 percent in 2010 compared closely linked to the United States. The with a 2.1 percent contraction in 2009. Strong Caribbean region recorded the weakest growth in growth in Argentina, Brazil, and Peru boosted Latin America at 3.8 percent, after a modest 0.5 growth in South America to 6.5 percent after a percent in 2009. mild contraction in 2009. Central America (including Mexico), the area in the region most Industrial production growth picked up in the affected by the crisis has yet to reach the level of first quarter of 2011, growing at more than a 10 output recorded before the crisis, having percent seasonally adjusted annualized rate (or saar) boosted by strong domestic demand and Table LAC.1 Latin America and the Caribbean forecast summary (annual percent change unless indicated otherwise) Est. Forecast 98-07a 2008 2009 2010 2011 2012 2013 GDP at market prices (2005 US$) b 2.9 4.0 -2.1 6.0 4.5 4.1 4.0 GDP per capita (units in US$) 1.6 2.7 -3.4 4.7 3.2 2.8 2.7 PPP GDP c 2.9 4.3 -2.0 5.9 4.7 4.2 4.1 Private consumption 3.2 5.1 -0.8 5.8 4.6 4.0 3.9 Public consumption 2.2 3.0 4.3 3.9 3.7 4.4 4.3 Fixed investment 3.4 8.7 -10.4 11.9 7.0 7.8 6.7 Exports, GNFS d 5.2 1.4 -10.1 12.5 6.6 6.1 6.1 Imports, GNFS d 5.5 7.7 -15.5 22.5 7.9 7.8 7.1 Net exports, contribution to growth -0.1 -1.7 1.7 -2.5 -0.6 -0.7 -0.6 Current account bal/GDP (%) -0.9 -0.8 -0.6 -1.5 -1.4 -1.9 -2.3 GDP deflator (median, LCU) 5.8 8.0 4.0 5.0 5.2 5.6 5.4 Fiscal balance/GDP (%) -2.9 -0.9 -4.0 -3.0 -2.2 -2.3 -2.0 Memo items: GDP LAC excluding Argentina 3.1 3.8 -2.4 5.7 4.3 4.1 4.0 Central America e 3.5 1.8 -5.5 5.2 4.4 4.1 4.2 Caribbean f 4.4 3.3 0.5 3.8 4.1 4.3 4.0 Brazil 2.6 5.2 -0.7 7.5 4.2 4.1 3.8 Mexico 3.4 1.5 -6.1 5.5 4.4 4.1 4.2 Argentina 3.0 6.8 0.9 9.2 6.3 4.2 4.3 a. Growth rates over intervals are compound average; growth contributions, ratios and the GDP deflator are averages. b. GDP measured in constant 2005 U.S. dollars. c. GDP measured at PPP exchange rates. d. Exports and imports of goods and non-factor services (GNFS). e. Central America: Costa Rica, Guatemala, Honduras, Mexico, Nicaragua, Panama, El Salvador. f. Caribbean: Antigua and Barbuda, Belize, Dominica, Dominican Republic, Haiti, Jamaica, St. Lucia, Trinidad and Tobago, St. Vincent and the Grenadines. g. Estimate. Source: World Bank. 91 Global Economic Prospects June 2011: RegionalAnnex import demand from other developing countries, remains an issue in the Caribbean economies and China in particular, and more recently from high Central America, partly because of their reliance -income countries where consumer spending has on remittances and tourism from the United started to recover at a moderate pace. The States and—to a lesser extent—Europe, where recovery has been supported to a great extent by the recovery has been relatively slow. Although strong increases in output and employment in output in the region as a whole is now 2.2 non-traded sectors, including services. percent below its pre-crisis peak level, in a few countries it has exceeded that benchmark. In seasonally adjusted annualized terms acceleration in industrial production growth was The rebound in industrial production has been particularly pronounced in several resource-rich, mirrored in trade volumes, which have also globally integrated economies, including strengthened in the three months ending in Argentina (close to 11 percent), and Mexico March 2011. The biggest rebound was in (close to 9 percent). Growth in Central America regional import demand, which preceded the strengthened to close to 9 percent, boosted by pickup in exports. Latin American imports now strong external demand. In other countries the stand 4 percent above earlier pre-crisis peaks, recovery is more muted or industrial production reflecting a strengthening in regional domestic remains stagnant (figure LAC.1). demand--retail sales were up year-on-year 15.3 percent in Argentina, 8.5 percent in Brazil, 5.5 Reflecting both differences in initial conditions percent in Colombia in February, and going into the crisis and in the pace of recovery, momentum is particularly strong in some of output gaps across the region vary widely. these economies. Widespread currency Manufacturing capacity utilization is now above appreciation (notably in Brazil and Mexico) has trend levels for the region as a whole, with the contributed to this result, as have stronger wages recovery entering a new more-mature phase, in some cases. where additional investment in productive capacity will be necessary to sustain growth The rebound in imports was followed by an ahead. Spare capacity has been completely re- acceleration in regional export growth to a 9.2 absorbed in Uruguay, Peru, Brazil and Colombia percent annualized pace in the three months to due to strong growth in 2010 and relatively March 2011, mainly reflecting strong exports by shallow slowdowns in 2009. Industrial output Argentina, Brazil, Colombia, and Mexico (figure gaps have closed in Mexico, and remain positive LAC.3). Export volumes are now roughly 1.1 in Argentina, but are expected to close in the percent above pre-crisis peaks, and exceed the course of 2011 (figure LAC.2). Economic slack pre-crisis peak by 9.2 percent in Brazil. In Figure LAC.1 Industrial output annualized growth re- Figure LAC.2 Industrial capacity utilization in Latin mains strong in Latin America American countries 3m/3m %-change, volumes, seasonally adjusted annualized rates percentage difference from long-term trend 30 60 Central America Commodity exporters LAC 20 40 10 20 0.8 10.4 0 5.7 5.8 0 -1.6 1 0.7 2 -2.6 9 -9.6 -10 -20 1 -19.8 -20 -40 3 -39.1 -30 -60 -40 Ecuador Nicaragua Mexico Brazil Colombia Peru Argentina Uruguay Venezuela Chile Jan-08 Aug-08 Mar-09 Oct-09 May-10 Dec-10 Source: Thomson Datastream and World Bank. Source: Thomson Datastream and World Bank 92 Global Economic Prospects June 2011: RegionalAnnex Central America, including Mexico, volumes are first months of 2011. Mexico took advantage of closing on pre-crisis peaks. The increase in both historically low U.S. interest rates and sold $1.5 export revenues and imports is much stronger on billion of bonds due in 2040 during April, its account of rising commodity prices for some second dollar issue in two months, pushing its main export and import commodities. share of regional offerings to 65 percent. Capital flows have returned to selected Figure LAC.3 Trade growth reaccelerates in Latin economies in search of higher yields and are America and the Caribbean putting upward pressures on select currencies Volumes, ch% 3m/3m saar (box LAC.1). Net private inflows rose to 4.8 70 percent of GDP in 2010, after falling to 3.7 50 percent of GDP in the year of the crisis, but are Imports still shy of the 6.0 percent of GDP recorded in 30 2007. The largest increase was recorded in FDI inflows, up 57.4 percent, while net portfolio 10 equity inflows increased by almost 30 percent to -10 $54 billion. Net lending by banks totaled $7.4 billion, after an outflow of $5.6 billion the -30 Exports previous year, while short-term debt flows -50 amounted to $16.6 billion. Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-1 A large pipeline of sovereign and commercial Source: World Bank. bond issuance has run through the region in the Table LAC.2 Net capital flows to LAC $ billions 2003 2004 2005 2006 2007 2008 2009 2010e 2011f 2012f 2013f Current account balance 8.1 20.2 32.4 44.0 9.9 -35.8 -22.2 -67.1 -78.6 -112.8 -141.7 as % of GDP 0.4 0.9 1.2 1.4 0.3 -0.8 -0.6 -1.5 -1.4 -1.9 -2.3 Financial flows: Net private and official inflows 62.2 57.2 85.2 66.2 217.5 177.2 166.7 240.4 Net private inflows (equity+private debt) 57.5 67.3 116.6 86.1 218.5 170.7 147.5 220.0 237.1 243.3 258.1 ..Net private inflows (% GDP) 3.1 3.1 4.4 2.8 6.0 4.0 3.7 4.8 4.3 4.2 4.1 Net equity inflows 46.6 65.3 84.4 83.0 138.2 118.2 115.2 169.9 174.1 181.3 199.1 ..Net FDI inflows 43.3 65.9 72.2 72.0 109.4 127.9 73.6 115.9 130.1 132.3 147.1 ..Net portfolio equity inflows 3.3 -0.6 12.2 11.0 28.8 -9.7 41.6 54.0 44.0 49.0 52.0 Net debt flows 15.7 -8.1 0.8 -16.8 79.2 59.0 51.5 70.5 ..Official creditors 4.7 -10.2 -31.3 -19.9 -1.1 6.5 19.2 20.4 ....World Bank -0.4 -1.0 -0.7 -3.4 -0.1 2.4 6.6 6.2 ....IMF 5.6 -6.3 -27.6 -12.1 0.0 0.0 0.4 0.2 ....Other official -0.4 -2.9 -3.0 -4.4 -1.0 4.1 12.2 14.0 ..Private creditors 10.9 2.0 32.2 3.1 80.3 52.5 32.3 50.1 63.0 62.0 59.0 ....Net M-L term debt flows 9.2 -0.9 16.4 5.2 47.6 48.4 34.1 40.9 ......Bonds 16.7 3.1 20.6 -11.9 13.4 7.5 40.3 33.5 ......Banks -7.0 -3.8 -3.9 17.7 34.6 41.4 -5.6 7.4 ......Other private -0.5 -0.1 -0.3 -0.6 -0.4 -0.5 -0.5 0.0 ....Net short-term debt flows 1.8 3.0 15.7 -2.1 32.7 4.1 -1.8 16.6 Balancing item /a -34.6 -52.0 -83.3 -54.7 -89.6 -91.2 -92.5 -110.6 Change in reserves (- = increase) -35.6 -25.4 -34.4 -55.5 -137.8 -50.1 -52.0 -62.7 Memorandum items Workers' remittances 36.9 43.4 49.8 58.9 63.0 64.5 56.6 57.6 62.5 68.4 Source: World Bank. Note: e = estimate, f = forecast /a Combination of errors and omissions and transfers to and capital outflows from developing countries. 93 Global Economic Prospects June 2011: RegionalAnnex Furthermore international investors bought $21 In most economies the build-up in inflationary billion of peso-denominated debt in the six pressures stems from significant increases in months through March. And Argentina’s international fuel and food prices. Additionally, companies and provinces sold $1.5 billion worth Brazil, Peru, and Argentina are operating at of bonds in the first quarter, a record since 2001 almost full capacity, and face the risk of cost- when the government defaulted on $95 billion of Figure LAC.4 Annualized inflation in the three months obligations and more-than double the $597 to April exceeds the upper limit of the targeted band in million sold a year ago. three of the five inflation targeting economies in LAC percent, 3m/3m saar Inflationary pressures are rising in several economies on higher food and fuel prices, strong 10 10 domestic demand, rising wages, and increasingly 8 8 limited spare capacity. Headline inflation rates are near the upper ends of central bank target 6 6 ranges in many inflation-targeting economies. Indeed, inflation accelerated to 6.5 percent 4 4 during April in Brazil (year-on-year) matching 2 2 the upper-limit of the inflation target range. In Peru, inflation accelerated to the fastest pace in 0 0 almost three years, while Uruguay’s consumer Brazil Chile Mexico Colombia Peru price inflation picked-up to 8.6 percent, the -2 -2 fastest pace in four years, and well above the Upper Limit Inflation momentum, saar Lower Limit upper limit of the inflation target range of 3 to 7 percent (figure LAC.4). Source: World Bank, Central Banks. Box LAC.1 Impacts of and policy responses to strong capital inflows and strong real credit growth Strong economic performance in the major economies of the region, low interest rates in high-income countries, and interest differentials favoring Latin American assets, have attracted large capital inflows. And along with strong export revenues in commodity-exporting countries, this has resulted in strong upward pressure on selected currencies. In real-effective terms, the Brazilian real and the Mexican peso have appreciated sharply, reducing the external competitiveness of their exports. To limit short-term volatile capital inflows, countries have implemented a combination of macro policies (monetary, exchange rate policies, and fiscal policies). To stem currency appreciation, which in some cases had started in the pre-crisis period, some countries have intervened in foreign exchange markets. As foreign exchange market interventions were proving increasingly costly and ineffective in stemming currency appreciation, and as massive sterilization efforts led in selected cases to rising interest rate differentials which where attracting still more capital inflows, countries also resorted to some measures of capital control. Argentina, Brazil, Chile, Colom- bia, Mexico, and Peru have intervened in the foreign exchange markets, while Chile, Colombia, Mexico and Peru have also increased ceilings for foreign pension fund investments. Furthermore Brazil has introduced IOF taxes on financial transactions, short-term loans and issuance of securities. It is now charging a 6 percent levy on interna- tional debt sales and loans with an average minimum maturity of up to 360 days, after having tripled a tax on for- eigners’ purchases of fixed-income securities in October 2010 in a bid to stem the appreciation of the real. Countries have also taken steps to manage credit growth in a bid to ease domestic demand and prevent overheat- ing, by increasing reserve requirements (Brazil, Colombia, Peru), as real credit growth has been expanding very rapidly in selected economies (14 percent in Brazil and 20 percent in Colombia). Rapid credit growth increases the risk that in the event of growth slowing down abruptly, banks’ balance sheets will come under pressure. Some countries in the region have already implemented measures to strengthen balance sheets and capital by raising countercyclical capital requirements, and capital requirements for credit operations (Brazil), requiring tighter loan-loss provisions (Bolivia, Colombia, Peru), limiting the net open positions of finan- cial institutions (Brazil, Colombia, Mexico, Peru), and through counter-cyclical provisioning (Bolivia, Colombia, Peru, Uruguay). Source: Crowe 2011, Moreno 2011 94 Global Economic Prospects June 2011: RegionalAnnex push inflation. Indeed, wages in Argentina were Relative to the pre-crisis period, the currencies rising at a record pace in January. Demand-pull of Ecuador, Colombia, Chile, Peru and Brazil inflation is also a source of concern in countries have appreciated in nominal effective terms, like Brazil, where domestic demand remains between 2.5 and 11 percent, while Venezuela buoyant. Moreover, la Nina-related supply side and Argentina recorded some of the strongest shocks have compounded the effects of imported depreciations. Meanwhile real effective food inflation, in countries like Colombia and exchange rates have appreciated by more than 10 Venezuela. Inflation remains relatively subdued percent relative to the pre-crisis period in in many economies, including in Mexico, Chile, Bolivia, Brazil, Costa Rica, Guyana, and and Peru. Uruguay, while depreciating in Mexico and Argentina. Nevertheless given relatively stable Most inflation-targeting countries in the region nominal exchange rate and high inflation rates have begun to normalize monetary policy the Argentine peso appreciated strongly in 2010 (Mexico is a notable exception). Brazil’s central and in the early months of 2011. In the first four bank hiked its benchmark rate 125 basis points months of 2011 the currencies of Brazil, to 12.00 percent over the past three meetings as Colombia, and Mexico have appreciated in inflation is nearing the upper limit of the targeted nominal effective terms by between 3.5 and 4.5 range; while Peru raised policy rates ten times to percent. In some cases like Brazil and Colombia, 4.25 percent (figure LAC.5). Nevertheless, in the currencies are considered overvalued, while many cases policy has not kept pace with in others like Argentina currencies are estimated inflation and how effective these measures will to be weaker than warranted by medium-term depend critically on what has happened to fundamentals. inflationary expectations. At the moment, despite hikes in nominal interest rates, real Many countries that saw increased pressures on interest rates deflated by actual inflation remain currencies intervened in the exchange markets, low and even negative in some countries. The including Argentina, Brazil, Chile, Colombia, task of adopting the appropriate monetary policy and Mexico. International reserves rose $37.6 is being complicated in selected economies by billion to reach $657.1 billion by the end of the the surge in capital inflows, which is putting first quarter. Some countries have also pressure on currencies to appreciate and which introduced higher ceilings to foreign investment lead to increased liquidity in the economy to the of pension funds, including Chile, Colombia, extent that these flows are intermediated by the Mexico, and Peru (Crowe et al. 2011, Moreno financial sector. 2011). Several countries, including Brazil and Peru have resorted to capital controls to ease the Figure LAC.5 Central banks in Latin America have pressure on currencies. started the monetary tightening cycle short-term policy interest rates, percent After deteriorating on average by nearly 3 16 percent of GDP in the crisis year, as 14 governments engaged in counter-cyclical spending, fiscal balances improved last year in 12 Colombia most developing Latin American and Caribbean 10 Brazil countries, on average by more than 1 percent of 8 GDP. Government balances deteriorated more in 6 Mexico small economies and island economies. General Chile 4 government balances are expected to continue to 2 Peru improve this year, by an estimated 0.8 percentage points of GDP, helped in large part 0 30-May 30-Jan 30-Sep 31-May 31-Jan by commodity windfall for commodity exporters. General government balances are Source: National Agencies through Datastream expected to deteriorate in Paraguay and Ecuador, 95 Global Economic Prospects June 2011: RegionalAnnex among others, as growth decelerates and/or performance in Latin America has also boosted prices of main commodity exports weaken. In tourist arrivals and to a lesser extent, tourism Argentina’s government balances are expected to revenues, which tend to lag in a recovery. Still, deteriorate as government spending grows faster this has been a positive for growth, especially in than government revenues, particularly in 2011, countries that rely heavily on tourism revenues. an election year. In Haiti the government deficit Tourism arrivals increased the most in South is projected to deteriorate sharply to 5.3 percent America, up 10.4 percent to 23.5 million, of GDP in 2011, after a surplus of 2.2 percent of followed by Central America, where arrivals GDP in 2010. Continued weak growth and rose 8.3 percent to 8.3 million, while growth in increased discretionary spending is expected to the Caribbean region lagged at 3.9 percent, with cause deficits in some countries to deteriorate a total of 20.3 million tourist arrivals.3 In the first further in 2011. quarter of 2011 tourism arrivals were up 15 percent in Latin America and the Caribbean. Nevertheless fiscal policies are becoming pro- cyclical in some countries,1 and tightening is Current account balances deteriorated in the required especially in countries that have very Latin America and Caribbean region by 0.9 little spare capacity and that show signs of percent of GDP in 2010 to a deficit of 1.5 overheating. For these countries, but even for percent of GDP. Current account balances those where deficits have receded, policy will remained relatively stable in the Caribbean need to take special care to ensure that the fiscal region and deteriorated by 0.24 percentage space that allowed policy to respond counter- points in Central America. Stronger currencies cyclically in the most recent crisis is recreated. and rapidly growing domestic demand help This, such that should another crisis arise, fiscal explain in part the deterioration in current policies will once again be in a position to account balances. In selected economies the respond. Corrected for cyclical impacts on deterioration in the services balance has played a spending and revenues, the structural deficit in significant role in the deterioration of current Argentina is estimated to be above 3 percent of account positions (for example in Brazil). potential GDP, in Brazil it is estimated at 2.5 percent, while in Guyana it is more than 5 Medium-term outlook percent of GDP. Structural deficits are lower in Chile and Peru, at around 1.5 percent of GDP.2 After a strong 2010 recovery from the 2009 economic slump, Latin America and the Brazil has signaled that it will rebalance its Caribbean is expected to grow at a somewhat policy mix to help fight inflation. Quasi-fiscal slower pace in 2011. Growing capacity expenditures remain a problem for Brazil constraints, and high fuel and food prices that however, and public banks need to contain loan cut into real incomes, as well as a gradual expansion to help anchor inflationary tightening of fiscal and monetary policies are all expectations. The government announced a 50 factors that are expected to contribute to the billion reais spending cut for 2011, with 68 slowdown (figure LAC.6). percent to come from reductions in discretionary spending, and the remainder to come from Growth in Brazil is expected to ease from the 7.5 limiting increases in mandatory expenditure. percent recorded in 2010, to 4.2 percent in 2011 and around 4.0 percent in 2012 and 2013, as the Improved economic performance in high-income economy is operating near full capacity, labor countries and higher employment helped tourism market conditions are tight, and wages are and remittances recover from the 2009 slump. starting to increase faster than productivity. The The recovery in remittances was modest in 2010, 46 percent real effective exchange rate but due to the depreciation of the U.S. dollar, in appreciation observed since January 2009, is local currency terms, remittances have fallen expected to continue to weigh on industrial slightly in many countries. Strong economic production, both because of weaker exports and 96 Global Economic Prospects June 2011: RegionalAnnex increased import demand. Capital flows are star performer of the region, expanding by 7 projected to be boosted by an increase in FDI percent in 2011, on the back of strong domestic (FDI is projected to reach $55 billion this year), demand, expansionary fiscal policy and even as market sensitivity and government consumption tax cuts, before easing to a more policy serves to dampen more volatile equity and sustainable pace of 5.2 percent by 2013. debt-creating flows. Venezuela’s economy should recover this year, after a two-year recession, but growth will In Mexico, economic activity should slow mildly remain anemic, at less than 2 percent, as the to 4.4 percent in 2011, and 4.1 percent in 2012, business environment continues unattractive for before picking up slightly to 4.2 in 2013. Higher private investors; inflation remains elevated, and energy prices are projected to cut into consumer supply bottlenecks undermine economic demand in both Mexico and the United States, performance. with the latter impact slowing Mexican export growth. Argentina’s economy is projected to Growth in Central America excluding Mexico is slow this year to 6.3 percent following a expected to accelerate to 4 percent in 2011, and remarkable 9.2 percent gain last year as bounce- to average about 4.1 percent over the 2012-2013 back effects recede. Prospects for 2012 and 2013 period, as labor markets in the high-income are for a further slowing of growth as capacity countries improve only gradually. Stronger constraints begin to be felt, but outturns will external demand will underpin growth over the depend importantly on efforts to improve the forecasting horizon, but remittances will grow country’s productive potential. Colombia’s only modestly as labor income of migrants in the economy is expected to expand by about 4.7 United States and Spain advance only percent in 2011, picking-up slightly from 4.3 moderately, and as unemployment remains percent recorded in 2010, before easing relatively elevated. Poor infrastructure, shortages marginally in 2012 to 4.4 percent and further to of skilled labor, expensive electricity and 4.2 percent in 2013. There are downside risks to unreliable energy supply will hinder growth in the forecast, as consumer demand is showing the region. signs of weakness, evidenced in weaker retail sales and worsening consumer confidence. Economic activity in the Caribbean will accelerate marginally to 4.1 percent in 2011, in Chile and Venezuela will be also see an large part due to continued strong growth in the improvement in economic performance relative Dominican Republic and rebound in growth to to the previous year, while Peru should be the 8.7 percent in Haiti on reconstruction efforts. Meanwhile growth in other countries in the Figure LAC.6 Growth in Latin America and Caribbean to decelerate over the next two years region will be more subdued as remittances and tourism are yet to show signs of moderate GDP, percent change recovery. Uncertainties regarding the strength of 12 the global recovery among U.S. investors have 10 The Caribbean resulted in major tourism and large-scale 8 LAC Central America (incl. Mexico) investments being put on hold. Jamaica will be 6 one of the weakest performers in the region, due 4 to structural weaknesses and over-dependence on 2 the United States. The Dominican Republic, 0 which accounts for 40 percent of output in the -2 Caribbean region is expected to grow close to 5 -4 percent in 2011 and record slower growth of 4.3 -6 by 2013. Growth in the Caribbean is expected to -8 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 accelerate marginally to 4.3 percent in 2012 before easing to 4 percent in 2013. Source: World Bank. 97 Global Economic Prospects June 2011: RegionalAnnex Current accounts are expected to deteriorate in America face the challenge of fine-tuning the economies that operate close to capacity and monetary policy to help anchor inflationary which experienced currency appreciation, as expectations and keep inflation rates within a imports become cheaper. Commodity exporters targeted range without dampening recovery. If should continue to see improvements in their the authorities fail to bring inflation under current account balances, on account of stronger control in the near term, sharper monetary growth in commodity revenues. tightening is the likely course of action, with negative consequences for economic growth in Despite the recent rise in oil prices, as a result of 2012 and 2013. the political upheavals in the Middle East and North Africa, income effects in many oil- The recent political upheavals in the Middle importing developing countries are expected to East, while not having a direct impact on growth be relatively small due, to the partially offsetting for the region have increased the risks of further effects of high non-oil commodity prices. hikes in energy prices, which will negatively Resource-rich oil importers in the region will see affect growth in oil-importing countries in the their terms of trade improve slightly (0.2 percent region, and in particular growth in Central of GDP), as higher export prices for metals and America, excluding Mexico, and the Caribbean. grains offset the negative impact induced by The impact of a sustained $50 per barrel increase higher imported oil prices. Saint Vincent and the in oil prices is expected to slow growth by 0.3 Grenadines, Dominica, Saint Lucia, Nicaragua, percentage points in 2012 and 0.4 percentage Honduras, and Jamaica will see the largest terms points in 2013 in Latin America and the of trade losses, in excess of 3.5 percent of GDP Caribbean (excluding Mexico), although the (figure LAC.7). Oil exporting countries will see impacts very by country (see Table 3 in the main income gains of 2.0 percent of GDP, while the text). region as a whole will see positive gains estimated at 0.98 percent of GDP. And with food prices at elevated levels, any disruption in supply risks pushing food prices up Risks further fueling inflation, cutting into household purchasing power and increasing the poverty Perhaps the most important downside risk facing count, and fueling social tensions. Failure to the region is that the surge in oil prices will dent bring inflation under control could result in global economic growth, as inflationary sharper tightening of monetary and fiscal policy, pressures will take a heavier toll on consumer which could result in a sharper slowdown in spending worldwide. Most economies in Latin economic activity. Figure LAC.7 The terms of trade impacts in 2011 Selected economies in the region face the risk of share of 2010 GDP, percent overheating as they face strong commodity prices and high capital inflows that underpin Venezuela Paraguay Ecuador strong domestic demand. If policymakers in the Bolivia Argentina region fail to rebuild policy buffers, vulnerability Chile Peru Mexico to future crisis would be much increased. Brazil Uruguay Furthermore if exit from the fiscal stimulus is Guatemala Costa Rica delayed, countries will rely more on monetary Dominican Rep. Belize Haiti tightening to keep inflation under control. El Salvador Guyana Jamaica Honduras Nicaragua The economic fallout from the earthquake and St. Lucia Dominica tsunami that hit Japan will likely have a negative St. Vincent & Grenadines impact on FDI flows, given that Japan is an -6 -4 -2 0 2 4 6 8 10 important source of FDI for countries like Brazil. Another risk facing the emerging economies in Source: World Bank. 98 Global Economic Prospects June 2011: RegionalAnnex the LAC region is that of an abrupt reversal of portfolio flows, which could result in sharp depreciations of currencies. A disorderly unwinding of the fiscal sustainability issue in Europe represents a risk to economic activity in the Latin America and Caribbean region through trade and financial linkages. Table LAC.3 Latin America and the Caribbean country forecasts (annual percent change unless indicated otherwise) Est. Forecast 98-07a 2008 2009 2010 2011 2012 2013 Argentina b GDP at market prices (2005 US$) 2.2 6.8 0.9 9.2 6.3 4.2 4.3 Current account bal/GDP (%) 1.3 2.1 2.8 0.8 0.4 -0.6 -0.9 Belize b GDP at market prices (2005 US$) 5.4 3.8 0.0 2.0 2.1 2.4 2.8 Current account bal/GDP (%) -13.1 -10.7 -9.4 -2.7 -8.6 -6.6 -5.8 Bolivia b GDP at market prices (2005 US$) 2.8 6.1 3.4 4.2 4.4 4.5 4.2 Current account bal/GDP (%) 0.8 12.0 4.7 4.8 3.7 4.3 3.8 Brazil b GDP at market prices (2005 US$) 2.8 5.2 -0.7 7.5 4.2 4.1 3.8 Current account bal/GDP (%) -1.2 -1.7 -1.5 -2.6 -2.6 -3.3 -3.6 Chile b GDP at market prices (2005 US$) 3.4 3.7 -1.7 5.2 6.1 5.0 4.5 Current account bal/GDP (%) 0.3 -1.9 1.6 1.9 0.8 0.2 -1.8 Colombia b GDP at market prices (2005 US$) 3.1 2.7 1.5 4.3 4.7 4.4 4.2 Current account bal/GDP (%) -1.4 -2.9 -2.2 -3.1 -1.9 -2.6 -2.8 Costa Rica b GDP at market prices (2005 US$) 4.7 2.6 -1.3 4.2 4.0 4.2 4.5 Current account bal/GDP (%) -4.6 -9.3 -1.9 -3.6 -4.2 -4.3 -4.7 Dominica b GDP at market prices (2005 US$) 1.6 3.5 -0.3 1.0 1.9 2.6 2.8 Current account bal/GDP (%) -19.0 -36.4 -28.3 -26.9 -30.2 -26.4 -24.7 Dominican Republic b GDP at market prices (2005 US$) 4.9 5.3 3.5 7.8 5.1 4.9 4.3 Current account bal/GDP (%) -1.4 -9.9 -4.6 -8.2 -8.7 -6.0 -5.4 Ecuador b GDP at market prices (2005 US$) 3.1 7.2 0.4 3.6 3.1 3.2 3.6 Current account bal/GDP (%) -0.1 2.0 -0.5 -3.4 -3.1 -3.4 -3.8 El Salvador b GDP at market prices (2005 US$) 2.6 2.4 -3.5 0.7 2.5 3.0 3.2 Current account bal/GDP (%) -3.1 -7.2 -1.8 -2.5 -4.4 -3.3 -3.6 Guatemala b GDP at market prices (2005 US$) 3.4 3.3 0.6 2.5 3.1 3.3 3.0 Current account bal/GDP (%) -5.4 -4.5 -0.1 -2.2 -3.4 -3.8 -4.1 Guyana b GDP at market prices (2005 US$) 1.7 2.0 3.3 3.5 4.6 5.1 5.6 Current account bal/GDP (%) -8.7 -9.9 -7.7 -9.5 -10.7 -21.0 -19.3 Honduras b GDP at market prices (2005 US$) 4.0 4.0 -2.1 2.8 3.2 3.8 4.0 Current account bal/GDP (%) -6.7 -12.9 -3.8 -6.2 -6.9 -6.5 -6.5 Haiti b GDP at market prices (2005 US$) 0.6 0.8 2.9 -5.4 8.7 9.0 8.3 Current account bal/GDP (%) -22.4 -11.9 -3.9 -3.4 -4.3 -4.8 -5.1 Jamaica b GDP at market prices (2005 US$) 1.6 -0.5 -3.0 -1.1 1.7 2.2 2.4 Current account bal/GDP (%) -7.8 -19.6 -10.4 -8.4 -8.7 -8.0 -6.0 99 Global Economic Prospects June 2011: RegionalAnnex (annual percent change unless indicated otherwise) Est. Forecast Source: The World Bank. 98-07a 2008 2009 2010 2011 2012 2013 Mexico GDP at market prices (2005 US$) b 2.8 1.5 -6.1 5.5 4.4 4.1 4.2 Current account bal/GDP (%) -1.9 -1.5 -0.7 -0.5 -0.8 -1.0 -1.0 Nicaragua GDP at market prices (2005 US$) b 3.4 7.5 -5.6 5.1 3.1 3.5 4.0 Current account bal/GDP (%) -18.0 -25.8 -12.9 -15.5 -16.2 -16.2 -15.7 Panama GDP at market prices (2005 US$) b 4.8 10.7 2.4 4.5 7.4 6.8 6.0 Current account bal/GDP (%) -5.5 -11.7 -0.2 -11.2 -12.4 -11.8 -11.9 Peru GDP at market prices (2005 US$) b 4.1 9.8 0.9 8.8 6.9 6.1 5.2 Current account bal/GDP (%) -1.1 -3.7 0.2 -1.4 -2.2 -3.1 -3.0 Paraguay GDP at market prices (2005 US$) b 1.9 5.8 -3.8 15.3 5.5 4.6 4.3 Current account bal/GDP (%) -0.1 -1.8 0.3 -3.2 -4.0 -4.0 -3.1 St. Lucia GDP at market prices (2005 US$) b 2.0 0.8 -3.6 1.1 3.7 3.7 3.1 Current account bal/GDP (%) -18.5 -35.2 -14.4 -16.7 -27.0 -21.6 -18.5 St. Vincent and the Grenadines GDP at market prices (2005 US$) b 4.2 1.1 -1.1 -2.1 3.1 2.9 3.6 Current account bal/GDP (%) -20.4 -39.2 -33.8 -33.2 -36.2 -33.4 -32.7 Uruguay GDP at market prices (2005 US$) b 0.8 8.5 2.6 8.5 5.2 5.7 4.1 Current account bal/GDP (%) -1.0 -4.8 0.7 0.6 -1.4 -2.0 -2.4 Venezuela, RB GDP at market prices (2005 US$) b 2.8 4.8 -3.2 -1.5 1.6 2.2 2.4 Current account bal/GDP (%) 8.5 12.0 2.6 5.0 7.6 6.6 4.7 World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time. Barbados, Cuba, Grenada, and Suriname are not forecast owing to data limitations. a. Growth rates over intervals are compound average; growth contributions, ratios and the GDP deflator are averages. b. GDP measured in constant 2005 U.S. dollars. c. Estimate. d. Forecast. Notes: Economic Outlook. April. 1. World Bank, LAC Success put to the test, Moreno, R., 2011. “Policymaking from a April 2011. macroprudential perspective in emerging markets.” 2 IMF, World Economic Outlook, April 2011. BIS Working Papers No. 336, January. 3 UN World Tourism Organization, January 2011. Walsh, James P. 2011. ―Reconsidering the Role of Food Prices in Inflationǁ. IMF Working Paper. References WP11/71. World Bank, 2011. “LAC Success put to the Crowe, C., G. Dell’Ariccia, D. Igan, and P. Rabanal, 2011. “Policies for Macro-Financial test”. Stability: Options to Deal with Real Estate World Travel and Tourism Council. 2011 Booms.” IMF Staff Discussion Note SDN/11/02, Tourism Impact Data and Forecast. April 2011. February. [www.wttc.org] International Monetary Fund. 2011. World 100 Global Economic Prospects June 2011: RegionalAnnex Middle East and North Africa Recent developments January to 1.8 percent anticipated in April.3 Those economies hardest hit include Egypt Before the start of the political upheaval in (down 4.5 percentage points), Tunisia (3.3 the Middle East and North Africa, developing points) and Jordan (1.5 points) (figure MNA.1). countries of the region had been poised to improve economic performance over 2011-12, Political-economy developments in countries returning to GDP gains of near 5 percent.1 where protests- and authorities’ responses Indeed, lack of tight international connections in occurred earliest—Tunisia and Egypt—could finance and non-oil goods trade allowed play a strong role in shaping other outturns in the developing Middle East and North Africa2 to region. And as evidenced from the first months experience less adverse effects from the financial of 2011, there are a variety of political responses crisis and global recession of 2008-09 than other across the Arab world. Progress may be more developing regions. But recovery in 2010 likely in countries like Tunisia, as well as in the disappointed, with regional growth falling below monarchies (Jordan and Morocco) where popular expectations to 3.1 percent, the slowest growth pressure will continue to have well-established among developing regions in a year of buoyant channels in which to be expressed. In the broader gains for developing economies. view of the World Bank, if these political events and economic externalities are followed by The Arab Spring. Revolutions and unrest have sound transitions to better governance structures, disrupted economic activity across almost every in looking forward, they should provide a unique country in the region over the first months of opportunity to change Middle East and North 2011, and will continue to restrain growth in a Africa’s political and social landscape (table number of countries at least for the year, and MNA.1).4 potentially for more. For those parts of the region where unrest has been less marked, higher The parameters of political and economic oil prices (linked tightly to developments in the disturbance in 2011. With the exception of Middle East and North Africa) will be a boon for several GCC economies, every country in the some and a drag on growth for others. And region has been affected—to varying degrees by higher food prices will exact an increasing toll Figure MNA.1 GDP growth marked down by 3.1 points on external balances across all countries. in 2011 for developing Middle East and North Africa Economic and social impacts are likely to be GDP growth in percent substantial in the short term as production, trade, Developing MENA services and other elements of economic activity Diversified economies slip; and fiscal revenues, tourism and FDI receipts come under increasing pressure. Egypt Consumers will be further affected as inflation Jordan heats up, tied among other factors to Tunisia developments in oil and food prices. Developing Oil exporters Taking current- and anticipated developments Algeria for 2011 into consideration, a comparison of the GCC January 2011 projections with revised forecasts 0 2 4 6 prepared in April, yields a sobering conclusion. Forecast of January 2011 Forecast of April 2011 GDP growth for the developing region is likely to suffer a 3.1 percentage point mark-down for Source: Middle East and North Africa Poverty Reduction the year, from gains of 4.9 percent expected in and Economic Management Unit, World Bank. 101 Global Economic Prospects June 2011: RegionalAnnex the Arab Spring. Among important observed and Egypt, Tunisia, Libya, and potentially Syria, anticipated economic developments for 2011: will be most affected, as continued uncertainty, economic disruption and lapse in tourism Oil prices are likely to remain high amid the revenues dampens growth in the former two, Libyan crisis and market fears of potential while Libya—and to a lesser degree, Syria— supply disruptions tied to unrest in larger oil may face prospects of prolonged violence or exporters; civil war. Those countries which have experienced the longest protests will suffer Oil exporters that are less troubled by protest lower growth- with investment coming to be (e.g. Algeria, Kuwait, Oman, Qatar, Saudi particularly adversely affected. Arabia and the UAE) will likely see windfall gains from higher oil prices—but net fiscal Developing Middle East and North Africa’s revenues will be reduced by use of funds for growth edged lower in the second half of financial packages intended to address social 2010—and for the year. Early indicators for unrest; 2011 point to a substantial slowdown. Oil importers will suffer—especially those that The initial strong rebound in global trade and choose to provide energy and food subsidies. production, particularly among the regions’ main Higher food prices will accentuate inflation Euro Area trading partners, and rising oil prices pressures. underpinned GDP gains for developing Middle Table MNA.1 Middle East and North Africa forecast summary (annual percent change unless indicated otherwise) Est. Forecast 98-07a 2008 2009 2010 2011 2012 2013 GDP at market prices (2005 US$) b 4.1 3.7 2.8 3.1 1.9 3.5 4.0 GDP per capita (units in US$) 2.6 1.9 1.1 1.5 0.2 1.9 2.3 PPP GDP c 4.3 4.1 3.1 3.0 1.7 3.6 4.0 Private consumption 4.4 5.1 4.5 4.4 3.2 3.5 4.2 Public consumption 3.2 9.1 12.6 8.3 8.6 7.3 7.0 Fixed investment 6.0 7.7 1.0 -3.8 -2.4 3.4 5.9 Exports, GNFS d 5.2 4.6 -4.9 4.6 3.7 4.4 2.0 Imports, GNFS d 7.1 11.4 -7.8 3.6 2.4 6.9 7.1 Net exports, contribution to growth -0.2 -2.2 1.0 0.4 0.5 -0.7 -1.7 Current account bal/GDP (%) 7.5 7.7 -1.1 1.4 5.6 5.7 4.3 GDP deflator (median, LCU) 4.8 12.2 3.0 5.5 11.5 7.3 5.3 Fiscal balance/GDP (%) -1.0 -0.3 -4.1 -4.3 -3.2 -2.3 -1.8 Memo items: GDP MENA Geographic Region e 3.8 4.4 1.5 3.2 2.8 3.8 4.1 Resource poor- Labor abundant 4.1 6.6 4.8 4.5 2.5 4.0 5.0 Resource rich- Labor abundant 4.2 1.8 1.4 2.2 1.4 3.2 3.2 f Selected GCC Countries 3.4 5.3 0.0 3.3 4.0 4.2 4.3 Egypt 4.3 7.2 4.7 5.2 1.0 3.5 5.0 Iran 4.9 1.0 0.1 1.0 0.0 3.0 3.0 Algeria 3.5 2.4 2.4 3.3 3.7 3.6 3.5 a. Growth rates over intervals are compound average; growth contributions, ratios and the GDP deflator are averages. b. GDP measured in constant 2005 U.S. dollars. c. GDP measured at PPP exchange rates. d. Exports and imports of goods and non-factor services (GNFS). e. Geographic region includes high-income countries: Bahrain, Kuwait, Oman and Saudi Arabia. f. Selected GCC Countries: Bahrain, Kuwait, Oman and Saudi Arabia. g. Estimate. Source: World Bank. 102 Global Economic Prospects June 2011: RegionalAnnex East and North Africa during the first half of manufacturing production in Tunisia performed 2010. But a world-wide “growth pause” in well until late 2010, but by March 2011 had production during the third quarter- and fallen 9.3 percent on a smoothed basis (y/y), slumping demand in Europe during the second with output of textiles and clothing declining at a half of 2010 came to the fore (see Main Text) steeper 15 percent rate. Lebanon highlights a and dampened the region’s non-oil exports to case of faltering production growth over the Europe, slowed tourism arrivals from earlier course of the second half of 2010, due to a heady rates while crimping remittance flows to cyclical decline after a period of unprecedented the Maghreb and Egypt in particular. These boom, especially in construction and real estate. developments preceded the start of popular Developments in the region and uncertainty unrest in early 2011. regarding political developments in the country yielded a falloff in electricity generation of 3.3 Industrial production for the diversified percent in the first quarter (y/y); Jordan’s path of economies (proxied in some cases here by recuperating output growth became more volatile electricity generation) slowed from rapid gains but re-crossed the line to positive growth in in early 2010 to fall fairly sharply during the first March (figure MNA.2b). quarter of 2011.5 Egyptian cement production for example, traced a path of output responding to Merchandise trade. Market conditions have been easing domestic and foreign demand, from difficult for the diversified group, with main growth of 20 percent in late 2009 to declines export destinations in the European Union averaging 15 percent over the first quarter of undergoing generally sluggish GDP growth and 2011; on a smoothed basis, cement output weak demand for exports from the region. But dropped 11.3 percent in March (3mma, y/y). In most recent data suggests a renewal of export contrast, the decline in Egyptian electricity growth for several countries, a favorable note in generation highlights the initial effects of the the current environment. Almost mirroring reform demonstrations in Cairo and the attendant production trends, Egyptian exports shifted from broader disruption to economic activity, halving growth near 25 percent at the start of 2010 to from robust 8 percent gains in early 2010 to modest decline in February 2011, but of below 4 percent the first quarter (figure encouragement, to a sharp upturn in March MNA.2a) reaching an 11 percent smoothed year-on-year pace. Exports of Lebanon dropped by 8 percent Among other diversified economies, as of March, down from 20 percent gains in the Figure MNA.2a Egypt: Early indicators of disrup- Figure MNA.2b: Activity begins to falter in other tion to economic activity diversified economies as well ch% 3mma, yr-on-yr ch% 3mma yr-on-yr 25 9 15 20 8 10 15 7 10 6 5 5 5 0 4 0 -5 3 -10 2 -5 -15 1 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 -10 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Egypt IP cement [Left] Egypt IP electricity [Right] Tunisia IP Jordan IP Lebanon IP Electricity Source: Egypt CAPMAS, through Haver Analytics. Source: National Agencies through Haver Analytics. 103 Global Economic Prospects June 2011: RegionalAnnex spring of 2010. For Tunisia, textiles and clothing This represented an impressive rebound from the shipments declined by some 7.5 percent in 2009 recession, with tourist arrivals improving March (smoothed, y/y)—likely a combination of from 3.5 percent growth in the previous year. supply difficulties in production and weaker Performance in Egypt was particularly vibrant, demand in export markets. But overall exports with a 17.5 percent gain in arrivals and 16.5 are reviving quickly to a 15 percent pace as of percent jump in receipts. April. Conditions have been difficult for Morocco and Jordan, but both countries have Looking at developments in 2011, with data seen exports perform buoyantly, in a 20 to 30 covering just a few months of the year, tourism percent range, due to strong global demand for phosphates (inputs to fertilizers and other goods Figure MNA.3 Exports from the diversified econo- and materials) (figure MNA.3). mies generally slacken in the second half of 2010 and into early 2011 Tourism—a mainstay for the region exerting export values in US dollars, ch% 3mma, yr on yr negative economic effects in 2011. For Lebanon, 50 Morocco, Tunisia, Jordan and Egypt, as well as Tunisia Morocco GCC-members Bahrain and the United Arab 38 Egypt Emirates, international tourism constitutes a key 25 Jordan contributor to GDP, with fiscal revenues 13 benefitting as well. Tourism is a key driver for local employment growth directly—and through 0 second-round effects—while spurring domestic -13 and foreign investment in tourism and related facilities. For the GCC economies, tourism is -25 providing an important path for diversification. -38 Before the onset of the political uprising, tourism -50 in the broader Middle East and North Africa 2009M01 2009M06 2009M11 2010M04 2010M09 2011M02 region was booming, with arrivals in 2010 up by 10.2 percent to 98 million persons; and for the Source: National Agencies through Haver Analytics, country sample in figure MNA.4a, a jump of 11 Tunisia: INS, Morocco: Customs, Egypt: CAPMAS, percent to 37 million arrivals (figure MNA.4a). and Jordan: DoS. Figure MNA.4a Middle East and North Africa Figure MNA.4b Tourism’s contribution to GDP was tourism boomed in 2010 large in several Middle East and North Africa coun- tries (2010) tourist arrivals ('000) 40,000 Direct contribution to GDP in percentage points Tunisia Lebanon 35,000 Morocco Morocco 30,000 Lebanon Tunisia Jordan Jordan 25,000 Egypt Egypt 20,000 North Africa Bahrain 15,000 United Arab Emirates Syria 10,000 Middle East 5,000 Algeria Saudi Arabia 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 0 3 5 8 10 Source: United Nations World Tourism Organization Source: World Travel and Tourism Council and World and National Agencies. Bank.. 104 Global Economic Prospects June 2011: RegionalAnnex arrivals appear to have fallen dramatically. Both abroad in the first half of 2010, remittances for Egypt and Tunisia, for example, have reported a the year grew by 6.5 percent (with Egypt up 8.1 45 percent decline in arrivals between the first percent to $7.7 billion) stronger than the 5.6 quarter of 2011 and the like period of 2010. Such advance for developing countries in aggregate. large-scale falloff in arrivals (and related Looking forward, the World Bank’s Migration receipts), if sustained could exact a heavy toll on and Remittances Unit expects Egypt to garner a growth in countries where tourism contributes a modest 0.8 percent gain during 2011, while substantial share of GDP (figure MNA.4b). remittance inflows to Tunisia are seen to drop by Estimates of the direct contribution of tourism to 2.5 percent. For developing Middle East and GDP appearing in the figure are produced by the North Africa overall remittances increase 3.5 World Travel & Tourism Council (WTTC), an percent, slowest among developing regions, with industry group working closely with the United stronger recovery in 2012 (5.4 percent)—still Nations World Tourism Organization sub-par contrasted with the region’s historic (UNWTO).6 In addition to the direct impact of standards (average growth of 14 percent over tourism on the economy, second-round effects 2000-2008).9 can be quite large, as tourism is a labor intensive sector with many interconnections with other Large shifts in international prices and terms branches of the economy; and in recent years of trade carry differing effects across the tourism has attracted much related investment, region. both domestically and from abroad. Heightened market uncertainty regarding oil supply accentuated by the outage of Libyan The less-than-favorable tourism reports from crude, served to increase the price of benchmark Egypt and Tunisia to date, together with Brent oil to above $120/bbl in April 2011, a 33 preliminary projections of a potential 18 percent percent increase from December 2010 levels, drop in tourism-related receipts during Egypt’s with the World Bank average price registering FY-20117, would imply (using WTTC impact $116/bbl for the month (figure MNA.5 and factors) a 1.1 percent direct loss in GDP for the Commodity Annex).10 A number of commodity year. Second-round and induced effects could analysts suggest that about $20/bbl of the carry GDP lower by an additional 1.1 points—an increase in price relates to tension in the region; adverse tourism contribution to GDP of 2.2 the remainder reflects strong world demand for percentage points. As earlier noted, Egypt’s oil. Given the continued fluidity of the political growth—pre-to-post the beginnings of the ‘Arab economy in the region, the outlook for crude oil Spring’—had been marked down by 4.5 points Figure MNA.5 Wheat, maize and sugar double (see figure MNA.1), implying non-tourism from recent troughs....oil increases 3-fold related factors (disruptions to production and other economic activity) may account for the Index Jan-2004=100 550 remaining 2.3 points of the slowdown. A similar 500 range of assumptions for tourism revenues/ 450 Crude Oil arrivals in Tunisia, Morocco, Jordan or Lebanon Wheat 400 would likely result in broadly similar outturns. Maize 350 Sugar Worker remittance flows to the developing 300 region faltered during the global recession of 250 2009 (as remittances did for all developing 200 regions) by some 7 percent to $32.2 billion, as 150 employment conditions in host countries in 100 Europe, the GCC and elsewhere deteriorated.8 50 Hardest hit at the time were Egypt and Yemen, Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 each facing a decline of more-than 18 percent. As recovery advanced within the region and Source: World Bank. 105 Global Economic Prospects June 2011: RegionalAnnex prices remains highly uncertain, but under a East and North Africa in aggregate, median ‘base case’ the price of oil is likely to remain at inflation accelerated from 4 percent in August high levels, averaging $107/bbl in 2011, and 2010 to 5.1 percent by February 2011 (year-on- easing only slightly to $98/bbl by 2013. year)—but eased to 4.5 percent by April on a recent softening in food prices. Indeed, food A quickening pace of increase in internationally prices for the group reached peaks of 8.2 percent traded food prices—notably maize and wheat— in October 2010 before diminishing to 3.6 is tied in good measure to supply disruptions, percent in April 2011 (figure MNA.6a). and together with higher crude oil prices is pressuring inflation across an increasing number Higher inflation is reducing purchasing power of countries (figure MNA.5). A key factor and dampening the pace of consumer spending underpinning the rise in food—likely the most in both oil importers and exporters, augmenting important—has been increasing production costs the disruption of economic activity and output due to higher energy prices. Since June 2010, otherwise pressuring households in the region. wheat prices have risen 113 percent and maize Several economies among the diversified 109 percent. Sugar prices had earlier ratcheted group—Morocco and Tunisia—rely on rain-fed upward (86 percent from June 2010 to January agriculture, with wheat crops often exposed to 2011) due to Brazilian use of sugarcane in adverse weather; these economies are now generating bio-fuels, resulting in a degree of experiencing escalating import bills and pass- shortage of sugar for use in food products. For through to headline inflation. the region, cereals (notably wheat) and sugar imports account for 58 and 75 percent of For the diversified economies, food prices led domestic consumption, respectively. And for headline prices through most of 2010, but the these foods alone, costs to the region have food CPI eased from 7.7 percent in October to amounted to $19-per capita or 0.3 percent of dip below headline CPI by February 2011. As of GDP.11 12 April food prices were increasing at a median 3.6 percent pace for the group against overall Tied to higher wheat and oil prices, as well as inflation of 4.5 percent—pointing to the government outlays that have tended to increase likelihood of higher domestic costs emerging in liquidity within economies, inflation picked up countries in transition—Egypt, Tunisia and across both diversified economies and oil others. exporters of the region. For developing Middle Figure MNA.6a Food CPI in developing Middle East Figure MNA.6b Middle East and North Africa oil and North Africa now lags median headline inflation exporters inflation led by rising costs of imported food median ch%, year on year median ch%, year on year 12 12 9 Food CPI 9 Food CPI 6 6 3 Headline CPI 3 Headline CPI 0 0 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Source: World Bank; Haver Analytics. Source: World Bank; Haver Analytics. 106 Global Economic Prospects June 2011: RegionalAnnex Among oil exporters, headline and food price In contrast with the differentiation of terms of inflation have ramped-up much faster, given trade displayed across the diversified group, the exceptionally high import dependence for food aggregate of oil exporters (including GCC) and feedstuffs in a number of economies (figure experienced cumulative gains of 16.2 percent of MNA.6b). For oil exporters (developing as well GDP over 2010-11, 6.2 percent- and a large 10 as GCC), food prices continue to lead overall favorable movement in 2011 and 2012 CPI, with the former standing 7.8 percent above respectively (figure MNA7.b). The run-up in year-earlier levels in March 2011; the later up hydrocarbons receipts as a share of oil exporter’s 4.7 percent. Food price increases span a wide GDP in 2011 exceeds that of the last boom year range from Bahrain (2.7 percent in March (y/y)), of 2008 at 42 percent versus 40 percent. Whether Saudi Arabia (5 percent), Kuwait (10 percent), to the large boost to domestic incomes will result in Iran (26 percent). Price developments in Iran, stronger GDP growth, will depend on the policy especially since December 2010, are due to a of the authorities in the current environment, to combination of international food price hikes save or dispense the windfalls via subsidies or and a removal of domestic subsidies. public works projects. It will also depend on the import propensity of the new spending. Evidence Terms of trade developments for Middle East over 2011 to date suggests that substantial and North African groups are tightly linked to portions of these funds will be expended international price movements and the domestically. underlying commodity composition of goods trade. For the diversified economies, the direct FDI and portfolio flows to the region likely to impact of the first “food crisis” of 2008 cost the fall sharply amid rising risk aversion. group some 2.2 points of GDP (with Jordan an Foreign direct investment (FDI) inflows to the exception) as prices ratcheted much higher. But developing region, increasingly originating in the loss was more-than offset during the global the GCC economies, had been a welcome source recession of 2009 for most countries with of new capital, attracted not only to tourism and softening oil and food prices. During 2010 and related facilities but also to industry (oil and gas, 2011, the terms of trade are anticipated to and other), services (telecoms) and real estate deteriorate in Jordan, Lebanon, and Morocco, (table MNA.2). Countries tending to benefit with both oil and food prices rising. The most from FDI were Egypt, Tunisia, Morocco diversified economies in aggregate are likely to and to a lesser degree, Jordan and Lebanon. At face a fairly moderate decline of 0.8 percentage peak dollar volumes in 2008, FDI amounted to points of GDP in 2010-11 (figure MNA.7a). $29.3 billion or 3.1 percent of regional GDP. Figure MNA.7a Several diversified economies suffer Figure MNA.7b Oil exporters enjoy two years of terms of trade losses in 2010-11 windfall revenues in 2010-11 change in termns of trade as a share of GDP (%) Change in terms of trade as a share of GDP (%) 5 15 4 10 3 2 5 1 0 0 -1 -5 -2 2009 2010 2011 -3 -10 Jordan Lebanon Morocco Egypt 2009 2010 2011 Source: World Bank. Source: World Bank. 107 Global Economic Prospects June 2011: RegionalAnnex Capital flows to developing Middle East and closed on January 28. North Africa held up exceptionally well during the recession of 2009 and over the course of Financial projections for 2011-2013 prepared by 2010 (figure MNA.8), amounting to $26 billion the World Bank suggest a sharp falloff in net in 2009, an increase of $6 billion, and the capital flows in 2011, followed—under equivalent of 0.6 points of GDP. Other flows assumptions of a gradual equilibration of stepped up to offset a $4 billion falloff in FDI political conditions in the region—by fairly rapid during 2010—including issuance of sovereign resumption of flows to reach recent pre-turmoil bonds from among others Tunisia and Lebanon, levels by 2013 (table MNA.2). In particular, FDI and an increase in official lending to the region. is seen to almost-halve from $20-to $10.7 billion in 2011, as GCC and other investors adopt a Following the onset of political disturbance, ‘wait and see’ perspective to political–economy financial market risk premia increased, implying developments. Indeed, the focus of the GCC, tighter financing conditions for sovereign- and less affected by political unrest and bolstered corporate borrowers. Spreads on Egyptian with new revenues, may turn “inward” for a time sovereign credit default swaps (CDSs) increased to bolster domestic demand and infrastructure by 100 to 150 basis points through February and investment. The recently announced $20-billion March 2011. Equity bourses were hard hit from Gulf Development Program for Bahrain and Egypt to Dubai (UAE) to Morocco, with MSCI Oman is an example of this emerging trend. dollar-based indexes dropping by double digits. Egypt’s market capitalization plummeted 14.5 Net private flows in 2011 are viewed to drop by percent during the week before the exchange was a substantial 83 percent to $4.1 billion from $28 Table MNA.2 Capital flows to the Middle East and North Africa $ billions 2003 2004 2005 2006 2007 2008 2009 2010e 2011f 2012f 2013f Current account balance 34.7 49.5 58.9 68.9 74.2 70.5 -10.8 15.4 68.1 74.2 60.2 as % of GDP 8.2 10.2 10.7 10.8 9.6 7.7 -1.1 1.4 5.6 5.7 4.3 Financial flows: Net private and official inflows 13.5 13.0 19.4 14.4 29.4 21.1 27.8 28.0 Net private inflows (equity+private deb 15.6 16.4 22.4 25.7 28.4 22.9 25.5 25.1 4.1 22.1 29.6 ..Net private inflows (% GDP) 3.7 3.4 4.0 4.0 3.7 2.5 2.7 2.3 0.3 1.7 2.1 Net equity inflows 10.2 10.4 19.2 28.2 25.5 29.7 25.6 21.5 11.0 17.9 23.2 ..Net FDI inflows 10.0 9.7 16.8 27.2 27.6 29.3 24.4 20.1 10.7 17.4 22.6 ..Net portfolio equity inflows 0.2 0.7 2.4 1.0 -2.1 0.4 1.2 1.4 0.3 0.5 0.6 Net debt flows 3.4 2.6 0.2 -13.7 3.9 -8.6 2.2 6.5 ..Official creditors -2.1 -3.4 -3.0 -11.2 1.1 -1.8 2.3 2.9 ....World Bank -0.3 -0.6 0.0 -0.8 1.0 -0.3 0.9 1.8 ....IMF -0.6 -0.5 -0.7 -0.2 -0.1 -0.1 -0.1 -0.1 ....Other official -1.2 -2.3 -2.3 -10.3 0.2 -1.4 1.4 1.2 ..Private creditors 5.4 5.9 3.2 -2.5 2.8 -6.8 -0.1 3.6 -6.9 4.2 6.4 ....Net M-L term debt flows 0.9 2.7 2.9 -1.7 -0.7 -2.7 -1.7 5.0 ......Bonds 0.7 2.8 2.5 0.8 0.7 -0.8 0.5 2.3 ......Banks -0.2 0.0 1.3 -1.3 -0.2 -0.5 -1.2 2.7 ......Other private 0.4 0.0 -0.9 -1.2 -1.2 -1.3 -0.9 0.0 ....Net short-term debt flows 4.6 3.2 0.3 -0.8 3.5 -4.2 1.6 -1.4 Balancing item /a -25.1 -47.8 -39.3 -45.5 -55.6 -48.2 7.3 -32.0 Change in reserves (- = increase) -23.2 -14.7 -38.9 -37.8 -48.0 -43.4 -24.2 -11.3 Memorandum items Workers' remittances 20.5 23.2 25.1 26.5 32.1 36.0 33.6 35.6 36.9 38.9 Note : e = estimate, f = forecast /a Combination of errors and omissions and transfers to and capital outflows from developing countries. Source: World Bank. 108 Global Economic Prospects June 2011: RegionalAnnex billion in 2010—a falloff equivalent to 2.1 weaker worker remittances; FDI flows are percent of regional GDP. Thereafter, a revival of likely to decline substantially. Unemployment FDI is hoped to lead private flows back into a reached 11.9 percent during the first quarter of range near $20 billion, with new opportunities 2011, and may increase further as a result of for investment emerging in the region. Clearly disruptions to activity, but also as some risks to this projection are numerous, and in 183,000 overseas workers have returned– and particular, a more extended period of time may are continuing to return from Libya.14 Against be required before international and local risk this background, GDP growth is anticipated to aversion regarding the region is diminished. drop sharply to 1 percent in 2011. Recent reports regarding financial support from Economic developments and policy among the international organizations and bilateral donors diversified economies. 13 is encouraging. A stronger start to 2010, and a sufficiently The Tunisian revolution, removal of former diverse set of outturns across countries, meant President Ben Ali and dissolution of the ruling that GDP growth for the diversified group party and Parliament have been significant faltered by just 0.3 points from 2009 outturns to developments. GDP is anticipated to be hard 4.5 percent in 2010—still notable as a 0.4 hit by declines in production and in services percentage point mark-down from earlier activity (tourism), such that growth of 1.5 expectations. percent is a likely outturn for 2011. The interim government has undertaken short-term Until recent political events, the Egyptian measures to support business and the labor economy showed strong signs of recovery market; and a with $1 billion multi-donor from the global recession, during which package the financial situation should remain Egypt’s GDP advanced 4.7 percent against an manageable. increase of 1.9 percent for all developing countries. Consumer spending and increasing In Jordan, political tensions are occurring activity in construction, tourism and while economic recovery remains weak. GDP communications were driving forces for growth of 3.1 percent characterized 2010, growth, which moved up to 5.2 percent in based on weak consumption and a drop in 2010. Egypt is facing a more prolonged period public investment. In February, Moody’s and of political uncertainty with signs emerging S&P both downgraded Jordan’s debt outlook during early 2011 of disruptions to production, rating, raising the cost of capital for the widening trade deficits, falling tourism and Kingdom. To address social concerns the King launched initiatives related to corruption and Figure MNA.8 FDI viewed to halve from $20- to improving governance and the government $10 billion in 2011 increased social spending and subsidies on the net capital f lows to developing MENA region order of 2.1 percent of GDP. In Lebanon, the billions USD billions USD [L] and %GDP [R] % of GDP government of National Unity formed in 35 3.5 November 2010, collapsed on January 12, 25 3.0 2011 blocking further policymaking. Still the 2.5 economy grew by a rapid 7 percent in 2010 on 15 the back of domestic demand fueled by foreign 2.0 5 financial inflows. A key risk is that traditional 1.5 Lebanese political rifts could re-emerge amid -5 Portfolio flows 1.0 the regional unrest of 2011. FDI Official creditors -15 Medium-term debt 0.5 And in Morocco, the King announced Short-term Debt Share of GDP % potentially significant constitutional and -25 0.0 2008 2009 2010 2011 fcst political reforms in response to a series of popular protests in more-than 52 cities during Source: World Bank. late February 2011. The announced proposals 109 Global Economic Prospects June 2011: RegionalAnnex appear to be short of the youth movement’s authorities over a range of intensity (from most demands, but are supported by political parties. severe in Yemen and Syria, to latent popular The economic outlook remains generally dissatisfaction in Iran, and to a lesser degree in favorable with a sustainable macro- and Algeria). Growth for the aggregate of oil financial framework. GDP growth could pick exporters dipped from 2.2 percent in 2009 to 1.4 up in 2011 based on gains in domestic percent in 2010. Gains across the group ranged demand, in part funded by increased subsidies from 1 percent in Iran to 3.3 percent in Algeria, for food and fuel. with Yemen an exception, as the coming online of an LNG train boosted growth to 8 percent in Oil exporter’s windfall eclipses 2007-08. the year. OPEC members GDP gains were dampened by constraints in hydrocarbons output Middle East and North African developing and in support of price targets, but were supported by GCC oil exporters15 appear set to eclipse the stronger growth in non-oil GDP. All oil hydrocarbon revenue windfalls of 2007-08 exporters benefited from the 28 percent gain in during the course of 2011 (figure MNA.9). The oil prices in 2010 (to $79/bbl from $62/bbl in cumulative increase in oil export receipts over 2009).16 2010-11 amounts to $370 billion or 37 percent of oil exporter-GDP, with total revenues expected Although protests in Algeria have not to peak at $845 billion in 2011. Several large coalesced into revolutionary style movements exporters (including Saudi Arabia) have begun as in some neighboring countries, Algeria’s to advance production modestly to offset the loss anticipated $72 billion in crude oil and natural of Libyan crude, and combined with the 36 gas exports in 2011 remains somewhat percent gain in crude oil price for the year, vulnerable to political unrest which could resulting export receipts are anticipated to disrupt shipments. GDP gains in 2010 were increase within a range of $85 billion for Saudi grounded in moderate advances for the oil Arabia to $10 billion in Oman. The aggregate sector and non-oil growth of some 5.3 result contrasts with top receipts of $735 billion percent—reflecting strong multiplier effects during 2008, with the buildup in revenues having associated with public infrastructure programs. accrued to $245 billion over 2007-08. Authorities have mitigated the chances of unrest by increasing food subsidies and Within the region, such massive revenue gains microcredit loans; adding public sector jobs for oil exporters offer authorities the means to and promising more sustainable employment increase spending of various forms to mitigate in other sectors of the economy. Though the potential for protest and social unrest. Saudi Figure MNA.9 Middle East and North Africa oil Arabia for example, pledged to provide revenues build by $370 billion over 2010-11 unemployed Saudi nationals with financial support for a year, helping its young population billions U.S. dollars 900 cope with structurally high unemployment. The 800 Saudi Government issued a number of such 700 orders with a total cost of SR135 billion ($36 600 billion) for the first year; possibly accumulating 500 to $100 billion over 10 years. 400 300 Developing oil exporters face economic as well 200 as social challenges against a broadly 100 favorable international background 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 The group of developing oil exporters in the Saudi Arabia Kuwait UAE Algeria Iran Oman Qatar Bahrain region, Algeria, Iran, Syria, and Yemen, form a Yemen Syria group of economies troubled by political protest Source: World Bank-COMTRADE and Interna- and/or forms of repression on the part of tional Energy Agency. 110 Global Economic Prospects June 2011: RegionalAnnex spending has added a degree of stress to the favor Middle East and North African oil fiscal position, new oil revenues should more- exporters with terms of trade moving largely than compensate in the near term. With OPEC against regional oil importers, but intensified for likely to expand output over the next years, all countries by the surge in international grains Algeria should be well placed to participate prices. more fully in energy markets, while keeping domestic demand buoyant. As highlighted in figure MNA.10, the net result of regional and international developments is a The recent upturn in unrest in the Middle East strong compression of GDP growth for the appears to have briefly reinvigorated Iran’s aggregate of developing countries in the region, ’Green Movement’, however there was no moving down by 1.2 percentage points between substantial effects on the economy as protests 2010 and 2011 to 1.9 percent. The step-down in were quickly suppressed. Despite growth for oil exporters (0.6 points in the year) improvements in global oil markets, Iran’s to 1.4 percent, compounds the sharper downturn growth has weakened over the last two years for diversified economies (2 points), dominated as a result of a major tightening of monetary by markdowns from pre-‘social revolution’ policy in mid-2008 that led to a slowdown in projections for several countries (figure MNA.1 growth in 2009; a large-scale subsidy reform earlier). The diversified economies in aggregate program that went into effect in December are expected to fall from growth of 4.5 percent in 2010, and the effects of the 4th round of 2010 to 2.5 percent in 2011. international sanctions against the country taking hold. GDP growth registered a meager Differences in current account balances between 0.1 percent during 2009, and remained weak at the groups for 2011 are presented in table a 1 percent gain in 2010. The approved 2011 MNA.3—with oil exporter surpluses rising from budget contains a major fiscal stimulus 5.4-to 12.6 percent of GDP from 2010 to 2011, package that pushes budgetary spending up vis- -vis increased deficits of some 0.8 points for sharply (46 percent), to counter subsidy the diversified economies to 4.8 percent of GDP. reforms and sanctions, putting additional On fiscal accounts, deficits increase to more-than pressures on already accelerating inflation. 7 percent of GDP in 2011 for the diversified Syria (more recently) and Yemen have joined exporters given the drain on government Libya closer to the fulcrum of popular protest revenues associated with declining tourism and and severe, violent repression by authorities in potentially increased subsides to cover higher the region. Economic developments will likely food and fuel costs; for developing oil exporters, move into second-tier consideration until some fiscal deficits narrow by 1.7 points to 0.5 percent form of resolution is found to the violence and of GDP. civil-war like conditions in Yemen and repression by Syrian authorities. Neither Political economy transitions will be crucial for country is a major exporter of crude oil (Syria the economic outlook. Under the assumption that about $4 billion) and Yemen just commencing some form of “normalization” takes place across gas production and exports amounting to $8 countries—a revival in domestic demand billion in 2010. becomes feasible, as does the ability of economies to participate in a rebound in Medium-term outlook international activity, through goods trade, tourism and investment flows. On these grounds Political economy developments within the views for GDP growth over 2012-13 are region appear likely to result in less disruption to moderately optimistic for the developing region- economic activity in those oil-exporting -though still below pre-‘Arab Spring’ economies least exposed to unrest and more expectations—at 3.5 and 4 percent respectively. aggressive popular calls for reforms. At the same time, the international environment has come to Regional growth in this phase is likely to be 111 Global Economic Prospects June 2011: RegionalAnnex driven by the diversified economies, 4 and 5 Figure MNA.10 Growth returns to 4 percent by percent gains over the period respectively, led by 2013 under favorable assumptions 5 percent advances in Egypt by 2013, and by percent change improvements in performance for Morocco, 5 Jordan, Lebanon and Tunisia to similar rates of growth. Domestic demand contributes fully 7.8 2010 2011 2012 2013 points of growth in these years, with net exports 4 influenced by a catch-up in import demand, dampening GDP gains by about 3.3 percentage 3 points. Developing oil exporters experience a more modest growth pickup to 3.2 percent in 2 2012-13 powered by public spending programs in both Algeria and Iran. As the current run-up in 1 oil prices turns to a modest gradual decline over the period current account surplus for the group 0 Diversified Exporters Developing Oil Developing MENA eases from 12.6 percent of GDP in 2010 to 9.7 Exporters percent by 2013, in part due to strong import growth tied to large infrastructure and social Source: World Bank. development programs. Table MNA.3 Middle East and North Africa country forecasts (annual percent change unless indicated otherwise) Est. Forecast 98-07a 2008 2009 2010 2011 2012 2013 Algeria b GDP at market prices (2005 US$) 3.5 2.4 2.4 3.3 3.7 3.6 3.5 Current account bal/GDP (%) 28.9 20.0 0.3 9.4 17.8 17.4 12.0 Egypt, Arab Rep. b GDP at market prices (2005 US$) 4.3 7.2 4.7 5.2 1.0 3.5 5.0 Current account bal/GDP (%) 0.9 -0.9 -2.3 -2.0 -2.9 -2.4 -2.0 Iran, Islamic Rep. b GDP at market prices (2005 US$) 4.9 1.0 0.1 1.0 0.0 3.0 3.0 Current account bal/GDP (%) 10.3 15.7 4.2 6.0 14.5 14.0 12.0 Jordan b GDP at market prices (2005 US$) 5.6 7.6 2.3 3.1 3.5 4.0 5.0 Current account bal/GDP (%) -2.3 -9.6 -5.1 -4.3 -8.0 -6.8 -6.0 Lebanon b GDP at market prices (2005 US$) 2.8 9.3 8.5 7.0 4.8 5.0 6.0 Current account bal/GDP (%) -17.5 -13.7 -21.5 -15.4 -15.6 -15.6 -15.0 Morocco b GDP at market prices (2005 US$) 3.7 5.6 4.9 3.3 4.4 4.5 5.0 Current account bal/GDP (%) 1.4 -5.2 -5.0 -4.2 -4.0 -3.5 -3.0 Syrian Arab Republic b GDP at market prices (2005 US$) 2.9 4.5 6.0 3.2 1.7 3.0 3.0 Current account bal/GDP (%) 3.0 0.3 -5.7 -4.4 -5.3 -4.8 -4.5 Tunisia b GDP at market prices (2005 US$) 4.5 4.5 3.1 3.7 1.5 3.5 4.5 Current account bal/GDP (%) -2.8 -3.8 -2.9 -4.8 -6.2 -4.0 -3.8 Yemen, Rep. b GDP at market prices (2005 US$) 3.5 3.6 3.9 8.0 3.0 4.0 4.0 Current account bal/GDP (%) 2.5 -4.6 -10.7 -4.4 -4.0 -4.0 -3.4 World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time. Djibouti, Iraq, Libya, West Bank and Gaza are not forecast owing to data limitations. a. Growth rates over intervals are compound average; growth contributions, ratios and the GDP deflator are averages. b. GDP measured in constant 2005 U.S. dollars. c. Estimate. d. Forecast. Source: World Bank. 112 Global Economic Prospects June 2011: RegionalAnnex Risks region included in this report are Algeria, The Arab Republic of Egypt, The Islamic Among the numerous challenges facing the Republic of Iran, Jordan, Lebanon, Morocco, region at this critical time, are wide variations in the Syrian Arab Republic, Tunisia and the set of possible political-economy outturns Yemen. Data is insufficient for the inclusion that could result from the series of reform of Djibouti, Iraq, Libya and the West Bank movements and differing responses of and Gaza. The high-income economies authorities over 2011, from lower growth included here are Bahrain, Kuwait, Oman scenarios associated with limited or unsuccessful and Saudi Arabia. Data is insufficient for the reform, to higher growth scenarios linked to inclusion of Qatar and the United Arab deeper and swift changes. The outturns of such Emirates. The group of developing oil developments in the Middle East and North exporters includes Algeria, the Islamic Africa would carry effects well beyond the Republic of Iran, the Syrian Arab Republic geographic boundaries of the area, as the oil and Yemen. The diversified economies of market (for one) would act as a powerful channel the region (oil importers) may be usefully for transmission to the global economy. segmented into two groups: those with strong links to the GCC (Jordan and The ongoing fiscal crisis in the Euro Area Lebanon), and those with strong EU links presents an external risk for the region, which if (The Arab Republic of Egypt, Morocco and continued or intensified would imply a longer Tunisia). period of sub-par exports and growth for the Maghreb economies. Moreover, if risk 3. See “Middle East and North Africa perceptions regarding the broader Middle East Economic Recovery Weakened in the Midst and North Africa region have “hardened” due to of Arab Uprisings”, A Regional Economic safety and other concerns, a risk that the flow of Update. Middle East and North Africa tourist arrivals from Western Europe might be Region. The World Bank. April 2011. lost for an extended period of time is one of concern. 4. See Arab World Brief: Shamshad Akhtar. Vice President, World Bank, Middle East And should oil prices remain at higher levels for and North Africa region. February 2011. a longer period of time, emergence of newer energy sources (affordable at prices over $100/ 5. The types of growth rates discussed in this bbl oil equivalent), such as solar/ocean, section and throughout the report, and Canadian tar sands, U.S. shale gas and appearing in accompanying figures—range improvements to enhanced recovery techniques from simple year-over-year (y/y) percentage could yield faster-than earlier anticipated change: gy/y=((Xt/Xt-12))-1)*100; a ‘smoothed’ competitive pressures for hydrocarbon exports in yr/yr rate, which helps to even out volatility the medium to longer terms. to highlight underlying trends: sgr=(((average (Xt-2:Xt)/(average (Xt-14:Xt-12))-1)*100, and a Notes: seasonally adjusted annualized rate (saar) which annualizes (i.e. multiplies– or raises to 1. Global Economic Prospects: “Navigating the power-4) the relationship between Strong Currents”. The World Bank. January consecutive 3-month averages to obtain a 2011. Internet. And “Sustaining the clearer picture of most recent trend Recovery and Looking Beyond”, A Regional developments. saar=(((average(Xt-2:Xt)/(average (Xt-5:Xt-3))**4)-1)*100. Economic Outlook. Middle East and North Africa Region. The World Bank, January 6. See ‘World Tourism Impact Data’. World 2011. Travel & Tourism Council (WTTC). London. 2011. www.wttc.org for definitions 2. The low-and middle income countries of the of ‘direct-, indirect, and induced’ impacts of 113 Global Economic Prospects June 2011: RegionalAnnex tourism on the national economy. And (including Qatar and UAE), Algeria, Iran, ’UNWTO World Tourism Barometer’. Syria and Yemen. Data for Iraq and Libya is United Nations’ World Tourism not available at this time. Organization. Madrid. April 2011. 16. Expressed as World Bank average price. 7. World Bank preliminary projections. Middle East and North Africa Poverty Reduction and Economic Management Unit. May 2011. 8. Worker remittances as presented in this report are sourced from the World Bank’s Migration and Remittances Unit (DEC/ PREM). The definition of ‘remittances’ compiled by the Unit differs from that of the IMF’s Balance of Payments (BOP) construct: in particular, to the BOP transfer item ‘worker remittances’ is added BOP factor income items ‘compensation of employees’ and ‘migrant transfers’ (on both the credit and debit sides). Data is reported as gross receipts (credit) or payments (debit) presented in calendar-year U.S. dollars. 9. See ‘Migration and Remittances Factbook 2011’. World Bank. Migration and Remittances Unit. November 2010. 10. The World Bank average price of crude oil is a simple average of Brent, Dubai, and WTI benchmarks. 11. Middle East and North Africa ‘Knowledge and Learning Note’. Number 38. World Bank. Middle East and North Africa Department. March 2011. 12. It should be noted that the high price of sugar on international markets served to shift Brazilian producers of sugar cane from directing output toward ethanol production, to the refined sugar market. Indeed, Brazil is now importing ethanol from the United States as an additive to local fuels. 13. ‘Economic Monitoring Notes’. World Bank. Middle East and North Africa Department. Spring 2011. 14. As of March 14, 2011. 15. The group is comprised of all GCC members 114 Global Economic Prospects June 2011: RegionalAnnex South Asia Recent developments developing countries, recovering demand in high -income countries and resilient worker After growing a robust 9.3 percent during remittances inflows (table SAR.1). calendar year 2010, activity in South Asia moderated in the first quarter of 2011—pointing The regional economic slowdown in 2011 to a projected slowdown in aggregate regional mainly reflects a fall-off in activity in India, growth to a still buoyant 7.5 percent in 2011. which represents about 80 percent of South This slowdown partly reflects macroeconomic Asia’s GDP, where growth is projected to ease policy tightening aimed at curbing stubbornly to 8 percent in FY2011/2012 from 8.8 percent in high price pressures and reducing large fiscal FY 2010/11 (box SAR.1). The slowdown stems deficits. Tighter financing conditions have from a moderation in domestic demand, as contributed to a moderation in private elevated inflationary pressures have cut into investment growth, while private consumption disposable incomes and household spending¸ growth has been hit by high and rising food and and as more restrictive monetary conditions have fuel inflation. The moderate compression of contributed to a dampening of investment domestic demand has been partly offset by activity. In particular, investment growth strong exports, as countries in South Asia have decelerated sharply in Q1-2011 to 0.4 percent benefited from robust import demand in from 7.8 percent in Q4-2010 and 14.1 percent Table SAR.1 South Asia summary forecasts (annual percent change unless indicated otherwise) Est. Forecast 98-07a 2008 2009 2010 2011 2012 2013 GDP at market prices (2005 US$) b,f 6.0 5.9 6.2 9.3 7.5 7.7 7.9 GDP per capita (units in US$) 4.4 4.5 4.8 7.9 6.1 6.4 6.6 PPP GDP d 6.0 5.8 6.3 9.0 9.5 7.7 7.7 Private consumption 4.9 6.8 6.4 7.0 5.9 5.6 5.9 Public consumption 3.9 16.9 13.6 2.8 6.7 5.4 4.8 Fixed investment 9.5 5.6 3.9 14.3 9.4 12.6 13.1 Exports, GNFS e 14.1 13.7 -6.3 12.7 11.3 11.7 12.4 Imports, GNFS e 9.3 24.8 -6.5 3.2 8.8 10.5 11.6 Net exports, contribution to growth -0.2 -3.7 0.6 1.7 0.1 -0.2 -0.4 Current account bal/GDP (%) -0.4 -3.3 -1.7 -2.4 -2.8 -2.6 -2.4 GDP deflator (median, LCU) 5.7 8.4 7.5 9.8 8.8 8.6 7.0 Fiscal balance/GDP (%) -7.1 -7.3 -8.9 -8.3 -7.4 -6.9 -6.6 f Memo items: GDP at market prices South Asia excluding India 4.5 4.8 3.9 5.0 4.7 4.7 5.2 India 6.4 4.9 9.1 8.8 8.0 8.4 8.5 at factor cost - 6.8 8.0 8.5 8.2 8.5 8.6 Pakistan 5.0 1.6 3.6 4.1 2.5 3.9 4.3 Bangladesh 5.1 6.2 5.7 5.8 6.2 6.4 6.6 a. Growth rates over intervals are compound average; growth contributions, ratios and the GDP deflator are averages. b. GDP measured in constant 2005 U.S. dollars. c. GDP figures are presented in calendar years (CY) based on quarterly history for India. For Bangladesh, Nepal and Pakistan, CY data is calculated taking the average growth over the two fiscal year periods to provide an approximation of CY activity. d. GDP measured at PPP exchange rates. e. Exports and imports of goods and non-factor services (GNFS). f. National income and product account data refer to fiscal years (FY) for the South Asian countries, while aggregates are presented in calendar year (CY) terms. The fiscal year runs from July 1 through June 30 in Bangladesh and Pakistan, from July 16 through July 15 in Nepal, and April 1 through March 31 in India. Due to reporting practices, Bangladesh, Nepal, and Pakistan report FY2009/10 data in CY2010, while India reports FY2009/10 in CY2009. Source: World Bank. 115 Global Economic Prospects June 2011: RegionalAnnex for 2010 overall (year-on-year). At the sectoral growth is also tied to worsening security level, a recent good harvest buoyed agricultural conditions, heightened political uncertainty, production, following poor crops on low rainfall stalled policy implementation, and extensive with the 2009 monsoon. In contrast, industrial infrastructure bottlenecks. While whole year output growth was weak in early-2011. growth numbers are expected to be weak, activity has begun to firm recently, as the effects Economic growth in Pakistan—the region’s of the 2010-flooding (which affected an second largest economy (representing about 15 estimated one-fourth of agricultural productive percent of regional GDP)—significantly lags capacity) wear off, supported by a surge in much of South Asia, and is projected to slow to exports in early-2011, and an upswing in worker 2.5 percent in FY2010/11 (ending June-2011) remittances inflows. from 4.1 percent in FY2009/10, reflecting the devastating flooding across much of the country Real GDP growth in Sri Lanka remains buoyant, in July and August 2010. The easing of GDP but has decelerated in early-2011, due to floods Box SAR.1 GDP reporting practices—market price versus factor cost and calendar year versus fiscal year There are a number of measures of economic output—including gross domestic happiness as reported in Bhutan. Most governments report headline GDP at market prices in calendar-year terms. In South Asia, many govern- ments report data on a fiscal-year basis using factor costs to weight output rather than market prices. The Indian government reports data in two different ways: factor cost and market prices, both in fiscal-year terms—although it places greater emphasis on the factor-cost measure. Importantly, although these measures are consistent, they can yield large differences. The differences arise because the weights attached to sectoral growth rates differ, depending on which measure you use. The factor-price measure weights output using prices that are net of indirect taxes less subsidies in a base year, while the market-price measure uses weights that are based on the actual market prices observed in a base year. If the underlying growth rates of sectors with relatively high net tax-rates are different from those of sectors with relatively low net tax-rates in the base year, then there will be a systematic and persistent difference between real GDP growth measured at factor cost and GDP measured at market prices. Indeed such persistent differences between real GDP growth at market prices and at factor cost are observable across most countries that publish both data, including Brazil, Australia and Germany, for example. In India, this difference is historically about 0.3 percentage points over the past twenty years, and by even more in recent years. There are a number of reasons why countries choose to report different headline measures. Only a small subset of countries (Egypt, Indonesia, Iran, and much of South Asia), report headline GDP at factor cost, in part reflecting that agricultural sectors remain important drivers—albeit typically declining—to their growth outturns. Similarly, countries often report data in fiscal years (instead of calendar years), as this often reflects the given country’s crop year. For the purposes of this report, GDP growth is provided at the country level at market prices in both calendar-year terms and fiscal-year terms for South Asia, while all regional aggregates are provided at market prices in calendar -year terms. The use of GDP at market prices in calendar-year terms enables ready comparison and aggregation across countries. This is because the vast majority of governments outside of South Asia report headline GDP at market prices—as it tends to be easier to monitor (and more reliable) given tax receipts, for example. Addition- ally, fiscal years can vary significantly across countries. For example, India’s fiscal year runs from April 1 through March 31 and Nepal’s fiscal year runs from July 16 through July 15. India's real GDP growth at market prices and factor cost, in calendar year- and fiscal year-terms 2003 2004 2005 2006 2007 2008 2009 2010 Market Price 6.9 7.9 9.2 9.4 10.1 6.2 6.8 10.3 Factor Cost 7.4 7.2 9.2 9.6 9.7 6.1 8.5 9.0 2003-04FY 2004-05FY 2005-06FY 2006-07FY 2007-08FY 2008-09FY 2009-10FY 2010-11FY Market Price 8.4 8.3 9.3 9.3 9.8 4.9 9.1 8.8 Factor Cost 8.5 7.5 9.5 9.6 9.3 6.8 8.0 8.5 Sources: Central Statistics Office, India and The World Bank. Note: For years 2006 and 2005-06FY onward, the base year is 2004-05FY. For prior years, the base year is 1999-2000FY. 116 Global Economic Prospects June 2011: RegionalAnnex that damaged a significant share of this year’s sectoral level, rising agricultural output reflects early crop. GDP growth in 2010 (calendar year) good harvests, and strengthened industrial registered 8 percent and has been strongly production has been buoyed by a revival in underpinned by the peace dividend following the garment exports. However, Bangladesh’s output end of the decades-old civil war. The recovery continues to be constrained by widespread power was led by private consumption and investment. supply outages, which are expected to limit GDP Agricultural output growth was boosted by the gains to 6.2 percent FY2010/11 (ending June- return to production of previously fallowed land 2011) from 5.8 percent in FY2009/10. with the cessation of fighting, while services activity benefitted from an upsurge in tourism. Among the remaining economies in South Asia, Activity in the first few months of 2011 has Bhutan’s real GDP is firming, underpinned by slowed due to waning of these rebound effects construction of additional hydropower projects, from the end-of-conflict and more normal and to a lesser extent by a revival in tourism. In growth rates in agriculture (aside from the FY2010/2011 GDP growth is projected to rise to negative impact of floods). 8.3 percent, up from 6.9 percent in 2009/10, (ending June-2010). The recovery in the Afghanistan’s GDP (on a fiscal year basis) is Maldives appears to have firmed slightly in early expected to have grown 8.2 percent in -2011 with strong tourism arrivals. In 2011, FY2010/11 (ending June-2011), down from an GDP growth is projected to accelerate to 5 unsustainable 20.1 percent increase in percent (calendar year) following 4.8 percent in FY2009/10 that was driven by a record harvest 2010. Tourism is expected to remain the key (following a long period of drought) and an driver for growth, supported by a 17.4 percent upswing in donor grants. Output this year expansion of capacity (number of beds) at end- continues to be bolstered by reconstruction and 2010 and robust growth in arrivals stemming strong aid inflows, which are reflected in a from diversification to faster-growing new robust expansion of services (including markets. In particular, China surpassed the transport) and vibrant construction activity. United Kingdom in 2010 as the largest source of tourists to the Maldives. Nepal also experienced a moderation in activity in early-2011. Ongoing political uncertainty Inflationary pressures are elevated across South attached to the post-conflict transition to a new Asia reflecting various factors, including higher government has extended into its fourth year, international food and fuel prices, tight capacity with law and order problems, continued utilization, and past macroeconomic loosening, extensive infrastructure bottlenecks (particularly which have led to elevated inflation expectations widespread load-shedding and unreliable power and higher core prices (figure SAR.1). High delivery) projected to limit real GDP growth to international fuel and food prices are key factors 3.5 percent in FY2010/2011 (ending mid-July- in South Asia because of its heavy reliance on 2011), down from 4.6 percent in FY2009/10. imports of oil and some staples, such as edible oils. Additionally, food represents a large share GDP growth has been picking up in Bangladesh, (about 40 percent) of the regional household where private consumption spending has been consumption basket, a key concern from a supported by higher private sector credit growth poverty perspective. and public- and private-sector wage increases. However, the strong boost to consumer incomes In particular, international wheat and edible oils from worker remittances in 2009 (up 17.1 prices have surged, while rice prices have percent in dollar terms that year) has given way remained more stable. Afghanistan, the Maldives to a much more modest 2.7 percent gain in 2010, and Sri Lanka—where at least one-third of reflecting falling net outmigration since 2009 domestic consumption of grains (including rice, and fewer remitters following last year’s return wheat, pulses) and edible oils is imported—are of workers from several gulf states. At the most exposed to an imported pass-through of 117 Global Economic Prospects June 2011: RegionalAnnex higher international commodity prices (figure partial liberalization of petroleum prices in India SAR.2). Indeed, reliance on imported edible oils (mid-2010); and the raising of administered is high across the region, where at least two- petrol prices elsewhere in the region (including thirds of consumption is imported (in Bhutan, the Maldives, and Pakistan). A recent Afghanistan, Bangladesh, India, Pakistan, and devaluation of the Maldives’ currency, following Sri Lanka, for which data is available). Some the introduction of an exchange rate band around countries are self-reliant in key staples, such as the Rufiyaa/US-dollar peg (R12.85/$1) of plus Bangladesh, India and Nepal, where rice-imports or minus 20 percent, has also contributed to a represent a very small share of consumption (2 resurgence of inflation in that country. percent or less). Notably, the short-run pass- through (monthly) of international grain prices is To rein-in domestic demand and inflationary generally low in South Asia, partly reflecting pressures, monetary authorities have initiated administered prices. For example, in India, policy rate hikes in Bangladesh, India, and wheat prices have remained well-below Pakistan, with the Reserve Bank of India having international prices, compared to near complete started raising rates in March 2010. Despite pass-through in Bangladesh. these measures, real policy interest rates are negative—or remain looser than they were prior The strength of the recovery in South Asia partly to the crisis (figure SAR.3). Unfortunately, explains the persistence of inflation in the bringing inflation back down will be region, as little spare capacity remains. Although complicated by the trend rise in inflation over estimates of potential output can vary depending the past decade, which has contributed to an on methodology and assumptions—especially increase in inflationary expectations in recent for countries with ongoing conflict, such as years. Household surveys in India, for example, Pakistan, or coming out of conflict, such as Sri indicate that consumers’ inflation expectations Lanka—measures across sources for many of the have increased over the last four years (from 5.8 region’s economies (Afghanistan, Bangladesh, percent in Q4-2006 to 13.1 percent in Q4-2010 India, Sri Lanka) suggest output gaps narrowed for year-ahead inflation), and have recently (or closed) in 2010, which has likely contributed jumped by 1.2 percentage points in the second to price pressures. In addition, a series of local half of 2010 (figure SAR.4).1 one-off factors have contributed to price pressures including: the economic disruptions Despite the steps taken earlier to reduce fuel from flooding in Pakistan (during the second subsidies, the pass-through of higher half of 2010) and Sri Lanka (early-2011); the international energy prices is incomplete, Figure SAR.1 South Asia’s inflationary pressures Figure SAR.2 Imports of rice, wheat and edible oils as a sharply exceed other developing countries in post- share of domestic consumption crisis years median annual percent change, CPI %-shares, 2008/9-2010/11period averages, zeros indicate no data available, ranked by wheat 12 140 120 10 Developing Countries 100 Rice Wheat Edible oils South Asia 8 80 60 6 40 4 20 0 2 Nepal India Pakistan Afghanistan Bangladesh Sri Lanka* 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Sources: World Oil, U.S. Department of Agriculture and The World Bank *Sri Lanka's wheat imports as a share of consumption is above 100% due to re-exports Sources: Thomson Reuters and World Bank. Source: U.S. Department of Agriculture and World Bank. 118 Global Economic Prospects June 2011: RegionalAnnex increasing subsidization costs and contributing funded by the Tala hydroeclectic project revenue to fiscal deficits (figure SAR.5). The region’s stream. In Bangladesh, the deficit rose to 4.9 large general government budget deficits are also percent in 2010/11, due to large outlays for complicating efforts to restrict domestic demand investment in power generation and higher and reduce inflation. South Asia’s aggregate subsidies. Sizeable foreign aid inflows and fiscal deficit continues to outstrip those of other improved revenue performance helped contain developing regions. And, despite progress Nepal’s deficit to a relatively modest 2.8 percent toward fiscal consolidation in some countries of GDP and helped Afghanistan retain a surplus (India, Maldives and Sri Lanka) in 2010, general of 0.6 percent of GDP. government deficits remain very high, at 8.8 percent of GDP in India for FY2010/11, 20.7 Given high inflation rates—currencies in South percent in the Maldives for CY2010, and 7.9 Asia appreciated in real effective (trade- percent in Sri Lanka for CY2010. Large outlays weighted and inflation adjusted) terms, with the for interest payments are slowing progress toward fiscal consolidation, and—while Figure SAR.4 India's household inflation expectations have increased improving in some countries (Afghanistan, Maldives, and Sri Lanka, for example)—the mean inflation rates for given survey quarter, y/y percent growth rates region’s low tax base makes consolidation 17 Current perceived particularly challenging. 1-Year Ahead 15 Actual CPI Linear (Current perceived) Elsewhere in the region, fiscal balances have 13 Linear (1-Year Ahead) deteriorated. In Pakistan—after rising to 6.3 Linear (Actual CPI) percent of GDP in FY2009/10—the deficit 11 continued to expand in the first half of 9 FY2010/11 tied to flood-related outlays, high power-sector subsidies and increased defense 7 spending. In Bhutan, the fiscal deficit rose to an 5 estimated 4.4 percent of GDP in FY2010/11, as the government continues to plow money into 3 development and infrastructure projects Q3-2006 Q2-2007 Q1-2008 Q4-2008 Q2-2009 Q1-2010 Q4-2010 (including roads, financial services and information technology) that are only partly Sources: Reserve Bank of India and World Bank. Figure SAR.3 Real lending rates remain expansionary Figure SAR.5 Elevated food and fuel prices are likely in India and Pakistan, despite monetary policy tighten- to weigh on fiscal balances and might delay consolida- ing tion lending interest rate minus CPI, annual growth rates, percent General government balances, percent share of GDP 16 2 1 12 0 8 -1 -2 4 -3 0 -4 -5 -4 Bangladesh -6 2007 2010 2013 -8 -7 India Pakistan -8 -12 Sri Lanka -9 -16 South Asia High-Income Middle East East Asia and Latin America Sub-Saharan countries and North Pacific and Africa Jan-06 Aug-06 Mar-07 Oct-07 May-08 Dec-08 Jul-09 Feb-10 Sep-10 Africa Caribbean Sources: Economist Intelligence Unit and World Bank. Source: World Bank. 119 Global Economic Prospects June 2011: RegionalAnnex largest increases in Pakistan and Nepal, where in combination with higher import prices led to a currencies stood about 15 percent above mid- modest deterioration in the region’s trade deficit 2008 levels at end-2010. Bangladesh’s real from 6.2 percent of GDP in 2009 to 6.4 percent effective exchange rate had appreciated strongly of GDP in 2010. as well, but depreciated during much of 2010 and ended the year 12 percent above pre-crisis Tourism receipts rebounded in 2010 following levels. In India and Sri Lanka, real effective the 2009 downturn with nearly all countries in exchange rate appreciation has been less the region registering a recovery (Bhutan, India, pronounced, about half the rates of appreciation Maldives, Nepal, and Sri Lanka). Sri Lanka in across the rest of the region (8 percent and 6 particular posted a 46 percent upsurge in tourist percent, respectively, over the same period). arrivals following the end of civil war in 2009. In general, higher regional tourist arrivals Despite headwinds implied by appreciating reflected recovery in high-income Europe and currencies, regional merchandise export volume vibrant growth in developing East Asia, growth accelerated sharply in the second half of especially China. 2010 (figure SAR.6). As the global growth recovery has deepened, external demand for Worker remittance inflows to South Asia rose in South Asia has firmed, with volume growth U.S.-dollar terms by 8.2 percent in 2010 to $81 given an extra impetus following a shift in billion, helping to offset sizeable trade deficits, export market composition toward higher- remaining a critical source of foreign exchange.2 growth developing countries (China) and away However, when measured in local currency from traditional export markets in slower- terms, remittances inflows to the region grew by growing Europe and the United States (figure only 4.1 percent in 2010, while high inflation SAR.7). In India, the value of exports rose by rates meant that the real value of these inflows 37.5 percent year-on-year to reach $245 billion declined by 3.9 percent. in FY2010/11, exceeding the $200 billion government target. Among other factors, this The pick-up in the dollar value of remittances strong performance reflects the success of the was strongest in Sri Lanka, where they increased government's strategy to expand export markets 24 percent in 2010—reflecting increased inflows in emerging economies, particularly in Latin through official channels and the boost in America and Asia. Regional merchandise import confidence following the end of the civil war. In volume growth remained robust as well, which Nepal, the dollar value of remittances expanded Figure SAR.6 South Asia's merchandise goods exports Figure SAR.7 Shift toward developing country export markets buoys South Asia's export growth as demand recover following sharp deceleration in mid-2010 slackens in high-income countries 3m/3m, %-change, seasonally adjusted annualized rates, percent share of South Asia's merchandise exports long-term average=1991-2010 40 100 2000-2004 2005-2009 2010 Developing excl. South Asia South Asia High Income Countries World long-term average 35 80 30 60 25 40 20 20 15 0 10 -20 5 -40 0 -60 Developing countries European Union United States Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11 Sources: CEIC and World Bank. Sources: Thomson Datastream and World Bank. 120 Global Economic Prospects June 2011: RegionalAnnex 17 percent, supported in part by vibrant growth fell to 3.8 percent from 4.2 percent—roughly in India, a key source-country for Nepalese half the peak share (7.8 percent) recorded in remittances. In India, the uptick in the dollar 2007 when inflows reached $113.3 billion. South value of remittances inflows was more modest Asia accounts for a small share (10 percent in (7.4 percent), reflecting larger shares of Indian 2010) of total private capital inflows to migrants in high-income countries that have yet developing countries, in part reflecting more to fully recover from the financial crisis. shallow financial markets—with the exception Elsewhere in the region, remittances inflows of equities (India). Capital inflows to South Asia moderated sharply in 2010 (in dollar terms) by rose in the third quarter of 2010, after which they 2.7 percent in Bangladesh, following 19.4 fell-off in the fourth quarter and into early-2011, percent growth in 2009. The deceleration very much in line with the overall trend in flows appears to partly reflect a delayed impact of the to developing countries in aggregate. decline in the net outflow of migrants, which nearly halved during the first half of 2009 and The composition of South Asia’s inflows has continued to decline in 2010 and into early-2011. shifted markedly since the onset of the global crisis, led by a sharp contraction in FDI South Asia’s current account deficit deteriorated inflows—which are down 50 percent in 2010 in early 2011, reflecting higher oil import bills from the 2008-peak. This compositional shift and strong, albeit moderating, import volume also reflects a recovery in portfolio equity growth. Helping to contain the deterioration in inflows, which have expanded 19 percent above external balances, the region recorded strong the 2007-peak as of 2010. In comparison, for the export volume growth in early-2011 (led by rest of the developing countries FDI inflows are India, Pakistan and Sri Lanka)—supported by down by only 18 percent as of 2010 from the strong external demand from China. During 2008-peak (including a 52 percent decline posted calendar year 2011, the regional current account by Europe and Central Asia). Portfolio inflows deficit is projected to expand to 2.8 percent as a to South Asia are more in line with share of GDP from 2.4 percent in 2010. In part developments in the rest of the developing this reflects a projected shrinking of world, standing 12 percent above 2007 peaks as Bangladesh’s current account surplus, due to a of 2010. As a share of FDI inflows to developing stronger pace of growth in imports over exports, countries in aggregate, South Asia captured 5 falling terms of trade (driven by rising percent, roughly in line with those captured by international food and fuel prices) and a major Sub-Saharan Africa and the Middle East and slowdown in worker remittances receipts. Africa. Indeed, deterioration in the current account prompted the government of Bangladesh to seek In contrast, South Asia attracts a IMF funding to help maintain business and disproportionately large share of total portfolio investor confidence. While FDI to the region has inflows to all developing countries, equivalent to fallen (India and Pakistan), the regional current 28 percent in 2010, for example (or 1.5 percent account deficit is expected to continue to be of South Asia’s GDP versus about 0.8 percent covered by significant foreign exchange reserve for other developing countries). While these holdings, particularly in India, and sustained flows are more volatile than FDI flows, South capital inflows. Asia has generally accounted for a relatively large share of the total, and for 2010 exceeded Capital Flows the shares of portfolio inflows accounted by other regions, with the exception of Latin Net private capital inflows to South Asia America and the Caribbean (with 35 percent in expanded by an estimated 12.3 percent in 2010 2010) and just above East Asia and Pacific (24 to $76.6 billion, driven by a doubling (110 percent in 2010). Investors have been drawn to percent growth) in portfolio equity inflows (table South Asia’s relatively liquid equity markets— SAR.2). As a share of GDP, however, inflows notably in India, where its companies have 121 Global Economic Prospects June 2011: RegionalAnnex continued to issue ADRs (American Depository double the level in 2009, with 47 percent of the Receipts) and GDRs (Global Depository funds flowing to the energy sector. After India, Receipts) in recent years (in contrast to China for Sri Lanka and Pakistan also attract significant example, where companies have stopped ADR equity inflows. Following the end of the civil and GDR issuances). In comparison to equities, war in Sri Lanka of 2009 capital inflows have South Asia’s bond markets—including in surged, contributing to the Colombo Stock India—are much less developed, thus effectively Exchange’s boom returns of 96 percent in dollar channeling foreign investors into equities. terms in 2010, registering the largest gains in the Elsewhere, flows to Latin America and the world in the year. Caribbean tend to be more concentrated in bonds and flows to Europe and Central Asia—prior to FDI to India, the region’s main recipient, fell by the global crisis—were more concentrated in nearly one-third in 2010. In January 2011, FDI banking instruments. continued to decline sharply, down nearly by half from January 2010. This weak FDI India continues to account for the bulk of performance has occurred despite India’s strong portfolio inflows to the region, which are growth. A confluence of factors may have channeled largely through institutional investors contributed to the sharp decline, which has (which tend to squeeze out individuals). Foreign prompted the government of India to form a equity inflows into India reached a record $44.8 panel to investigate possible causes. billion in 2010, exceeding the previous peak of Nevertheless, it appears that increased regulatory 2007 before the market crash of 2008. The scrutiny of the sources of FDI has contributed to increased participation of many foreign mutual a fall-off in flows tied to ‘round-tripping’ (to funds in the country has contributed to the avoid taxes, for example) via offshore accounts. success of many new issues by Indian Flows from Mauritius and Cyprus—which companies, such as the mega, public sector together account for two-fifths of flows to offering of Coal India. In 2010 IPOs were nearly India—contracted markedly in 2010, by 60 Table SAR.2 Net capital flows to South Asia $ billions 2003 2004 2005 2006 2007 2008 2009 2010e 2011f 2012f 2013f Current account balance 12.5 -1.2 -15.1 -16.8 -17.6 -49.9 -28.0 -49.6 -60.3 -60.9 -63.2 as % of GDP 1.6 -0.1 -1.5 -1.5 -1.2 -3.3 -1.7 -2.4 -2.8 -2.6 -2.4 Financial flows: Net private and official inflows 14.5 21.2 28.5 76.6 117.7 61.4 77.7 88.3 Net private inflows (equity+private debt 18.6 21.5 25.6 73.1 113.3 52.8 68.2 76.6 103.1 107.3 118.3 ..Net private inflows (% GDP) 2.4 2.4 2.5 6.3 7.8 3.5 4.2 3.8 4.8 4.5 4.5 Net equity inflows 13.5 16.8 23.6 36.4 68.4 32.9 58.8 67.2 73.1 82.8 92.3 ..Net FDI inflows 5.4 7.8 11.2 26.0 32.3 48.7 38.3 24.2 36.1 43.8 51.3 ..Net portfolio equity inflows 8.0 9.0 12.4 10.4 36.1 -15.8 20.5 43.0 37.0 39.0 41.0 Net debt flows 1.0 4.4 4.9 40.2 49.3 28.5 18.8 21.1 ..Official creditors -4.1 -0.3 2.9 3.5 4.4 8.6 9.5 11.7 ....World Bank -2.3 2.3 2.3 2.0 2.0 1.4 2.1 3.9 ....IMF -0.1 -0.3 0.0 -0.1 -0.1 3.2 3.6 3.8 ....Other official -1.8 -2.4 0.6 1.6 2.4 4.0 3.8 4.0 ..Private creditors 5.1 4.7 2.0 36.7 44.9 19.9 9.3 9.4 30.0 24.5 26.0 ....Net M-L term debt flows 3.1 4.0 -0.2 19.9 32.0 12.0 10.3 3.2 ......Bonds -3.7 3.9 -2.8 6.4 10.7 1.7 1.7 -2.6 ......Banks 6.8 0.5 2.8 13.5 21.3 10.3 8.6 5.8 ......Other private 0.0 -0.3 -0.2 -0.1 0.0 0.0 0.0 0.0 ....Net short-term debt flows 2.0 0.7 2.3 16.8 12.9 7.9 -1.0 11.1 Balancing item /a 10.0 7.6 -6.6 -18.2 3.7 -37.8 -11.0 -30.4 Change in reserves (- = increase) -36.9 -27.6 -6.8 -41.7 -103.8 26.3 -38.6 -8.3 Memorandum items Workers' remittances 30.4 28.7 33.9 42.5 54.0 71.6 75.1 81.2 88.7 93.8 Note : Only for Afghanistan, Bangladesh, Bhutan, India, M aldives, Nepal, Pakistan and Sri Lanka. e = estimate, f = forecast /a Combination of errors and omissions and transfers to and capital outflows from developing countries. Source: World Bank. 122 Global Economic Prospects June 2011: RegionalAnnex percent and 78 percent, respectively. In contrast, with that of high-income countries (91 percent), total inflows to India excluding these countries although the upward trajectory since the onset of contracted by only 8 percent. Similarly, some the financial crisis is not as pronounced in South projects were delayed for environmental Asia as in high-income countries—with the compliance issues. For example, South Korean marked exception of the Maldives. steel giant POSCO suffered a setback when the Environment Ministry delayed the operation of Medium-term outlook its $12 billion steel project in Orissa in mid- 2010. U.K.-based Vedanta’s investment of Regional GDP growth is projected to continue to around $9 billion was also halted in 2010, as it record strong growth outturns averaging 7.7 had breached environmental regulations in the percent in calendar terms and at market prices mining sector. Other countries in the region from 2011 through 2013, off 1.6 percentage generally rank below India in international points from the 9.3 percent outturn of 2010—but investor surveys, with Afghanistan often ranked 1.7 percentage points above the pre-crisis near the bottom, helping to explain relatively decadal average from 1998 through 2007. The weak FDI inflows to South Asia. Remarkably, deceleration from 2010 reflects progressive Pakistan—where security concerns remain a key tightening of monetary policy and fiscal hindrance—captures a similar share of FDI consolidation aimed at a quelling excess demand relative to GDP as India and has exhibited the and inflationary pressures, reducing same pattern of declining FDI inflows as India unsustainably large fiscal deficits and containing over recent years (figure SAR.8). deterioration in external balances. Aside from dampening private sector demand, fiscal Government debt is elevated across the region— consolidation is expected to lead to a slowing of reflecting the impact of long-term structural public sector consumption. fiscal deficits—and exceeds the average for developing countries in aggregate (except for In combination with macro-policy tightening, Afghanistan) (figure SAR.9). As of FY2009-10, improving crop production (Pakistan and Sri debt as a share of GDP in the Maldives (96 Lanka) and an expected moderation in percent), Sri Lanka (82 percent) and India (73 international fuel prices over the balance of 2011 percent), sharply exceeded the average for should foster some easing of inflationary developing countries (37 percent). Indeed, South pressures ahead. But, deceleration in prices is Asia’s government debt is more closely in line projected to be slow given incomplete pass- Figure SAR.8 India and Pakistan FDI inflows as a share of Figure SAR.9 Government debt in South Asia exceeds GDP lag other developing countries average for emerging markets -- except in Afghanistan percent share of GDP Total government debt, percent share of GDP for fiscal years (*calendar years 2008 and 2009) 4.5 100 90 2007-08 2009-10 80 70 3.0 60 50 40 1.5 30 India 20 Pakistan 10 Developing countries, excl. South Asia 0 0.0 Afghanistan Nepal Bangladesh Pakistan Bhutan India Sri Lanka* Maldives* Emerging* High-income* 2003 2004 2005 2006 2007 2008 2009 2010e Sources: CEIC, IMF Fiscal Monitor Jan-2011, and World Sources: .UNCTAD and World Bank Bank. 123 Global Economic Prospects June 2011: RegionalAnnex through of higher international prices thus far, translate into significant terms of trade particularly for fuel prices. An expected normal deterioration for South Asia, compared with oil crop year (2011/2012) in much of the region and importers in most other developing regions, with relatively high regional stocks are providing a the exception of the Middle East and North buffer for grain prices and import demand in Africa (figure SAR.10). Price changes are 2011 (table SAR.3).3 However, South Asia is expected to reduce real incomes in South Asian facing the current upturn with some weaker countries by about 1.1 percent of GDP, largely initial conditions compared with the 2007-2008 due to higher oil prices, and partly offset by upswing—given less fiscal space and higher increases in other commodities. For example, inflation—which is posing additional challenges South Asia’s cotton producers (such as India) are in addressing risks of increased poverty and likely to see marked gains in their terms of trade, malnutrition rates. as cotton prices are projected to rise by one- third, whereas textile exporters (such as External demand for goods and services is Bangladesh, which imports cotton) are likely to projected to moderate in 2011, given policy see greater deterioration in their terms of trade. normalization and fiscal consolidation across most of South Asia’s export markets, along with Remittances are projected to rise 9.1 percent in a natural deceleration in demand growth as 2011 in dollar terms, up slightly from 8.2 percent global demand converges back to trend growth in 2010 (growing substantially below pre production levels. Accordingly, the pace of -crisis boom rates, when they averaged 30 growth of tourism activity is projected to percent over 2007 and 2008), and help provide a moderate in 2011, as arrivals from high-income cushion to the deterioration in the regional countries, particularly from Europe, are expected current account balance (figure SAR.11). In to slow. However, the slowdown in arrivals from particular, worker transfers to South Asia from Europe is being partially offset by still strong the high-income Gulf Cooperation Council growth from developing East Asia and high- (GCC) countries (most of the region’s 9 million income Middle Eastern economies. Deceleration migrants work in these countries) are projected in domestic demand growth will be reflected in a to firm with strengthened activity tied to higher moderation in South Asia’s imports in 2011. oil-rents, which is boosting labor demand in the However, given the deterioration in the terms of oil producers (figure SAR.12).4 The countries trade (as higher oil prices weigh on the region’s most affected by political upheaval in the Middle import bill) the current account deficit is East (Egypt, Libya, Syria, Tunisia, and Yemen) projected to expand in 2011. are not large migrant host-countries for South Asia, so the net impact on migrant labor demand The recent rise in oil prices is projected to and remittances appears positive. Table SAR.3 South Asia’s grain supply and demand balances 1,000 metric tons, unless otherwise noted 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012 Production 251,472 263,234 264,995 284,200 289,168 278,943 290,733 298,683 y-o-y % growth -0.6 4.7 0.7 7.2 1.7 -3.5 4.2 2.7 Ending stocks 18,710 20,729 23,117 26,134 40,767 45,389 45,581 43,406 y-o-y % growth -20.6 10.8 11.5 13.1 56.0 11.3 0.4 -4.8 % share of use* 7.8 8.4 9.2 9.9 15.7 17.5 16.6 15.4 Domestic consumption * 240,445 245,368 251,370 262,857 260,328 259,012 275,288 282,363 y-o-y % growth -0.6 2.0 2.4 4.6 -1.0 -0.5 6.3 2.6 * Excludes feed consumption. Countries = Bangladesh, India, Nepal, Pakistan, Sri Lanka. Sources: U.S. Department of Agriculture (11 May 2011) and World Bank. 124 Global Economic Prospects June 2011: RegionalAnnex GDP growth (in calendar year terms) in South Afghanistan, Bangladesh, Bhutan, India and Sri Asia is projected to gain momentum Lanka should support acceleration of GDP incrementally in 2012 and 2013 to 7.7 percent growth in the outer years, boosting productivity and 7.9 percent, respectively, from an expected and potential output. External demand is 7.5 percent in 2011, led by firming private sector projected to strengthen incrementally in 2012 activity, as inflationary pressures diminish and and 2013—assuming continued increased market enable monetary authorities to pursue less penetration to faster growing developing restrictive stances in the outer years. In countries—and be supportive of growth as well, particular, investment is expected to firm as as large high-income export markets begin to tighter monetary conditions are projected to stabilize macroeconomic conditions. contribute to an easing of inflation expectations and as fiscal consolidation fosters greater access The region’s relatively strong projected growth to credit. Additionally, large programmed path—reaching 7.9 percent in 2013 compared investment and reconstruction projects in with the 6.0 percent average from 1998 through 2007 (compound growth rate)—is projected to Figure SAR.10 Projected terms of trade impacts in 2011 be led by India, Sri Lanka and Bangladesh, for oil-importing countries (by region) where acceleration of investment activity is percent share of GDP expected to support higher growth outturns. In Middle East & North Africa contrast, Pakistan and Nepal are expected to lag, given continued political challenges and South Asia associated macro-policy slippage. Indeed, GDP growth in Pakistan is not projected to recover to East Asia & Pacific above the pre-crisis decadal average of 5.0 Europe & Central Asia percent during the forecast period (table SAR.4). Latin America & Caribbean Risks Sub-Saharan Africa The region has witnessed a build-up in price -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 pressures and is bumping up against potential output, which suggests that it needs to address Sources: UN Comtrade and World Bank. supply constraints through higher investment. However, large fiscal deficits and public sector Figure SAR.11 Growth of worker remittances inflows to Figure SAR.12 Most migrant workers from South Asia South Asia projected to level off in 2011 are based in the high-income Gulf Cooperation Council countries of the Middle East annual percent change 40% thousands Developing countries, excl. South Asia South Asia 35% 3,500 30% 3,000 25% Sri Lanka 20% 2,500 Pakistan 15% Nepal 2,000 10% India 1,500 Bangladesh 5% 0% 1,000 -5% 500 -10% -15% 0 2005 2006 2007 2008 2009 2010e 2011f Bahrain Oman Qatar Kuwait UAE Saudi Arabia Source: World Bank, Migration and Development Brief No. Source: World Bank, Migration and Development Brief No. 16, April 2011. 16, April 2011. 125 Global Economic Prospects June 2011: RegionalAnnex debt may be crowding out private sector Inflation remains a key downside risk to growth, investment, which is likely being pressured by a as policymakers face numerous challenges in relatively poor business climate and relatively reducing price pressures. If inflation remains shallow domestic financial markets (such as elevated, unless offset by exchange rate small corporate bond markets). As a depreciation (itself an inflationary impulse) it is consequence, demand is being channeled into likely to begin eating into the region’s higher prices and deteriorating current account international competitiveness and discourage balances. In this context, pursuing policy foreign investment—creating headwinds to gains normalization is critical and failure to bring in productivity. Elevated international public finances and monetary policy into line commodity prices are also a negative risk factor, could undermine growth projections and particularly given political resistance to reducing progress toward South Asia’s urgent subsidies. In countries such as India that development objectives, including an expansion maintain price controls on food, farmers are not of infrastructure spending and potential output. fully participating in the global upswing in prices. Higher monetary policy interest rates Table SAR.4 South Asia country forecasts (annual percent change unless indicated otherwise) Est. Forecast 98-07a 2008 2009 2010 2011 2012 2013 b Calendar year basis Bangladesh c GDP at market prices (2005 US$) 5.0 6.3 6.0 5.8 6.0 6.3 6.5 Current account bal/GDP (%) 0.2 1.4 3.5 2.5 -0.5 -1.3 -1.7 India c GDP at market prices (2005 US$) 6.4 6.2 6.8 10.3 8.1 8.4 8.5 Current account bal/GDP (%) -0.3 -2.6 -2.0 -2.7 -2.8 -2.5 -2.3 Nepal c GDP at market prices (2005 US$) 3.4 6.2 5.3 4.5 4.1 3.7 4.1 Current account bal/GDP (%) -1.7 3.0 -2.0 -2.8 -2.9 -2.7 -2.6 Pakistan c GDP at market prices (2005 US$) 4.9 3.6 2.6 3.9 3.3 3.2 4.1 Current account bal/GDP (%) -0.8 -9.6 -2.5 -1.3 -2.4 -2.5 -2.7 Sri Lanka c GDP at market prices (2005 US$) 4.4 6.0 3.5 8.0 7.5 6.8 6.4 Current account bal/GDP (%) -3.2 -9.8 -0.7 -3.5 -4.9 -4.7 -4.2 Fiscal year basis b Bangladesh Real GDP at market prices 5.1 6.2 5.7 5.8 6.2 6.4 6.6 India Real GDP at market prices 6.4 4.9 9.1 8.8 8.0 8.4 8.5 Memo: Real GDP at factor cost - 6.8 8.0 8.5 8.2 8.5 8.6 Nepal Real GDP at market prices 3.4 6.1 4.4 4.6 3.5 4.0 4.2 Pakistan Real GDP at market prices 5.0 1.6 3.6 4.1 2.5 3.9 4.3 World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time. Afghanistan, Bhutan, Maldives are not forecast owing to data limitations. a. Growth rates over intervals are compound average; growth contributions, ratios and the GDP deflator are averages. b. National income and product account data refer to fiscal years (FY) for the South Asian countries with the exception of Sri Lanka, which reports in calendar year (CY). The fiscal year runs from July 1 through June 30 in Bangladesh and Pakistan, from July 16 through July 15 in Nepal, and April 1 through March 31 in India. Due to reporting practices, Bangladesh, Nepal, and Pakistan report FY2009/10 data in CY2010, while India reports FY2009/10 in CY2009. GDP figures are presented in calendar years (CY) based on quarterly history for India. For Bangladesh, Nepal and Pakistan, CY data is calculated taking the average growth over the two fiscal year periods to provide an approximation of CY activity. c. GDP measured in constant 2005 U.S. dollars. d. Estimate. e. Forecast. Source: World Bank. 126 Global Economic Prospects June 2011: RegionalAnnex aimed at crimping price pressures, however, the Maldives and Sri Lanka. could also prompt a rise in capital inflows and complicate monetary policy—emphasizing the Notes: need for fiscal consolidation. 1. The Reserve Bank of India’s Inflation Persistently large budget deficits also pose Expectations Survey of Households important downside risks to growth, by conducted in Q4-2010 (Round 22) shows crowding out private investment and households expect inflation to increase 130 contributing to excess demand. Fiscal slippage is basis points to 13.1 percent from the contributing to inflationary pressures and limits perceived current rate of 11.8 percent— policy options in the event of future crises compared with the expected 11.9 percent through limited fiscal space. Regional deficit inflation rate from the Q2-2010 survey (and debt) problems will need to be resolved by (Round 20), (1-year-ahead expected rates). simultaneous reforms on both revenues and expenditures along with reforms to support 2. Nepal, Bangladesh, and Sri Lanka, were expansion of the private sector, including among the top 15 recipients of remittances in deepening financial markets. Efforts to reduce 2009—with inflows representing the deficits are being hampered by South Asia’s equivalent of 23.8% of GDP in Nepal, weak revenue collection and a small tax base, 11.8% in Bangladesh, 8% in Sri Lanka, while large food-, fuel- and fertilizer subsidies 5.4% in Pakistan and 3.6% in India. are hindering progress toward cutting expenditures. 3. Sources: India’s Meteorological Department (April 2011 first monsoon forecast for Key external downside risks are tied to 2011/12), and U.S. Department of uncertainty in the Middle East and North Africa. Agriculture (May 2011). If political turmoil leads to sustained high oil prices, South Asia’s oil import bill and price 4. Over two-thirds of South Asia’s migrant pressures could rise further, while a spreading of workers are based in Saudi Arabia (3.3 turmoil to GCC countries could undermine million) and the U.A.E. (2.9 million). confidence and economic growth in the Middle East and North Africa, and result in sluggish or 5. “European Sovereign Debt Crisis: Links to even falling remittances inflows. Already, recent the South Asia Region”. December 2010. political tensions have intensified efforts within Francis Rowe, et al. the GCC to replace migrant workers with nationals, which if it were to spread, could curb remittances flows to South Asia. Expansion of the sovereign-debt crisis in the Euro Area represents another important external downside risk, particularly if the crisis were to spread to larger Euro Area economies that would lead to weaker goods and services exports, worker transfer receipts and capital inflows for South Asia. The Euro Area represents about one- fourth of South Asia’s merchandise export market, of which Germany and France account for 40 percent and 20 percent, respectively.5 A spreading of the Euro Area crisis could negatively impact the tourism sectors among the smaller South Asian economies, particularly in 127 Global Economic Prospects June 2011: RegionalAnnex Sub-Saharan Africa Recent developments whose price increases were higher than the increase in crude oil prices also benefitted Growth in Sub-Saharan Africa rebounded (figure SSA.2). This includes exporters of sharply in 2010. Supported by the global metals such as copper (Zambia), as well as economic recovery and developments on the exporters of agriculture products such as rubber domestic front, GDP in Sub-Saharan Africa (Liberia), and cotton (Burkina Faso, Benin, and grew by 4.8 percent in 2010—up from the 2 Mali). However, even though the prices of the percent advance of 2009 and just shy of the principal merchandise exports of many oil region’s 5 percent pre-crisis average growth importing Sub- Saharan countries improved in (figure SSA.1). Excluding South Africa, the 2010, they still suffered a deterioration in their largest economy in the region, Sub Sahara Africa terms of trade, as in general, the recovery in grew by 6.0 percent, one of the fastest growth prices was not sufficient to compensate for the rates among developing regions. Figure SSA.2 Terms of trade changes in SSA coun- tries Recovery in exports. African export revenues, which had fallen to some 51 percent of their pre- Terms of Trade Changes as Share of GDP (%) crisis August 2008 levels by January 2009, had Mauritania Angola almost recovered by November 2010, reaching Nigeria Mali 93 percent of earlier peaks. Much of the increase Cote d'Ivoire Sudan was due to the surge in commodity prices (see Cameroon Uganda Tanzania, United Rep. Commodity annex) as in volume terms, exports Swaziland South Africa increased by a moderate 7.5 percent in 2010. Central African Republic Burundi Ethiopia Rwanda Malawi Among the biggest winners from the terms of Namibia Eritrea trade changes were the oil exporters in the Comoros Cape Verde region, with incomes gains of upwards 10 Seychelles -10 -5 0 5 10 15 20 percent of GDP in Angola, Congo, and Gabon. Among oil importers in the region the picture was mixed. In general, exporters of commodities Source: World Bank. Figure SSA.1 Growth in Sub Saharan Africa re- bounds close to Pre-Crisis Average Figure SSA.3 Impact of terms of trade on growth is mixed Percent growth GDP 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Sub Saharan Africa Sub Saharan Africa ex. South Africa Pre-Crisis Average Source: World Bank. Source: World Bank. 128 Global Economic Prospects June 2011: RegionalAnnex sharp rebound in oil prices. Nonetheless, the 2011, with new discoveries and production impact of terms of trade changes on growth in coming on stream (table SSA.1). 2010 remains mixed as stronger growth was associated with countries that recorded both These resource flows have supported growth by favorable as well as unfavorable terms of trade creating new jobs, increasing government changes, implying that there is more to the Sub revenues and helping to finance current account Saharan African growth story than developments deficit. Yet in countries with poor governance in commodity prices (figure SSA.3). and weak institutions, the natural resource sector which exists as an enclave in many countries, Rebound in capital flows. Thanks to recovery in can be a deterrent to growth, as rents generated the global economy, as well as an increasing by the sector are appropriated by the elite recognition by investors of the opportunities minority, often leading to conflict. This so-called presented in a rapidly growing developing resource-curse need not be the norm. Twenty- region, net private capital inflows to Sub one Sub-Saharan countries have sought to Saharan Africa increased from $35.8bn in 2009 maximize the potential benefit from resource to an estimated $41.1bn in 2010 and are exploitation and reduce the potential for projected to rise to $48.6bn in 2011 (figure corruption by joining the Extractive Industries SSA.4 and table SSA.3). Transparency Initiative. Five are currently considered compliant to the initiative (the The leading destination of FDI inflows, in value Central African Republic, Ghana, Liberia, Niger, terms, is to the capital intensive mining sector. and Nigeria), while another 16 countries are Indeed, higher commodity prices and the global candidates. competition to secure supplies of commodities have spurred investments globally in the natural Even though, natural resources and energy are resource sector. Sub Saharan Africa, a region the most important destination for Sub-Saharan with a high proportion of known mineral FDI by value, combined they represent only 16 resources with great potential for further percent of the total number of new FDI projects.2 development is benefitting from this trend. This Motivated by higher GDP growth rates, fast has been facilitated by improvements to growing populations and a rising middle class, regulatory regimes in some countries. Capital the bulk of new investment projects were in the raisings by African resource companies are non-natural resources sector. Developments in reported to have increased by 240 percent the telecommunications (box SSA.1) and retail compared to 2009.1 Much exploratory activity Table SSA.1 Recent mineral discoveries and pro- has been ongoing in several countries during duction Figure SSA.4 Net private capital inflows to Sub Sahara Africa rebounds after crisis Discoveries in Q1 2011 Natural Resource Country ($ bn) Oil Ghana (West Cape Three points) 80 Gold Tanzania (Handeni region) 70 Forecasts Iron Ore Liberia (Bopulu and Timbo) Manganese Gabon (Ndjole) 60 Diamond Sierra Leone (Tongo) 50 Natural gas Tanzania (offshore) 40 30 New Production to come on stream in 2011 Natural Resource Country 20 Coal Mozambique 10 Oil Ghana 0 Copper Zambia (Konkola North) 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Manganese Gabon Source: World Bank. Source: Africa Mining, various issues. 129 Global Economic Prospects June 2011: RegionalAnnex sectors epitomize the interest in non-extractive share of such inflows. However other industries in the region. In retail for instance, economies, including Nigeria, with its fast large South African retail firms have been busy growing economy and large population; Kenya, opening up shopping malls across the region. which is often viewed as the gateway to the $84 Walmart, the world’s largest retailer, is currently billion East African economy, and Ghana, with in the process of acquiring MassMart, a South its stable political environment and fast growing African chain with operations in 14 countries in economy, are of particular interest. the region. Table SSA.2 Africa Focused Funds Portfolio equity flows to Sub Saharan Africa rose by 10 percent in 2010, reaching $11 billion. The Fund strong growth performance of Sub Saharan size ($m) African countries over the last decade (5 percent ECP Africa Fund 613 per year) coupled with increasing political Pan African Investment Partners II 492 stability and reforms that have lowered barriers Aureos Africa Fund 381 to entry, have begun to place Sub Saharan Leapfrog Microfinance Inclusion 136 African countries on the radar screens of Fund portfolio equity managers. This is evidenced in Evolution One Fund 91 the recent establishment of a number of Africa- Africinvest Financial Sector 43 focused private equity funds (table SSA.2). Not Source: Africainvestor, November December 2010. surprisingly, South Africa receives the largest Box SSA.1: Recent Developments in the Telecoms Sector in Sub Saharan Africa – a booming sector Sub Saharan Africa is the region with one of the fastest growing mobile phone markets (International Telecom- munications Union, 2010), partly because of the weak penetration of fixed-lines but also due to the pace of ur- banization—the fastest compared to other regions. An estimated 40 million new mobile cellular subscriptions were added in 2010, and as much of the population remains unserved, the potential for further growth remains strong. The telecommunications sector is one of the strongest recipients of foreign direct investment flows to the region. In 2011 there have been a number of announcements to that effect. MTN, the giant South African telecommuni- cations company, has announced plan to invest $1 billion in Nigeria (Sub Saharan Africa’s biggest mobile phone market) and a further $150 million in Zambia. In March 2011, Etisalat, a UAE telecommunications company, announced that it had sealed an agreement for a $680m syndicated loan from eight Nigerian banks. Movitel (Vietnamese company), Mozambique’s third biggest mobile phone operator, also announced plans to invest $120 million to build new base stations. Government policies are supporting these FDI inflows through improvements to regulatory regimes, including opening up the sector to further competition. In the last year, for example, operating licenses have been granted to new entrants to the telecommunications sector in Congo (Brazzaville), Ghana, Liberia, Malawi, Mozambique, and network charges by regulators have been reduced. These developments, and the arrival of high speed undersea fiber optic broadband cables on the coast of Africa, are a boon to the sector but also the broader economy as they generate significant productivity spillovers. In both East and Western Africa a “price war” is ongoing between rival telecoms operators, and in some cases service charges have dropped by more-than 50 percent – lowering costs for business (and personal) customers. Innova- tions such as Kenya’s pioneering mobile money scheme (M-PESA), Ethiopia’s Commodity Exchange, which uses mobile technology to provide real time information to farmers across the country, and Ghana’s mPedigree app, which allows patients to check the authenticity of medicines, are only a few examples of how investment in the telecoms sector is supporting innovation and growth in the region. A recent study finds that increasing access to mobile telephone networks by 1 percent translates into a 0.5 per- cent increase in real GDP per capita (Djiofack and Keck, 2009). In Nigeria, for instance, though the telecommu- nications sector share in GDP was about one-quarter of that of the oil sector, its direct contribution to GDP growth was higher than the oil sector’s in 2010. 130 Global Economic Prospects June 2011: RegionalAnnex South Africa also dominated bond flows to the oversubscribed by 88 percent. Kenya auctioned a region, accounting for almost all of the $4.7 9-year infrastructure bond worth 31.6 billion billion in regional bond sales during 2010. shillings ($380m) in August 2010, and the However, with an estimated $93 billion annual country is likely to continue to tap the market in infrastructural deficit, and a funding gap of $31 2011. Indeed, local currency bond supply in Sub billion, a number of countries in Sub Saharan Saharan Africa is estimated to have increased Africa (Ghana, Kenya, Tanzania, Zambia) from $7bn in the 1990s to almost $20bn by continue to express interest in tapping the euro- 2008. Improving liquidity is also supporting the bond market. In January 2011, Nigeria issued a extension of the yield curve in a number of $500 million debut Eurobond, which was countries, with Nigeria offering 20-year oversubscribed. In March 2011 Zambia received maturities and Kenya up to 30-year maturities.3 a “B+” credit rating from international credit rating agencies. Several other countries are Domestic demand reinforced growth revamping their laws to tap into the nearly $1 prospects for Sub-Saharan Africa. While the trillion Islamic financial market. Senegal has increase in external demand supported GDP indicated that it plans to raise $200m in Islamic growth, domestic demand accounted for more financing in 2011. Increasingly, foreign than all of the growth in the region) in 2010. investors are participating in local bond markets, Although exports increased 7.5 percent thereby notwithstanding the foreign exchange risk. supporting growth, imports increased by even Ghana’s February 2011 auction of GHS 400 more (9.1 percent), boosted by a solid 4.9 million ($263m), in 3-year bonds attracted percent rise in consumer demand. Hence, the net significant global interest and was exports contribution to growth was negative. Table SSA.3 Net capital flows to Sub-Saharan Africa $ billions (April 2011) 2003 2004 2005 2006 2007 2008 2009 2010p 2011e 2012f 2013f Current account balance as % of GDP Financial flows: Net private and official inflows 14.6 24.0 33.0 42.4 53.2 38.9 45.3 51.1 Net private inflows (equity+private debt) 13.2 21.7 33.9 44.4 50.7 34.3 35.8 41.1 48.6 56.1 70.4 ..Net private inflows (% GDP) 3.0 4.0 5.3 6.0 5.9 3.5 3.9 3.8 4.1 4.4 4.8 Net equity inflows 14.0 17.7 26.1 37.0 38.7 28.9 40.2 34.8 39.1 44.2 55.3 ..Net FDI inflows 13.3 11.0 18.0 20.2 28.5 34.5 30.3 23.8 32.1 35.2 45.3 ..Net portfolio equity inflows 0.7 6.7 8.1 16.8 10.1 -5.6 10.0 11.0 7.0 9.0 10.0 Net debt flows 0.6 6.4 6.9 5.4 14.6 10.0 5.1 16.3 ..Official creditors 1.4 2.3 -0.9 -1.9 2.5 4.6 9.5 10.0 ....World Bank 2.2 2.5 2.4 2.2 2.4 1.9 3.1 3.4 ....IMF 0.0 -0.1 -0.4 -0.1 0.1 0.7 2.2 1.8 ....Other official -0.8 0.0 -2.9 -4.1 0.0 2.0 4.1 4.8 ..Private creditors -0.8 4.0 7.9 7.4 12.1 5.5 -4.4 6.3 9.5 11.9 15.1 ....Net M-L term debt flows 0.9 2.7 4.8 -2.0 8.0 0.8 5.6 8.1 ......Bonds 0.4 0.6 1.3 0.3 6.7 -0.7 1.9 3.4 ......Banks 1.2 2.4 3.8 -1.7 2.1 1.7 2.9 4.7 ......Other private -0.7 -0.3 -0.3 -0.7 -0.8 -0.1 0.8 0.0 ....Net short-term debt flows - -1.7 1.4 3.0 9.4 4.0 4.6 10.0 -2.1 - - - - - Balancing item /a -4.1 -4.6 33.5 26.0 20.4 11.1 28.7 -38.5 Change in reserves (- = - - - - - increase) -3.5 21.7 19.9 32.5 27.0 10.9 1.9 -6.1 Memorandum items Workers' remittances 6.0 8.0 9.4 12.7 18.6 21.3 20.8 21.0 22.0 24.0 Source: World Bank. 131 Global Economic Prospects June 2011: RegionalAnnex Robust consumer demand were supported by telecommunication sectors, creating new well higher farm incomes from favorable harvests in paid jobs and improving overall productivity. much of the region in 2010 (box SSA.2); Associated increases in tax revenues supported increased activity in the mining sector and robust by higher aid inflows contributed to a 5.5 growth in the services sector and a relatively low percent increase in public consumption, even as inflation environment—all of which served to fiscal balances in the region improved by 1 boost real incomes. percentage point from a deficit of 5.1 percent of GDP in 2009 to 4.1 percent in 2010. Countries Improved access to consumer credit (especially that benefitted the most from the positive terms in South Africa, where interest rates were at of trade changes also had a better turnaround in record lows) and stable remittance inflows ($21 their fiscal balances. billion in 2010) also helped underpin consumer demand. And, in a virtuous circle, that strong Though overall growth in Sub Sahara Africa demand has been an important factor luring in remains strong, there is significant new investments into the retail, banking and heterogeneity across region. An encouraging Box SSA.2: The Agriculture Sector in Sub Saharan Africa – Unrealized potential The agricultural sector, the largest employer in many Sub Saharan African economies, an important foreign ex- change earner, and the sector with the greatest potential for poverty reduction was also providing support to growth in several countries in 2010. Studies have found that growth originating in the agricultural sector is two-to- four times as effective as non-agricultural growth in reducing poverty (WDR, 2008), since some 75 percent of the poor live in rural areas. 4 However, while the past 40 years has witnessed remarkable progress in global agricultural production, with per capita world food production growing by 17 percent and aggregate world food production up by 145 percent, agri- cultural production in Sub Saharan Africa is 10 percent lower than it was in 1960. Land productivity in Africa is estimated at 42 percent and 50 percent of that in Asia and Latin America, respectively. Factors accounting for low yields in Sub Saharan Africa include the fact that only 4 percent of Africa's crop area is irrigated compared to 39 percent in South Asia, and fertilizer usage is less than 10 percent of the world average. Further, mechanization remains low with an average of only 13 tractors per 100 square kilometers, compared to a world average of 200 tractors per square kilometers. In part this underinvestment in the agricultural sector reflects a weak policy suppor- tive environment. 5 Indeed much of agricultural production is mostly weather dependent. In 2010, where weather patterns were mostly favorable, good harvests kept food prices in check, even amidst the surge in global food prices. In the Southern Africa region bumper harvests were recorded in Malawi, Zambia and South Africa, with the latter reaching a thirty -year record high maize output of 12.8 million tonnes. These favorable weather conditions are unlikely to repeat themselves regularly, hence for output growth to be sustained other yield enhancing techniques need to be em- ployed. Already in 2011 agricultural output is being hampered in East Africa by poor rains, thus cutting into growth prospects for the region. Nonetheless there a number of recent encouraging developments in the Sub-Saharan African agriculture sector worth highlighting. One prominent example is the transformation of Malawi from a food importer with depend- ence on food aid to a food self sufficient and net exporter over the past five years, thanks to a government sup- ported farmer input program. Other Sub Saharan countries including Ghana, Zambia, Nigeria, Rwanda and Tanza- nia are implementing programs of their own. However, if not managed well, fiscal sustainability could be compro- mised. With about 60 percent of the world’s uncultivated arable land in Africa and very low yields there exists significant opportunities to scale-up production. By one estimate, if cereal yields were to be doubled to two tons per hectare – still half of the average in the developing world – Africa would grow an extra 100 million tons a year of food. This would be roughly equivalent to adding another US corn belt to world food production, helping moderate world food price increases, shifting Africa to a major food surplus region and helping eradicate hunger and poverty. 6 The benefits of an increase in yields with out improvements to both hard and soft infrastructure to allow the in- creased output to reach the relevant markets will however curtail the benefits. 132 Global Economic Prospects June 2011: RegionalAnnex aspect of the trend rise in Sub Saharan Africa Angola, Southern Africa’s largest economy growth rates has been the extent to which (excluding South Africa) dampened growth for almost all countries have seen significant the sub-region. South Africa, the largest improvements in their growth. Strong Sub- economy in the region, grew at a 2.8 percent Saharan growth does not reflect extremely high pace in 2010. growth rates by one or two countries, but solid growth in several economies (figure SSA.5), Growth among the large economies. South with the highest growth rates comparable to Africa’s tepid recovery has been driven by those of other fast growing developing higher consumer spending, with business economies (figure SSA.6). Only two economies investment lagging in the recovery. Consumer grew by less than 2 percent in 2010, while the spending has been buoyed by an accommodative bulk registered solid growth rates of between 2 monetary policy, with the repo rate at 30-year and 6 percent, 30 percent of countries in the lows in nominal terms. The lower cost of region enjoyed real GDP growth rates of more borrowing lent support to spending on consumer than 6 percent. Across sub-regions growth was durables, while broader consumer spending was strongest in West Africa (6.5 percent) powered supported by above-inflation wage increases by Nigeria’s robust growth (7.9 percent) and gained by South Africa’s unionized workers, and supported by Ghana’s 7.7 percent gains in the to a lesser extent the wealth effects associated year. GDP growth in East Africa was almost as with the recovery in asset prices. Increased strong, with Ethiopia (7 percent), Rwanda (7.5 government spending on infrastructure, social percent), Tanzania (7 percent) and Kenya (5.6 sectors and wages is also providing stimulus to percent) all recording robust gains. the recovery. In 2010, government consumption expenditure increased by 4.6 percent. On a more In contrast, growth for most Central African somber note, low business confidence and long economies registered below the regional running labor disputes caused private investment average, save for Congo (Brazzaville) with spending to fall for a second consecutive year in growth of (9.1 percent), thanks to new oil that 2010. Fortunately, a recovery may be underway came on stream, thus making it the fastest in 2011. growing economy in sub Saharan Africa in 2010. Though growth rates in several Southern African The Nigerian economy continued its robust countries (Botswana, Malawi, Mozambique, and expansion in 2010, with growth estimated at 7.9 Zambia) exceeded 6 percent, slower growth in percent, up from 5.6 percent recorded in 2009. Figure SSA.5: More than a third of countries in Nigeria’s oil and government sectors benefitted Sub-Saharan Africa achieved growth rates of 6 Figure SSA.6 Fastest growing SSA compares well percent and more in 2010 with other fast growing developing countries China No. of Congo countries India 16 SSA Oil Exporters Ethiopia Nigeria 14 SSA Oil Importers Mozambique 12 Ghana Zambia 10 Niger Brazil 8 Rwanda 6 Botswana Burkina Faso 4 Tanzania Malawi 2 Russia Real GDP growth (%) 0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 Growth < 2% Growth 2-4% Growth 4-6% Growth 6-8% Growth >8% Source: World Bank. Source: World Bank. 133 Global Economic Prospects June 2011: RegionalAnnex from the global jump in oil prices, as well as the need to clear arrears to contractors. from increased output due to relative calm in the Nonetheless, a pick-up is expected over the Niger Delta region following the government’s forecast horizon. The recovery in oil prices and amnesty program. However, the oil sector, government revenues helped return both the which accounts for some 16 percent of GDP, fiscal and current account balances to healthy contributed only a percentage point to the 7.9 surpluses in 2010 and tighter monetary policy percent surge in 2010 GDP, with the remainder helped contain inflationary pressures somewhat. attributable to rapid growth in the non-oil sector. Indeed, the improvements to its macroeconomic The agricultural sector, which accounts for 42 environment supported the B+/B1 credit rating percent of GDP and is the largest employer, for its long-term foreign debt issuer default benefitted from favorable rains and expanded by ratings from the three main international credit 5.7 percent in 2010 Q3 contributing 2.4 rating agencies in 2010. percentage points. Productivity in the sector remains low, however, as it is constrained by Kenya’s growth was stronger than expected at poor market infrastructure and weak access to 5.6 percent in 2010. Good rainfall supported basic farm inputs. Much of the dynamic sectoral harvests in the agricultural sector (including tea growth performance in recent years has been in and horticulture exports) and boosted electricity wholesale and retail trade and the services and water supply. This helped to alleviate some sectors with growth rates in the double digits. In of the binding infrastructural constraints, 2010 Q3, these sectors added 2 and 2.1 allowing Kenyan manufacturers to meet strong percentage points to GDP growth, respectively. demand from its faster-growing regional trading partners in East Africa. Business and consumer Growth in these dynamic sectors has been driven confidence was also lifted by the passage of the by and contributed to a rising middle class. A new constitution. Tourist arrivals were up by survey carried out by the National Bureau of 15.6 percent in the first 11 months of 2010 (year- Statistics showed that, while in 1996 the average on-year), with tourist receipts increasing 8 household spent 63.6 percent of income on food, percent in the same period. Strong growth in by 2004 the share had fallen to 47.3 percent. Kenya’s other services sectors: finance, With per capita incomes doubling between 2004 telecommunication and real estate also provided and 2010 the food expenditure share of income support to growth. has dropped still further, implying Nigerian households have more income to spend on Medium-term outlook discretionary items--which helps to drive growth in new sectors. One such sector is GDP growth in Sub-Saharan Africa is expected telecommunications. Using the latest detailed to remain strong in 2011 and 2012. With the GDP figures available (Q3 2010), the global recovery still on a firm footing; a growing telecommunications sector, which accounts for domestic middle class with discretionary only 3.7 percent of GDP, contributed 1.3 incomes to spend, and rising business confidence percentage points to GDP growth (even higher in the region’s prospects, growth in Sub Saharan than contributions from oil). Africa is expected to step-up to stronger rates in 2011 and 2012, reaching growth of 5.1 percent Angola’s recovery from the crisis, unlike most and 5.8 percent, respectively (figure SSA.7). Sub Saharan African countries has lagged Excluding South Africa, GDP growth in Sub- behind. In 2010 it grew at 3.4%, well below its Saharan Africa is expected to grow between 5.9 strong pre-crisis double digit growth rates and percent and 6.6 percent over the forecast that of the Sub Sahara African average (4.8%). horizon, making it one of the developing regions Though oil prices rebounded in 2010, oil output with the highest growth prospects over the was hindered by technical delays. Further, medium term (table SSA.4 and table SSA.5). government spending which has helped drive growth in the non-oil sector was curbed due to Prospects for large economies. Medium term 134 Global Economic Prospects June 2011: RegionalAnnex Figure SSA.7 Growth in Sub Saharan Africa growth prospects for South Africa point to a will be among the fastest in developing regions strengthening economy. With the monetary stance expected to remain accommodative, Percent growth GDP consumer spending should continue to drive 8 growth. As the global recovery has taken hold, 7 the uncertainty that affected private investment 6 spending is expected to abate, allowing business 5 spending to increase and resume its positive 4 contribution to growth. As businesses demand 3 more labor, employment should rise and 2 consumer spending should strengthen. With 1 government fiscal policy countercyclical, the 0 2011 2012 boost to growth from increased government Sub-Saharan Africa Ex. S.Africa East Asia and Pacific Ex. China spending will remain strong in 2011 but is likely Europe and Central Asia (ECA) Latin America South Asia Ex. India Middle East and N. Africa to wane thereafter. With South Africa’s economy well integrated into the global economy the Source: World Bank. ongoing global recovery should continue to provide support to South Africa’s export growth, Table SSA.4 Saharan Africa forecast summary (annual percent change unless indicated otherwise) Est. Forecast 98-07a 2008 2009 2010 2011 2012 2013 GDP at market prices (2005 US$) b 4.2 5.1 2.0 4.8 5.1 5.7 5.7 GDP per capita (units in US$) 1.9 3.0 0.0 2.8 3.0 3.7 3.7 PPP GDP c 4.4 5.5 2.2 4.6 5.4 5.7 5.7 Private consumption 2.3 3.8 1.3 3.9 5.1 5.3 5.3 Public consumption 5.5 8.0 4.3 6.9 5.5 5.3 5.3 Fixed investment 8.0 12.0 4.9 8.3 7.3 6.8 8.3 Exports, GNFS d 4.2 4.3 -6.5 8.3 6.5 7.2 6.5 Imports, GNFS d 6.8 7.0 -4.5 9.5 7.9 6.9 7.1 Net exports, contribution to growth -0.7 -1.1 -0.5 -0.8 -0.8 -0.3 -0.6 Current account bal/GDP (%) -0.8 -1.5 -2.8 -1.3 -1.6 -1.6 -1.5 GDP deflator (median, LCU) 6.1 10.6 4.3 6.3 5.8 6.1 6.7 Fiscal balance/GDP (%) -0.6 1.0 -5.5 -4.4 -3.2 -2.0 -1.2 Memo items: GDP SSA excluding South Africa 4.5 6.0 4.2 6.0 5.9 6.6 6.4 Oil exporters e 4.9 6.6 4.7 6.0 5.8 6.9 6.7 CFA countries f 3.5 4.2 1.6 4.1 3.0 4.9 4.9 South Africa 3.7 3.7 -1.8 2.8 3.5 4.1 4.4 Nigeria 5.0 6.0 6.7 7.8 7.1 7.5 7.3 Kenya 3.4 1.6 2.6 5.6 4.8 5.0 5.2 a. Growth rates over intervals are compound average; growth contributions, ratios and the GDP deflator are averages. b. GDP measured in constant 2005 U.S. dollars. c. GDP measured at PPP exchange rates. d. Exports and imports of goods and non-factor services (GNFS). e. Oil Exporters: Angola, Cote d Ivoire, Cameroon, Congo, Rep., Gabon, Nigeria, Sudan, Chad, Congo, Dem. Rep. f. CFA Countries: Benin, Burkina Faso, Central African Republic, Cote d Ivoire, Cameroon, Congo, Rep., Gabon, Equatorial Guinea, Mali, Niger, Senegal, Chad, Togo. g. Estimate. h. Forecast. Source: World Bank. 135 Global Economic Prospects June 2011: RegionalAnnex though strengthening domestic demand will investment will be capital intensive and thus increase imports which will moderate the import dependent, which will reduce the overall contribution of net exports to GDP. Over the contribution of net exports to growth. However, forecast horizon, South Africa’s growth is growth in the non-oil sector, will continue to be projected to accelerate to 3.5 percent in hindered by infrastructural challenges, a weak 2011,then reaching pre-crisis average growth business regulatory environment and possible rates of 4.1 percent and 4.4 percent in 2012 and crowding out of private sector investment by the 2013 respectively. public sector. Prospects for faster and sustained growth in And, the medium term outlook for Kenya is also Nigeria appear favorable for the forecast favorable, though growth in 2011 will be horizon, as underlying growth dynamics remain undercut by recent poor rains. The ongoing robust. Consumer spending, underpinned by global recovery should continue to provide increased bank lending and employment support to Kenya’s agricultural exports and opportunities in the consumer services sector, tourism sector. Strong growth in its trading will continue to drive growth. A number of partners in the East African Community, should multinationals already operating in Nigeria have provide support to its manufacturing sector. announced plans to increase investments (e.g. With the largest and most developed economy in food giant Nestle), while new ones seek East Africa, a rising middle class and a sizeable opportunities to get a foothold in the market. In population (40 million people), investors are March 2011, the Carlyle Group–a Washington increasingly considering Kenya as the gateway DC based Global Asset Manager-set up offices to the rest of East Africa. This augurs well for in Lagos (and Johannesburg) to conduct buyout foreign investment flows. Investor confidence and growth capital investments in Sub Saharan has been reinforced by the passage of the new Africa. A forecast of favorable rain patterns constitution, though some may postpone along with selected government programs in the investments until after the 2012 elections. agricultural sector, should continue to provide Government investment in critically needed in support to farm incomes. However, infrastructure, and ongoing reforms at the expansionary fiscal policy--if not managed Mombasa port should underpin growth prudently--could compromise macroeconomic prospects. Kenya’s dynamic Information and stability, especially so as inflationary pressures Communications Technology sector should also from food and fuel prices take hold. Over the be provided with a windfall opportunity from forecast period, Nigerian GDP is projected to increased access to higher bandwidth after the remain robust at 7.1 percent growth in 2011, arrival of a number of broadband fiber optic sea peaking at 7.5 percent in 2012 before moderating cables on its coast. And developments in the ICT to 7.3 percent in 2013. sector should support productivity gains in other sectors of the economy. Inflationary pressures Medium term growth prospects for the Angolan stemming from higher crude oil prices and economy remain strong, with real GDP projected inadequate rainfall in the latter part of 2010 to grow at 6.7 percent in 2011, up from the 3.4% threaten to undermine growth prospects. Over recorded in 2010. Output in the oil sector is the forecast period Kenya’s growth is projected expected to climb up to 2.1 million b/d from to remain robust at 4.8 percent in 2011, rising to 1.78 million b/d on the back of new oil 5 percent in 2012 and 5.2 percent by 2013. production coming on stream. Further, the start of the liquefied natural gas project should further Projected fastest growing Sub-Saharan boost export revenues. And with much of the African economies. Over the forecast horizon clearance of contractor arrears behind, increased (2011-2013), Sub-Saharan African economies public investment is expected to make a more projected to be amongst the fastest growing in significant contribution to growth over the the region, with growth rates averaging higher forecast horizon. Nonetheless, much of this than 6.5 percent in GDP include Ethiopia, 136 Global Economic Prospects June 2011: RegionalAnnex Ghana, Mozambique, Nigeria, Rwanda, and from increased output and yields thanks in part Zambia (table SSA.5). to government support to the sector via the provision of improved seeds and fertilizers to With real GDP forecast to grow at 13.4 percent farmers. Further, against the back drop of rising in 2011, Ghana is projected to be the fastest incomes and low accessibility of important growing economy in Sub Saharan Africa, thanks services such as telecommunication and banking to the commencement of oil exports. Over the services, growth in the services sector is medium term growth will be driven by the expected to remain strong over the forecast nascent oil sector with production expected to horizon. average 120,000 bpd, with the possibility of Real GDP growth in Mozambique is projected higher output as recent new discoveries also at 7.6 percent in 2011. Mozambique is expected come on stream. Further, increased investments to sustain its buoyant growth over the forecast in the gold mining industry and productivity horizon as it continues to benefit from increased gains in its cocoa sector should further boost investments in its mining sector. Recent export revenues. Thanks to increased business discoveries of large deposits of iron ore and confidence the services sector will continue to commercial quantities of natural gas offshore, in see strong inflows of private investments, addition to known deposits of coal, has only particularly in the construction and added to its attraction as a mining investment telecommunications sector, thereby lending destination. Growth in Mozambique is already further support to growth. However, increased being supported by ongoing mega-projects macroeconomic instability remains a downside including the Mozal aluminium smelter, the risk. Moatize coal mine which started production in Ethiopia’s economy is projected to grow the second quarter of 2011, the extraction and between 7.2 and 7.8 percent over the 2011-2013 treatment of natural gas project by South African period. Ethiopia’s growth will continue to be petro-chemical giant Sasol, and the Irish-owned driven by developments in its agricultural sector, titanium minerals dredge mine in Mona. These the largest sector in the economy. Productivity in investments and the exports that they generate in the sector will benefit from the support provided the coming years will continue to drive growth to small scale farmers via the expansion of road, in Mozambique. However, the tightening of power and market networks. Increased monetary policy to tackle double digit inflation investment flows to large scale commercial rates is likely to moderate growth in 2011. agricultural ventures should lend further support to the sector and the recent addition to hydro Rwanda’s strong growth is projected to continue electric power capacity should help alleviate over the medium term, averaging about 6.9 some of the binding constraints to growth. percent over the forecast horizon, led by the However, the current double digit inflationary agriculture sector. Food crop production will environment remains a risk to growth. benefit from government support to farmers via the provision of fertilizer, improved seeds and Zambia is forecast to grow at 6.8 percent in extensions services. Coffee, Rwanda’s main 2011 thanks to developments in its mining, export, should also benefit from the strong agricultural and services sectors. Record high rebound in international coffee prices. Lower copper prices continue to support increased transactions cost due to increased integration investment activity in Zambia’s copper industry, with it’s neighbors in the East African thereby generating higher copper production and Community should lend further support to exports. However, developments elsewhere in growth through increased trade and investment the economy are also critical to Zambia’s growth flows. Growth in the services sector, particularly prospects, in particular, the agricultural sector, construction, finance and insurance, and which still remains the major employer in the telecommunications is expected to be supported economy. The agricultural sector is benefitting 137 Global Economic Prospects June 2011: RegionalAnnex by increased private credit flows through the inflation rates above 10 percent (including forecast horizon. Ethiopia, Nigeria, Sierra Leone, Guinea, and Mozambique). Risks to the outlook The persistence of food price increases could High food prices pose a risk. Prices of globally have negative consequences, including traded food products have risen significantly deterioration in the current account and fiscal since June 2010. As of April 2011, global prices balances of net food importing Sub-Saharan were up by 103.2 percent for maize (year-on- African countries; as well as higher levels of year), 74.1 percent for wheat, 94.6 percent for poverty and malnutrition, with the possibility of Sorghum and 38.4 percent for palm oil. unrest in some countries--all of which would cut However, for most Sub Saharan African into growth prospects for the region. The countries, food price increases were moderate for moderate food price increases in 2010 were also much of 2010, and in a few countries prices helped by the fact that compared to other declined, thanks to favorable harvests; the local internationally traded food products, the rise in nature of food markets in many countries in the the price of rice was limited. Given the high region; and the availability of alternate staples import content of domestic consumption of rice (e.g. cassava) that can substitute for higher in most Sub-Saharan African countries, and as a priced internationally traded food (figure consequence a much higher pass through of SSA.8). international price changes, if rice prices were to go up more significantly in 2011, this could pose However, since November 2010 there has been a an important threat to food security, even if for rise in headline consumer price inflation rates some countries this would be moderated by with increases in price of the food basket helping substitution to other staples. Further, if current to drive the increase. The median inflation rate forecasts of drought conditions in parts of for Sub Saharan Africa increased to 4.5 percent Southern and Eastern Africa come to pass, this in December 2010 from a 10-year low 3.1 will serve to cut back on agriculture output and percent in August 2010. The distribution differs accentuate the rise in food prices. In some across the region however. As of February 2011 countries the impact of drought will go beyond 24 percent of countries in the region had its effects on food prices, but could impact inflation rates ranging between 5 and 10 percent; hydroelectric generation (e.g. Kenya), in an and another 25 percent of countries recorded environment in where businesses already consider power supply to be a binding constraint. Figure SSA.8 Inflation levels remain below 10 percent for most Sub-Saharan African countries Rise in oil prices represents another risk to macro stability. Another price increase of (number of countries) concern is the rise in oil prices. As of April 14 2011, crude oil prices had risen by 38 percent 12 compared to a year earlier. The result of this Food price inflation increase in price on Sub Saharan African 10 Consumer price inflation countries is mixed, as the region comprises both 8 net oil exporters and importers. If oil prices are 6 to persist at high levels through 2011, oil exporters in the region will see an improvement 4 in their current account and fiscal balances. 2 Indeed, given the pre-dominance of oil in the 0 economy of Sub Saharan African oil exporters— Inflation Inflation 0- Inflation 5- Inflation 10- Inflation in both Angola and Congo the oil sector <0% 5% 10% 15% >15% accounts for over 90 percent of exports and over 60 percent of GDP—should oil prices remain at Source: World Bank. 138 Global Economic Prospects June 2011: RegionalAnnex their February levels current account balances region, there still remain a number of instances could improve by as much as 7 percent of GDP. where political developments, leading to This could also pose a macroeconomic elections and in its aftermath, have been a challenge, since if not managed well, could lead deterrent to economic activity. In 2010, growth to a “Dutch Disease” effect, thereby making prospects in Madagascar, Comoros, Cote more difficult the ability to diversify the d’Ivoire and Guinea were affected adversely by economy. political unrests. Hence the evolution of the political cycle over the forecast horizon will be The downside risks to oil importers in the region consequential to individual country growth are however, greater. With countries facing an outcomes. As of June 2011, six presidential increased oil import bill, and given that oil elections had been carried out, none of which imports are about 18 percent of total created disruptions to economic activity. merchandise imports among Sub Saharan Africa However, the turmoil in Cote D’Ivoire which oil importers, this could lead to a deterioration in escalated in 2011 is likely to have led to negative the current account to GDP ratio by about 0.5 growth in the first two quarters of 2011. percent (excluding South Africa), if the February level of prices are sustained. However, were prices to increase even further, by an additional $50 from their February highs, current account balances would deteriorate even further, by as much as 3.5 percent of GDP. Fiscal balances could also deteriorate depending on the degree of petroleum subsidies provided by governments. And depending on the exchange rate regime, deterioration in current account balances could lead to depreciation of the nominal exchange rate, thereby bringing a further bout of inflationary pressures to bear. Higher inflation rates are also likely to prompt further monetary tightening, which could limit credit expansion in an already credit-constrained environment. For instance, in both March and May, Kenya’s Central Bank raised its key interest rate by 25 basis points, the first interest rate hikes since June 2008, on account of rising inflation and the depreciation of the shilling to close to a six and half year low. Other countries in the region to have hiked up interest rates in 2011 include Mozambique and Nigeria. According to World Bank estimates, if the current high oil prices were to increase an additional $50/bbl this could shave between 0.3 percent and 1 percent from GDP growth in Sub Saharan Africa. Political risks associated with elections in 2011. Over the forecast horizon, elections are scheduled to be carried out in at least a third of Sub-Saharan African countries. Though the past decade has seen an increasing number of smooth transitions of power in many countries in the 139 Global Economic Prospects June 2011: RegionalAnnex Table SSA.5 Sub-Saharan Africa country forecasts (annual percent change unless indicated otherwise) Est. Forecast 98-07a 2008 2009 2010 2011 2012 2013 Angola GDP at market prices (2005 US$) b 9.5 13.3 2.4 3.4 6.7 8.1 7.8 Current account bal/GDP (%) -0.9 8.5 -10.0 -1.7 4.0 7.4 9.9 Benin GDP at market prices (2005 US$) b 3.8 5.1 2.7 2.5 3.4 4.3 4.8 Current account bal/GDP (%) -7.7 -9.3 -9.2 -10.6 -14.8 -12.4 -7.2 Botsw ana GDP at market prices (2005 US$) b 4.7 3.1 -4.9 7.2 6.5 5.9 4.9 Current account bal/GDP (%) 9.2 3.5 -4.5 -6.2 -3.1 2.7 7.8 Burkina Faso GDP at market prices (2005 US$) b 4.8 5.0 3.2 7.9 5.2 5.6 6.0 Current account bal/GDP (%) -14.0 -24.8 -19.5 -21.3 -19.8 -18.9 -18.0 Burundi GDP at market prices (2005 US$) b 1.8 4.5 3.5 3.9 4.1 4.6 4.8 Current account bal/GDP (%) -20.5 -30.2 -16.0 -14.6 -15.1 -14.0 -12.9 Cape Verde GDP at market prices (2005 US$) b 5.9 6.5 2.8 4.7 5.8 6.6 6.6 Current account bal/GDP (%) -10.8 -13.4 -9.9 -14.9 -11.8 -18.2 -24.3 Cameroon GDP at market prices (2005 US$) b 3.4 2.9 2.0 2.8 3.8 4.1 4.6 Current account bal/GDP (%) -2.4 -1.9 -5.1 -3.8 -2.7 -3.2 -3.3 Central African Republic GDP at market prices (2005 US$) b 0.8 2.2 2.4 3.0 3.3 3.3 3.3 Current account bal/GDP (%) -4.6 -9.7 -7.9 -9.0 -8.0 -7.9 -7.0 Chad GDP at market prices (2005 US$) b 8.0 -0.4 -1.6 5.1 6.0 6.0 4.0 Current account bal/GDP (%) -36.5 -19.8 -28.9 -24.1 -14.3 -12.7 -5.4 Comoros GDP at market prices (2005 US$) b 1.9 1.0 1.8 1.7 2.3 2.3 2.3 Current account bal/GDP (%) -4.0 -10.5 -5.9 -8.5 -9.1 -10.0 -10.3 Congo, Dem. Rep. GDP at market prices (2005 US$) b 1.9 6.2 2.8 7.3 6.5 6.0 8.0 Current account bal/GDP (%) -3.6 -17.5 -10.5 -6.8 -2.8 -0.7 0.6 Congo, Rep. GDP at market prices (2005 US$) b 2.9 5.6 7.6 9.1 7.8 5.4 4.9 Current account bal/GDP (%) 1.2 1.2 -10.6 3.7 9.5 6.6 6.1 Cote d Ivoire GDP at market prices (2005 US$) b 0.0 2.2 3.6 3.0 -6.0 4.9 5.5 Current account bal/GDP (%) 0.7 1.9 7.2 6.7 -1.5 0.6 -0.8 Equatorial Guinea GDP at market prices (2000 USD) 2 20.7 11.3 -5.4 0.9 2.8 4.0 4.0 Current account bal/GDP (%) 6.7 10.1 -20.0 -6.7 -10.7 -8.6 -6.9 Eritrea GDP at market prices (2005 US$) b -0.1 -9.8 3.6 2.7 3.4 3.5 3.5 Current account bal/GDP (%) -19.0 -5.2 -6.5 -2.5 -2.7 -3.2 -3.4 Ethiopia GDP at market prices (2005 US$) b 6.5 10.8 8.8 8.1 7.7 7.2 7.8 Current account bal/GDP (%) -5.3 -7.0 -5.1 -6.8 -7.7 -8.8 -9.6 Gabon GDP at market prices (2005 US$) b 0.4 2.3 -1.0 5.1 6.0 5.1 4.1 Current account bal/GDP (%) 10.9 22.2 13.3 12.3 16.1 13.1 12.2 Gambia, The GDP at market prices (2005 US$) b 4.6 6.1 4.6 4.8 5.0 5.0 5.0 Current account bal/GDP (%) -9.5 -6.1 4.0 3.1 3.1 2.9 2.7 Ghana GDP at market prices (2005 US$) b 4.6 8.4 4.7 7.7 13.4 10.0 8.0 Current account bal/GDP (%) -6.4 -12.4 -3.6 -7.7 -6.3 -4.9 -4.0 Guinea GDP at market prices (2005 US$) b 2.8 4.9 -0.3 3.5 4.3 4.5 4.7 Current account bal/GDP (%) -6.0 -31.9 -10.4 -8.9 -7.6 -7.4 -7.1 Guinea-Bissau GDP at market prices (2005 US$) b 1.5 3.5 3.0 3.4 3.9 3.9 3.9 Current account bal/GDP (%) -7.2 -11.0 -8.5 -9.4 -9.8 -9.2 -8.9 Kenya GDP at market prices (2005 US$) b 3.4 1.6 2.6 5.6 4.8 5.0 5.2 Current account bal/GDP (%) -4.9 -6.6 -5.7 -7.8 -9.9 -7.7 -7.1 Lesotho GDP at market prices (2005 US$) b 2.8 4.5 0.9 2.4 3.1 4.0 3.8 Current account bal/GDP (%) -12.9 12.6 -2.4 -22.4 -19.5 -19.5 -19.3 Madagascar GDP at market prices (2005 US$) b 3.2 7.1 -3.7 0.7 2.6 3.9 3.9 Current account bal/GDP (%) -9.5 -17.4 -15.2 -13.8 -12.7 -11.2 -9.7 Malaw i GDP at market prices (2005 US$) b 2.8 8.6 7.6 6.6 6.1 5.7 5.5 Current account bal/GDP (%) -4.7 -7.1 -9.6 -2.7 -4.7 -5.1 -5.5 Mali GDP at market prices (2005 US$) b 5.1 4.9 4.3 5.0 5.8 5.9 5.9 Current account bal/GDP (%) -7.9 -12.2 -14.1 -15.2 -15.4 -15.8 -15.8 140 Global Economic Prospects June 2011: RegionalAnnex (annual percent change unless indicated otherwise) Est. Forecast 98-07a 2008 2009 2010 2011 2012 2013 Mauritania b GDP at market prices (2005 US$) 4.1 3.7 -1.1 4.9 6.0 6.3 5.4 Current account bal/GDP (%) -5.8 -12.6 -13.2 -10.6 -11.6 -12.1 -12.7 Mauritius b GDP at market prices (2005 US$) 3.6 5.1 3.0 4.3 4.1 4.2 4.3 Current account bal/GDP (%) -1.3 -10.5 -9.5 -13.1 -12.3 -11.5 -10.5 Mozambique b GDP at market prices (2005 US$) 6.8 6.7 6.3 6.6 7.6 7.7 7.7 Current account bal/GDP (%) -14.6 -12.0 -12.0 -13.7 -12.0 -10.9 -9.9 Namibia b GDP at market prices (2005 US$) 4.4 4.3 -0.8 4.6 4.0 4.8 4.5 Current account bal/GDP (%) 4.0 0.5 -1.2 -7.2 -1.8 2.1 6.3 Niger b GDP at market prices (2005 US$) 2.7 9.5 1.0 7.5 6.0 8.5 6.8 Current account bal/GDP (%) -7.4 -12.2 -18.9 -19.3 -19.7 -17.1 -14.7 Nigeria b GDP at market prices (2005 US$) 5.0 6.0 6.7 7.8 7.1 7.5 7.3 Current account bal/GDP (%) 11.0 13.8 12.4 13.5 12.7 11.6 10.3 Rw anda b GDP at market prices (2005 US$) 6.8 11.2 4.1 7.5 7.0 6.8 7.0 Current account bal/GDP (%) -6.0 -5.4 -7.3 -5.9 -5.6 -5.1 -4.7 Senegal b GDP at market prices (2005 US$) 4.0 3.3 2.2 3.2 4.2 4.4 4.4 Current account bal/GDP (%) -7.0 -14.3 -12.9 -14.0 -14.2 -14.9 -15.5 Seychelles b GDP at market prices (2005 US$) 2.1 -0.9 -7.6 3.5 4.0 5.0 5.0 Current account bal/GDP (%) -16.4 -44.0 -37.2 -39.5 -23.1 -16.7 -10.3 Sierra Leone b GDP at market prices (2005 US$) 7.5 5.5 3.2 5.8 5.6 5.9 6.0 Current account bal/GDP (%) -12.2 -15.3 -15.0 -14.3 -14.7 -13.6 -12.5 South Africa b GDP at market prices (2005 US$) 3.7 3.7 -1.8 2.8 3.5 4.1 4.4 Current account bal/GDP (%) -2.1 -7.1 -4.1 -2.8 -3.2 -3.8 -4.4 Sudan b GDP at market prices (2005 US$) 6.3 6.8 4.5 5.5 5.3 5.8 5.8 Current account bal/GDP (%) -7.1 -2.3 -7.1 -3.0 -7.8 -7.9 -7.9 Sw aziland b GDP at market prices (2005 US$) 3.1 2.4 1.2 2.0 0.5 1.5 2.0 Current account bal/GDP (%) -1.3 -8.1 -13.8 -14.5 -14.2 -13.6 -12.5 Tanzania b GDP at market prices (2005 US$) 5.9 7.4 6.0 7.0 6.5 6.9 6.7 Current account bal/GDP (%) -5.7 -13.0 -8.5 -8.7 -9.1 -10.1 -11.3 Togo b GDP at market prices (2005 US$) 1.8 1.8 3.2 3.4 3.7 4.0 4.1 Current account bal/GDP (%) -9.5 -7.7 -5.3 -5.7 -4.3 -4.6 -4.7 Uganda b GDP at market prices (2005 US$) 7.0 8.7 7.1 5.2 6.4 6.6 7.0 Current account bal/GDP (%) -5.4 -9.1 -6.6 -9.7 -11.9 -15.8 -12.1 Zambia b GDP at market prices (2005 US$) 4.2 5.8 6.4 7.6 6.8 6.7 6.0 Current account bal/GDP (%) -13.7 -9.5 -5.5 -3.7 -3.6 -3.0 -2.4 World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time. Liberia, Somalia, Sao Tome and Principe are not forecast owing to data limitations. a. Growth rates over intervals are compound average; growth contributions, ratios and the GDP deflator are averages. b. GDP measured in constant 2005 U.S. dollars. c. Estimate. d. Forecast. Source: World Bank. Notes: Bank, Washington DC. 1. Peter Guests, “Resource Deals to Africa”, in 5. Calestous Juma. “Growing the economy”, in This is Africa, Financial Times Business, The New Harvests. Oxford University Press. April/May 2011. Transforming Africa’s Role in the Global Food Security System. Address by H.E. Mr 2. “Who’s investing in Africa”, Ai, November- Kofi A. Annan, Chair of the Alliance for a December 2010, Vol. 8 issue 6. Green revolution in Africa, London 30 March 2011. 3. Gail Mwamba, “Structuring Local Solutions”, in This is Africa, Financial 6. Address by H.E. Mr Kofi A. Annan, Chair Times Business, April/May 2011. of the Alliance for a Green revolution in Africa, London 30 March 2011. 4. World Bank (2008). World Development Report: Agriculture for Development, World 141