Global 55602 Economic Volume 1 | Summer 2010 Prospects Fiscal Headwinds and Recovery Global Economic Prospects Summer 2010 Global Economic Prospects Summer 2010: Fiscal Headwinds and Recovery Key messages developing countries is expected to grow by 6.2, 6.0, and 6.0 percent in 2010, 2011 and Market nervousness concerning the fiscal 2012. This is more than twice as quickly as positions of several European high-income in high-income countries, where growth is countries poses a new challenge for the projected to strengthen from 2.3 percent this world economy. This arises as the recovery year to 2.7 percent in 2012. is transitioning toward a more mature phase during which the influence of rebound However, should current uncertainty factors (such as fiscal stimulus) fades, and regarding developments in Europe persist, GDP gains will increasingly depend on outturns could be weaker. A high probability private investment and consumption. alternative baseline, characterized by an accelerated tightening of fiscal policy across So far evolving financial developments in high-income countries, would see a more Europe have had limited effects on financial muted recovery, with global GDP expanding conditions in developing countries. Although by 3.1 percent in 2010 and by 2.9 and 3.2 in global equity markets dropped between 8 2011 and 2012. The easing of momentum and 17 percent, there has been little fallout would be concentrated in high-income on most developing-country risk premia. countries, where GDP might rise 2.1, 1.9, And despite a sharp deceleration in bond and 2.2 percent during each of the three flows in May, year-to-date capital flows to years. Under these conditions growth in developing countries during the first 5 developing countries could average 5.9 months of 2010 are up 90 percent from the percent during the projection period. same period in 2009. Deeper and more widespread effects might arise if the situation causes investors to Little real-side data is available to evaluate become significantly more risk averse; or in the impact of the European fiscal/debt crisis a less likely scenario, if there is a major on economic activity. Existing data suggests crisis of confidence, prompted by (or that through the end of March, the recovery causing) a default or major restructuring of remained robust in most developing and high-income sovereign European debt. developed countries, with the exception of high-income Europe where it has stagnated. Simulations suggest that an increase in risk aversion that caused long-term Assuming that measures in place prevent yields on U.S. government bonds to today's market nervousness from slowing rise by 100 basis points could slow the normalization of bank-lending, and that a global growth by 0.5 percentage default or restructuring of European points. sovereign debt is avoided, global GDP is projected to increase by 3.3 percent in 2010 A serious loss of confidence in the and 2011, and by 3.5 percent in 2012. debt of five EU countries combining Private capital flows to developing countries high fiscal deficits and high are projected to increase from 2.7 percent of government debts that led to a freezing their GDP in 2009 to 3.2 percent in 2012 -up of credit in those countries could (Table 1). Reflecting stronger productivity cause GDP growth to slow by as much growth, and less-pronounced headwinds than as 2.4 percent in 2011--pushing high- in high-income countries, GDP in income countries into recession. Global Economic Prospects Summer 2010 A default or major restructuring Following the announcement of a 750 billion, among the EU-5 (Greece, Ireland, or nearly $1 trillion aid package by the Italy, Portugal and Spain) could European Union, the International Monetary threaten the solvency of several banks Fund, and the European Central Bank, the initial outside the EU-5, with potentially far- sharp uptick in the price of credit default swaps reaching consequences for the global (CDSs) on the sovereign debt of select financial system. European countries receded before rebounding partially in the following weeks (Figure 1). Because of significant presence of EU- LIBOR-OIS spreads have increased to 32 basis 5 banks, international capital flows to points, suggesting that commercial banks are Europe and Central Asia and to a concerned that the ability of counterparties to lesser extent to Latin America and the repay even short loans might be affected by a Caribbean might be seriously affected default or restructuring of high-income in the event of a default or sovereign debt. Moreover, anecdotal evidence restructuring of high-income sovereign suggests that some European banks are having debt. trouble getting funding. Nevertheless, LIBOR- OIS spreads remain well below the values To ensure longer-term sustainability, fiscal observed during the initial phases of the sub- policy in many high-income countries needs prime crisis, and suggest that for the moment, to be tightened sharply over the next several markets are not overly concerned. years. Although politically difficult, a policy that favors a more aggressive reining-in of The credit ratings of most developing country deficits will, by reducing high-income sovereigns have not been affected by the crisis. country borrowing costs, favor medium-term Since the end of April, though May 24, the credit growth in both developing and high-income ratings of 5 countries (Azerbaijan, Bolivia, countries. Nicaragua, Panama and Ukraine) have been upgraded, and none have been downgraded. For Limited fiscal space in low-income countries the year to date, there have been 22 upgrades and means that if official development assistance only 4 downgrades. EMBI spreads for major were to decline, policymakers in low-income developing countries, after rising much less than countries could be forced to cut growth in September 2008 (Figure 1 bottom panel), have enhancing infrastructure and human capital declined again and are only a little higher than in investments. As a result, the number of January 2010 (less than 10 basis points in the people living on $2 or less per day in 2020 case of Brazil and Russia, and 27 and 40 basis could be higher by as much as 79 million. points in the case of South Africa and Turkey). Indeed, a recently developed index of the deterioration in financial conditions2 for a sample of 60 countries (31 high-income, 27 So far, the fall-out from the high- middle-income, and 2 low-income countries), income European debt crisis has shows that as of early June 2010, only 8 of the been contained. 23 countries displaying relative deterioration in market conditions since March 31st were Concerns about the sustainability of Greece's developing counties. Four of the 8 countries fiscal position spilled over into global financial where the deterioration in the aggregate index markets in early May 2010. Although there was exceeded 0.5 were developing countries. a sharp increase in risk premia and a steep However, in two cases, the deterioration decline in stock markets worldwide, there are reflected rising interest rates following a only limited indications of contagion ­ at least so tightening of monetary policy in response to far.1 improving economic conditions, rather than a reaction to the situation in Greece. 2 Global Economic Prospects Summer 2010 Table 1. The global outlook in summary (percentage change from previous year, except interest rates and oil price) 2008 2009e 2010f 2011f 2012f Global Conditions World Trade Volume (GNFS) 3.2 -11.6 11.2 6.8 7.2 Consumer Prices 1,2 3.1 -0.2 1.5 1.6 1.8 G-7 Countries United States 3.8 -0.3 2.0 2.2 2.4 Commodity Prices (USD terms) Non-oil commodities 0.0 -21.6 16.8 -4.0 -5.4 3 97.0 61.8 78.1 74.6 73.9 Oil Price (US$ per barrel) Oil price (percent change) 36.4 -36.3 26.4 -4.5 -0.9 4 5.9 -4.9 0.0 -3.7 0.0 Manufactures unit export value Interest Rates $, 6-month (percent) 3.2 1.2 0.8 2.2 2.2 , 6-month (percent) 4.8 1.5 1.0 1.5 2.8 International capital flows to developing countries (% of GDP) Developing countries Net private and official inflows 4.7 3.4 Net private inflows (equity + debt) 4.3 2.7 3.0 3.1 3.2 East Asia and Pacific 3.1 2.2 2.1 2.2 2.5 Europe and Central Asia 7.8 2.6 4.0 4.2 4.1 Latin America and Caribbean 4.0 3.0 3.5 3.2 3.3 Middle East and N. Africa 1.9 1.8 2.5 2.8 2.6 South Asia 3.6 3.9 3.4 3.2 3.4 Sub-Saharan Africa 3.0 4.0 3.6 3.8 4.2 5 Real GDP growth World 1.7 -2.1 3.3 3.3 3.5 6 Memo item: World (PPP weights) 1.3 -0.4 4.2 4.0 4.3 High income 0.4 -3.3 2.3 2.4 2.7 OECD Countries 0.3 -3.4 2.2 2.3 2.6 Euro Area 0.4 -4.1 0.7 1.3 1.8 Japan -1.2 -5.2 2.5 2.1 2.2 United States 0.4 -2.4 3.3 2.9 3.0 Non-OECD countries 3.0 -1.7 4.2 4.2 4.5 Developing countries 5.7 1.7 6.2 6.0 6.0 East Asia and Pacific 8.5 7.1 8.7 7.8 7.7 China 9.6 8.7 9.5 8.5 8.2 Indonesia 6.0 4.5 5.9 6.2 6.3 Thailand 2.5 -2.3 6.2 4.0 5.0 Europe and Central Asia 4.2 -5.3 4.1 4.2 4.5 Russia 5.6 -7.9 4.5 4.8 4.7 Turkey 0.7 -4.7 6.3 4.2 4.7 Poland 4.8 1.7 3.0 3.7 4.0 Latin America and Caribbean 4.1 -2.3 4.5 4.1 4.2 Brazil 5.1 -0.2 6.4 4.5 4.1 Mexico 1.8 -6.5 4.3 4.0 4.2 Argentina 7.0 -1.2 4.8 3.4 4.4 Middle East and N. Africa 4.2 3.2 4.0 4.3 4.5 7 7.2 4.7 5.0 5.5 5.7 Egypt 7 2.3 1.8 3.0 3.2 3.2 Iran Algeria 2.4 2.1 4.6 4.1 4.3 South Asia 4.9 7.1 7.5 8.0 7.7 7, 8 5.1 7.7 8.2 8.7 8.2 India 7 2.0 3.7 3.0 4.0 4.5 Pakistan 7 6.2 5.7 5.5 5.8 6.1 Bangladesh Sub-Saharan Africa 5.0 1.6 4.5 5.1 5.4 South Africa 3.7 -1.8 3.1 3.4 3.9 Nigeria 5.3 5.6 6.1 5.7 6.4 Kenya 1.7 2.6 4.0 4.9 5.4 Memorandum items Developing countries excluding transition countries 5.7 3.0 6.6 6.2 6.2 excluding China and India 4.3 -1.8 4.5 4.4 4.6 Source: World Bank. Notes: PPP = purchasing power parity; e = estimate; f = forecast. 2009e 2010f 2011f 2012f 1. Canada, France, Germany, Italy, Japan, the UK, and the United States. Egypt 5.6 5.0 5.3 5.5 2. In local currency, aggregated using 2005 GDP Weights. Iran 1.8 3.0 3.2 3.2 3. Simple average of Dubai, Brent and Wes t Texas Intermediate. India 5.7 8.3 8.6 8.2 4. Unit value index of manufactured exports from major economies , expressed in USD. Pakistan 3.3 3.5 4.2 4.5 5. Aggregate growth rates calculated using constant 2005 dollars GDP weights. Bangladesh 5.6 5.7 6.0 6.1 6. Calculated using 2005 PPP weights. 7. In keeping with national practice, data for Egypt, Iran, India, Pakistan and Bangladesh are reported on a fiscal year basis. Expressed on a calendar year basis, GDP growth in these countries is as in the table on the right. 8. Real GDP at market prices . Growth rates calculated using real GDP at factor cost, which are customarily reported in India, tend to be higher and are, for 2008-12: 6.7, 7.4, 8.5, 9.0, and 8.5 percent ­ see Table B5.4 in the regional annex and the South Asia Economic Update (http://go.worldbank.org/6BU9N0AZM0) for more detail. While market conditions have improvedthe eventual contagion; and continued volatility, are size of the EU/IMF rescue package (close to $1 indications of the fragility of the financial trillion); the magnitude of the initial market situation. As discussed in the risks section reaction to the possibility of a Greek default and below, a further episode of market uncertainty 3 Global Economic Prospects Summer 2010 Figure 1. Limited signs of contagion crisis so far could entail serious consequences for growth in Stock market valuations worldwide have been affected both high-income and developing countries. Stock market valuations, USD index, April 30=100 110 Stock markets worldwide lost between 8 and 17 105 percent in May, with losses generally larger in 100 95 high-income Europe and developing Europe than 90 in markets further removed from Greece. 85 Moreover, data for May indicate a significant 80 Eurozone Hungary decline in capital inflows toward developing 75 Latin America India USA MiddleEast and North Africa China countries (Table 2), although year-to-date flows 70 Jan10 Feb10 Mar10 Apr10 May10 are 90 percent higher than in 2009. Most of the decline was concentrated in bond issuance by developing countries, with more modest declines Greek anxieties spread to other euro-zone economies with precarious fiscal positions, but markets are calmed by the in bank-lending and equity flows. Although it is EU package difficult to determine with precision to what extent this reflects a normal seasonal decline in basis points flows, or a temporary reduction in issuance 1200 prompted by elevated spreads at the beginning of Spain 1000 Greece the month,3 these developments could signal a 800 Ireland further tightening of capital markets. Portugal 600 400 Table 2. A sharp fall of in bond issues in May 200 $ billion 2008 2009 2010 Q1 Total Q1 Total Q1 Jan Feb M ar Apr M ay 0 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Total 103 390 48 353 104 41 17 47 45 15 Bonds 12 65 18 115 48 21 5 21 26 3 Banks 71 257 22 129 30 12 5 13 8 6 Funding cost pressures up­ but well below the average of Equity 20 68 8 109 26 7 7 12 11 6 early stages of sub-prime crisis Lat. Am erica 19 90 21 137 31 9 4 17 15 3 basis points Bonds 5 20 10 62 19 8 2 10 9 0 E. Europe 36 157 6 72 26 13 2 10 14 2 400 Bonds 2 35 4 33 17 7 1 8 11 1 350 Asia 38 98 18 122 38 16 7 15 11 10 300 Bonds 3 7 5 16 9 7 2 0.3 3 2 250 Others 11 45 3 22 10 2 3 5 4 1 200 Libor-OIS (US$) 150 Libor-OIS (euro) Source: World Bank, Dealogic. 100 50 0 -50 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 The recent bout of market nervousness arose as the recovery is Spreads have returned to close to earlier levels moving into a more mature phase basis points 600 characterized by significant 500 headwinds 400 Brazil 300 Russia Financial markets in developing and high- Turkey South Africa income countries have staged a remarkable 200 recovery from the worst of the crisis. 100 Notwithstanding recent turmoil, interbank 0 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 lending rates and developing country bond spreads have returned to close-to-normal levels; Source: World Bank, Datastream, Bloomberg stock markets in high-income and emerging 4 Global Economic Prospects Summer 2010 economies have recovered much of the value and developing countries face serious they lost, and most developing-country headwinds. High-income countries will continue currencies have regained their pre-crisis levels to be plagued by weak financial sectors, waning against the dollar, with some having appreciated. growth effects from fiscal and monetary The real-side of the global economy is also stimulus, and an increasingly pressing need to recovering. In the first quarter of 2010, global set public finances on a sustainable path. industrial production was expanding at an 11 percent annualized pace (Figure 2), while The need to tighten fiscal policy extends well merchandise trade, was growing even more beyond those countries most in the headlines, briskly (20 percent annualized pace). Still the and the immediate challenge of unwinding the level of industrial production remains 10 percent crisis-related stimulus measures that were put or more below potential in many developing into place. This is a problem for many high- countries and unemployment is high. income countries, where fiscal deficits and debt While the downturn and recovery of the global to GDP ratios have reached unsustainable levels. economy was remarkable for both its depth and The G-7's debt is expected by the IMF to reach its similarity across countries, the recovery is more than 113 percent of the group's GDP in now more than a year old and its character is 2010 (Figure 3), a level not seen since 1950. changing. Bounce-back factors (including the Bringing debt levels down will be more deep inventory cycle, and the growth impetus challenging now than earlier because, in contrast from fiscal and monetary stimulus) that with the war-related debt of the 1950s, today's contributed to very rapid quarterly growth rates debt reflects ongoing demands on government are fading. Increasingly, the pace of the recovery coffers that are likely to grow as pension and at the national and regional level will depend on health liabilities expand with aging populations. the extent to which private-sector activity The IMF (2010) estimates that high-income recovers, and measures taken to address longer- countries will need to cut government spending term structural factors (including fiscal (or raise revenues) by 8.8 percent of GDP for a sustainability, banking-sector restructuring, and 20 year period in order to bring debt levels down underlying productivity). to 60 percent of GDP by 2030. Fiscal policy poses challenges The need to unwind stimulus measures among developing countries is generally less pressing; Medium-term prospects for both high-income because both fiscal deficits and debt-to-GDP Figure 2. The real-side recovery is showing some signs of maturing Industrial production is growing rapidly Trade is recovering at very rapid rates 3m/3m annualized growth rates 3m/3m annualized growth rates 20 80 60 10 40 0 20 Developing -10 0 High income -20 -20 High Income -40 -30 Developing -60 -40 -80 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 Source: World Bank 5 Global Economic Prospects Summer 2010 Figure 3. G-7 debt is close to post-war highs unwinding stimulus (although overheating could Gross public debt as a % of GDP be a strong macroeconomic argument for doing so). 140 120 Lower tax and commodity revenues, 100 weaker aid flows, and more competition 80 for global savings could squeeze 60 government and private-sector 40 investment... 20 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Developing countries, particularly low-income countries that rely on official development Source: IMF assistance (ODA) for budgetary support, could come under severe pressure if the crisis results in reduced aid flows. So far, the crisis has caused ratios are much lower (Figure 4). Overall, government deficits in low-income countries to general government deficits as a percent of GDP increase by an average of 1.3 percent of GDP, in developing countries have increased by 4.5 suggesting that many were able to take percentage points between 2007 (before the advantage of relatively good fiscal positions, and crisis) and 2009. Due to binding financing ample reserves going into the crisis to buffer its constraints facing low-income countries, their effects on spending. However, the initial deficits increased by only 1.3 percentage points cushions have been exhausted, and the ability of of GDP. low-income countries to maintain spending in Figure 4. Most developing countries are not beset the face of a slow recovery is unclear ­ by concerns about fiscal sustainability especially if, as is likely, ODA declines in Public balance / GDP (%), 2009 coming years. -14 U. K. -12 G r eece S pain U. S . Extrapolating from trends in aid flows during Ir eland -10 previous recessions from 1977 through 2007-- South -8 Africa Romania Po r tugal and given the extent of fiscal consolidation and Russia F r ance -6 Ukraine Malaysia lower potential output faced by donor India Turkey Chile Thailaind Poland Italy countries--recent research (Dang, Knack, -4 Venezuela Brazil China Indonesia Colombia Philippines Rogers, 2009) suggests that ODA could fall by -2 Mexico as much as 20 to 25 percent in the current crisis, Argentina 0 and that it could take about a decade for flows to 0 20 40 60 80 100 120 140 Gross Public debt / GDP (%), 2009 recover. This probably represents a worst-case scenario, and aid flows are unlikely to fall so Source: World Bank much this time around. Nevertheless, aid flows will likely be tighter than in the past. Indeed, Several developing countries do face fiscal though bilateral aid did increase modestly in real challenges, including India whose fiscal deficit terms during 2009 (Figure 5), it has fallen short is estimated to have reached 9.5 percent of GDP of commitments and is declining as a share of in 2009/10, and whose debt represents 77 recipient GDP. percent of its GDP. Recognizing the challenge, the government has announced a medium-term In addition to potentially weaker aid flows, adjustment path, which is expected to reduce ongoing restructuring in the international India's debt-to-GDP ratio to at most 68 percent financial sector implies significantly less and of GDP by FY2014/15. China also put in place a more expensive financial capital for developing large stimulus package, but its finances are on a countries for years to come (Table 3). Private firmer footing, so there is less urgency to capital flows to developing countries are 6 Global Economic Prospects Summer 2010 projected to recover only modestly from $454 able to rollover their loans, potentially billion (2.7 percent of GDP) in 2009 to $771 generating a second-round region-specific crisis. billion (3.2 percent of GDP) by 2012 (Figure 6). For example, in Kazakhstan, Latvia, Lithuania, and Ukraine, where the repayment on corporate If the rebound in net capital flows remains muted external debt is anticipated to exceed 8 percent as expected, there is a real risk that many of the of GDP in 2010. private firms that borrowed heavily internationally in the boom period will not be Increased borrowing of high-income sovereigns Figure 5. Official assistance is declining as a share on international capital markets will increase of recipient GDP demands on global savings, raise borrowing costs and potentially crowd-out developing Net ODA donors 2000-2009 country borrowers. Already in 2009, the G-3 Current Prices (US billions) issued 5-times more bonds than they did in each $ billions percent 140 as a percent of IDA GDP 25 of 2005 and 2006. The group's total draw on 120 20 global saving exceeded $2.5 trillion--more than 100 7-times the net capital flows to developing 80 15 countries in that year. Partly as a consequence of 60 10 40 this increased borrowing and also because the 5 20 Federal Reserve has stopped purchasing U.S. 0 0 long-term corporate bonds and residential 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 mortgages, long-term yields on U.S. treasury securities had been rising, though with the onset Source: World Bank, OECD of the Greek crisis they have eased in response to "safe-haven" inflows (Figure 7). Table 3. Net International capital flows to developing countries $ billions 2005 2006 2007 2008 2009e 2010f 2011f 2012f Ne t private and official inflows 501.8 659.8 1222.8 780.5 523.5 Ne t private inflows (e quity+de bt) 573.3 732.1 1223.7 752.4 454.0 589.5 670.2 770.8 Net equity inflows 349.9 469.0 663.8 536.5 445.9 497.5 564.2 652.8 ..Net FDI inflows 281.1 363.2 528.4 593.6 358.3 438.0 501.0 575.0 ..Net portfolio equity inflows 68.8 105.8 135.4 -57.1 87.5 59.5 63.2 77.8 Net debt flows 151.9 190.8 559.0 244.0 77.6 ..Official creditors -71.5 -72.3 -0.9 28.1 69.5 ....World Bank 2.7 -0.5 4.8 7.1 21.1 ....IMF -40.2 -26.7 -5.1 10.8 27.5 ....Other official -34.0 -45.1 -0.6 10.2 20.9 ..Private creditors 223.4 263.1 559.9 215.9 8.1 92.0 106.0 118.0 ....Net M-L term debt flows 137.8 168.3 315.4 228.6 -2.7 ......Bonds 56.8 31.7 87.4 15.0 54.8 ......Banks 85.8 141.5 231.0 217.2 -52.9 ......Other private -4.8 -4.9 -3.0 -3.6 -4.6 ....Net short-term debt flows 85.6 94.8 244.5 -12.7 10.8 Balancing ite m -414.1 -446.5 -617.9 -808.4 -292.9 Change in re se rve s (- = incre ase ) -393.6 -643.5 -1081 -439.0 -561.0 Me morandum ite ms Net FDI outflows 61.6 130.5 148.7 207.5 153.9 210.0 250.0 275.0 Workers' remittances 193.0 235.0 290.0 336.0 316.0 335.0 359.0 As a pe rce nt of GDP (%) 2005 2006 2007 2008 2009e 2010f 2011f 2012f Ne t private and official inflows 5.03 5.59 8.45 4.51 3.09 Ne t private inflows (e quity+de bt) 5.74 6.21 8.46 4.35 2.68 3.02 3.05 3.15 ..Net FDI inflows 2.82 3.08 3.65 3.43 2.12 2.24 2.28 2.35 ..Net portfolio equity inflows 0.69 0.90 0.94 -0.33 0.52 0.30 0.29 0.32 ..Private creditors 1.5 1.6 3.9 1.4 0.5 0.5 0.5 0.5 Source: World Bank. 7 Global Economic Prospects Summer 2010 Figure 6. Net private capital inflows will financial sector regulations, and stage a modest recovery increased competition for capital from $ billions percent high-income sovereigns. Global 1400 10 Economic Prospects: Crisis, Finance Private Debt 1200 Portfolio Equity 9 and Growth (World Bank, 2010) 1000 FDI 8 estimated that just the latter two factors 7 800 share of GDP (right axis) could reduce developing country growth 6 600 5 rates by between 0.2 and 0.7 percent for 400 4 a period of 5 to 7 years. 3 200 2 Although the effects on trend growth of 0 1 a deterioration in financing conditions, -200 0 or in the capacity of developing countries to invest in their future Source: World Bank. production, may appear small, their cumulative impact on poverty and poverty reduction could be large. Even a Figure 7. Long-term corporate yields have relatively small 0.5 percentage point held relatively steady even as flight-to- decline in the rate of growth of potential safety causes U.S. and German govern- output in low income countries ment bonds to fall wouldover a 10 year period increase the number of people living on Yield to maturity on benchmark debt 9.5 U.S. Corporate $2 dollars per day or less, by as much as Euro Corporate U.S. Govt. 10 yr 79 million (Table 4). 8.5 Euro (German Govt., 10 yr)) 7.5 6.5 Medium-term prospects are 5.5 for a modest recovery, with 4.5 global growth dependent on 3.5 prospects for developing 2.5 countries 1.5 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Note: Corporate yields based on A-AAA 10 year Merrill Lynch indices Overall, global GDP is expected to expand by 3.3 percent in 2010 and 2011, rising somewhat thereafter to 3.5 percent Weaker aid flows could translate in 2012 (see earlier Table 1). Reflecting into slower growth and increased much higher productivity and population poverty over the long-term growth, the economies of the developing world are expected to grow by about 6 The economic impact on long-term percent in all three years, while high- growth in developing countries of a income country growth is limited to 2.3 forced pullback from growth-enhancing percent in 2010 and 2.4 and 2.7 percent infrastructure and human-capital in 2011 and 2012 respectively. Because investment due to lower fiscal revenues, of these large growth differentials, weaker ODA, and sluggish capital flows, developing countries will be a major are difficult to gauge, as are the effects source of global growth (Figure 8). on private sector growth of tighter Close to half of the increase in global 8 Global Economic Prospects Summer 2010 Table 4. A 0.5 percentage point decrease in the increase in global exports. the rate of growth could increase poverty by 79 million in the long term High-income countries Growth in the United States is expected to remain strong in the second and third quarters of 2010, with growth of 3.3 percent for the year as a whole (see Table 1). GDP gains are projected to ease in 2011 to 2.9 percent, reflecting both a gradual tightening of fiscal policy and an end to the boost to growth from stock-building. Japanese growth is anticipated to rebound to 2.5 percent in 2010, but to slow thereafter to 2.1 percent. On balance, growth in the Euro area is forecast to remain weak at 0.7 percent in 2010, with some strengthening to 1.3 and 1.8 percent in 2011 and 2012 respectively. However over the medium to long(er) terms, trend growth in high-income Europe will trail that of the United States (and ex fortiori developing countries), principally Source: World Bank because of slower working-age population growth, but also because of the large fiscal adjustments that Figure 8. Almost half of global growth is countries in the region will begin, and due to increased demand in developing the region's heavier reliance on banking countries (as opposed to bonds or stock markets) Contribution to world GDP growth to finance private-sector investment.4 5 4 Developing countries 3 2 Developing country growth is projected 1 to pick up from an estimated 1.7 percent 0 in 2009 to around 6 percent in each of -1 High income countries 2010, 2011 and 2012. The apparent -2 Developing countries steadiness of growth in each of these -3 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 years belies an anticipated slowing of growth in China, the largest developing Source: World Bank economy (from 9.5 in 2010 to 8.5 percent in 2011), as the fiscal stimulus demand in each of 2010 through 2012 put in place in 2009 begins to be will come from developing countries, unwound. Excluding China and India, and their rapidly rising imports will be developing country GDP is projected to responsible for more than 40 percent of increase by 4.5, 4.4, and 4.6 percent in 9 Global Economic Prospects Summer 2010 2010, 2011, and 2012 respectively. Figure 9. Nevertheless external financing gaps will persist High external financing needs in a time percent of GDP of sharp retrenchment in capital flows 9.0 2009 2010 2011 8.0 led to significant current account Total LMIC gap ($bn) 352 210 180 7.0 adjustments and slower growth in 6.0 2009e several developing countries during 5.0 2010p 2009. As a consequence, financing needs 4.0 2011p are forecast to decline from $1.2 to $1.1 3.0 2.0 trillion in 2010. Most of the decline in 1.0 2010 is due to reductions in current 0.0 account deficits forced on developing Low Lower-Middle Upper-Middle countries by a 40 percent decline in Source: World Bank DEC Prospects Group international capital flows during 2009. staff estimates Current account balances in deficit countries were almost halved from -$283 to -$128 billion in 2009. In several The East Asia and Pacific region fared developing countries in Europe and relatively well during the recession. The Central Asia, deficits narrowed by more region is expected to grow by 8.7 than 50 percent. Medium and long term percent in 2010 and 7.8 and 7.7 percent debt coming due declined somewhat, in 2011 and 2012. East Asia has thereby reducing financing benefitted from close links with China, requirements, but short-term debt has which led the regional (and global) increased ­ leading to an overall rise in recovery. However, the earlier strong scheduled debt repayments. Based on momentum in regional exports and the assumption that current account production is waning, and output gaps deficits remain at their 2009 levels as a are closing rapidly. Coupled with strong percent of GDP, the total external capital inflows and rising liquidity, this financing needs of developing countries may put pressure on both goods and is projected to be on the order of $1.1 asset price inflation. Reflecting these trillion for 2010 through 2012. factors, regional and Chinese growth are projected to slow to an average 7.8 and Private capital flows to developing 8.4 percent respectively over 2011 to countries are forecast to recover 2012 (see also the Regional Annex to modestly from $454 billion (2.7 percent this Report). of GDP) in 2009 to $771 billion (3.2 percent of GDP) by 2012 (see above). The recovery in Europe and Central As a result, the ex-ante estimates of the Asian countries is the least advanced financing gap will halve to $180 billion among developing regions, with by 2012 from $352 billion in 2009. As a industrial activity still some 11 percent share of GDP, the decline in the below January 2008 levels, with GDP financing gap is expected to be most continuing to decline in several countries marked for the upper-middle-income during the fourth quarter of 2009. countries 1.5 percent and low income Regional demand remains hobbled by countries 1.3 percent (Figure 9).5 The large household foreign-currency debt financial markets annex provides more obligations and significant negative detail on recent developments. wealth effects due to the earlier collapse 10 Global Economic Prospects Summer 2010 in real estate and equity markets. The The outlook for the Middle East and compression in remittances inflows North Africa region will continue to be remains a challenge for smaller driven by oil prices and economic economies. activity in the European Union (the region's main trade partner). The oil Economies in the region that weathered price collapse at the onset of the the crisis relatively well (Poland) are financial crisis together with OPEC projected to rebound more strongly, production restraints significantly supported by a return of capital inflows reduced oil revenues, cut into intra- and global trade normalization. But regional FDI flows, remittances and countries that faced the crisis with tourism receipts. However, exports are unsustainable domestic booms - showing signs of life, with a gradual characterized by large current account increase in oil revenues and a pick-up in deficits ­ (Bulgaria, Latvia, Lithuania) goods shipments (the latter bound to and those with vulnerable private or Europe). Though headwinds from public balance sheets (Hungary, Europe places regional growth at some Romania) are expected to recover more risk, recovery is anticipated to slowly, due to limited room for policy strengthen, with growth firming from 4.0 maneuver. Overall, growth is forecast to percent this year to 4.3 and 4.5 percent average 4.5 percent over 2011-2012, in 2011 and 2012 respectively. compared with an average 7 percent during the boom years. Despite the GDP in South Asia has benefitted from recovery in growth rates, the large loss stimulus measures (notably in India, and of output in 2009 means that even in to a lesser extent in Bangladesh and Sri 2012 many economies in the region will Lanka), relatively robust remittance continue to be characterized by high inflows, which continued to expand (in unemployment and large quantities of contrast to declines elsewhere), and the spare capacity. recovery in global demand. The recovery in Latin America and the The region also benefitted from Caribbean, a region dominated by relatively resilient capital inflows, which middle-income countries and commodity increased as a share of GDP--from 3.6 exporters, entered a strong cyclical percent in 2008 to 3.9 percent in 2009-- rebound during the second half of 2009, and was supported by long-standing benefitting from a robust rebound in capital account restrictions. A external demand, renewed capital combination of slower global growth, inflows, higher commodity prices (see tighter financial conditions and a Box 1), a turn in the inventory cycle, and consolidation of fiscal policy in some a significant boost to domestic demand countries in the region is expected to from substantial monetary and fiscal cause growth to average 8.4 percent over stimulus. After contracting by an 2010-2012, compared with the pre-crisis estimated 2.3 percent in 2009, output in rate of 9.2 percent in 2007 (calendar the region is forecasted to expand by year basis). around 4.3 percent over the projection period, somewhat slower than during the Sub-Saharan Africa weathered the boom period. global crisis better than previous, milder economic cycles. In part this is because 11 Global Economic Prospects Summer 2010 the hardest hit global markets (consumer 2009, led by strong demand in China--up durables and investment goods) are 1.3 mb/d or 17 percent (year-on-year). Nev- relatively small sectors in the region. At ertheless, global supplies are ample. Follow- the same time, the region's limited ing previous production cuts to support prices, OPEC's spare capacity has increased financial integration, normally a to around 6.5 mb/d, roughly the same level negative factor, diminished the size of as in 2002 when oil prices were $25/bbl. the initial shock. GDP growth for the Moreover, inventories in the U.S. and in region--is expected to continue to Europe are high. Over the medium term, oil strengthen slowly, driven by higher demand is expected to grow only slowly ­ commodity prices and stronger external about 1.5 percent per annum, while non- demand. Overall the region is forecast to OPEC oil supplies should continue to rise grow by 4.5, 5.1 and 5.4 percent modestly, by about 0.5 percent a year, while respectively over 2010 ­ 2012, up from OPEC countries continue to develop addi- an estimated 1.6 percent gain in 2009. tional capacity. As a result, markets should remain well supplied. While prices are ex- pected to average $75/bbl in real terms in the Box 1. Recent developments and prospects long run, they are likely to remain volatile, for commodity markets reflecting the inherent difficulties associated Commodity prices started to rebound in early with OPEC's efforts to guide global prices 2009 and into 2010 as the global recovery through supply management. The tragic oil intensified. Increased demand from China, spill in the Gulf of Mexico has not affected significant production cuts (metals and oil), oil production, but will likely have a long- and some weather-related factors (agriculture) term impact on the industry in terms of regu- contributed to higher prices. By the end of lation and costs. April 2010, energy prices were up 80 percent China has been the primary driver of metal from the lows in February 2009, while metal demand during this decade. Its consumption prices more than doubled. Agricultural prices of main base metals (aluminum, copper, increased by 20 percent over this period, with lead, nickel, tin and zinc) rose on average by most of the gains in raw materials, e.g. rubber 17 percent per year, while demand in the rest and cotton. Food prices rose just 7 percent on of the world fell 1.1 percent per year. China generally abundant global supplies. Mainly imported large volumes of metals in 2009, reflecting the gains already recorded, non- much of which went into private and govern- energy commodity prices are projected to ment controlled stocks, which propelled increase 16.8 percent in 2010, before declin- prices higher. Demand in 2010 is starting to ing in 2011-12. recover outside of China, and over the next Prices for industrial commodities fell sharply two years, metals prices are expected to con- during May in the wake of the Euro debt cri- tinue to rise moderately as the global recov- sis, on concerns about economic growth and ery progresses and metal demand expands. commodity demand. Industrial commodities However, prices are not expected to rise sub- fell most, with oil prices plunging nearly $20/ stantially, because of the large idle capacity bbl to $68/bbl, and a number of metals prices in many sectors that can be profitably fell more than 20 percent from their mid-April brought back into production at current highs. Among agriculture commodities, only prices. However, in some areas industry will rubber prices recorded a large decline, reflect- have to contend with declining ore grades, ing the plunge in the price of oil. Commodity environmental and land rehabilitation, as prices appeared to stabilize at end-May, but well as water, energy and labor pressures, uncertainty about demand remains. which may result in upward pressure on prices. After five consecutive quarters of decline, world oil demand rose in the final quarter of Agricultural prices have rebounded less 12 Global Economic Prospects Summer 2010 strongly than energy and metals, having in- CDSs for highly indebted high-income creased 27 percent from their December countries, and the potential for reduced 2008 trough. The gains have been centered market access for these countries, may in specific (mostly tropical) commodities. prompt both them and other Edible oil prices gained 28 percent while governments to speed up fiscal grain prices have fallen 8 percent. Fertilizer prices, a key input into agriculture, espe- consolidation programs. Table 5 presents cially in grain production, moderated and an alternative baseline that is consistent have declined by about two thirds since the with a more constrained lending record highs of the third quarter of 2008. environment, more cautious investment Among other commodities, coffee (arabica) and consumer behavior, and with prices increased 46 percent due to strong governments assumed to speed up fiscal demand and a weather-induced supply short- consolidation efforts by half the amount fall in Colombia, while cocoa prices are up required to bring debt to GDP ratios to 33 percent largely because of Côte d'Ivoire's 60 percent of GDP by 2030 (see IMF, difficulty in supplying the global market. 2010). Rice production shortfalls in India and the Philippines during 2009 put upward pressure on prices, but good prospects for the current In this alternative baseline scenario, crop have helped lower prices in May 2010 global growth expands between 0.2 to their lowest level in 27 months. Overall (2010) and 0.4 (2011 and 2012) agricultural markets, especially grains, ap- percentage points slower than in the pear to be well-supplied and are likely to primary base case (Table 1, earlier). remain so over the forecast period. Food Most of the slower growth is explained commodity prices are projected to be mar- by a weaker expansion in high-income ginally higher in 2010 compared with 2009, countries, where GDP is projected to but to decline by 3 and 1 percent in 2011 and grow by 2.1, 1.9 and 2.2 percent in 2010 2012 respectively. through 2012--lower by 0.1, and 0.5 See the Commodity annex for more on re- points of growth over the period. The cent developments and forecasts. more constrained environment also affects growth in developing countries, but to a lesser extent ­ in part because A slower-growth alternative only a few countries are assumed to baseline implement sharper fiscal consolidation. The weaker growth in this scenario The uncertainty emanating from Europe slows the pace of the expansion in global and as yet unknown policy reactions to trade, and results in a somewhat lower the volatility that erupted in May, makes price for commodities and lower projecting short-term growth particularly inflation. Because the slowdown is difficult. Increased equity market concentrated in high-income countries, volatility may lead investors to hold the share of developing countries back on investment projects or cause contribution to global growth rises from consumers to delay durable goods 47 to 50 percent. purchases, potentially slowing growth and even leading to a double dip The expected confirmation of recession in selected countries. By the developing countries as a major growth same token, how policy reacts to the pole does not mean that their prospects current situation will also affect are divorced from those in high-income prospects. The rapid rise in the price of countries. To the contrary, slower 13 Global Economic Prospects Summer 2010 growth in high-income countries will should a disorderly adjustment occur, it imply slower growth than might have could have serious consequences for otherwise been expected in developing both high-income and developing countries in the short-term. Moreover, countries. But even in the absence of a their long-term growth prospects are disorderly adjustment, developing intimately tied to those of high-income countries and regions with close trade countries. Failure to deal with high- and financial connections to highly- income indebtedness could deprive indebted high-income countries, may developing countries of healthy markets face important repercussions. for their goods. And, increasing developing-country borrowing costs and The Middle-East and North Africa, sharper competition for global savings-- Europe and Central Asia and Sub- due to persistent debt problems in high- Saharan Africa regions have the closest income countries--could cut into trade ties with the heavily-indebted high- developing-country investment and income European countries (EU-5) that growth. are most likely to undergo a significant fiscal contraction (Figure 10). At the Table 5 A slower growth baseline country level, these economies account (percentage change from previous year) for 20 percent or more of the exports of 2008 2009e 2010f 2011f 2012f Albania, Azerbaijan, Cameroon, Cape World 1.7 -2.1 3.1 2.9 3.2 Verde, Morocco, Tunisia, and Namibia. High income 0.4 -3.3 2.1 1.9 2.2 How hard these developing countries are OECD Countries 0.3 -3.4 2.0 1.9 2.1 hit, will depend on the extent of the Euro Area 0.4 -4.1 0.5 0.9 1.5 fiscal contraction initiated, and how Japan -1.2 -5.2 2.2 1.4 1.5 successful they are in shifting sales to United States 0.4 -2.4 3.0 2.3 2.5 Non-OECD countries 3.0 -1.7 4.1 4.1 4.4 other markets. Developing countries 5.7 1.7 6.1 5.7 5.8 East Asia and Pacific 8.5 7.1 8.6 7.5 7.4 According to IMF (2010) fiscal Europe and Central Asia 4.2 -5.3 4.0 4.1 4.3 consolidations, ranging between 9.2 Latin America and Caribbean 4.1 -2.3 4.4 3.9 4.0 (Greece) and 4.1 (Italy) percent of GDP, Middle East and N. Africa 4.2 3.2 4.0 4.2 4.4 need to be implemented between 2010 South Asia 4.9 7.1 7.3 7.8 7.5 Sub-Saharan Africa 5.0 1.6 4.4 4.9 5.2 and 2020 if these countries are to bring Source: World Bank. debt-to-GDP levels down to 60 percent e = estimate; f = forecast. by 2030. There is precedent for such 1. Aggregate growth rates calculated using constant 2005 dollars GDP weights. large cuts in spending, but achieving 2. Calculated using 2005 PPP weights. them will require significant political sacrifices.6 Potential impacts for Also at risk are countries whose financial sectors are closely linked to developing countries from the these highly indebted countries. Albania, sovereign debt crisis in Bulgaria, Romania, and Serbia are Europe economies that have benefitted in the past from heavy capital inflows from Although a gradual, smooth resolution Greek financial institutions. Similarly, of the fiscal issues in high-income banks in Portugal and Spain are an Europe is the most likely scenario, important source of finance in Latin 14 Global Economic Prospects Summer 2010 Figure 10 Developing regions with high Figure 11 Outstanding claims of banks in trade exposure to heavily indebted Euro- heavily-indebted European countries on pean economies developing countries Share of Greece, Italy, Portugal, and Spain in Exports, % of lender's GDP percent percent Ireland 25 20 19.3 Spain 15 Greece 10.0 10 8.8 7.7 Italy 7.4 5.7 4.5 5 3.7 Portuga l 0 0 5 10 15 20 25 30 EAP LAC Asia SSA ECA MNA HICs World EE LAC Africa/ME Asia Source: World Bank, UN-COMTRADE. The global consequences of a America. Overall, the public and private sectors in Latin America have borrowed default or major some $320 billion or 8 percent of GDP, restructuring could be far while those in emerging Europe owe reaching some $400 billion or 13 percent of GDP. And, Spanish banks own over 25 percent A crisis of confidence, a default or major of bank capital in Mexico, Chile, and restructuring of EU-5 debt could have Peru. Portuguese banks are also serious consequences for the global important in African countries such as economy, both because of the large- Angola and Mozambique. Beyond scale recession that the directly affected banking, FDI flows may also be countries are likely to enter into, but also affected, in particular to Latin because of the potential knock-on effects America--12 percent of FDI flows to of the default on the financial health of Brazil in 2009 came from Spain and creditor banks elsewhere in the globe. Portugal. Should banks in the EU-5 be forced to re-capitalize or retrench, The scenario outlined in Table 6, which capital flows to the developing regions takes as a starting point the slower noted could contract heavily, potentially growth baseline, illustrates the potential imposing further significant cuts to impacts on GDP, if a failure to take domestic demand--particularly among forceful action to restore fiscal policy those that still have large external onto a sustainable path were to increase financing needs. investors' risk aversion towards economies with high debts.7 In this scenario, increased risk aversion is assumed to cause the yield on 10 year U.S. government bonds to rise by 100 basis points and that of other sovereigns depending upon the degree of their 15 Global Economic Prospects Summer 2010 indebtedness.8 The increase in long-term impacts on EU-5 exports and on activity interest rates has an almost immediate in the rest of Europe and indeed the rest effect on investment decisions. In this of the world. scenario, global growth slows by about ½ a percentage point throughout the Table 7 presents the results of a forecast period. The impact on growth is simulation that combines the generalized more severe in high- and middle-income increase in risk premia of the earlier countries, reflecting lower interest rates scenario, with the impact of an acute (and therefore a bigger percentage crisis in confidence that hits the EU-5 in shock) and in countries/regions with the second half of 2010. The impact of strong trade linkages to the most the confidence crisis on domestic affected high-income countries. demand in EU-5 countries is modeled on the East Asia Crisis, and assumes that, Table 6. Impact from a 100 basis point in- either following a default, or based on crease in risk aversion market expectations of a default, credit 2009 2010 2011 2012 (both international and domestic) to the (Percent change in GDP from baseline) EU-5 countries dries up and that a brutal World 0.0 -0.4 -0.9 -1.4 fiscal adjustment and credit crunch High-income 0.0 -0.4 -1.0 -1.5 0.0 -0.4 -0.9 -1.4 ensues. GDP in EU-5 countries declines High-income (ex EU-5) Developing countries 0.0 -0.3 -0.8 -1.3 by as much as 15 percent, which has Middle-income 0.0 -0.3 -0.8 -1.3 serious knock-on effects to the exports Low-income 0.0 -0.4 -1.0 -1.6 East Asia and Pacific 0.0 -0.4 -1.0 -1.5 and activity levels in the rest of the EU Europe and Central Asia 0.0 -0.2 -0.6 -0.8 and the rest of the world. Although the Latin America and Caribbean 0.0 -0.4 -1.0 -1.6 Middle East and N. Africa 0.0 -0.3 -0.6 -0.9 world economy escapes a recession in South Asia 0.0 -0.4 -0.8 -1.1 this scenario, global growth declines by Sub-Saharan Africa 0.0 -0.2 -0.5 -0.7 about 2 percent in 2011. 1 Post shock (annual percentage growth) World -2.1 2.7 2.4 2.7 High-income -3.4 1.6 1.3 1.7 Growth begins to recover in 2012, but High-income (ex EU-5) -3.3 1.9 1.5 1.8 overall world GDP is some 4 percentage Developing countries 1.9 5.8 5.2 5.1 Middle-income 1.8 5.8 5.2 5.1 points lower than it would have been in Low-income 4.5 4.7 5.6 5.6 the baseline no crisis scenario. Because East Asia and Pacific 7.1 8.2 6.9 6.4 Europe and Central Asia -5.2 3.8 3.8 4.0 the shock runs through the trade channel, Latin America and Caribbean -2.3 3.9 3.2 3.4 the hardest hit economies are those Middle East and N. Africa 3.2 3.7 3.8 4.1 South Asia 7.1 7.1 7.5 7.3 where export value-added is a large Sub-Saharan Africa 1.6 4.2 4.6 4.9 share of GDP and those with tight trade Source: World Bank. 1. Percentage growth after shock connections to the hardest hit countries. East Asia and the Pacific is particularly hard hit because of the importance of A less likely scenario might see exports to its overall economy; likewise confidence levels fall so far as to cause a South Asia's still relatively low export- freezing up of both domestic and to-GDP ratios insulate it from the worst external credit to heavily indebted effects of the shock. Impacts in Sub- countries. In such a scenario, a sharp and Saharan Africa and the Middle-East and sudden reduction in domestic demand in North Africa are relatively muted despite affected countries might be anticipated. the high concentration of EU-5 countries Should such a crisis engulf all of the EU in their exports, because of low export to -5 countries, it would have significant GDP ratios overall. 16 Global Economic Prospects Summer 2010 Table 7. Impact of a 100 basis point in- countries can do to insulate themselves crease in risk aversion combined with the a from the possibility of a widening of the severe debt crisis in EU-5 countries sovereign debt crisis. Clearly countries are well advised to improve their own fundamentals to ensure that markets continue to distinguish between their 2009 2010 2011 2012 risks and those of these high-income (Percent change in GDP from baseline) countries. Countries that have run-down World High-income 0.0 0.0 -1.0 -1.1 -3.1 -3.5 -4.1 -4.6 their reserves to dangerous levels should High-income (ex EU-5) 0.0 -0.9 -2.4 -3.5 institute policies now that help to De veloping countries 0.0 -0.8 -2.0 -2.9 Middle-income 0.0 -0.8 -2.0 -2.9 rebalance domestic demand (fiscal Low-income 0.0 -0.6 -1.6 -2.2 austerity in some cases, enhanced East Asia and Pacific 0.0 -0.9 -2.3 -3.4 Europe and Central Asia 0.0 -0.6 -1.6 -2.1 exchange rate flexibility in others) so as Latin America and Caribbean 0.0 -0.9 -2.2 -3.4 to engineer a relatively smooth current Middle East and N. Africa 0.0 -0.7 -1.9 -2.4 South Asia 0.0 -0.8 -1.9 -2.5 account adjustment rather than a sudden Sub-Saharan Africa 0.0 -0.4 -1.1 -1.3 and disruptive market driven one. 1 Post shock (annual percentage growth) World -2.1 2.0 0.7 2.1 High-income -3.4 0.9 -0.6 1.0 Figure 12. European Banks are also at risk High-income (ex EU-5) -3.3 1.4 0.5 1.2 from a default or restructuring De veloping countries 1.9 5.3 4.4 4.6 Middle-income 1.8 5.3 4.4 4.6 Bank claims on heavilyindebted Eurozone countries total exposure as % of banks' capital Low-income 4.5 4.4 5.1 5.7 and reserves East Asia and Pacific 7.1 7.7 5.9 5.7 180 Europe and Central Asia -5.2 3.4 3.0 3.7 Latin America and Caribbean -2.3 3.5 2.5 2.7 160 Middle East and N. Africa 3.2 3.3 2.9 4.0 140 South Asia 7.1 6.6 6.8 7.0 Sub-Saharan Africa 1.6 4.0 4.2 4.9 120 Source: World Bank. 100 1. Percentage growth after shock 80 60 40 The financial channel has the potential 20 to be even more disruptive to global 0 growth. A default or major restructuring Austria Belgium Germany France Netherlands among heavily indebted European sovereigns could have serious knock-on Source: World Bank, JP Morgan effects among the banks of other European countries. Banks located in A faster fiscal consolidation Austria, Belgium, France, Germany, and the Netherlands have loan exposures to would be better for both high- heavily-indebted European countries income and developing totaling 1.4 trillion at end-2009 (Figure countries 12), with those exposures exceeding the capital of these banks in many countries. Even in the event of a smooth resolution A sharp decline in the value of such of the fiscal challenges in high-income assets could threaten the solvency of countries, how they are resolved may some of these banks, with potentially far have important implications for -reaching consequences for the overall outcomes in developing countries. In banking system and the global economy. particular, simulations suggest that a policy that sought to unwind the fiscal Ex ante, there is little that developing challenges of high-income countries 17 Global Economic Prospects Summer 2010 relatively quickly would benefit because of the fiscal tightening. Real developing countries, more than a policy interest rates in developing countries that sought o unwind them only slowly. could be as much as 300 basis points lower in the short-run. The simulation Table 8 presents the results of assumes that interest rates in developing simulations using the G-cubed dynamic countries respond to international market general equilibrium model. The conditions. To the extent that simulations compare GDP outcomes developing country interest rates do no from two fiscal consolidation scenarios. react, perhaps because of market In the baseline scenario, which is based controls, this simulation will over- on IMF (2010), countries slowly estimate the positive effects for growth increase their primary balances between of lower interest rates. 2010 and 2020 to a level, which if maintained until 2030, would bring their Table 8. Impact of a faster fiscal consolida- debt-to-GDP ratios down to 60 percent tion by this time.9 Table 8 reports the 2010 2014 2022 changes in the level of GDP that would (Per cent of GDP) be observed at two points in time if the World 0.0 0.6 1.2 High-income 0.0 -0.3 1.3 same fiscal consolidation (increase in United States 0.0 -0.9 1.1 primary balance) were undertaken more Japan 0.0 -1.6 1.3 United Kingdom 0.0 -1.8 2.9 within four years and maintained until Germany 0.0 1.1 0.5 2030.10 Two main factors are at work in Euro Area 0.0 0.5 1.6 Canada 0.0 2.0 0.5 these simulations. First, reduced Australia 0.0 1.7 0.7 government expenditure tends to lower New Zealand 0.0 1.4 1.7 ROECD 0.0 1.1 0.8 GDP and import demand in the G-20 Low- and Middle-income 0.0 2.3 1.0 countries undertaking a consolidation. Low- and middle income (ex. China 0.0 2.7 1.2 and India This effect is offset by the influence of Low- and middle-income (ex. China, 0.0 3.4 0.9 lower interest rates due to decreased India, Europe and Central Asia) China 0 2.9 0.9 demand for global savings. India 0 2.3 1.2 Other Asia 0 3.4 1.1 Latin America 0 2.9 0.9 Among consolidating high-income Other developing countries 0 4.1 0.6 Europe & Central Asia 0 2.3 1.1 countries, the first effect dominates for OPEC 0 0.3 2.4 the first few years, so that GDP comes in Source: World Bank. Simulations using the G as much as 1.8 percent lower than in the -cubed model. baseline for the United Kingdom. In Germany, however, where less fiscal consolidation is required, the second Overall, although a more rapid effect dominates and GDP is actually consolidation policy would imply (at higher by 1.1 percent in 2014. For least for the United States) a bigger short developing countries and high-income -term cost in terms of reduced GDP, in countries that do not need to undertake the long run such a policy would be a consolidation, the impact of the win-win. Lower interest rates and the consolidation is positive even in the stronger projected growth in developing short-run because the negative effects countries in the quick adjustment from weaker demand for their exports is scenario cause GDP in high-income more than offset by the benefits to be countries to be higher in the long run, derived from lower real interest rates and even in the short-run in the case of 18 Global Economic Prospects Summer 2010 high-income countries that do not have The depth and duration of the to undertake a large fiscal adjustment. crisis in Europe and Central Asia continues to be a source of concern Interestingly, in addition to alleviating the fiscal imbalances that currently The expected duration and depth of the characterize the global economy, the crisis will complicate matters further, simulations suggest that this needed especially for countries in the Europe consolidation will also go a long way to and Central Asia region. As the reducing global imbalances. For recession wears on, firms are example, in the short-run a quick increasingly likely to have difficulty adjustment scenario would see the U.S. meeting their debt obligations. Non- trade deficit decline by about 3 percent performing loans are rising, and in some of GDP and China's trade surplus countries: Ukraine, Croatia, and decline by more than 6 percent of its Romania, bank provisioning is lagging GDP. In the longer run, the adjustments more than 50 percent of the non- are more muted 1.6 and 4.5 percent performing loans. Banking-sector respectively. fragility is accentuated in several countries that have significant exposures The conduct of monetary policy in high- to Greek Banks. Should difficulties in income countries may also pose Greece become more serious, these challenges for developing countries. For banks may be forced to cut activities or the moment, inflationary pressures have extract capital from their subsidiary been on the wane in the vast majority of operations ­ which could have serious developing countries, reflecting both knock-on effects for countries in the lower food and fuel prices and the region. extended bout of spare capacity brought about by recession (see the Appendix on Moreover, many companies in the inflation for more). As a result, region borrowed heavily during the monetary policy has been broadly boom period. Private companies expansionary. However, the recovery is borrowed $418 billion dollars over the much more advanced in many 2003-2008 period, with as much as $133 developing countries, and central billion expected to come due in 2010. bankers in many have begun to tighten Tighter global financial conditions may monetary policy, including in Brazil and result in a reduction in rollover rates China. As a result, the spread between (international financial institutions and their short-term interest rates and those high-income Central European countries in several high-income countries are exercised considerable moral suasion on growing. This increases the financial banks to renew loans in 2009), which incentive to make short-term could cause individual firms in the investments in these countries, and region to default ­ potentially putting associated capital inflows have the them into bankruptcy and adding to potential to be de-stabilizing for their pressure on regional banks. economies. 19 Global Economic Prospects Summer 2010 Concluding remarks poverty. The strong recovery that currently The fiscal challenges facing developing characterizes monthly data for the global countries are less marked, but if aid economy is expected to lose some steam flows are compromised, as they have in the coming months; but annual been following past high-income growth rates should continue to recessions, then the consequences for strengthen--especially among developing-country investment and long developing countries. These countries -term growth prospects could be serious. are responsible for a growing share of global growth, a trend that is expected to Continued very relaxed monetary policy continue in the years and decades to in high-income countries could also pose come. The outlook, nevertheless remains challenges for developing countries, fragile and significant challenges stand especially as they move to tighten their in the way of a smooth recovery. own policy stance. Rising interest rate differentials could induce significant Chief among these are the problems in capital inflows that could serve to Greece and other highly indebted high- regenerate some of the asset bubbles that income countries--problems which created the conditions of the crisis in the continue to have the potential to widen. first place. Although developing country finances are much stronger, a widening of the Greek crisis to other much larger high- income economies with serious fiscal difficulties could generate significant disruption to developing country export and GDP growth. If markets lose confidence in the credibility of efforts to put policy on a sustainable path, global growth could be significantly impaired and a double-dip recession could not be excluded. More generally, significant fiscal consolidation is necessary to ensure the long-term sustainability of public finances in many high-income countries. While the domestic motivations for bringing government accounts back onto a sustainable path should be sufficient, more than the economic well-being of high-income countries is at stake. A prolonged period of rising high-income country indebtedness would raise global borrowing costs for developing countries, reducing investment and growth and ultimately resulting in more 20 Global Economic Prospects Summer 2010 Notes countries respectively. 1. In particular, while movements in 5. The aggregate financing gap is global equity markets were highly defined as the sum of the difference correlated in May, they have been between the estimated financing much less so than in the fall of 2008. needs and projected private capital Moreover, current correlations are flows for all countries whose lower than those observed in early country-specific gap is negative. 2010. Co-movements in other asset Thus, if ex ante projected financing classes (CDS spreads for example) exceeds the requirements of some are also stronger, but they remain countries, this positive gap is not well below levels seen during the used to offset the negative gap of fall of 2008. countries with unmet needs. Developing countries' external 2. The index combines information on financing needs, are defined as the the changes since March 30th in current-account deficit (assumed to sovereign spreads; domestic 3- be a constant at its 2009 level as a month commercial interest rates; percent of GDP) plus scheduled stock-market indices; and nominal principal payments on private debt exchange rates into a single index. (based on information from the The raw data are normalized by World Bank's Debtor Reporting expressing them as the deviation System). Private capital flows from the average change, divided by include disbursements on private the standard deviation of those debt, net equity flows (inflows deviations, such that each measure minus outflows), and net contributes equally to the overall unidentified capital outflows, which index. Because of the normalization are projected at the country level. procedure, the index is a relative index. If financial conditions in all Previous calculations utilized current countries deteriorated, the index account projections. Earlier would show no change. estimates of the financing gap for 2009 used forecasts for current 3. Several sovereign borrowers account deficits in 2009. Had a (including Argentina, Albania, similar methodology been employed Angola, Kenya, FYR Macedonia, as reported here, the ex ante Poland, and Tanzania) have delayed financing gap for 2009 would have issuance plans likely due been around $460 billion rather than consideration of current market $350 billion as estimated using the conditions. projections. 4. Over the next 10 years, the United 6. Ireland increased its primary balance Nations predicts that the working- in the 1980s by 20 percent of GDP, age population in Western Europe while nine countries have will decrease 0.42 percent per engineered improvements in excess annum ­ in stark contrast to growth of 10 percent of GDP over a time of 0.54 and 1.44 percent per annum period ranging from 3 to 15 years in the United States and developing (IMF, 2009). 21 Global Economic Prospects Summer 2010 7. Although during periods of scenario is adjusted to bring the net heightened uncertainty there is a government debt-to-GDP ratio to 80 tendency for bond yields in safe- percent by 2030 (equal to about 200 haven currencies to fall as money is percent in gross terms), while for repatriated, over the longer-run, Greece the 7.6 percent of GDP once these portfolio adjustments tightening announced for 2010 is occur, long-term rates even in safe- assumed to occur. haven countries tend to rise once again. Indeed, prior to the EU-5 10. In the second scenario, debt-to-GDP debt concerns dominating market ratios are lower in 2030 than in the attention, long-rates in the United first scenario because the adjustment States were rising. The simulations in primary balances is the same, but presented here examine this long- occurs 6 years earlier. term behavior and abstract from the short-term fluctuations associated References with short-term portfolio adjustments. Dang, Hai-Anh, Steve Knack and Halsey Rogers. 2009. "International Aid 8. The scenario assumes short-term and Financial Crises in Donor investment to long-term interest rate Countries" Policy Research elasticities broadly consistent with Working Paper. No. 5162. The Hervé et al. (2010). Following World Bank. Washington DC. Kinoshita (2006) it assumes that countries risk premia rise or fall with Hervé, K. et al. (2010), "The OECD's the rate of the risk-free interest rate New Global Model", OECD linearly (2 basis points per 1 percent Economics Department Working of Government debt-to GDP ratio). Papers, No. 768. OECD Following, a 10 basis point increase P u b l i s h i n g . d o i : in the risk-free interest rate would 10.1787/5kmftp85kr8p-en result in a 10.2 basis point increase in the interest rate paid by a country Kinoshita. Noriaki . 2006. "Government with a 1 percent debt-to GDP ratio Debt and Long-Term Interest and a 14 basis point increase in a Rates". IMF Working Paper. No. country with a 20 percent of GDP WP/06/03, International Monetary debt ratio. In this scenario, where the Fund, Washington, DC. http:// long-term yield in the U.S. where www.imf.org/external/pubs/ft/ Government debt-to-GDP is 71 wp/2006/wp0663.pdf percent (2008), interest rates rose by 100 basis points; the yield for Brazil, International Monetary Fund. 2009. whose debt-to-GDP ratio is 65 Global Economic Prospects and percent (2008), would rise by 95 Principles for Policy Exit: basis points. November 2009. International Monetary Fund., Washington, DC. 9. This is a simplification of the IMF http://www.imf.org/external/np/ scenario. The degree of adjustment g20/pdf/110709.pdf in most countries is as described. In the case of Japan, however, the _______. 2010. "Navigating the Fiscal 22 Global Economic Prospects Summer 2010 Challenges Ahead Fiscal Monitor: May 2010." ISBN 978-1-61635- 000-0, International Monetary Fund, Washington, DC. http:// www.imf.org/external/pubs/ft/ fm/2010/fm1001.pdf Hkanna, Gaurav, David Newhouse and Pierella Paci. 2010. "Fewer Jobs or Smaller Paychecks? Labor Market Impacts of the Recent Crisis in Mid d le - In c o me Co u n tr ie s ". Economic Premise. No. 11. April. http://siteresources.worldbank.org/ INTPREMNET/Resources/ EP11.pdf United Nations, World Populations Prospects: The 2008 Revision Population Database, http:// esa.un.org/unpp/, accessed on: May 6, 2010. 23 Global Economic Prospects Summer 2010 : Appendix Topical Appendix Recent developments in financial figure) in May, spreads for these countries actually declined slightly compared with a year markets ago after they had skyrocketed to more than 3,000 basis points in October 2008 and have As discussed in the main text, the very high remained high from that time on. government deficits and debt levels in several high-income countries (notably, Greece, Ireland, Italy, Portugal and Spain) has provoked a great Figure A1.2 Sovereign risk premia for develop- deal of volatility in international financial and ing countries remain relatively stable commodity markets--notably oil and metals. So 800 5year sovereign CDS spreads, basis points far, the main impacts for developing countries 700 have been limited to a generalized decline in 600 500 Year ago Current stock-market valuations (Figure A1.1), a 400 300 significant fall in bond issuance in May (some 200 due to seasonality), and an increase in volatility 100 0 and realignment of global currencies, as the euro has depreciated against the dollar--to the benefit of exporters in countries tied to the euro, but to the detriment of those tied to the dollar. Source: Bloomberg and DECPG staff calculation Figure A1.1 Emerging market equities experi- enced declines recently A recovery in credit conditions MSCI Emerging Market Index (in local currency) 50000 Data on capital flows to developing countries do 45000 not, as yet, indicate that the crisis in Europe has 40000 had a major effect on developing country access 35000 to capital. 30000 The benchmark emergingmarket stock index And even with the deterioration observed since 25000 the end of April, developing country stock 20000 Jun08 Oct08 Feb09 Jun09 Oct09 Feb10 Jun10 markets are up since their post-Lehman lows of March 2009. Although developing-country Source: Morgan-Stanley through Bloomberg. sovereign interest rate premiums have widened to 325 basis points in May, they are still lower than the peak of more than 800 in October 2008 For the moment, the crisis has not impacted (Figure A1.3). And most developing-country sovereign risk premia of developing countries currencies have regained pre-crisis levels, with that do not have fiscal sustainability issues of some even appreciating against the dollar. their own. Most developing countries have much lower deficits and debt to GDP ratios than high- Both developing-country sovereign and income countries. As a result, the price of corporate borrowers have taken advantage of insurance against a sovereign credit default improved market conditions, with bond issuance (credit default swaps, or CDS) for most reaching $115 billion in 2009, up almost $65 developing countries has remained relatively billion over 2008. Developing-country stable even as this same indicator has jumped borrowers have issued $73 billion in bonds in the substantially for the EU-5 (Figure A1.2). Despite first four months of 2010, well ahead of the pace the sharp increase in sovereign CDS spreads for seen in periods of previous peak performance Venezuela and Argentina (not shown in the (Figure A1.4). In particular, developing-country Global Economic Prospects Summer 2010 : Appendix Figure A1.3 Emerging market sovereign bond capitalize and strengthen their balance sheets spread and yields, January 2000-May 2010 (indeed, cross border lending to both developed and developing countries is down). As a result, percent 16 net international bank lending in 2009 14 (disbursements minus repayments), amounted to 12 10 negative $53 billion. New (syndicated, bilateral Bond spread 8 (EMBIG composite index ) and intra-bank) loans more than halved from 6 $531 billion in 2008 to $258 billion, less than the 4 2 Yield on 10-year US treasury note $311 billion in maturing debt that was repaid. 0 Syndicated bank-lending totaled only $123 billion in 2009--half its 2008 level. There has not been any sign of a rebound so far in 2010, Source: JP Morgan with only $46 billion in syndicated lending between January and May (Figure A1.5). corporate borrowers, after having been shut out of the market for three quarters following the Figure A1.5 Syndicated bank lending continues crisis, succeeded in issuing $43 billion since the to be limited beginning of 2010. However, in February-- $ billions when the European debt problem affected the 120 markets for the first time, and in May, when 100 effects intensified, international bond issuances 80 by developing countries were historically low, at 60 $5 and $3 billion, respectively. There was only 40 one sovereign issuance placed by Malaysia for 20 $1.25 billion in May. In fact, several sovereign 0 2006 2006 2007 2007 2008 2008 2009 2009 2010 borrowers (such as Argentina, Albania, Angola, Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Kenya, FYR Macedonia, Poland, and Tanzania) have likely delayed issuance plans due to current Source: Dealogic. market conditions. It is difficult to determine with precision to what extent these reflect a FDI inflows to developing countries fell 40 normal seasonal decline, or a temporary percent in 2009 (Figure A1.6). Flows declined reduction in issuances prompted by elevated from $594 billion (3.4 percent of GDP) in 2008 market volatility related to European debt to $358 billion (2.1 percent of GDP)--the problems. sharpest decline in 20 years. Even China experienced a 45 percent drop in FDI flows to an Bank lending to developing countries remains estimated $78 billion, partly because of high depressed, as high-income banks continue to re- disinvestments in the financial sector. Similarly, FDI inflows to other developed countries Figure A1.4 Increased bond issuance by develop- declined by another 40 percent in 2009 as they ing countries 2006 Q1-2010Q1 did in 2008. Multinational firms were hit hard by the global economic recession and financial Sovereign and public corporate 60 crisis of the last year. Slower global growth Private Corporate squeezed their profitability, and at the same time 50 40 economic uncertainty and weak global demand 30 reduced their willingness (and ability) to expand 20 abroad. Energy-oriented FDI was less affected as 10 0 many companies with expertise in energy 2006 2006 2007 2007 2008 2008 2009 2009 2010 exploration still had strong cash positions, while Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 falling prices of developing-country energy assets raised investment attractiveness. Source: Dealogic. 2 Global Economic Prospects Summer 2010 : Appendix Figure A1.6 Global net FDI flows recovered from Figure A1.7 Sovereign debt issuance by HICs trough in Q1-2009, but remain below 2008 levels 2006-2010 $ trillions $ billion 500 3.0 Developing Countries 2.5 400 Developed Countries 2.0 300 1.5 200 1.0 100 0.5 0.0 0 2006 2007 2008 2009e 2010f 2008 Q1 2008 Q3 2009 Q1 2009 Q3 Source: Country sources and World Bank. Source: IMF Overall, despite the rebound in bond issuance, while leading to only a shallow and short-lived portfolio equity flows and short-term debt flows spread-widening for U.S. corporate bonds. All of (mostly trade related); international capital flows these elements will raise the cost of capital for to developing countries fell sharply for a second developing countries. This, even if developing year in 2009. Net private capital flows fell by a country risk premiums decline somewhat due to further 40 percent in 2009 to $454 billion (2.7 a relative improvement in emerging country risk percent of GDP) compared with $752 billion vis-à-vis developed countries. However, if real (4.4 percent of GDP) in 2008 (see Table A1.1). interest rates in high-income countries were to This represents a dramatic reversal from peak return to pre-boom levels, and if the historical levels of $1.2 trillion in 2007 (8.5 percent of relationship between base rates and interest rate GDP). spreads remains unchanged, borrowing costs in developing countries could rise by between 110 Recent developments in and 220 basis points. international capital flows Net private capital flows to developing countries are projected to recuperate in 2010 as the global The recovery in international capital flows to recovery continues; but they are not expected to developing countries is expected to face reach pre-crisis levels in the medium term. Debt headwinds from increased competition for global flows may be constrained by (rising) risk savings, as increased debt of high-income aversion (related to sovereign debt sustainability countries put pressure on developing countries. concerns), tighter regulations and increased The five-fold increase in public sector financing competition for funding. While cross-border requirements of high-income countries will bank lending is expected to remain muted in the enhance competition for funds and raise medium-term, several upper-middle income borrowing costs for developing-country countries may opt to continue relying on borrowers going forward (Figure A1.7). In international bond markets to raise capital. Most addition, the need for banks to rebuild their developing countries--poor countries in balance sheets, as well as increased risk aversion particular--have limited access to international on the part of investors, should result in less bond markets. FDI is expected to rebound more abundant and more expensive capital. readily, reflecting relatively strong growth prospects for developing countries, which will The possibility of G3 policy tightening over the continue to push multinationals to undertake coming months (or years) could have a efficiency and market-enhancing investments in significant impact on emerging market bonds. developing regions. As a result, private capital For example, the last time that the U.S. Federal flows to developing countries are forecasted to Reserve began to raise rates after a protracted recover from $454 billion (2.7 percent of GDP) easing cycle in 2004, it triggered a large in 2009 to $771 billion (3.2 percent of GDP) by widening of emerging market bond spreads, 3 Global Economic Prospects Summer 2010 : Appendix 2012, still far below the $1.2 trillion (8.5 percent billion in 2009. As a share of GDP, the decline of GDP) in 2007 (Figure A1.8). in the gap was most marked for upper-middle- income countries (1.5 percent) and lower-middle Figure A1.8 Prospects for private capital inflows income countries (1.3 percent) (Figure A1.9). to developing countries For low income countries--given still-depressed $ billions 1400 percent 10 bank-lending and limited access to bond 1200 Private Debt Portfolio Equity 9 markets--financing the projected gap of 6.5 8 1000 FDI 7 percent of GDP in 2010 will prove challenging, share of GDP (right axis) 800 6 especially should ODA flows decline. 600 5 400 4 200 3 Figure A1.9 External financing gaps for develop- 2 0 ing countries, 2009-2011 1 -200 0 percent of GDP 10 9 Total Gap in 2009e 2010p 2011p $352 $210 $180 Source: World Bank 8 ($billion) 7 2009e 2010p 2011p 6 Financing gaps are expected to decline, but 5 4 remain substantial for a number of countries. In 3 2 2009, high financing gaps led to significant 1 current account adjustments and slower growth 0 Low Lower-Middle Upper-Middle in several developing countries. Based on the assumption that the current account deficit to Source: World Bank GDP ratios remain, at 2009 levels, and with the projected rise in international capital flows, the ex-ante financing gap is projected to decline gradually to $180 billion in 2011 from $352 Table A1.1 Net capital flows to developing countries $ billions 2005 2006 2007 2008 2009e 2010f 2011f 2012f Ne t private and official inflows 501.8 659.8 1222.8 780.5 523.5 Ne t private inflows (e quity+de bt) 573.3 732.1 1223.7 752.4 454.0 589.5 670.2 770.8 Net equity inflows 349.9 469.0 663.8 536.5 445.9 497.5 564.2 652.8 ..Net FDI inflows 281.1 363.2 528.4 593.6 358.3 438.0 501.0 575.0 ..Net portfolio equity inflows 68.8 105.8 135.4 -57.1 87.5 59.5 63.2 77.8 Net debt flows 151.9 190.8 559.0 244.0 77.6 ..Official creditors -71.5 -72.3 -0.9 28.1 69.5 ....World Bank 2.7 -0.5 4.8 7.1 21.1 ....IMF -40.2 -26.7 -5.1 10.8 27.5 ....Other official -34.0 -45.1 -0.6 10.2 20.9 ..Private creditors 223.4 263.1 559.9 215.9 8.1 92.0 106.0 118.0 ....Net M-L term debt flows 137.8 168.3 315.4 228.6 -2.7 ......Bonds 56.8 31.7 87.4 15.0 54.8 ......Banks 85.8 141.5 231.0 217.2 -52.9 ......Other private -4.8 -4.9 -3.0 -3.6 -4.6 ....Net short-term debt flows 85.6 94.8 244.5 -12.7 10.8 Balancing ite m -414.1 -446.5 -617.9 -808.4 -292.9 Change in re se rve s (- = incre ase ) -393.6 -643.5 -1081 -439.0 -561.0 Me morandum ite ms Net FDI outflows 61.6 130.5 148.7 207.5 153.9 210.0 250.0 275.0 Workers' remittances 193.0 235.0 290.0 336.0 316.0 335.0 359.0 As a pe rce nt of GDP (%) 2005 2006 2007 2008 2009e 2010f 2011f 2012f Ne t private and official inflows 5.03 5.59 8.45 4.51 3.09 Ne t private inflows (e quity+de bt) 5.74 6.21 8.46 4.35 2.68 3.02 3.05 3.15 ..Net FDI inflows 2.82 3.08 3.65 3.43 2.12 2.24 2.28 2.35 ..Net portfolio equity inflows 0.69 0.90 0.94 -0.33 0.52 0.30 0.29 0.32 ..Private creditors 1.5 1.6 3.9 1.4 0.5 0.5 0.5 0.5 4 Global Economic Prospects Summer 2010 : Appendix Recent developments in trade Figure A2.1 Trade rebound is slowing Merchandise exports, 3m/3m saar % change 80 As the global recovery gained momentum, trade 60 also rebounded and global merchandise exports 40 accelerated sharply in recent months. Global 20 goods exports in value terms advanced at a 47 0 percent annualized pace (saar) by the end of -20 -40 D e v e lo p in g ( v a lu e s ) 2009; developing countries reported growth at D e v e lo p in g ( v o lu m e s ) -60 H ig h In c o m e ( v a lu e s ) 65 percent, while high income countries' exports -80 H ig h In c o m e ( v o lu m e s ) gained 39 percent in December. However, this Ja n - 0 7 Ju l- 0 7 Ja n - 0 8 Ju l- 0 8 Ja n - 0 9 Ju l- 0 9 Ja n - 1 0 brisk pace is now slowing, as exports from Source: World Bank developing countries eased to 32 percent, and shipments from high-income countries dropped to 16 percent during the first quarter of 2010. Of remained strong in developing countries, at 30 note, exports from Germany fell, as the pace of percent in April, but receded in high income export growth dropped from 46 percent in countries to 5 percent contrasted with 38 percent December to negative territory in the first in September 2009. The growth in imports has quarter. decelerated sharply in the Euro Zone, to annualized negative growth of 12 percent by In volume terms, global exports have been March. As several high income European growing at an annualized pace of 20 percent countries launch austerity measures to rein in during the first quarter of 2010, with developing fiscal deficits, further weakness in domestic countries posting annualized gains of 26 percent, demand will undoubtedly lead to a reduced and high income economies 17 percent in most appetite for imports. In contrast, import demand recent observations. However, in contrast with in the United States, remains close to peak other high-income countries, Japanese exports recovery rates of 20 percent annualized growth accelerated in the first two months of 2010, in March. growing at an annualized pace of 56 percent in January, before slipping to a still robust 40 The importance and resilience of domestic percent growth in April­indicative of continued demand is becoming evident among the patterns strong demand in the East Asia and Pacific of import demand among developing countries. region. In South Asia, import volumes were growing at an annualized pace of 116 percent in February, As is the case with output and industrial influenced by a resurgence in demand from production growth, export growth is also India. Similarly in Latin America, import becoming more differentiated among the various demand has continued to accelerate, with developing regions. In developing Europe, annualized growth peaking at 61 percent in annualized growth reached 65 percent in the April. East Asian import demand appears to be early phase of the recovery, but has since stabilizing at very high growth rates in a 70 subsided to 24 percent in April. Exports from percent range: 40 percent (excluding China). In South Asia, Latin America and East Asia and contrast, import demand in developing Europe Pacific remain strong, in fact on the edge of a has moderated from 50 percent at the end of second wind, even when China is excluded from 2009 to 15 percent by March. the calculations. In value terms, global merchandise exports Strong import demand from developing remained 10.6 percent below January 2008 countries was responsible for the majority of the values in March 2010, with the shortfall acceleration in global import volumes, which measuring 12.5 percent in high income countries increased to an annualized pace of 25 percent in and 6.2 percent in developing countries, with the January. The pace of import growth has latter benefitting from the recent resurgence in 5 Global Economic Prospects Summer 2010 : Appendix commodity prices. In volume terms, global Recent developments in commodity exports are just 4 percent below pre-crisis levels, with high income countries trade still 6 percent markets below January 2008 levels. In contrast, the The rebound in commodity prices that started at volume of developing country exports has the beginning of 2009 continued into 2010 as the rebounded to 1.7 percent above pre-crisis levels global economy recovered. Increased demand by March 2010. This was largely due to South from China, significant production cuts (metals and East Asia, where export volumes have made and oil), and some weather-related factors a robust recovery, and were 14.5 and 5.3 percent (agriculture) also contributed to higher prices. above the pre-crisis levels of January 2008. In As a result, energy prices increased by 60 developing Europe, both merchandise export percent in the first quarter of the year (compared values (-16 percent) and volumes (-6 percent) with year-earlier levels) while metals and remain below pre-crisis levels observed in agricultural prices increased by 62 percent and January 2008. 19 percent respectively (Figure A3.1). The overall value (volume) of global merchandise imports remains 9 (6) percent Figure A3.1 Commodity price indices (Nominal below January 2008 levels, with a shortfall of 13 US$, 2000=100) (10) percent in high income countries, and with 500 developing regions 2 (6) percent above pre crisis Energy levels. East Asia, South Asia and the Middle 400 Metals & Minerals East were all importing more in volume terms by 300 March 2010 than they were two years earlier, with South Asian import volumes up 21 percent 200 from January 2008. Import demand has been 100 Agriculture very weak in developing Europe, remaining 16 percent below pre-crisis levels in volume terms 0 Jan00 Jan01 Jan02 Jan03 Jan04 Jan05 Jan06 Jan07 Jan08 Jan09 Jan10 in March. Source: World Bank Figure A2.2 Rapid developing-country import growth drives recovery in trade Following the outbreak of the Euro debt crisis, Merchandise export volumes, Jan 2008 = 100 industrial commodities fell sharply during May Ea s t A s ia & Pa cific 125 Eu rop e & C e n tra l A s ia due to concerns about economic growth and L a tin A m e rica & C a ribbe a n 115 M id d le Ea s t & N . A frica weakening commodity demand. Oil prices S ou th A s ia 105 S u b-S a h a ra n A frica dropped from a high of $87/bbl to $68/bbl 95 during May, and some metals prices fell more 85 than 20 percent from their highs in April. The 75 declines occurred amid recovering global 65 demand, particularly outside of China, which 55 had provided much of the initial demand Ja n -0 8 M a y - 08 S e p -0 8 Ja n -0 9 M a y - 09 S e p -0 9 Ja n -1 0 strength during the recovery. Agriculture prices Source: World Bank have not been impacted during the debt crisis. Furthermore, markets are generally well supplied and crop prospects are good. The only large decline was for rubber, and this mainly due to the plunge in oil prices. Energy prices are projected to increase 25.1 percent in 2010, while non-energy commodity prices are expected to rise 16.8 percent in the 6 Global Economic Prospects Summer 2010 : Appendix year--with the bulk of the gains in non-food 2002 when oil prices were $25/bbl. Even though sectors. However as the recovery in global oil inventories have fallen significantly from growth peters out and output stabilizes at levels peak levels in early 2000, they remain relatively closer to potential growth rates, energy and non- high. energy prices are projected to decline by 4.5 percent and 4 percent, respectively, in 2011 and Over the medium term, oil prices are expected to another 1.0 percent and 5.4 percent in 2012. remain volatile, but on average are expected to Both energy and non-energy prices will remain remain in a $70-80 range as OPEC seeks to put a well below their 2008 highs over the forecast floor under prices via production restraint. But period. the group will be wary of allowing prices to rise much above that level due to the impact on Crude Oil demand. After five consecutive quarters of decline, world Growth in global oil demand is expected to oil demand rose in the final quarter of 2009--led remain moderate at 1.5 percent per year, with by strong demand in China, up 1.3 mb/d or 17 virtually all of the growth in developing percent (year-on-year). However, much of countries and North America. Non-OPEC oil China's growth was feedstock (naphtha) for new supplies should continue to rise modestly, as petrochemical capacity, and thus represents a production increases in Brazil, Canada, the one-off source of growth. All of the projected Caspian and West Africa, are offset by declines growth in demand during 2010 (1.6 mb/d or 1.9 in yields from older fields, especially in the percent) will be from developing countries, as North Sea and Mexico. Globally there are no OECD demand is expected to remain flat resource constraints, and our long-term forecast following four years of decline (partly reflecting of $75/bbl in real terms is commensurate with the impact of higher prices). In the medium term, world oil demand is expected to grow Figure A3.3 OPEC crude oil production and oil moderately, owing to efficiency improvements prices in transport and ongoing efforts by governments $/b b l m b /d and industry to reduce carbon emissions, 32 140 O P EC [le ft ax is] particularly in high-income countries. 30 120 100 28 In response to the large fall in global demand 26 80 that began in 2008H2--as well as the precipitous 24 60 40 drop in oil prices--OPEC reduced production by 22 20 4 mb/d in late-2008/early-2009 in an effort to 20 O il P rice [rig h t ax is] 0 raise prices to its target range of $70-80/bbl. As Jan 9 0 Ju n 9 2 N o v 9 4 A p r 9 7 S e p 9 9 F e b 0 2 Ju l0 4 Jan 0 7 Ju n 0 9 a result, OPEC's spare capacity has increased to Source: International Energy Agency, and World more than 6 mb/d, roughly the same level as in Bank Figure A3.2 World oil demand (mb/d) the higher end cost of developing additional oil 100 capacity, notably from oil sands in Canada. 80 Oth e r O t h e r Asi a Metals 60 C h in a 40 FSU O EC D China has been the primary driver of metal prices this decade, as Chinese consumption of 20 1971 1976 1981 1986 1991 1996 2001 2006 the main base metals (aluminum, copper, lead, nickel, tin and zinc) rose by 17 percent per year, while demand in the rest of the world fell 1.1 Source: International Energy Agency 7 Global Economic Prospects Summer 2010 : Appendix percent per year (Figure A3.4). In 2009, Chinese consumption--gained 31 percent. Fertilizer demand rose 23 percent, while demand in the prices, a key input into agriculture, especially in world outside China fell 13.5 percent (and by grain production, declined 38 percent, and prices 20.4 percent in the OECD). Much of the rise in are now less-than half the 2008 average and Chinese demand went into stocks (both private about one-third the 2008Q3 record highs. and government) but there was also strong stimulus-led consumption for construction and For the most part, the gains in agricultural prices infrastructure. reflect price increases for certain tropical Figure A3.4 World metal consumption (`000 tonnes) commodities. Coffee (arabica) prices, for example, have traded above $3.00/kg during the 60000 past 12 months, reflecting strong demand and a Ch in a Oth e r 50000 weather-induced supply shortfall in Colombia, 40000 the world's second largest arabica supplier. 30000 Natural rubber prices reached record highs on 20000 the back of strong import demand following the recovery of the global economy (most natural 10000 rubber goes to tire manufacturing), higher crude 0 1990 1995 2000 2005 oil prices (key input to competing synthetic rubber), as well as weather problems in key SE Asian rubber producing countries. Source: World Metal Statistics, and World Bank Because of the large drop in demand and prices Cocoa's strength is largely due to Côte following the onset of financial crisis in 2008, d'Ivoire's inability to supply the global market. there were significant cutbacks at mines and Côte d'Ivoire, which accounts for one-third of smelters. With the sharp recovery in demand global cocoa supplies, faces deteriorating (mainly in China) prices more-than doubled infrastructure due to prolonged civil conflict, from their troughs of early 2009. Over the next thus making the transport of inputs and output to two years, prices are not expected to rise and from cocoa producing areas very costly. In substantially, partly given the large price gains to addition, diseases affecting cocoa trees have not date, but mainly due to substantial idle capacity. been adequately addressed due to the poor state Further large price increases would require idle of its agricultural research system. These capacity being reabsorbed over the longer-term, conditions combined with steady demand growth but with demand growth slowing toward trend, have exerted pressure on global markets. Sugar pressures for real price increases should be prices doubled between December 2008 and moderate. Over the longer term, declining ore August 2009 reflecting a weather-induced grades, environmental and land rehabilitation, as shortfall in India, the world's second largest well as water, energy and labor pressures, may sugar supplier after Brazil. Interestingly, with the result in upward pressure on prices. exception of natural rubber, these commodities did not participate in the 2008 commodity price Agriculture spike. Agricultural prices have rebounded less sharply Rice production shortfalls--in India earlier in than energy and metals, having gained 28 2009 and in the Philippines later in the year--put percent between December 2008's trough and upward pressure on prices towards the end of the first quarter of 2010. Most of the gains 2009. This in turn led the Philippine government reflect large price increases in specific to announce large tenders for rice imports. commodities, rather than a broader trend. Grain However, prices receded in 2010 in view of the prices, for example, remained unchanged during large stockpiles accumulated by many countries this period while edible oil prices--traditionally during the 2008 food price spike as well as good the fastest growing food group in terms of prospects for the current crop, and April 2010 8 Global Economic Prospects Summer 2010 : Appendix rice prices recorded the lowest monthly average Figure A3.6 Food price indices (US$, 2000=100) of the past 26-month period. 400 Overall agricultural markets, especially grains, Nominal Real appear to be well-supplied and, barring 300 unforeseen (weather related) production problems--such as those affecting some tropical 200 commodities--are likely to remain ample over the forecast period. Moreover, food security 100 concerns have subsided. Most countries have reduced or eliminated trade restrictions 0 introduced by the 2008 price spike. According to 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 the latest U.S. Department of Agriculture's Source: World Bank update, the global stocks-to-use ratio (including China) for key grains currently stands at 22 2010) shows that in Tanzania the price of maize increased by 21 percent in the year ending Figure A3.5 Global grains stocks-to-use ratio February 2010 and in Kenya the price of maize (percent) rose by 16 percent in the same period. Also, the 40 DRC, Uganda and Zimbabwe were among the 35 countries with the sharpest fluctuation in prices 30 of main food staples. Food price increases 25 contribute to undernourishment and hunger and 20 heighten the importance of food security 15 10 policies. The upward trend in price of staples in 5 W ith C h in a W ith o u t C h in a domestic markets is, therefore, worrisome as it 0 poses a significant threat to both food security 1 9 6 0 /1 9 6 1 1 9 7 0 /1 9 7 1 1 9 8 0 /1 9 8 1 1 9 9 0 /1 9 9 1 2 0 0 0 /2 0 0 1 2 0 1 0 /2 0 1 1 and nutrition in the region. For example, in Source: US Department of Agriculture countries where staple food prices have risen sharply, estimates suggest that hunger could increase by between 2-3 percent. percent (Figure A3.5), the highest ratio in the past 7-years and close to the historical average of Recent developments in inflation 24 percent. As a result, food prices are projected to be essentially unchanged in 2010 compared Core inflation in the Euro zone has eased to very with 2009, and to decline by 3 percent in 2011 low levels, raising the specter of deflation ­ (Figure A3.6). which is already visible in some countries. This is largely reflective of weak domestic demand, Rising and volatile domestic staple food prices excess capacity and continued high are an increasing concern in several Sub-Saharan unemployment, which has reduced the pricing African and South Asian countries. A recent power of both producers and labor. In April study (World Bank, Food Price Watch, May Table A3.1 Key nominal commodity price indices (actual and forecast, 2000=100), 2004-11 Actual Projection 2004 2005 2006 2007 2008 2009 2010 2011 Energy 136 188 221 245 342 214 268 257 NonEnergy 133 149 192 225 272 213 249 239 Agriculture 130 133 150 180 229 198 211 196 Food 136 134 147 185 247 205 206 199 Beverages 120 137 145 170 210 220 233 196 Raw Materials 120 131 160 175 196 169 215 190 Metals & Minerals 139 179 280 314 326 236 329 330 Fertilizers 137 163 169 240 567 293 259 209 Source: World Bank 9 Global Economic Prospects Summer 2010 : Appendix 2010, core inflation for the euro area was down Figure A4.2 Headline inflation in BRICs to 0.8 percent year-on-year, the lowest core (% change yoy) inflation rate since at least 1991. In Germany 20 core inflation dropped to 0.3 percent, while in 15 Spain, Portugal, and Ireland core prices were 10 falling for the first time since the euro was 5 introduced­a development that should help 0 competitiveness issues in these countries (Figure Brazil -5 A4.1). A weaker euro, the result of the lingering China India -10 sovereign stress, could prevent a further slide Russian Federation -15 toward deflation even in the event of weak private consumption in the euro area. Source: Global Economic Monitor and World Bank Figure A4.1 Core inflation in high-income coun- calculations tries (% change yoy) more-than 5 percent in February 2010--but still percent, year-on-year 4 remaining below the 7 percent average registered 3 during the January 2006 ­ July 2007 period 2 (Figure A4.3). In middle-income countries, 1 inflation followed a similar, but less steep trend. 0 It bottomed at 2.3 percent in September 2009 -1 and has gained nearly 2 percentage points since -2 Eurozone Germany Greece then. This compares with a pre-crisis peak of Italy Spain Portugal -3 Ireland 11.5 percent in July 2008. -4 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Figure A4.3 Headline inflation in low-, middle-, and high-income countries, medians Source: Datastream and World Bank calculations (% change yoy) 18 Low-Income Among developing countries, the BRICs have 16 Middle-income 14 generally registered very strong recoveries High-income 12 following the financial crisis. This has supported 10 renewed (mostly portfolio related) capital 8 inflows, which has raised domestic liquidity and 6 4 a revival of asset price inflation. Compared to 2 other countries, BRICs are also operating at 0 levels that are much closer to full capacity, -2 Sep-06 Sep-07 Sep-08 Sep-09 Nov-06 Nov-07 Nov-08 Nov-09 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 May-06 Jul-06 May-07 Jul-07 May-08 Jul-08 May-09 Jul-09 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 implying higher domestic demand price pressures relative to other countries. As a result, inflation pressures have been rising recently ­ Source: Global Economic Monitor and World Bank notably in China and India (Figure A4.2). The calculations only exception among BRICs has been Russia, where a strengthening rouble has contributed to a decline in inflation. In other low and middle-income countries, there are also signs of a pick-up in inflation (albeit from very low levels). In low-income countries, headline inflation has steadily increased after a rebound from 1.3 percent in October 2009 to 10 Global Economic Prospects Summer 2010 : Regional Annex Global Economic Prospects Summer 2010: Fiscal Headwinds and Recovery Fiscal packages elsewhere in the region helped East Asia and the Pacific cushion effects of the crisis. Many countries went into recession with sufficient fiscal space to Recent developments respond pro-actively using both fiscal and monetary measures. Fiscal stimulus measures GDP in the East Asia and Pacific region grew amounted to 2 percent of GDP for the region in 7.1 percent in 2009, a moderate falloff from the 2009. But fiscal deficits (2.9 percent of GDP for strong 8.5 performance of 2008. But, excluding 2009) and government debt grew by much less China from the East Asia aggregate, growth than in other developing regions, reflecting a slowed sharply from 4.7 percent in 2008 to 1.5 smaller deterioration in overall growth in East percent in 2009 (Table B1.1). Across countries Asia and the relative absence of automatic results were mixed, ranging from an stabilizers in the region. For Indonesia, where impressively resilient 8.7 percent gain for China GDP advanced 4.5 percent in 2009, government to decline of 2.5 percent for Fiji. GDP also fell in spending contributed about 1 percentage point of Malaysia and Thailand, among middle income growth. Malaysia's fiscal deficit climbed to near countries, and Cambodia among low-income 7 percent in 2009 in part due to weaker revenues, countries. The dispersion of growth was a but also to large stimulus measures; while the reflection of initial conditions across countries Philippines and Thailand both undertook fiscal going into the financial crisis and the recession easing (Figure B1.1). Even low-income that followed. Given the importance of trade in countries Cambodia, Lao PDR and Vietnam East Asia's global presence, these included trade injected discretionary fiscal stimulus of about 3- partner orientation and the product composition 4 percent of GDP or more each in 2009, helping of a country's exportsand more to cushion the impact of the crisis on domestic fundamentallythe magnitude of fiscal and activity. monetary stimulus applied. Lessons learned from Figure B1.1 Fiscal adjustment will be a challenge the East Asia crisis of the late 1990s were also not forgotten in the region, and stability was Fiscal balance as share of GDP, % 0 supported by widespread reforms of the financial sector and private businesss environment; earlier -2 fiscal adjustment to bring down excessive deficits, and a newfound (and healthy) caution -4 regarding the capital account. -6 China's massive stimulus package was a major 2008 2009 2010f factor in the country's and region's economic -8 resilience. The program was centered in China Indonesia Malaysia Philippines Thailand government infrastructure spending, combined with increases in transfers, consumer subsidies Source: World Bank and tax cuts. The surge in government-led investment boosted overall GDP by 5.9 points in 2009, though most of the spending was financed through quasi-fiscal measures such as lending by Recently, a number of central banks (notably state-owned banks. Indeed, bank lending reached Malaysia) have started to tighten interest rates in 30 percent of GDP in the year and financed the face of strengthening economic activity and almost two-thirds of the stimulus. rising inflation expectations. But as for all 1 Global Economic Prospects Summer 2010 : Regional Annex developing-and high-income countries, among partners. adjustment of fiscal balances in the post-crisis era will present a challenge for policymakers and Among regional sources for energy and raw play a large role in shaping the outlook to 2012. materials, imports into China from Indonesia moved higher by a full 105 percent by March The rebound in trade is slowing...East Asian 2010 (y/y) amounting to $14 billion during exports and production of capital-, high-tech and 2009; and imports from Malaysia, a country with durable consumer goods, in which the region is a mix of energy, materials and high-tech goods well specialized, dropped off sharply with the also gained over 100 percent by early 2010. global collapse of investment spending and Regional exports to China helped to shift the retrenchment by households. At its lowest point contribution of trade to GDP to positive during industrial production in the region (excluding the second half of 2009 for a large number of China) was 9 percent below pre-crisis levels, countries. East Asian imports also increased while trade volumes declined by 21 percent. As rapidly, with the result that the external sector the global recovery gathered momentum, provided a net 3.2 percent drag on regional regional industrial production and trade levels growth during 2009. have recovered much of the loss. The stimulus- charged surge in China's investment led to a Export volumes bottomed-out toward the end of sharp increase in imports for domestic use, 2008 and early 2009, but have recovered rapidly notably from East Asian trade partners since that time, expanding at more than 30 (developing as well as high-income, e.g. percent annualized rates for much of 2009 Australia, Japan and the Republic of Korea). (Figure B1.2). Growth rates are beginning to Chinese demand underpinned exports, slow, as spare capacity is absorbed and demand production and incomes for partner countries subsides. By the end of the first quarter of 2010, throughout the region in 2009. Though the pace exports had regained pre-crisis levels in most of import growth in China has slowed in the first countries, though "only just" in the cases of months of 2010, China's demand continues to Thailand and the Philippines. These grow and support double-digit export growth developments, plus a deterioration of the Table B1.1 East Asia and Pacific forecast summary (annual percent change unless indicated otherwise) Est. Fore cast 95-05 1 2007 2008 2009 2010 2011 2012 GDP at market prices (2005 USD) 2 7.4 11.4 8.5 7.1 8.7 7.8 7.7 GDP per capit a (unit s in USD) 6.3 10.5 7.6 6.2 7.9 7.0 6.8 PPP GDP 3 7.3 11.3 8.4 7.0 8.7 7.8 7.7 Privat e consumpt ion 5.7 7.8 6.6 5.9 7.7 7.4 7.2 Public consumpt ion 8.1 9.0 10.1 11.1 9.4 8.2 7.0 Fixed invest ment 8.1 9.8 10.1 18.8 10.5 7.7 7.9 Export s, GNFS 4 12.5 15.7 7.6 -10.8 10.7 9.8 9.0 Import s, GNFS 4 9.7 11.4 5.8 -5.4 12.1 9.0 8.3 Net export s, cont ribut ion t o growt h 0.7 2.9 1.5 -3.2 0.2 0.9 0.9 Current account bal/GDP (%) 2.2 9.6 8.7 6.0 4.3 4.2 4.2 GDP deflat or (median, LCU) 5.9 4.8 7.3 4.9 3.5 3.0 2.8 Fiscal balance/GDP (%) -2.1 0.4 -0.7 -2.9 -2.6 -2.0 -1.7 Me mo i te ms: GDP East Asia excluding China 3.5 6.2 4.7 1.5 5.8 5.3 5.6 China 9.1 13.0 9.6 8.7 9.5 8.5 8.2 Indonesia 2.7 6.3 6.0 4.5 5.9 6.2 6.3 T hailand 2.7 4.9 2.5 -2.3 6.2 4.0 5.0 Not es: 1. Growt h rat es over int ervals are compound average; growt h cont ribut ions, rat ios and t he GDP deflat or are averages. 2. GDP measured in const ant 2005 U.S. dollars. 3. GDP measured at PP P exchange rat es. 4. Export s and import s of goods and non-fact or services. Source: World Bank 2 Global Economic Prospects Summer 2010 : Regional Annex region's terms of trade led to narrowing of the Figure B1.3 Industrial production growth is regional current account surplus from $470 slowing billion in 2008 (8.7 percent of GDP) to $355 billion (6 percent of GDP) in 2009, with most of p ro d u ctio n , ch % (3 m o n th /3 m o n th saar) 50 the decline stemming from China (Table B1.1). 38 C h in a In d o n e sia 25 M a la ysia Figure B1.2 Export growth is easing 13 T h a ila n d 0 export volumes, ch% (3month/3month, saar) -1 3 -2 5 90 China -3 8 60 Indonesia -5 0 Jan -0 8 M ay -0 8 S e p -0 8 Jan -0 9 M ay-0 9 S ep -0 9 Jan -1 0 Malaysia 30 Thailand Source: World Bank 0 -30 Financial markets in East Asia avoided the -60 worst effects of the crisis Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 To a large degree, financial markets in Source: World Bank developing East Asia were insulated from the direct effects of the global (read `high-income') The recent decline in the pace of export growth financial crisis. Commercial banks and other across the region from a peak of 68 percent in institutions in the region were only small holders February, to 24 percent by April 2010 (saar) of toxic CDOs and related derivatives, and reflects, in part, an end to the "rebound factors" carried little direct exposure to the worst-hit from recession (including the pronounced institutions in the high-income world. inventory cycle, and onset of fiscal support) that Nevertheless, markets in East Asia were roiled have been driving growth in the final months of by the (almost immediate) second-round effects 2009. Looking forward, export growth is of the crisis. Both equity markets and currencies expected to ease to more sustainable rates, as were hard hit as international capital fled to China's import demand eases and growth in the perceived safety, and/or given mammoth losses OECD (notably Europe) continues to disappoint. by financial institutions, assets were reclaimed to shore-up balance sheets. Stock valuation in local ... and growth in industrial production is currency dropped 52 percent in Thailand and 56 also easing to a more sustainable pace percent in Indonesia (Figure B1.4). Exchange rates also depreciated sharply vis-à-vis the dollar The collapse in global demand and exports of with the outflow of foreign funds, pressuring investment and durable goods was reflected in currencies to 15-to 20 percent declines by early an 11 percent decline in regional industrial 2009, before capital began to reflow to the production between August 2008 and January region and currencies stabilizedthen 2009. If China is excluded, production echoed appreciated once more. Since that time, as the pattern of export volumes, contracting at a 22 elsewhere, markets recovered as investor's percent annualized rate in January 2009 (saar), confidence returned. then rebounding to a positive 22 percent pace a year later. The trajectory of output growth also Capital flows to the region fell off sharply in displays a tailing off during the first months of 2009. Overall international capital flows to East 2010 to 17.5 percent by April (saar), in part as Asia fell from a peak of $295 billion in 2007 spare capacity has been re-absorbed and- with (6.5 percent of regional GDP) to an estimated the exception of Malaysia-, all countries in the $138 billion in 2009 (Table B1.2 and Figure region have reached or exceeded their pre-crisis B1.5). Key to the decline was a large 45 percent peak levels (Figure B1.3). fall in FDI flows to the region, from $187 billion 3 Global Economic Prospects Summer 2010 : Regional Annex Figure B1.4 Most regional equity markets have Figure B1.5 Capital flows to East Asia have de- recouped pre-crisis levels clined index LCU based equity markets, June 2008 =100 b illio n s U .S . d o lla rs 120 300 110 250 100 200 90 150 80 100 50 70 China Indonesia 0 60 Malaysia Philippines -5 0 50 2007 2008 2009 Thailand N et FD I P o rtfo lio Eq u ity B onds B an k s N e t sh o r t te rm O t h e r L T flo w s 40 6/2/2008 10/20/2008 3/9/2009 7/27/2009 12/14/2009 5/3/201 Source: World Bank Source: World Bank Inflation pressures building in 2008 to $102 billion during 2009, and a $31 billion turnaround in net bank lending, as high- As spare capacity has been absorbed and with income banks sought to redress their balance growth at double-digit rates, there are increasing sheets). Capital flows continued to strengthen signs of supply-bottlenecks and incipient during the first four months of 2010, with bond evidence of localized asset-bubbles emerging. flows at $11 billion almost twice as strong as in For the region as a whole, the median inflation the same period of 2009, while syndicated bank rate increased from 3.2 percent to 5.7 percent loans came in at $9.8 billion--80 percent higher between January 2009 and March 2010. Asset than a year earlier. First-time IPOs and new price bubbles appear to be forming in the equity issues, on the other hand, were off by housing sector in China, partly reflecting easy about 20 percent from the pace set in early 2009. financing but also tied to the massive expansion Table B1.2 Net capital flows to EAP $ billions 2003 2004 2005 2006 2007 2008 2009e 2010f 2011f 2012f Financial flows: Net private and official inflows 76.0 127.1 184.1 193.9 291.8 178.7 136.6 Net private inflows (equity+debt) 83.2 132.3 187.0 203.5 294.9 179.2 137.6 147.6 176.4 224.1 ..Net private inflows (% GDP) 3.6 5.0 6.1 5.6 6.5 3.1 2.2 2.1 2.2 2.5 Net equity inflows 69.3 89.7 130.0 161.8 212.1 179.0 112.3 ..Net FDI inflows 56.8 70.4 104.4 105.7 177.0 187.1 101.9 ..Net portfolio equity inflows 12.5 19.3 25.7 56.2 35.1 -8.1 10.4 Net debt flows 6.7 37.4 54.1 32.1 79.7 -0.3 24.3 ..Official creditors -7.2 -5.2 -2.9 -9.6 -3.1 -0.5 -1.0 ....World Bank -1.5 -1.9 -0.6 -0.4 -0.3 1.2 2.2 ....IMF -0.5 -1.6 -1.6 -8.5 0.0 0.0 0.1 ....Other official -5.2 -1.7 -0.7 -0.7 -2.8 -1.7 -3.3 ..Private creditors 13.9 42.6 57.0 41.7 82.8 0.2 25.3 ....Net M-L term debt flows -9.9 9.1 13.9 14.2 26.0 15.8 -3.4 ......Bonds 1.8 9.6 12.1 6.0 2.3 -0.5 10.8 ......Banks -8.6 1.6 3.8 9.8 24.1 18.6 -12.3 ......Other private -3.1 -2.1 -2.0 -1.6 -0.4 -2.3 -1.9 ....Net short-term debt flows 23.8 33.5 43.1 27.5 56.8 -15.6 28.7 Balancing item -6.4 21.8 -141.2 -196.5 -180.5 -209.8 11.7 Change in reserves (- = increase) -139.7 -237.1 -217.7 -295.3 -537.3 -427.9 -491.0 Memorandum items Workers' remittances 32.7 40.3 50.5 58.0 71.0 86.0 86.0 94.0 103.0 Source: World Bank 4 Global Economic Prospects Summer 2010 : Regional Annex in infrastructure associated with the stimulus prices ­ reflecting productivity differentials and plan (Figure B1.6). policy efforts to reorient production in China toward satisfying domestic demand. Figure B1.6 Inflation has picked up with the recovery Figure B1.7 Recovery expected to slow 2011 Monthly inflation, yearonyear Real GDP growth in percent 70 10 Cambodia China 2010 2011 2012 60 Indonesia Malaysia Philipines Thailand 50 Vietnam 8 40 30 5 20 10 3 0 0 10 Developing China ASEAN Lowincome NIEs 20 East Asia East Asia 2007M01 2008M01 2009M01 2010M01 Source: World Bank and Datastream Source: World Bank Near-term outlook Risks GDP is projected to expand by 8.7 percent in The main risk facing the global economy in the 2010, led by 9.5 percent growth in China. near term stems from debt sustainability issues Excluding China, GDP in the remaining in high-income Europe. Should these problems developing countries of East Asia is anticipated not be resolved in a smooth manner, global GDP to increase by 5.8 percent (Figure B1.7). Both could be much weaker, with the level of GDP for China and other countries, growth will lower by between 2-and 5 percent (see main continue to reflect strong expansion of domestic text). For the countries of East Asia, the effects demand, which in China was responsible for 95 of such a cycle are potentially serious, in part percent of the increase in GDP (85 percent in the because both exports and investment are large rest of developing East Asia and the Pacific). shares of regional economies, and these are Looking forward, strengthening demand in high- precisely the two channels through which a income countries should boost export growth. deeper European crisis might be transmitted to This, in addition to a gradual strengthening in developing countries. capital inflows (and associated investment) will help offset some slowing in domestic demand As was the case with the first phase of the into 2011-12, as fiscal and monetary stimulus financial crisis, countries in the region should be measures are gradually withdrawn. Growth is well placed to introduce macroeconomic policies projected to ease to a still-robust average of 7.8 to limit the impact of such a "second" crisis. percent over the final years of the forecast (8.4 Indeed, events in Europe grounded in the percent for China and 5.5 percent for the sovereign debt difficulties of Greece, Spain and remaining countries) (Table B1.3). Portugal, and the consequent EU/IMF Stabilization Package for the Euro Area have The region-wide slowing of growth and dampened several of the emerging trends of tightening of policy measures is expected to rein importance for the East Asia region. The -in inflation pressures by 2011 and 2012. Despite economic outlook for Europe has dimmed, as strengthening export growth, and moderately austerity measures are in place among the highly weaker imports in line with slower domestic -indebted countries of the Southern Euro Zone, demand, the region's current account surplus is as well as in France, Italy, the United Kingdom expected to remain relatively steady near 4 and others. These adjustments will work to slow percent of GDP, in part because import prices near-term economic activity--and import are likely to increase more rapidly than export demandin a large market, that was worth some 5 Global Economic Prospects Summer 2010 : Regional Annex $375 billion, or 18 percent of total exports for a prudent "exit" strategy for fiscal accounts that developing East Asia during 2008. is not premature, and which allows private sector activity to become more self-sustaining. Just as the larger countries of East Asia are Moreover, avoidance of "hot" capital inflows recognizing that--in the new "post-crisis world" that could risk economic stability and damage concerns may include slower growth of high- exchange rate regimes is important; and of note income economies, tighter global financing is potential competition in international bond conditions, high and rising high-income debt markets with the issuance of high-income levels and a more difficult environment for sovereign debt, funding the stimulus packages of tradethe growth of export markets and trade the financial crisis years. for East Asia may be less robust than in previous decades. In this overall environment the risk of Figure B1.8 Post-crisis use of trade remedies protectionism may come more prominently to the fore. In the post-crisis period, developing countries have emerged as the most active users of trade remedies in the crisis, initiating three- quarters of all investigations since 2008, with India and Argentina as the most active users, followed by Turkey, Brazil, and China. Should this trend intensify, it could have serious implications for countries in the region; especially if, as appears to be the case, the implementation of trade measures is prompting the retaliatory actions (Figure B1.8). Source: Global Antidumping Database and World Bank Calculations Other elements of risk for East Asia are financial, including the challenge of shifting into Table B1.3 East Asia and Pacific country forecasts (annual percent change unless indicat ed ot herwise) Es t. Fore cast 95-05 1 2007 2008 2009 2010 2011 2012 C am bodi a Real GDP at market prices 8.3 10.2 6.7 -2.0 4.8 6.0 6.5 Current account bal/GDP (%) -4.4 -5.8 -9.9 -7.8 -11.1 -10.3 -9.7 China Real GDP at market prices 9.1 13.0 9.6 8.7 9.5 8.5 8.2 Current account bal/GDP (%) 2.6 11.1 10.6 6.4 4.7 4.7 4.8 Fi ji Real GDP at market prices 2.3 -6.6 -0.1 -2.5 2.0 2.2 2.4 Current account bal/GDP (%) -3.3 -14.3 -18.3 -8.6 -15.8 -17.7 -17.9 In don e s i a Real GDP at market prices 2.7 6.3 6.0 4.5 5.9 6.2 6.3 Current account bal/GDP (%) 1.5 2.4 0.0 2.1 0.4 0.1 0.1 Lao PDR Real GDP at market prices 6.2 7.9 7.5 6.7 7.7 7.5 8.0 Current account bal/GDP (%) -9.8 2.5 2.7 1.9 1.0 1.8 1.6 Mal aysi a Real GDP at market prices 4.8 6.3 4.7 -1.8 5.7 5.3 5.5 Current account bal/GDP (%) 6.5 15.7 18.3 15.7 15.2 15.1 14.9 Papu a Ne w Gu i n e a Real GDP at market prices 0.7 6.2 6.7 4.5 6.5 4.2 4.5 Current account bal/GDP (%) 3.0 16.9 14.0 -3.1 0.3 2.0 -0.1 Ph i l i ppi n e s Real GDP at market prices 4.2 7.1 3.7 1.1 4.4 4.0 4.0 Current account bal/GDP (%) -1.4 4.9 2.2 5.3 3.8 3.4 2.8 Th ai l an d Real GDP at market prices 2.7 4.9 2.5 -2.3 6.2 4.0 5.0 Current account bal/GDP (%) 1.9 6.6 0.6 7.3 2.5 1.5 0.7 Van u atu Real GDP at market prices 1.5 6.8 6.6 4.2 4.5 5.5 5.5 Current account bal/GDP (%) -9.8 -10.6 -9.6 -8.4 -6.4 -6.9 -6.0 Vi e tn am Real GDP at market prices 7.2 8.5 6.2 5.3 6.5 6.5 6.5 Current account bal/GDP (%) -2.5 -10.0 -11.9 -12.8 -11.1 -10.2 -10.4 Not es: 1. Growt h rat es over int ervals are compound average; growt h cont ribut ions, rat ios and t he GDP deflat or are averages. 2. Micronesia, Fed. St s., Kiribat i, Marshall Islands, Myanmar, Mongolia, P alau, Korea, Dem. Rep., Samoa, Solomon Islands, T imor-Lest e, T onga are not forecast owing t o dat a limit at ions. Source: World Bank World Bank forecasts are frequently updated based on new inform ation and changing (global) circum stances. Consequently, projections presented here m ay differ from those contained in other Bank docum ents, even if basic assessm ents of countries' prospects do not significantly differ at any given m om ent in tim e. 6 Global Economic Prospects Summer 2010 : Regional Annex Europe and Central Asia thirds, and net debt flows (international bank and bond-lending) were decimated, falling from Recent developments $153.8 billion to an estimated $13.7 billion between 2008 and 2009 (Table B2.1). With the After an estimated 5.3 percent contraction in drying up of financial flows, the region's current economic activity in 2009--the sharpest account balance shifted from a $34.9 billion slowdown of any region--the recovery in real deficit in 2007 to an estimated surplus of $13.6 GDP in Europe and Central Asia in 2010 is billion in 2009. projected at 4.1 percent. With the exception of the Middle East and North Africa, this is the As global import demand was falling (and did slowest pace of growth projected among the not permit adjustment through higher exports), developing regions--and is 3.2 percentage most of the adjustment came through reduced points slower than the region's pre-crisis five- imports, which fell by 13.7 percent during 2009. year average. The recovery largely reflects the More generally domestic demand fell sharply, as strong growth rebound in the region's two fixed investment spending contracted 16 percent largest economies (Russia and Turkey), which and private consumption contracted 3.9 percent. account for 62 percent of regional GDP, and are Within the region, the macro-impacts of the projected to grow 4.5 percent and 6.3 percent, crisis were most severe for those countries with respectively. The recovery in activity in the next large current account deficits and vulnerable four largest economies is weak (Poland, external debt dynamics at the onset, including Kazakhstan and Ukraine) or remains negative Bulgaria, Latvia, Lithuania, and Ukraine. The (Romania). And for the remaining 16 countries plunge in capital inflows and contraction in trade in the region, growth is expected to register 3 following the crisis, given large internal and percent or less for 13 economies. external imbalances, led nine of the 24 developing ECA countries to enter IMF Regional growth has been held back relative to programs (since September 2008).1 other regions because of the intense domestic adjustments that some countries have had to Countries with significant reliance on petroleum undergo as a consequence of their dependence exports--notably Russia, Azerbaijan and on debt-creating flows and associated large Kazakhstan--also saw sharp contractions in current account imbalance with which they GDP growth, as lower oil revenues led to entered the crisis. Heightened uncertainty--tied pronounced fall-off in economic activity through to the sovereign-debt crisis in some of the high- fiscal linkages. income European countries (Greece, Ireland, Italy, Portugal, and Spain) and their related The impact of the crisis was exacerbated by diminished growth prospects--has also created falling remittances, which in aggregate dropped additional headwinds for developing Europe and by an estimated 20 percent in 2009 for the region Central Asia, including weakened external as a whole, the sharpest decline of any demand for exports as high-income Europe developing region. The impact of Russia's weak tightens fiscal policy to reduce its debt burden. growth performance in 2009 was felt, in particular, by regional economies dependent on More so than elsewhere, the global financial remittances inflows from Russia. The decline crisis had a severe impact on domestic output has been especially acute in Tajikistan, where reflecting the pre-crisis dependence of many remittances inflows represent 50 percent of countries on international bank and bond-lending GDP. Notably, while recorded worker to finance domestic expenditure (and associated remittances outflows from Russia to other CIS current account deficits). The drying up of member countries declined 26% to $5.3 billion capital flows to the region has forced large-scale in 2009 over 2008, on a quarterly basis they have cutbacks in spending. Overall, net private begun to recover to over $1.5 billion in both the inflows to the region declined by more than two- third and fourth quarters of 2009, reflecting 7 Global Economic Prospects Summer 2010 : Regional Annex Table B2.1 Net capital flows to ECA $ billions 2003 2004 2005 2006 2007 2008 2009e 2010f 2011f 2012f Financial flows: Net private and official inflows 77.9 120.9 155.4 279.9 485.8 312.8 115.9 Net private inflows (equity+debt) 84.5 131.2 191.4 312.5 491.2 303.9 84.0 151.6 178.0 195.8 ..Net private inflows (% GDP) 6.8 8.2 9.5 12.8 15.8 7.8 2.6 4.0 4.2 4.1 Net equity inflows 29.4 58.7 69.6 123.9 183.3 159.0 102.2 124.1 138.1 155.6 ..Net FDI inflows 28.6 55.3 61.6 113.8 156.8 173.6 97.2 ..Net portfolio equity inflows 0.7 3.5 8.0 10.2 26.5 -14.6 4.9 Net debt flows 48.5 62.2 85.8 156.0 302.5 153.8 13.7 ..Official creditors -6.6 -10.3 -36.0 -32.6 -5.4 8.9 31.9 ....World Bank -0.6 0.4 -0.6 0.2 -0.1 0.6 5.9 ....IMF -2.0 -5.9 -9.8 -5.8 -5.0 7.0 21.1 ....Other official -4.0 -4.8 -25.6 -27.0 -0.3 1.3 4.9 ..Private creditors 55.1 72.5 121.8 188.6 307.9 144.9 -18.2 ....Net M-L term debt flows 21.5 52.8 100.6 134.5 204.2 154.2 -7.6 ......Bonds 11.2 19.1 28.1 34.6 58.7 19.3 9.6 ......Banks 10.7 35.0 73.8 100.8 146.6 135.5 -16.7 ......Other private -0.4 -1.3 -1.3 -0.9 -1.1 -0.6 -0.5 ....Net short-term debt flows 33.6 19.7 21.2 54.1 103.7 -9.3 -10.6 Balancing item -40.0 -75.7 -107.4 -125.6 -213.7 -355.0 -101.3 Change in reserves (- = increase) -53.5 -72.1 -93.1 -179.7 -237.2 61.0 -15.7 Memorandum items Workers' remittances 14.4 21.0 30.1 37.0 51.0 58.0 46.0 48.0 52.0 Source: World Bank higher oil prices--this after having reached a compression in demand and economic activity. post-crisis low of $871 million in the first For instance, Hungary, Poland, Romania, Russia, quarter of the year (versus $2 billion in both the Turkey, among others, introduced policy rate third and fourth quarters of 2007).2 Remittances cuts since the onset of the crisis and have yet to inflows to Romania and Poland also fell sharply begin to introduce rate hikes to normalize in 2009, but this primarily was a reflection of monetary policy stances. economic weakness and higher unemployment in the European Union. Similarly, the recovery has been supported by fiscal stimulus measures, in countries with The region started to recover during the second sufficient fiscal space, such as Russia. These half of 2009, initially responding to rebound higher outlays, combined with increased transfer factors, including a recovery from exceptionally payments through automatic stabilizers, and depressed bases, and strengthening external lower revenues (given the contraction in demand. As global growth gained momentum, economic activity), with increased liabilities (as prices and demand for commodities (particularly governments absorbed problem private sector oil) also rebounded and provided a further fillip assets) led to a shift from a regional fiscal to incomes and foreign currency earnings for surplus of 0.3 percent of GDP in 2008 to a regional commodity exporteres. deficit of 6 percent in 2009--the largest among developing regions with the exception of South The recent rebound in output was also supported Asia. by countercyclical monetary policy actions, with policy interest rate cuts across much of the The growth rebound has primarily been driven region (where countries have independent by recovery in the largest economies of the monetary policy), as inflationary pressures region, masking continued weak growth in many diminished significantly, given the marked of the smaller economies. This is particularly 8 Global Economic Prospects Summer 2010 : Regional Annex evident in the evolution of industrial production large current account deficits that were over the past two years (Figure B2.1). In the supported by rapid credit expansion and financed three largest economies, i.e. Russia, Poland and through debt-creating flows (Armenia, Belarus, Turkey, growth rates in industrial production Bulgaria, Latvia, Lithuania, Montenegro, have bounced back strongly and have returned to Moldova, Romania and Ukraine). GDP growth pre-crisis growth rates. Indeed, Poland was the in these countries decelerated or fell by 10 only European Union member state for which percentage points or more in 2009. Indeed, in GDP did not decline in 2009. Armenia, industrial production had fallen by 31.5 percent by April 2009 from September The contraction in industrial production was 2008, although it has since bounced back to pre- more pronounced in smaller countries, crisis levels. While industrial production fell less particularly those that entered the recession with deeply in Lithuania and Bulgaria, for example, because of the sharp contraction in domestic Figure B2.1 Industrial production after easing is demand required as financing of large current rebounding fast accounts dried up, output has not recovered to Annualized growth of industrial production, 3m moving average the same degree and remains 11 percent and 21 40 percent, respectively, below pre-crisis peaks. 30 20 10 The combination of extremely deep falls in 0 output in 2009 and a relatively modest recovery 10 means that many countries in the region continue 20 30 to be characterized by ample spare capacity and 40 high unemployment. Indeed, capacity utilization 50 rates have not recovered to the extent that other 2007M01 2008M01 Poland Russia 2009M01 Turkey ECA 2010M01 developing markets have done (Figure B2.2). Moreover, unemployment continues to rise in many economies. Registered unemployment has Annualized growth of industrial production, 3m moving average 40 risen by 3 million and exceeded 10 percent of the 20 labor force in several countries, including Latvia, 0 Turkey, Estonia, Lithuania, Slovakia and Hungary. Rising joblessness is pushing 20 households into poverty and creating greater 40 challenges for those already in poverty. The 60 number of poor and vulnerable has risen by an 80 estimated 12 million since the onset of the crisis, 2007M01 2008M01 2009M01 2010M01 with Armenia, Georgia and Moldova particularly Bulgaria Romania Ukraine ECA hard hit. Annualized growth of industrial production, 3m moving average Figure B2.2 Change in capacity utilization 80 rates since June 2008 60 ARGENTINA 40 THAILAND 20 INDONESIA PHILIPPINES 0 BRAZIL 20 ESTONIA TURKEY 40 LATVIA 60 LITHUANIA BULGARIA 80 SLOVENIA 2007M01 2008M01 2009M01 2010M01 ROMANIA Armenia Latvia ECA SLOVAKIA 20 15 10 5 0 5 10 Source: World Bank Source: World Bank and Datastream 9 Global Economic Prospects Summer 2010 : Regional Annex The recovery in the Commonwealth of Figure B2.3 CDS spreads ­ EU periphery vs. Independent States appears to be somewhat more selected emerging Europe and core EU countries robust than in the rest of the region, GDP is Basis points projected to rise 4.2 percent in 2010. In contrast, 500 Average EUperiphery 450 countries in Central and Eastern Europe are 400 Average EUcore expected to grow at a very modest 1.8 percent.3 350 Russia Turkey 300 Despite signals of a pick-up in activity (retail 250 sales, industrial production, business and 200 150 consumer confidence surveys), GDP in the EU- 100 10 is projected to rise only 1.6 percent in 2010, 50 0 weighed down by sluggish growth in the rest of the European Union, where growth is projected at a tepid 0.8 percent in 2010, as these economies are vulnerable to heightened Source: Bloomberg economic uncertainty following the crisis in Greece. percent in 2009 (Figure B2.4). And debt servicing charges of nine reporting countries GDP in Uzbekistan is projected to increase 8.3 exceed 30 percent of exports (in Romania they percent, reflecting a massive program of public reached an estimated 128 percent of exports in infrastructure construction, supported by a 2009). Given existing debt obligations and rebound in international energy prices since growth projections for 2010, external debt-to- early-2009. Other energy exporters are GDP ratios are on track to increase further in benefitting from strong oil prices. Growth in 2010 to 87 percent and 47 percent, respectively, Russia is expected to reach 4.5 percent, in Central and Eastern Europe, and the following a 7.9 percent contraction in 2009, Commonwealth of Independent States sub- while Poland and Turkey are forecast to grow by regions. 3 and 6.3 percent, respectively. In contrast, Figure B2.4 External debt-servicing burden rose Romania and Latvia are expected to experience sharply for ECA economies, as exports declined their second and third years, respectively, of economic contraction in 2010, although the rates 140 % share of exports, for countries with 30% or greater as of 2009 Ukraine of decline have decelerated sharply. For 120 Hungary example, Latvia posted an estimated 18 percent Turkey 100 Lithuania contraction in 2009 and is projected to contract 80 Serbia Croatia by a further 3.5 percent in 2010. 60 Latvia Kazakhstan Romania The projected improvement in the region's fiscal 40 indicators (see below) is fortuitous, as markets 20 are increasingly becoming concerned about 0 sovereign debt and fiscal sustainability. So far, 2004 2005 2006 2007 2008 2009p the spread of sovereign stress in highly indebted Source: World Bank high-income European countries to developing countries has been limited, and CDS spreads in The burden of household and corporate losses the major countries in the region (Turkey and incurred during the financial crisis is also Russia, for example) have been relatively stable. constraining the pace of recovery, and has (Figure B2.3). contributed to a rise in non-performing loans (NPLs). Eleven of the 16 countries across the With the sharp fall-off in external demand and globe which reported that NPLs represented at associated hit to exports, median debt servicing least 9 percent of total loans outstanding, were charges in the region have risen from 14.6 within the ECA region (Figure B2.5). Among percent of exports in 2007 to an estimated 21.4 ECA countries with NPLs exceeding 9 percent, 10 Global Economic Prospects Summer 2010 : Regional Annex are Ukrainian banks (reporting provisioning for momentum. On the plus side, private capital only 32 percent of NPLs), while in Albania, inflows are projected to firm, which is expected Latvia, Moldova, Montenegro, and Romania 50 to result in a 1.1 percentage point of GDP percent to 60 percent are provisioned (as of the decline in the region's financing gap, much of second half of 2009). In contrast, provisioning of which is likely to be met through strong official NPLs is close to or exceeds 100 percent in lending over the medium-term. Moreover, Kazakhstan, FYR Macedonia, Russia and Serbia. inflation pressures in most of the region (with the notable exceptions of Russia and Turkey) Figure B2.5 Non-performing loans in selected remain muted--and are expected to remain ECA countries in % of total loans outstanding subdued--so that monetary policy is expected to Belarus be broadly supportive of growth. Armenia Bosnia and Herzegovina Although public debt levels remain relatively Estonia 2009 Turkey 2007 low, private-sector debt is a concern, and is Hungary Bulgaria Croatia Poland Georgia expected to remain a drag on growth. The median shares of total private and public sector Macedonia, FYR Russia Albania Montenegro Romania external debt rose to an estimated 60.5 percent for the region as a whole, with Central and Serbia Latvia Moldova Lithuania Kazakhstan Eastern Europe's share rising to an estimated 82 Ukraine 0 5 10 15 20 25 30 35 40 percent in 2009 (Figure B2.6). Moreover, in Central and Eastern Europe they are projected to Source: IMF Global Financial Stability Report increase further to 87 percent in 2010, and to 47 April 2010 percent in the Commonwealth of Independent States. Outlook Figure B2.6 External debt rose across sub- GDP growth in Europe and Central Asia is regions - led by an upswing in Central Europe projected to expand 4.1 percent in 2010 and firm Total public and private, %share of GDP 90 further by 4.2 percent and 4.5 percent in 2011 Central Europe and Baltics and 2012, respectively (Table B2.2). This 80 Comm. of Indep. States aggregate result masks sub-regional variations, 70 with a relatively stable 4.5 percent expansion 60 expected for the Commonwealth of Independent 50 States, a steady improvement in growth rates in 40 Central and Eastern Europe from 1.8 percent in 30 2010 to 4 percent by 2012. Compared with other 20 developing regions, this recovery is slower to 10 gather momentum and more muted--with GDP 0 growth over the entire period at rates well below 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009p 2010p 2011p the pre-crisis pace of 7.1 percent in 2007. Large household foreign-currency denominated debt Source: World Bank obligations, significant negative wealth effects (due to the collapse in local real estate and equity The recovery in Russia, initially export-led and markets), the sharp restructuring underway in fed by bounce-back factors, is expected to high current-account deficit countries, and the continue through the first half of 2010, but weak recovery in high-income Europe are all should lose some momentum towards the end of factors expected to weigh on domestic demand the year as these factors fade (Table B2.3). So in the region. A move toward fiscal far, consumer demand and investment have consolidation is expected throughout the region, lagged the recovery, in part because of continued which will also serve to dampen growth high unemployment and spare capacity, but also 11 Global Economic Prospects Summer 2010 : Regional Annex Table B2.2 Europe and Central Asia forecast summary (annual percent change unless indicat ed ot herwise) Est. Fore cast 95-05 1 2007 2008 2009 2010 2011 2012 GDP at market prices (2005 USD) 2 4.1 7.1 4.2 -5.3 4.1 4.2 4.5 GDP per capit a (unit s in USD) 4.0 7.1 4.1 -5.3 4.0 4.2 4.4 P PP GDP 3 4.0 7.4 4.5 -5.5 4.0 4.3 4.5 Privat e consumpt ion 4.8 10.1 8.1 -3.9 3.6 4.0 4.1 Public consumpt ion 2.0 6.0 3.4 2.9 2.2 2.6 2.6 Fixed invest ment 4.7 15.2 6.1 -16.0 6.4 5.4 6.6 Export s, GNFS 4 7.9 8.0 7.3 -12.8 6.7 7.0 7.2 Import s, GNFS 4 8.7 17.9 11.1 -13.7 6.1 6.2 6.7 Net export s, cont ribut ion t o growt h 0.1 -3.1 -1.5 0.7 0.1 0.2 0.1 Current account bal/GDP (%) 0.9 -1.1 -0.1 0.5 0.4 -0.7 -0.8 GDP deflat or (median, LCU) 18.8 9.6 10.0 3.5 4.5 5.7 5.7 Fiscal balance/GDP (%) -5.2 2.3 0.3 -6.0 -4.5 -3.8 -3.3 Me mo i te ms: GDP T ransit ion count ries 5 4.0 5.7 2.9 -3.3 4.0 3.9 4.3 Cent ral and East ern Europe 6 3.8 6.8 5.0 -2.1 1.8 3.6 4.0 Commonwealt h of Independent St at es 7 4.1 8.5 5.4 -7.1 4.2 4.6 4.6 Russia 3.9 8.1 5.6 -7.9 4.5 4.8 4.7 T urkey 4.3 4.6 0.7 -4.7 6.3 4.2 4.7 P oland 4.3 6.7 4.8 1.7 3.0 3.7 4.0 Not es: 1. Growt h rat es over int ervals are compound average; growt h cont ribut ions, rat ios and t he GDP deflat or are averages. 2. GDP measured in const ant 2005 U.S. dollars. 3. GDP measured at PP P exchange rat es. 4. Export s and import s of goods and non-fact or services. 5. T ransit ion Count ries: Albania, Bulgaria, Lit huania, Lat via, Macedonia, FYR, P oland, Romania, T urkey 6. Cent ral and East ern Europe: Albania, Bulgaria, Lit huania, Lat via, Macedonia, FYR, Poland, Romania 7. Commonwealt h of Independent St at es: Armenia, Azerbaijan, Belarus, Georgia, Kazakhst an, Kyrgyz Republic, Moldova, Russian Federat ion, Ukraine, Uzbekist an Source: World Bank because of declining credit as the banking sector play a declining role as the government is forced restructures. Looking forward, rising wages and to scale back on spending, given the oil incomes should combine with a reduced drag unsustainable level of the deficit at 7.1 percent of from the financial sector, to support an GDP (although Poland is advantaged by its increasingly prominent role for domestic relatively low debt-to-GDP ratio). A modest demand in the recovery. These forces, however, strengthening of investment demand, partly will be partially offset by the appreciation of the reflecting EU transfers and preparations for the currency, which would curb export 2012 European football championships, plus a competitiveness. Overall, regional growth is gradual strengthening of the labor market are expected to find itself on more sustainable expected to underpin a modest pick-up in growth footing by 2012, led by strengthening domestic in 2011 and 2012 to 3.7 and 4 percent, demand. respectively. Poland was the only country in the European The recovery in Turkey, which began in the Union to record positive growth in 2009. Partly second quarter of 2009, is more advanced than in because its economy did not decline as sharply other countries, and is overwhelmingly driven by as others, its recovery will be less marked with a firming in consumer and business demand, growth accelerating from 1.7 percent in 2009 to supported by tax cuts on durables consumption around 3 percent in 2010. Despite the relatively as part of fiscal stimulus measures. The economy muted cycle, unemployment has risen to 9 is projected to grow close to potential in 2011 percent of the labor force, which will weigh on and 2012--following the rebound in activity in consumer demand. Fiscal policy is expected to 2010 coming out of sharply negative growth in 12 Global Economic Prospects Summer 2010 : Regional Annex 2009. Rising inflationary pressures could Figure B2.7 Share of Southern Euro-Zone in translate into appreciation of the currency total exports through higher import costs and hurt percent share of total exports in 2008 competiveness, which along with weak demand 20 19.3 in export markets and a tightening of monetary and fiscal policies is expected to contribute to a 15 slowing of growth to 4.2 and 4.7 percent in 2011 10.0 and 2012, respectively, from 6.3 percent in 2010. 10 8.8 However, recent depreciation pressure on the 5 4.5 5.7 3.7 Turkish lira, due to concerns on financing debt in some high-income European countries, might 0 offset some of the negative impacts stemming EAP LAC Asia SSA ECA MENA from weak external demand on exports. Source: World Bank, UN-COMTRADE Household consumption is also projected to post a slow recovery in many smaller regional EU-5 banks own a large share of the banking economies, (in Central and Eastern Europe, on sectors in several countries in the region. While weak employment prospects and negative wealth during the crisis these banks managed to effects, and in the CIS, as the pace of growth in maintain their exposures, a protracted crisis in remittances inflows is expected to be lower than Western Europe could lead to a reassessment. during the pre-crisis period). The weak recovery Also, going forward, there might be an increased in high-income Europe and a generalized move aversion to issuing new credit as loans come toward fiscal tightening will constrain consumer due. And banking systems in ECA countries and business sector activity and growth. might be challenged by possible withdrawals by Remittances are likely to pick up with oil prices resident and non-resident depositors. To reduce and activity in Russia, but are likely to be more risks, countries in the region introduced liquidity subdued than in the immediate pre-crisis era, support operations and strengthened deposit reflecting lingering high rates of unemployment insurance schemes at the peak of the global in the EU. financial crisis. Some countries entered into crisis management agreements with the banking Risks sector regulators of their parent banks. Yet, risks remain. In particular, one issue to follow in The outcome of the debt crisis in high-income coming months is the case of Greek banks that Europe will shape conditions globally, but hold large shares of outstanding loans in particularly in Europe and Central Asia, both Albania, Bulgaria, Romania, and Serbia. Should because of its tight trade and financial linkages Greek banks in an effort to restore their own to countries most immediately affected, but also balance sheets choose (or are forced) not to roll- its increasing integration into the broader high- over loans, this could have significant income European economy. Europe and Central implications for investment and economic Asia is the developing region with the second activity in this group of countries. Area wide, the largest share in Southern Euro zone total exports debt-burdened EU-5 (Greece, Ireland, Italy, (Figure B2.7). The most vulnerable countries in Portugal and Spain) have supplied some $400 the region include Albania and Azerbaijan, for billion or 13 percent of ECA regional GDP as of which Greece, Italy, Portugal and Spain end-2009. represent more than 20 percent of their total exports. Finally, the depth and prolonged nature of the crisis poses a risk to the region itself. As outlined The region is also dependent on financial flows in the main text, an extended period of high- from lenders in some of the most vulnerable high unemployment and spare capacity risks taking its -income countries in Western Europe. In fact, toll on the ability of consumers and firms in the 13 Global Economic Prospects Summer 2010 : Regional Annex region to pay back loans. Already, non- to provision these loans. Should the problem performing loans are rising rapidly and at least in intensify, a second regionally based financial some countries, banks are lagging in their efforts crisis cannot be ruled out. Table B2.3 Europe and Central Asia country forecasts (annual percent change unless indicat ed otherwise) Est. Fore cast 95-05 1 2007 2008 2009 2010 2011 2012 Al bani a Real GDP at market prices 5.4 6.0 6.5 2.2 3.0 4.0 4.7 Current account bal/GDP (%) -5.5 -10.6 -15.2 -15.7 -10.9 -9.9 -8.9 Arme ni a Real GDP at market prices 8.6 13.7 6.8 -14.4 1.2 3.5 4.5 Current account bal/GDP (%) -11.7 -6.4 -11.6 -15.4 -13.7 -12.3 -10.8 Az e rbai jan Real GDP at market prices 10.2 25.0 10.8 9.3 2.3 1.0 2.5 Current account bal/GDP (%) -16.6 27.3 35.7 24.1 27.4 22.1 20.4 Be l arus Real GDP at market prices 6.9 8.6 10.0 0.2 2.4 4.6 4.9 Current account bal/GDP (%) -3.2 -6.7 -8.6 -13.0 -10.4 -9.2 -9.1 Bosnia He rz e govina Real GDP at market prices - 6.8 5.4 -3.4 0.5 4.0 6.0 Current account bal/GDP (%) - -12.6 -14.9 -7.8 -8.0 -8.1 -7.9 Bulgari a Real GDP at market prices 2.2 6.2 6.0 -5.0 0.2 2.0 3.6 Current account bal/GDP (%) -3.6 -25.4 -25.2 -9.4 -6.2 -5.8 -4.8 Ge orgia Real GDP at market prices 6.6 12.3 2.3 -3.9 4.5 4.0 4.7 Current account bal/GDP (%) -10.0 -20.9 -22.7 -11.9 -12.8 -12.6 -12.4 Kaz akhstan Real GDP at market prices 6.4 8.9 3.3 1.2 2.1 2.7 3.5 Current account bal/GDP (%) -2.3 -7.8 5.3 -2.5 3.3 4.1 4.0 Kyrgyz Re publ ic Real GDP at market prices 4.7 8.2 8.4 2.3 2.2 3.0 4.5 Current account bal/GDP (%) -10.2 -7.0 -8.1 4.0 -6.1 -6.4 -6.5 Li thuani a Real GDP at market prices 6.0 9.8 2.8 -14.8 0.5 3.1 2.2 Current account bal/GDP (%) -7.9 -14.5 -12.0 3.8 1.5 -0.6 -1.0 Latvia Real GDP at market prices 6.9 10.0 -4.6 -18.0 -3.5 3.3 4.0 Current account bal/GDP (%) -7.5 -22.3 -13.0 9.4 7.3 7.0 6.5 Moldova Real GDP at market prices 2.3 3.0 7.2 -6.5 2.5 3.6 4.5 Current account bal/GDP (%) -7.9 -16.5 -16.7 -10.0 -9.9 -10.2 -10.0 Mace donia, FYR Real GDP at market prices 2.2 5.9 5.0 -1.3 1.9 3.8 3.8 Current account bal/GDP (%) -5.9 -3.1 -12.7 -9.6 -8.5 -7.6 -4.8 Pol and Real GDP at market prices 4.3 6.7 4.8 1.7 3.0 3.7 4.0 Current account bal/GDP (%) -3.3 -4.8 -5.1 -1.6 -1.8 -2.6 -2.9 Romani a Real GDP at market prices 2.2 6.3 7.3 -7.1 -0.5 3.6 4.4 Current account bal/GDP (%) -5.8 -13.8 -12.1 -4.5 -5.0 -5.0 -5.0 Russi an Fe de rati on Real GDP at market prices 3.9 8.1 5.6 -7.9 4.5 4.8 4.7 Current account bal/GDP (%) 7.6 6.0 6.1 3.9 4.0 2.0 2.1 Se rbia Real GDP at market prices - 6.9 5.5 -3.0 1.5 3.0 5.0 Current account bal/GDP (%) - -15.9 -17.6 -5.6 -8.5 -8.0 -7.4 Tajikistan GDP at market prices (2000 USD) 2 4.6 7.8 7.9 3.4 4.0 5.0 5.0 Current account bal/GDP (%) -4.5 -8.6 -7.7 -7.3 -8.0 -8.8 -9.1 Turke y Real GDP at market prices 4.3 4.6 0.7 -4.7 6.3 4.2 4.7 Current account bal/GDP (%) -1.5 -5.7 -5.9 -2.5 -4.7 -5.2 -5.0 Ukraine Real GDP at market prices 2.7 7.9 2.1 -15.0 3.0 4.0 4.5 Current account bal/GDP (%) 2.7 -3.7 -7.3 -1.6 -0.9 -2.2 -2.4 Uz be kistan Real GDP at market prices 4.6 9.5 9.0 8.1 8.3 8.7 9.0 Current account bal/GDP (%) 3.3 17.4 13.1 7.0 7.8 8.5 8.8 Not es: 1. Growth rat es over intervals are compound average; growt h cont ributions, rat ios and t he GDP deflator are averages. 2. T urkmenistan, Montenegro, Kosovo are not forecast owing to data limitat ions. Source: World Bank World Bank forecasts are frequently updated based on new inform ation and changing (global) circum stances. Consequently, projections presented here m ay differ from those contained in other Bank docum ents, even if basic assessm ents of countries' prospects do not significantly differ at any given m om ent in tim e. even if basic assessm ents of countries' prospects do not significantly differ at any given m om ent in tim e. 14 Global Economic Prospects Summer 2010 : Regional Annex Latin American and the Caribbean with industrial production growing at a 10 percent annualized rate during the fourth quarter. The pace remained relatively robust in the first Recent developments quarter at 6.5 percent, stepping down marginally in selected economies. Excluding Chile from the Countries in Latin America and Caribbean regional aggregate, industrial production entered a strong cyclical rebound during the expanded at 9 percent the first quarter of this second half of 2009, benefitting from a robust year (Figure B3.2). In Chile, following the rebound in external demand, renewed capital earthquake, industrial production declined by 30 inflows, higher commodity prices, the turn in the percent in the first quarter. inventory cycle, and a boost to domestic demand from substantial monetary and fiscal stimulus. Figure B3.2 Industrial production is slowing in GDP in the region, after contracting by 2.3 Latin America and the Caribbean percent in 2009, is projected to expand by 4.5, percent, 3m/3m saar 4.1 and 4.2 percent over 2010 - 2012, slightly 30 below the average 5 percent recorded during the 20 boom period. 10 0 Financial conditions improved noticeably. 1 0 International capital flows to the region after 2 0 declining sharply in the first half of 2009, picked 3 0 up in the second half of that year and into 2010. 4 0 Overall, bond, bank and equity flows to Latin Brazil A rge ntina 5 0 M e xico Ve ne zue la American fell by 24.8 percent in 2009 to $130.3 6 0 Chile (e arthquake e ffe ct) billion. Reflecting gains already made, net Jan0 7 Jan0 8 Jan0 9 Jan1 0 private inflows are expected to pick up to about Source: World Bank $156 billion in 2010, still some 6.2 percent lower than in 2008 and 33 percent lower than in 2007 Despite the sharp bounce back in growth rates, (Figure B3.1 and Table B3.1). industrial production in the region remains nearly 4 percent below its pre-crisis peak level. Figure B3.1 Financial flows to Latin America and Compared with the level of activity that would Caribbean dropped markedly in 2009 have been expected had the crisis not intervened Billion USD there is even more slack, with 10 percent or 350 more in output gap4 in 3 of the 10 countries for 300 which monthly industrial production data is Workers' remittances available (Figure B3.3). The output gap also has 250 Net debt flows its reflection in labor markets. At its trough, 200 Net portfolio equity inflows unemployment in the region had increased by 2 150 Net FDI inflows million, but has since declined by 1 million. 100 The recovery in regional industrial production 50 was due to both domestic demand and a global 0 recovery in trade. After falling sharply, both the -50 volume and value of regional exports have been 2002 2003 2004 2005 2006 2007 2008 2009 rebounding at rapid rates (Figure B3.4). Source: World Bank. Nevertheless, the volume of exports is now only 10 percent higher than its August 2008 level and because of lower commodity prices, the value of Economic activity in the region began trade remains 4.5 percent below its earlier peak. rebounding sharply in the second half of 2009, 15 Global Economic Prospects Summer 2010 : Regional Annex Figure B3.3 Capacity utilization rates in selected accelerating inflation. In Brazil, monthly countries inflation has picked up to a 5.22 percent rate in 84 April 2010, prompting the authorities to raise 82 their policy rate by 75 basis points in April. Peru's central bank raised its reference rate by 80 25 basis points to 1.5 percent in early May 2010, 78 as economic growth continues at a strong pace. 76 Conversely weak economic growth prompted the 74 central bank of Colombia to cut its key rate by 72 50 basis points in early May. 70 A rg en tin a M ex ic o B ra zil Figure B3.5 Brazil and Peru started the monetary Source: World Bank. tightening Basis points The turn in the inventory cycle has already 16 Bra z il started to make a positive contribution to growth 14 M exico in many countries. However, even with a solid C hile 12 C olom bia recovery, output gaps will persist in many 10 Pe ru countries until at least 2012, translating into 8 lingering excess capacity and high 6 unemployment. 4 Despite the acceleration in growth, inflation 2 pressures remain subdued in most countries. On 0 M a y -08 A ug-08 N ov-08 M a r-09 Jun-09 S e p -09 D ec-09 M a r-10 a year-over-year basis, median inflation has picked up from around 2 percent to just over 4 Source: Central banks. percent in recent months, but this mainly reflects the fluctuations of commodity prices. Monthly Among countries in the region, Mexico's was inflation has been more stable at around 4 most affected by the crisis (and by the H1N1 percent for the region as a whole. flu). GDP fell by 6.5 percent in 2009, although activity began recovering in the second half of Reflecting the benign inflation environment, still the year. Renewed demand from the U.S., ample spare capacity and high unemployment, stronger domestic demand and the end of the flu most central banks in the region, with the crisis caused industrial production to grow at a exception of Brazil and Peru (Figure B3.5), have more than 10 percent pace in the second half of kept their policy rates on hold. Nevertheless the year. The auto sector has rebounded signs of overheating are emerging in several particularly sharply, with output up 79 percent in economies in the region, as evidenced by the first quarter of 2010 compared with the year Figure B3.4 Trade has not yet fully recovered Export growth, 3m/3m saar Level of exports, index August 2008=100 80 120 60 100 40 80 20 0 60 20 Volume s Volume s 40 Value s Value s 40 A ug08 20 60 80 0 2003M02 2 004M0 2 200 5M02 2006 M02 2007M02 2008M02 2 009M02 2 010M0 2 2003M02 2004M02 2005M02 2006M02 2007M02 2008M02 2009M02 2010M02 Source: World Bank 16 Global Economic Prospects Summer 2010 : Regional Annex Table B3.1 Net capital flows to LAC $ billions 2003 2004 2005 2006 2007 2008 2009e 2010f 2011f 2012f Financial flows: Net private and official inflows 62.2 57.2 84.6 70.0 232.3 173.2 130.3 Net private inflows (equity+debt) 57.4 67.3 115.8 90.1 233.1 166.5 115.4 156.2 160.1 171.8 ..Net private inflows (% GDP) 3.0 3.1 4.4 2.9 6.4 4.0 3.0 3.5 3.2 3.3 Net equity inflows 46.5 65.1 84.1 83.3 139.0 115.3 108.9 ..Net FDI inflows 43.2 65.7 71.9 72.1 109.4 125.0 70.8 ..Net portfolio equity inflows 3.3 -0.6 12.2 11.3 29.6 -9.7 38.1 Net debt flows 15.7 -7.9 0.5 -13.3 93.3 57.9 21.4 ..Official creditors 4.8 -10.1 -31.2 -20.1 -0.8 6.7 14.9 ....World Bank -0.4 -1.0 -0.7 -3.4 -0.1 2.4 6.6 ....IMF 5.6 -6.3 -27.6 -12.1 0.0 0.0 0.4 ....Other official -0.4 -2.8 -2.9 -4.6 -0.7 4.3 7.9 ..Private creditors 10.9 2.2 31.7 6.8 94.1 51.2 6.5 ....Net M-L term debt flows 9.1 -0.8 16.0 3.6 46.9 47.8 16.1 ......Bonds 11.0 -0.7 15.6 -16.5 8.6 -4.0 33.6 ......Banks -1.4 0.0 0.6 20.6 38.3 51.3 -16.5 ......Other private -0.5 -0.1 -0.2 -0.5 0.0 0.5 -1.0 ....Net short-term debt flows 1.8 3.0 15.7 3.2 47.2 3.4 -9.6 Balancing item -35.7 -53.2 -84.3 -59.1 -105.5 -95.8 -81.2 Change in reserves (- = increase) -35.6 -25.4 -34.4 -55.5 -137.8 -45.2 -28.3 Memorandum items Workers' remittances 36.6 43.3 50.1 59.0 63.0 64.0 57.0 60.0 64.0 before. Stronger industrial activity, up 5.4 policy has also moved to a tightening phase, the percent year-on-year, fueled by strong external IPI tax rebate has been partially called back and demand, boosted GDP growth to 4.3 percent reserve requirements were raised. Furthermore year-on-year in the first quarter. While prospects the government has announced a modest R$7.8 are better, unemployment in the United States billion (less than 0.3% of GDP) cut in 2010 remains high (especially among the low-skilled budgeted discretionary expenditures, but there migrant population) and labor market conditions are no indications yet that the large expansionary weak. As a result, tourism and remittances, impulse of public bank credit will be withdrawn. which were down 15 percent in the first quarter of 2010 from a year earlier, are projected to The recession was relatively short-lived in Chile, remain weak ­ putting pressure both on foreign with GDP bouncing back at an annualized 6 currency earnings and the incomes of the poor. percent in the second half of 2009, as stronger domestic demand supported the manufacturing Brazil managed to navigate the crisis relatively and trade sectors. Overall, the economy well, with GDP declining by only 0.2 percent in contracted 1.5 percent in the year, with falling 2009, in part because expansionary inventories subtracting 2.4 percentage points macroeconomic policies were able to boost from GDP. As noted the earthquake in February domestic demand, contributing to rapid declines has cut sharply into activity in the first quarter, in spare capacity (see above) and tighter labor and it is unclear how quickly the economy will markets. Private consumption started the year bounce back. Prior to the earthquake, the strongly, with retail sales volumes up an recovery remained strong with retail sales and impressive 14.7 percent year-on-year by March labor market developments pointing to a strong up from 5 percent growth a year earlier. economic rebound in 2010, boosted by However, rapid expansion in domestic demand significant monetary stimulus. Reconstruction contributed to a buildup of inflationary pressures efforts are expected to offset this negative effect, that has prompted the monetary authorities to such that growth for the remainder of the year start tightening policy (see Figure B3.5). Fiscal should be relatively robust. 17 Global Economic Prospects Summer 2010 : Regional Annex In both Colombia and Peru, growth decelerated fiscal policy implemented by countries in the significantly below potential on account of much region was more muted than in other developing weaker domestic demand, a marked drawdown countries. On the supply side, unfavorable in inventories, and, in the case of Colombia, weather conditions took a toll on agricultural weak net export performance. Colombia's output in Central America, while construction exports rebounded in recent months, despite activity had also slowed markedly, undermining continued loss of market share to Venezuela, growth in selected Central American economies. while revived investor confidence and stronger Stagnant tourist sectors in many countries in the commodity prices led to a 24 percent year-on- Caribbean and Central America weakened the year surge in FDI in the first quarter of 2010. contribution of the service sector to growth. Major infrastructure projects linked to the Venezuela experienced one of the sharpest expansion of the Panama Canal helped Panama recessions in the region, contracting 3.3 percent avoid recession in 2009 despite the global in 2009, with endemic high inflation, power downturn in trade. In the Caribbean, Jamaica shortages and electricity rationing, restricted experienced one of the deepest recessions, with access to foreign currency, and an unfriendly output down an estimated 2.7 percent in 2009, policy mix towards the private sector, delaying mainly on account of a sharp compression in and weakening the recovery. Domestic demand export volumes, and a 9 percent decline in contracted sharply, down a dramatic 7.9 percent remittances. In the Dominican Republic, weak in 2009, triggering a 20 percent contraction in bank lending, relatively low fiscal spending and imports, helping net exports to contribute a revenues, high unemployment, and low exports, positive 4.6 percentage points to growth (even as tourism receipts and remittances limited growth exports declined 6.6 percent). The economy to 3.5 percent in 2009. continues to contract in the first quarter of 2010, down 5.8 percent (year-on-year) as both the oil Medium-term outlook and non-oil sectors contracted by about 5 percent. To revive the economy, the government After contracting 2.3 percent in 2009, output in devalued the official exchange rate, and the region is forecasted to expand by 4.5 percent introduced a two tier exchange rate system, with in 2010, and by nearly 4.2 percent per annum the rate set at 2.6 and 4.3 bolivars against the over the 2011-2012 period, slightly below the USD from 2.147 in January 2010, as capital average recorded in the boom period (Table flight intensified (FDI outflows amounted to B3.2). Private consumption is expected to $3.1 billion in 2009). However the currency rebound after contracting last year, supported by continued to depreciate on the unregulated the lagged effects of expansionary markets reaching record 8.05 bolivars per USD macroeconomic policies, while the contribution by early May. to growth from government spending will weaken as policy stimuli are being withdrawn Growth in the Caribbean slowed to 2 percent (Figure B3.6) -- even as 2010 is an election year while the Central American region, excluding in many countries in the region. Stronger Mexico contracted by 0.5 percent in 2009, as demand should fuel a cyclical rebound in fixed trade, tourism, FDI, and remittances were investment, but investment levels will remain affected by recession in their main economic below pre-crisis levels over the forecast horizon partners, in particular the United States and due to excess capacity. Spain. Large decline in imports, on weak private consumption and a plunge in investment, helped Reflecting the gains already made, growth in limit the negative impact of lower exports from Brazil is expected to be particularly robust this the region. High unemployment domestically year, accelerating to 6.4 percent in 2010 on together with lower remittances, played a pivotal account of strong commodity demand as well as role in weakening private consumption. the lagged effects of expansionary demand Furthermore the impact of the expansionary management policies but growth should slow 18 Global Economic Prospects Summer 2010 : Regional Annex Table B3.2 Latin America and the Caribbean forecast summary (annual percent change unless indicat ed ot herwise) Est. Fore cast 95-05 1 2007 2008 2009 2010 2011 2012 GDP at market prices (2005 USD) 2 2.9 5.4 4.1 -2.3 4.5 4.1 4.2 GDP per capit a (unit s in USD) 1.4 4.1 2.8 -3.5 3.2 2.8 3.0 P P P GDP 3 2.9 5.6 4.3 -2.0 4.5 4.1 4.2 Privat e consumpt ion 3.4 7.3 5.1 -0.6 4.7 3.8 3.9 Public consumpt ion 2.2 4.1 4.1 3.8 3.0 2.7 2.9 Fixed invest ment 3.1 11.7 13.1 -14.6 7.9 7.4 7.7 Export s, GNFS 4 6.0 5.9 2.1 -10.8 7.7 5.7 5.7 Import s, GNFS 4 6.2 13.3 10.1 -15.2 11.4 6.8 6.6 Net export s, cont ribut ion t o growt h 0.2 -1.8 -2.1 1.6 -1.0 -0.4 -0.4 Current account bal/GDP (%) -1.6 0.3 -0.8 -0.5 -1.4 -1.6 -1.7 GDP deflat or (median, LCU) 7.1 6.9 7.1 7.6 4.9 5.3 5.2 Fiscal balance/GDP (%) -3.4 -1.1 -1.0 -4.0 -2.4 -2.2 -2.3 Me mo i te ms: GDP LAC excluding Argent ina 3.0 5.2 3.9 -2.4 4.4 4.1 4.2 Cent ral America 5 3.6 3.6 2.0 -5.9 4.1 3.9 4.2 Caribbean 6 3.6 6.4 3.6 2.0 2.3 4.9 6.1 Brazil 2.4 5.7 5.1 -0.2 6.4 4.5 4.1 Mexico 3.6 3.2 1.8 -6.5 4.3 4.0 4.2 Argent ina 2.3 8.7 7.0 -1.2 4.8 3.4 4.4 Not es: 1. Growt h rat es over int ervals are compound average; growt h cont ribut ions, rat ios and t he GDP deflat or are averages. 2. GDP measured in const ant 2005 U.S. dollars. 3. GDP measured at P P P exchange rat es. 4. Export s and import s of goods and non-fact or services. 5. Cent ral America: Cost a Rica, Guat emala, Honduras, Mexico, Nicaragua, P anama, El Salvador 6. Caribbean: Belize, Dominica, Dominican Republic, Hait i, Jamaica, St . Lucia, St . Vincent and t he Grenadines Source: World Bank Figure B3.6 Fiscal stimulus withdrawal will weigh goods such as cars and electronics bounces back, on growth and will also be fueled by recovery in private change in primary balance, percent of GDP consumption. However the recovery in consumption will be to some extent curtailed by 12 10 2009 weak workers' remittances, higher taxes, administered price hikes and higher food prices 2010 8 2011 6 which will erode the purchasing power of 4 consumers. 2 0 Leading indicators suggest a strong and broad- -2 based rebound in Peru's economy. Economic -4 growth is expected to accelerate to 6.1 percent in -6 2010, on the back of stronger commodity prices, -8 -1 0 robust activity in the construction sector, A rg en tin a B ra zil C h ile C o lo m b ia Ecu ador M ex ic o P eru V e n ezu ela supportive monetary policy and robust credit Source: International Monetary Fund. growth. Nevertheless growth will be much weaker than the 9.8 percent growth recorded in 2008. over the medium term. Argentina and other commodity exporters in the Mexico's growth is projected to rebound to 4.3 region will benefit from terms of trade gains and percent in 2010, marking the fastest growth pace stronger external demand, in particular from in almost a decade, before easing in 2011 and Asia. Argentina is expanding at a solid pace, 2012. Growth in 2010 will be driven by a robust with growth fueled by very strong demand from recovery in exports, as demand for major export Brazil, which is driving the sharp recovery in 19 Global Economic Prospects Summer 2010 : Regional Annex Argentina's industrial sector, as well as by lax 2010 has increased fiscal space and will ensure a monetary and fiscal policies. The normalization continuation of the lax fiscal policy, the long(er) of agricultural production after the 2008/09 term growth impact is diminished by surging drought will also support growth. inflation and declining economy wide productivity. Furthermore, supply bottlenecks, Growth in Chile will be weaker than previously energy and water supply disruptions, anticipated as a result of the massive earthquake decelerating credit growth, and the (largely) that hit the country in February 2010. In the near unfriendly policy mix will continue to term the disruptive impact of the earthquake on undermine growth over the forecast horizon, economic activities will outweigh the positive with growth forecast to contract 2.9 percent in growth impact of the reconstruction efforts, with 2010, before returning to modest growth 1.4 growth in the first and second quarters estimated percent in 2011. With investment falling 12.4 to be 3 and 2 percentage points lower than percent in 2009 the country's capital stock is initially expected. However, from the second now significantly lower, with negative half of 2010 onwards, the positive growth impact implications for potential GDP and long term of the massive reconstruction activity should growth. predominate and growth should register 4.2 percent for the year as a whole, compared to the Growth in the Caribbean economies will be 4.7 percent projected before the earthquake. hindered by high unemployment and weak Growth will continue to accelerate over the private consumption in the United States and forecast horizon, as reconstruction efforts raise other high-income countries that will affect productive capacity. Potential GDP has been demand for tourism services, and weaken and negatively affected given the extent of delay the recovery in remittances. Higher destruction to the productive capacity, in commodity prices will affect growth in particular of the industrial base. According to commodity-importing countries in the region. central bank estimates there was a loss of 3 Growth in Dominican Republic will benefit from percent of net capital stock, which implies a the U.S. rebound, stronger external demand and negative potential GDP impact of between 1 and rising investment, while government 1.5 percent. consumption will be supported by rising revenues and multilateral support. In Jamaica the In Colombia, the growth recovery will be more recovery will remain anemic, with austerity subdued (Table B3.3), on account of a weaker measures, still-weak domestic demand, and fiscal impulse and trade difficulties related to alumina output well below potential loss of market share in Venezuela. Growth undermining the recovery. High government should accelerate moderately to 2.8 percent in borrowing on the domestic markets will crowd 2010, before accelerating further towards out the private sector, undermining the recovery potential growth into 2012. But the acceleration further. Haiti's economy is projected to recover in growth remains dependent on macroeconomic over the forecast horizon, after contracting a stimulus. dramatic 8.5 percent in 2010 due to the earthquake, boosted by reconstruction efforts Notwithstanding a strong cyclical rebound in the financed mostly by aid flows. Excluding Haiti, region, Venezuela's economy will continue to growth in the Caribbean region will accelerate contract in 2010, the only economy in the region modestly to 3.2 percent in 2010, from 2 percent besides Haiti to contract this year, as the non- in 2009. commodity tradable sectors continue to suffer from an overvalued exchange rate, unproductive Central American economies (excluding investment and low productivity in non-tradables Mexico) will also lag in the recovery on weak while potential output continues to suffer from workers' remittances from the United States, private sector underinvestment. Although the with economic growth projected at 2.7 percent in large devaluation of the currency in January 2010. In these economies the scope for recovery 20 Global Economic Prospects Summer 2010 : Regional Annex is also constrained by limited fiscal space to source of capital for public and private sectors in implement counter-cyclical policies. A recovery Latin America ($320bn or 8% of GDP). Spanish in agricultural and manufacturing exports will be banks own over 25% of bank capital in Mexico, supportive of growth in many economies in the Chile, and Peru. To date, these banks have relied region, as will growth in the service sector, mostly on local deposits rather than cross-border particularly back-office services. Improved flows for funding, which has proven to be a weather conditions and improved market access source of resilience rather than weakness during to export markets like the EU, and selected the global financial crisis.5 So far there have Asian markets will give a welcome boost to been no significant hikes in credit default swaps agricultural exports in countries like Guatemala, (CDS) for country sovereigns rated similarly as Nicaragua and Costa Rica. Meanwhile heavily indebted European countries (Colombia, manufactured goods exports will benefit from Panama), and their CDS are much lower for the stronger demand in the United States and in same rating. Should a full-scale crisis emerge in Central America. In Panama growth will Europe, growth in Latin American and the accelerate, fueled by continued enlargement of Caribbean could slow by 1.7 percent and output the Panama Canal, which will bolster the to could be more than 4 percent lower in 2012. contribution to growth from the construction and In these circumstances, countries should place a service sectors. priority on ensuring that their domestic fiscal houses are in order, both to ensure that markets As policy makers in the region begin tightening do not perceive them as lacking fiscal discipline monetary policy and interest rates rise, some (something that has not happened as yet), but currencies will see appreciation pressures, which also to ensure that they are in a position to react could adversely affect external competitiveness. counter-cyclically if needed. Furthermore higher capital inflows in response to higher interest rate differentials could lead to Alternatively poor economic performance in excess credit expansion, complicating Europe if the sovereign debt crisis unfolds could policymakers' task of combating inflation, which result in increased capital flows to successful is already rising in some of the advanced Latin American economies. This would put emerging economies. additional pressure on currencies to appreciate, hurting external competitiveness, and could lead Beyond 2010, growth in the region will likely to imposition of capital controls that may have slow as the impact of the policy stimulus is longer term negative consequences for the waning, while the inventory cycle's contribution financial systems. to growth turns negative and financial conditions remain tight. Furthermore slower (quarterly) Outside of this major risk, the remaining risks growth in the United States in the second half of for the region are largely balanced, with the most the year, and lingering high unemployment will important downside risk relating to the strength undermine growth in Mexico, Central America of the global recovery, and in particular the and the Caribbean, through trade, investment, turnaround in high-income (notably the U.S.) remittances and tourism linkages. countries. For tourism dependent economies the main downside risk is that of a sluggish recovery Risks in labor markets and incomes in high-income countries which will delay the recovery in The possibility of a disruptive resolution of the tourism revenues. real or perceived lack of fiscal sustainability of a number of high-income European (EU-5) Among upside risks, the lagged effects of very countries remains a significant risk for countries accommodative macroeconomic policies and in Latin America. Financial linkages with some delays in withdrawing these stimuli could lead to of these countries are extensive, with banks in even stronger growth, and in some cases the EU-5 countries having been an important overheating of economies. For commodity 21 Global Economic Prospects Summer 2010 : Regional Annex exporting countries, a stronger-than-expected controls. global cyclical bounce back would translate into even larger terms of trade gains and much stronger external demand adding to the tenor of the recovery. In such a scenario the risks to inflation are on the upside, complicating macroeconomic management. Strong capital inflows could also pose additional policy challenges for selected countries in the region, that could lead to further currency appreciation and reintroduction of capital Table B3.3 Latin America and the Caribbean country forecasts (annual percent change unless indicat ed ot herwise) Est. Fore cast 95-05 1 2007 2008 2009 2010 2011 2012 Arge nti n a Real GDP at market prices 2.3 8.7 7.0 -1.2 4.8 3.4 4.4 Current account bal/GDP (%) -0.2 2.8 2.4 2.6 2.4 1.9 1.4 Be l i z e Real GDP at market prices 5.6 1.2 3.8 -1.0 1.7 2.3 3.9 Current account bal/GDP (%) -12.1 -4.1 -11.2 -7.2 -8.5 -8.1 -7.4 Bol i vi a Real GDP at market prices 3.8 0.0 6.1 3.3 4.2 4.1 4.2 Current account bal/GDP (%) -3.0 12.1 11.6 3.4 3.3 3.3 3.4 Braz i l Real GDP at market prices 2.4 5.7 5.1 -0.2 6.4 4.5 4.1 Current account bal/GDP (%) -2.0 0.1 -1.7 -1.6 -2.9 -2.9 -3.0 Chile Real GDP at market prices 4.2 4.6 3.7 -1.5 4.2 5.6 5.4 Current account bal/GDP (%) -1.5 4.4 -1.5 2.6 -1.1 -1.5 -2.4 C ol ombi a Real GDP at market prices 2.4 7.5 2.4 0.4 2.8 3.7 4.2 Current account bal/GDP (%) -2.2 -2.8 -2.8 -1.8 -2.6 -2.1 -2.5 C osta Ri ca Real GDP at market prices 4.5 7.9 2.8 -1.1 3.8 4.2 4.4 Current account bal/GDP (%) -4.0 -6.3 -9.2 -2.1 -3.9 -3.8 -3.3 Domi n i ca Real GDP at market prices 1.4 5.4 3.2 1.1 1.9 3.0 3.3 Current account bal/GDP (%) -19.4 -25.0 -32.3 -32.4 -28.8 -27.2 -25.7 Domi n i can Re pu bl i c Real GDP at market prices 5.2 8.5 5.3 3.5 4.0 5.3 6.7 Current account bal/GDP (%) -0.8 -5.3 -9.7 -4.9 -6.0 -5.2 -4.7 Ecu ador Real GDP at market prices 3.2 2.5 7.2 0.4 2.2 2.3 2.6 Current account bal/GDP (%) -1.4 3.6 2.3 -1.1 -0.4 -1.2 -2.1 El S al vador Real GDP at market prices 2.7 4.7 2.5 -3.5 1.2 2.5 3.3 Current account bal/GDP (%) -2.5 -6.0 -7.6 -1.6 -2.7 -2.8 -3.4 Gu ate mal a Real GDP at market prices 3.5 6.3 3.3 0.6 2.0 2.8 3.5 Current account bal/GDP (%) -4.9 -5.2 -4.5 -0.6 -3.1 -3.8 -4.1 Gu yan a Real GDP at market prices 1.7 7.0 2.0 3.1 3.5 3.8 4.2 Current account bal/GDP (%) -9.4 -11.1 -13.2 -8.4 -10.9 -9.9 -8.0 Hon du ras Real GDP at market prices 3.8 6.3 4.0 -1.9 2.1 2.8 4.0 Current account bal/GDP (%) -6.7 -10.4 -13.2 -3.2 -5.8 -5.9 -6.1 Hai ti Real GDP at market prices 0.9 3.4 1.3 2.9 -8.5 9.6 9.1 Current account bal/GDP (%) -3.7 -5.6 -10.2 -4.8 -9.5 -6.6 -6.4 Jamai ca Real GDP at market prices 0.8 1.4 -0.9 -2.7 0.3 2.2 3.0 Current account bal/GDP (%) -5.5 -15.6 -20.0 -7.8 -9.3 -7.8 -7.2 22 Global Economic Prospects Summer 2010 : Regional Annex (annual percent change unless indicated otherwise) Est. Fore cast 95-05 1 2007 2008 2009 2010 2011 2012 Me xico Real GDP at market prices 3.6 3.2 1.8 -6.5 4.3 4.0 4.2 Current account bal/GDP (%) -1.9 -0.8 -1.5 -0.6 -0.9 -1.2 -1.4 Nicaragua Real GDP at market prices 4.1 3.1 2.8 -1.5 1.7 2.3 3.6 Current account bal/GDP (%) -20.2 -17.7 -23.8 -13.0 -18.1 -16.9 -17.3 Panama Real GDP at market prices 4.5 11.5 9.2 2.2 4.5 6.1 6.5 Current account bal/GDP (%) -5.3 -7.2 -11.5 -0.5 -8.4 -8.6 -7.2 Pe ru Real GDP at market prices 3.3 8.9 9.8 0.9 6.1 5.6 6.2 Current account bal/GDP (%) -3.3 1.4 -3.7 0.2 -0.8 -1.0 -1.9 Paraguay Real GDP at market prices 1.2 6.8 5.8 -3.8 5.1 4.4 4.7 Current account bal/GDP (%) -1.5 1.4 -2.9 -1.3 -2.3 -1.2 -0.6 St. Lucia Real GDP at market prices 2.9 1.5 0.7 -5.2 1.1 2.7 3.7 Current account bal/GDP (%) -13.6 -31.4 -31.0 -19.9 -18.1 -17.5 -17.7 St. Vince nt and the Gre nadine s Real GDP at market prices 4.2 7.7 0.9 -1.1 2.1 3.9 4.2 Current account bal/GDP (%) -18.3 -34.2 -33.8 -29.0 -30.9 -29.3 -26.8 Uruguay Real GDP at market prices 1.5 7.5 8.5 2.9 4.6 4.1 4.0 Current account bal/GDP (%) -0.9 -0.9 -4.8 0.8 -1.5 -1.4 -1.2 Ve ne z ue la, RB Real GDP at market prices 1.6 8.4 4.8 -3.3 -2.9 1.4 2.7 Current account bal/GDP (%) 7.5 7.9 11.8 2.3 7.0 5.8 4.9 Notes: 1. Growth rates over intervals are compound average; growth contributions, ratios and the GDP deflator are averages. 2. Barbados, Cuba, Grenada, Suriname are not forecast owing to data limitations. Source: World Bank 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. 23 Global Economic Prospects Summer 2010 : Regional Annex Middle East and North Africa6 -middle income oil exporters of the region, beginning in late 2009 and continuing into the Recent Developments first months of 2010 (Figure B4.1). The aggregate increase amounted to 25 percent, The Middle East and North Africa shows carrying total revenues to an annualized rate of tentative signs of recovery in 2010. $605 billion as of January 2010. This contrasts Developments in the external environment for favorably with total 2009 earnings of $530 the region have been generally favorable over billion, offering some scope for optimism the second half of 2009 and into the first months looking forward. of 2010, as the financial crisis and global recession have given way to hopes of stronger Figure B4.1 High-income oil revenues recover only recovery, led by the developing countries. But slowly changes in international financial markets and export revenues, millions USD economic growth developments have also 70,000 shifted to favor- or have placed at some 60,000 Oman Qatar disadvantage- the region's diverse set of Kuwait 50,000 UAE countries grouped into high-income and Saudi Arabia developing oil exporting countries, and the more 40,000 diversified economies. From 2008 through 2010, 30,000 regional government policies shaped the outlines 20,000 of domestic absorption growth--depending on 10,000 the availability of fiscal space and inflation 0 headroomand the manner in which these Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 measures will be modified or withdrawn over the Source: World Bank data course of 2010 through 2012 will play a key part in the outlook. Crude oil production cutbacks over 2009 and into 2010, initiated in an effort to reduce massive Just as during the decline of regional growth into global stocks, were substantial and economically the global recession of 2009 differed damaging for the high-income oil exporters, substantially by country, so recovery from the pushing oil-sector GDP well into decline. crisis will differ. This will depend on the set of Generous expenditure of reserves was used as initial conditions, and the intensity of effects offsets to support the non-oil economy from flowing though the transmission channelsthe fallout. Crude oil output declines for the group price of oil and the balance of payments, ranged from 8 to 9 percent from year-earlier reflecting impacts on trade, remittances and FDI levels by mid-2009, registering a 7.8 percent cut flows. But serious headwinds for both oil- and for the year (Figure B4.2). From mid-2009, diversified exporters have cropped up in the production declines eased, and crude oil output early months of 2010. recouped to stand 2 percent below January 2009 levels by January 2010. Having achieved this Hydrocarbon revenues increase. As the intensity modicum of production management (given of global recession began to ease in latter 2009, traditional OPEC-quota non-compliance), and upward pressure on oil prices emerged, with stronger GDP gains in developing emanating from (i) market expectations of countries, oil prices continued to move well eventual return of strong fuels demand among above $70/bbl in early 2010 from $50/bbl as of developing countries, and (ii) substantial spring 2009. cutbacks in OPEC crude oil production to restrict growth of global supply and set a floor Indeed, after five consecutive quarters of under prices. Together these developments decline, world oil demand moved into positive yielded a gradual increase in oil and gas territory during the final quarter of 2009, led by revenues for the high-income- as well as low-and strong demand in China--up 1.3mb/d or 17 24 Global Economic Prospects Summer 2010 : Regional Annex percent (year-on-year). But global crude oil place among the highly-indebted countries of the supplies are ample. OPEC's spare capacity has Southern Euro Zone, as well as in Germany, increased to 6.5mb/d following the recent France, Italy, the United Kingdom and others. cutbacks, roughly the level as of 2002 when oil These adjustments will work to slow near-term prices registered $25/bbl. economic activity. Business and consumer sentiment have fallen quickly, while the euro has For the diversified economies, there are signs of depreciated sharply against the dollar, with incipient revival in goods exports, being echoed negative implications for European demand and to a lesser degree in a return of industrial exports from the Middle East and North Africa's production to stronger growth (Figure B4.2). in 2010 and 2011. At this writing, the potential Inflation has eased to more moderate rates in for financial contagion remains high within these economies, helping to support monetary Europe, and between Europe and its neighboring measures designed to shelter financial systems developing regions, notably Europe and Central from distress in the context of crisis. And despite Asia, the Middle East and North Africa and Sub- the global downturn, reductions in key Saharan Africa. remittance-, tourism and FDI flows to the developing region may be considered moderate The euro's decline is a mixed development for with respect to how far such flows could have the Middle East and North Africa. For oil fallen, given the deterioration in economic exporters, where receipts are denominated in conditions in source countries. But for oil-and dollars, but where the bulk of procurement of diversified exporters alike, economic headwinds capital and consumer goods is transacted with have cropped up during the late spring months of Europe in euros, exporters enjoy a boost to the 2010. purchasing power of exports. For the diversified group, the euro's decline carries less dramatic Figure B4.2 Oil and non-oil production recovering effects, as both foreign receipts and outlays tend to be euro-based (Figure B4.3). industrial production, ch% (3mma, year-on-year) 10 Figure B4.3 Oil has held its value in Euro terms 5 0 -5 Non-oil exporters Oil exporters -10 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 Source: World Bank Headwinds near. Events in Europe over April-to -June 2010, grounded in the sovereign debt Source: World Bank difficulties of Greece, Spain and Portugal, and the consequent EU/IMF Stabilization Package for the Euro Area, have dampened several of the Middle East and North Africa suffered less emerging trends of importance for the Middle disruption than most developing regions in the East and North Africa. Oil prices plummeted crisis. As background to recent developments, it from $85/bbl in the first week of May 2010 to should be noted thatcontrasted with other $70/bbl during the third week of the month, on developing regions which may carry tighter concerns of potentially reduced global oil integration with global financial markets; and for demand. And the economic outlook for Europe those with trade linkages that may be more has also dimmed, as austerity measures are in 25 Global Economic Prospects Summer 2010 : Regional Annex extensivethe adverse effects of the global Remittances-, and especially flows of foreign crisis and recession on the Middle East and direct investment (FDI) from the group to the North Africa have been moderate. A loss of 1 developing regionwhich had become an point of growth during 2009 (from GDP gains of import source of financing and for 4.2 percent for the developing region in 2008 to investmentslowed, removing an important 3.2 percent in 2009), contrasts favorably with the factor for growth in the developing region. 9.5 point decline in growth for Europe and Table B4.1 (below) highlights a number of Central Asia; a 6.4 point falloff for Latin dramatic developments for the region during America and the Caribbean, and 4 point drop for 2009 and 2010. Growth of per-capita income for developing countries in aggregate. the developing region declined by almost a percentage point in 2009, increasing just 1.5 Within the broader region, the high-income Gulf percent, following two consecutive years of Cooperation Council economies were hardest hit stronger gains. Household spending grew at a by crisis, due to the huge terms of trade shock slower pace in 2009 and is likely to remain associated with the plunge in oil prices, and a subdued through 2010 (in historic comparison), financial shock which destabilized overextended suppressed by potential job losses, reduced domestic banks, in part leading to a bursting of government support, lower confidence levels and real estate bubbles. The debt problems of Dubai, a decline in worker remittances. Trade United Arab Emirates, first brought the performance has reflected the decline in possibility of sovereign default` in the region hydrocarbons and goods exports, with some onto the global radar screen. Equity markets recovery expected in 2010. across the oil exporters plunged at the outset of crisis, and recovery has been exceptionally Against this background, the current account sluggish, underscoring continuing market surplus for the developing countries of the uncertainties regarding the financial region shifted to deficit of 1.4 percent of GDP in underpinnings of these economies (Figure B4.4). 2009, a sharp correction from peaks nearer 10 percent in 2007. But the regional surplus is Figure B4.4 Equity markets still down anticipated to improve moderately in 2010 to 0.4 percent of GDP on higher oil revenues. Public index USD based equity markets, January 2008 =100 consumption in support of domestic demand 140 picked-up to nearly 11 percent growth in 2009, 120 in turn, pushing the fiscal balance from surplus UAE Qatar 100 Egypt Morocco of 1.6 percent of GDP in 2008 to deficit of 5 percent. And fiscal shortfalls are anticipated to 80 continue through 2012 (Figure B4.5). 60 40 Figure B4.5 Government deficits up 20 1/2/2008 5/2/2008 9/2/2008 1/2/2009 5/2/2009 9/2/2009 1/2/2010 5/2/2010 fiscal balance as a share of GDP, percent Source: Morgan-Stanley 6 MENA 4 Oil exporters Diversified A decline in the group`s GDP growth in 2009 to 2 0.2 percent from 5.3 percent in the preceding 0 year, tied to loss of oil revenues and scale-back -2 in oil production, carried confidence across the -4 broader region lower, and set the tenor for -6 weaker growth. The high-income oil exporter`s -8 current account surplus plummeted to 10 percent 2008 2009 2010 of GDP from 30 percent in 2008, while the fiscal surplus narrowed by 20 percentage points. Source: World Bank 26 Global Economic Prospects Summer 2010 : Regional Annex Table B4.1 Middle East and North Africa forecast summary (annual percent change unless indicat ed ot herwise) Est. Fore cast 95-05 1 2007 2008 2009 2010 2011 2012 2 GDP at market prices (2005 USD) 4.4 5.3 4.2 3.2 4.0 4.3 4.5 GDP per capita (units in USD) 2.7 3.5 2.4 1.5 2.3 2.6 2.8 3 PPP GDP 4.5 5.6 4.1 3.1 4.0 4.3 4.4 Privat e consumpt ion 4.2 6.1 5.4 3.6 4.1 4.7 5.2 Public consumption 3.3 4.3 7.8 10.7 8.5 6.5 5.7 Fixed investment 6.5 14.3 15.3 4.5 4.6 4.4 4.5 Exports, GNFS 4 4.9 4.9 0.6 -12.3 2.0 4.3 5.1 Imports, GNFS 4 5.7 12.2 13.8 -7.3 4.4 5.7 6.5 Net exports, contribution to growt h -0.2 -2.1 -4.6 -1.7 -0.9 -0.7 -0.7 Current account bal/GDP (%) 2.9 10.5 7.5 -1.4 0.4 -0.3 -1.1 GDP deflator (median, LCU) 5.2 7.3 17.5 6.7 6.6 3.4 4.3 Fiscal balance/GDP (%) -1.5 0.0 1.6 -5.0 -4.6 -4.1 -3.1 Me mo ite ms: GDP MENA Geographic Region 5 4.0 4.7 4.7 1.9 3.9 4.3 4.4 Select ed GCC Countries 6 3.6 3.9 5.3 0.2 3.7 4.2 4.4 Egypt 4.4 7.1 7.2 4.7 5.0 5.5 5.7 Iran 4.8 6.2 2.3 1.8 3.0 3.2 3.2 Algeria 4.0 3.0 2.4 2.1 4.6 4.1 4.3 Notes: 1. Growth rates over intervals are compound average; growt h cont ribut ions, ratios and the GDP deflator are averages. 2. GDP measured in const ant 2005 U.S. dollars. 3. GDP measured at PPP exchange rates. 4. Export s and imports of goods and non-fact or services. 5. Geographic region includes high-income countries: Bahrain, Kuwait, Oman and Saudi Arabia. 6. Selected GCC Countries: Bahrain, Kuwait , Oman and Saudi Arabia. Source: World Bank Low-and-middle-income oil exporters' revenues (3.1 percent, y/y), and that in Iran to 1.6 percent halved. Algeria, Iran, Syria and Yemen in the same period. collectively suffered a halving of hydrocarbon Economic developments in Iraq have been fast revenues in 2009, as exports declined 40 percent moving in the last months. The country's fiscal from $212 billion in 2008 to $125 billion in position deteriorated substantially in 2009 to 22 2009. On this massive drop in revenue, the percent of GDP, a result of the sharp falloff in current account surplus of the group fell from 18 oil prices affecting revenues, from modest percent to 3 percent of GDP. For countries surplus positions during 2007-08. At the same highly reliant on oil revenues to (i) finance time, GDP growth fell from a 9.5 percent jump longer term infrastructure and housing projects in 2008 to 4.6 percent for 2009 tied once more to (Algeria); (ii) subsidize current consumer the oil price slump. A new two-year Stand-By outlays (Iran), or (iii) build and maintain the Arrangement with the IMF, as well as a Fiscal capacity for exporting larger quantities of LNG Sustainability Development Policy Loan from (Yemen), the virtual collapse of incomes carried the World Bank were approved in February a toll on economic growth. But much stronger 2010. activity in non-oil sectors (Algeria) helped to soften the overall impact of the downturn. The diversified economies hit hard by the Though public spending in these countries is recession in Europe. The more diversified typically pro-cyclical, in the current crisis, both economies of the region, including Egypt, Algeria and Iran used monetary easing and fiscal Jordan, Lebanon, Morocco and Tunisia, were stimulus to encourage economic growth. As is directly affected by the recession in key export the case for the high-income exporters, oil markets in the European Union, and to a lesser revenues for the group have been on the rise of degree, the United States, carrying exports to late, as oil prices firmed to near $80/bbl in early sizeable decline over the course of 2009. Signs 2010 and hydrocarbons production in Algeria of some recovery are now apparent in the early breached to positive growth as of February 2010 months of 2010. Industrial production has largely followed the decline in exports. Though 27 Global Economic Prospects Summer 2010 : Regional Annex these (largely) oil-importing economies enjoyed Industrial production for the group moved from reprieve on import bills, with a substantial gains of 10 percent in early 2008 (y/y) to trough improvement in terms of trade, they are also at nil in spring 2009, though with much diversity suffering severe indirect consequences of the across countries (Figure B4.7). financial crisis and recession. These include There are early signs of recovery, which have reduced remittance inflows from Europe and the carried the group`s merchandise exports to high-income oil exporters, a cutback in FDI growth of 18 percent by January 2010 (y/y), with flows from the latter group, and tourist arrivals advances for Egypt and Morocco bettering these diminished by the crisis. figures at 45 percent and 23 percent respectively during February. Production has not yet Fiscal policy for the diversified economies is responded to the new impetus, as business may expected to continue to be expansionary, as be using existing inventories to meet demand, a countries use various measures to stimulate sign of caution under current global demand. But these will carry adverse circumstances. consequences for fiscal balances--for some economies, including Lebanon, Jordan and Table B4.2 highlights recent developments and Egypt, for which fiscal space is limitedand the estimates for important ancillary income and fiscal position could become a longer-term financial flows to the region, including worker growth constraint. remittance receipts, tourism revenues and net FDI inflows. For the diversified group, these are Among the more prominent exporters of the especially important, as additions to household group, Egypt`s merchandise exports peaked at incomes (remittances), employment, income and more-than 100 percent growth (y/y) during infrastructure growth (tourism), and investment summer 2008 (the effects of oil exports coming as well as external financing (FDI). on stream), before slipping to decline of 30 percent a year hence (Figure B4.6). In broader For the developing MENA region, worker fashion, the sharp falloff of import demand in remittance inflows reached an all time high in Europe yielded a growth path for the aggregate 2008 at $33.8 billion representing 4 percent of of diversified exporters which peaked near 70 regional GDP. Egypt was the largest recipient of percent in summer 2008- fell to nil by year-end- remittances at $8.4 billion, with the importance before recovery set in. Production in the of such flows highest for Lebanon at close to 20 diversified economies was directly affected by percent of GDP. Given deterioration of the downturn in exports, as well as by softening employment conditions in the European Union, domestic demand, in turn adversely affected by and notably among the high-income oil several important indirect channels of the crisis. exporters, remittance flows declined 6 percent in Figure B4.6 Rebound in exports is slowing Figure B4.7 Modest industrial production growth among diversified exporters export values, bn USD, ch% (3mma, year-on-year) industrial production, ch% (3mma, year-on-year) 125 Diversified exporters 15 Diversified exporters 100 Egypt Egypt Morocco 75 Morocco 10 Tunisia Tunisia Jordan 50 Jordan 5 25 Lebanon 0 0 -25 -5 -50 -10 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 Source: World Bank Source: World Bank 28 Global Economic Prospects Summer 2010 : Regional Annex Table B4.2: Remittances, Tourism revenues and For- 2009 to $31.8 billion, or to 3.8 percent of eign Direct Investment, selected MENA countries regional GDP. And estimates for 2010 look less- than promising due to continuing uncertainties in the European economy. The knock-on effects of such decline are especially important for consumer spending and private investment in the diversified economies of the Middle East and North Africa. Tourism revenues also established all-time highs in the region during 2008 at $35.1 billion, or 4.2 percent of GDP. Highest in Egypt, at near $11 billion during 2008, and of greater importance for Jordan at 14.4 percent of GDP, tourism represents an important source of job growth, with many "multiplier" effects in local communities. Analysis from the United Nation's World Tourism Organization and the World Travel and Tourism Council, indicate that tourism was exceptionally hard hit by the global slump after a strong showing in 2008. During the former year, global tourist arrivals grew 2 percent, but were sharply affected during the second half of the year by the financial crisis, declining 1.5 percent over the like period of 2007. The Middle East however, saw strongest gains in international arrivals, moving up to 55 million persons in 2008 or 18 percent growth. North Africa also saw tourist arrivals increase to Table B4.3 Capital flows to MENA region $ billions 2003 2004 2005 2006 2007 2008 2009e 2010f 2011f 2012f Financial flows: Net private and official inflows 12.2 10.1 16.4 12.2 26.1 18.6 22.0 Net private inflows (equity+debt) 14.3 13.6 19.4 23.1 24.8 20.1 19.3 30.1 36.2 36.1 ..Net private inflows (% GDP) 3.1 2.5 3.2 3.2 2.9 1.9 1.8 2.5 2.8 2.6 Net equity inflows 7.7 7.5 16.2 25.9 22.9 26.5 18.8 ..Net FDI inflows 7.5 6.8 13.8 24.9 25.0 26.1 18.7 ..Net portfolio equity inflows 0.2 0.7 2.4 1.0 -2.1 0.4 0.1 Net debt flows 4.5 2.6 0.2 -13.7 3.2 -7.9 3.2 ..Official creditors -2.1 -3.5 -3.0 -10.9 1.3 -1.5 2.7 ....World Bank -0.3 -0.6 0.0 -0.8 1.0 -0.3 0.9 ....IMF -0.6 -0.5 -0.7 -0.2 -0.1 -0.1 -0.1 ....Other official -1.2 -2.4 -2.3 -9.9 0.4 -1.1 1.9 ..Private creditors 6.6 6.1 3.2 -2.8 1.9 -6.4 0.5 ....Net M-L term debt flows 0.9 2.7 2.9 -1.7 -0.8 -2.9 -3.9 ......Bonds 0.7 2.8 2.5 0.8 0.7 -0.8 -1.3 ......Banks -0.4 -0.1 1.2 -1.4 -0.4 -0.8 -1.7 ......Other private 0.6 0.0 -0.8 -1.1 -1.1 -1.3 -0.9 ....Net short-term debt flows 5.7 3.4 0.3 -1.1 2.7 -3.5 4.4 Balancing item -11.3 -33.4 -54.6 -42.8 -57.6 -63.9 -9.1 Change in reserves (- = increase) -23.1 -14.6 -21.7 -38.6 -43.6 -43.2 -14.5 Memorandum items Workers' remittances 20.4 23.0 25.0 26.0 32.0 35.0 32.0 33.0 34.0 29 Global Economic Prospects Summer 2010 : Regional Annex 17.2 million in 2008, a gain of 5 percent. hydrocarbon revenues, merchandise exports, and the beginnings of spillover to crude oil- output Travel conditions in 2009 and early 2010 and industrial production growth. But export deteriorated sharply, and the World Tourism markets remains constrained by the unwinding Organization estimates that global arrivals of sovereign debt in Europe; and oil exporters' declined by a heady 4 percent in the year. shipments will face headwinds of large crude oil Tourism revenue estimates for the Middle East stocks among OECD countries, amounting to and North Africa in 2009 suggest a downturn of near record "days of consumption". Against this about $3 billion, a decline of 8.5 percent, background, and following GDP gains of 3.2 especially affecting Egypt, Jordan and Morocco. percent in 2009, growth in the developing region The falloff in tourist income from Europe and is anticipated to pick-up to 4 percent in 2010, the OECD has been offset to a degree by before a movement toward potential growth sets increased arrivals from within the region, a trend in more forcefully, with GDP registering 4.3 in development over the last years. Still, receipts percent growth in 2011 and 4.5 percent by 2010 are likely to decline further in 2010 against a less (Figure B4.8).7 -than hospitable global environment for growth, notably in Europe. Figure B4.8 Output to slowly pick up strength Given the adverse developments in economies that serve as the main source for FDI flows to the real GDP growth, percent developing region, such flows are estimated to 6 have declined sharply in 2009, by 32 percent to 5 $19.2 billion in the year. Recent developments in 4 Europe and the high-income oil exports suggest 2009 that FDI may continue its decline through 2010. 3 2010 The implications of the decline in FDI are 2 2011 2012 important for the region, as the dynamism of private investment growth of the last years, 1 largely spurred by FDI, is waning in 2009 and 0 2010. Moreover, as fiscal positions deteriorate MENA Oil Exporters Diversified into 2010, FDI as an external financing source will be more keenly missed. Source: World Bank Capital flows to the developing economies of the GDP gains in 2010 should be supported by an Middle East and North Africa, outside of foreign improvement in the contribution of net exports direct investment, are quite small both in dollar from drag of 1.7 points of GDP in 2009 to terms and as a proportion of GDP. subtraction of less-than a point, and a pickup in Developments during 2009 reflect the downturn household spending contribution by three-tenths in FDI noted, with a $3.2 billion pickup in net of a point to 2.2 points of growth. These debt flows, comprised of $2.7 billion from elements should be sufficient to offset a falloff in official sources and $0.5 billion from private government consumption and investment creditors. Short term flows shifted to net inflow spending as it becomes clearer to authorities that of $4.4 billion in the year from outflow of $3.5 fiscal deficits will need to be reined-in. Indeed, billion in 2008 (Table B4.3). in 2010 fiscal balances for the region are likely to deteriorate from surplus of 1.6 percent of Near-term Outlook GDP in 2008 to deficit of 5 percent. The issue is Despite gathering headwinds in the international more exigent for the diversified group, with environment, the Middle East and North African deficits pegged nearer 9 percent of GDP over economy looks poised for recovery from the 2009-2010. lows of the global financial crisis and recession. The high-income oil exporters seem better There are signs of recent increases in placed to lead recovery for the broader MENA 30 Global Economic Prospects Summer 2010 : Regional Annex region, as oil prices have traced an upward trend likely. Some of the developing oil exporters will and financial conditions in the group are benefit from recovery in the high-income stabilizing. As noted earlier, world oil demand countries of the region, as exports to the group picked-up during the final quarter of 2009, fully constitute a large proportion of total outbound concentrated in the developing countries, with shipments. And those which rely on remittances U.S. demand improving in the early months of from the GCC, notably Yemen, will also gain 2010, carrying global fuels demand growth to 2 from recovery. percent (y/y). Against this background, selected economies may see GDP growth improve by a Recovery for the diversified group of exporters strong 3.4 points in 2010 to 3.7 percent, firming will hinge largely on developments in Europe thereafter to 4.2-and 4.4 percent over 2011-2012 and the high-income exporters. Whether on stronger oil demand- increasing hydrocarbons economic recovery in the EU will be dampened output and resumed public spending on by the sovereign debt crisis or sufficiently infrastructure and social development. ameliorated by the EU/IMF Stabilization Package remains an open question. Growth for Within the developing region, the low-and the diversified group is anticipated to ease from middle-income oil exporters are likely to see 4.9 percent in 2009 to 4.4 percent in 2010 with GDP gains firm to 3.8 percent in 2010 from 2.1 growth in Morocco viewed to slow to 3 percent percent in 2009, as oil production and export from 5.3 percent, as agricultural output volumes pick-up gradually while domestic normalizes this year following a 2009 bumper demand gains some momentum. In step with crop. Assuming a return to stronger growth in world oil demand, a further extension of growth Europe and a revival in the region's ancillary near 3.8 percent over 2011 to 2012 appears income and investment flows, the diversified Table B4.4 Middle East and North Africa forecast summary (annual percent change unless indicat ed ot herwise) Est. Fore cast 1 95-05 2007 2008 2009 2010 2011 2012 Al ge ri a Real GDP at market prices 4.0 3.0 2.4 2.1 4.6 4.1 4.3 Current account bal/GDP (%) 8.2 22.5 19.9 0.4 2.7 2.3 1.9 Egypt, Arab Re p. Real GDP at market prices 4.4 7.1 7.2 4.7 5.0 5.5 5.7 Current account bal/GDP (%) 0.4 4.3 0.5 -2.4 -1.7 -1.8 -1.9 Iran , Isl am i c Re p. Real GDP at market prices 4.8 6.2 2.3 1.8 3.0 3.2 3.2 Current account bal/GDP (%) 7.3 17.9 14.2 2.1 5.4 4.1 2.6 Jordan Real GDP at market prices 4.7 8.0 7.9 2.8 3.9 4.5 5.0 Current account bal/GDP (%) 0.0 -8.8 -5.3 -2.8 -6.1 -7.3 -8.4 Le banon Real GDP at market prices 3.2 7.5 9.3 8.0 6.0 6.0 6.0 Current account bal/GDP (%) -20.0 -11.3 -21.0 -18.5 -18.3 -17.9 -17.5 Morocco Real GDP at market prices 4.4 2.7 5.6 5.3 3.0 4.4 5.0 Current account bal/GDP (%) 0.7 -0.1 -5.8 -4.9 -6.0 -6.5 -6.5 Syri an Arab Re pu bl i c Real GDP at market prices 3.2 4.2 5.2 3.0 4.0 5.5 5.5 Current account bal/GDP (%) 2.9 1.1 1.2 -2.9 -2.1 -3.7 -5.3 Tun i si a Real GDP at market prices 5.0 6.3 4.5 3.1 4.0 5.0 5.5 Current account bal/GDP (%) -3.0 -2.6 -4.3 -2.9 -2.5 -2.6 -2.6 Ye me n , Re p. Real GDP at market prices 4.9 3.0 3.6 3.8 7.9 4.4 4.2 Current account bal/GDP (%) 3.1 -6.8 -5.6 -8.2 -1.6 -1.0 -1.6 Not es: 1. Growt h rat es over int ervals are compound average; growt h cont ribut ions, rat ios and t he GDP deflat or are averages. 2. Djibout i, Iraq, Libya, West Bank and Gaza are not forecast owing t o dat a limit at ions. Source: World Bank World Bank forecasts are frequently updated based on new inform ation and changing (global) circum stances. Consequently, projections presented here m ay differ from those contained in other Bank docum ents, even if basic assessm ents of countries' prospects do not significantly differ at any given m om ent in tim e. 31 Global Economic Prospects Summer 2010 : Regional Annex economies' growth should firm to 5.1 percent in prices over 2010-2012, coming to affect the 2011, and further to 5.5 percent by 2012. region's oil exporters external surpluses, fiscal positions and GDP growth. Finally, Current account positions are seen to improve in developments on the domestic front in the 2010 for the low-and middle-income oil region, including whether the series of reforms exporters, on firming oil prices and increasing begun in countries such as Egypt, Tunisia and output; widening to 3.7 percent of GDP from 0.7 Morocco are stymied by the global crisis, or percent in 2009, before easing (on fairly steady move ahead despite more adverse external oil prices) to 1.4 percent of GDP by 2012. conditions should be considered. Deficits are viewed to persist for the diversified group, but to inch down from minus 3.8 percent of GDP in 2008 to minus 5.1 percent by 2012 (Figure B4.9). Risks Risks for the region are clustered into three groups, and lie in large measure to the downside. Uncertainty regarding the financial environment Figure B4.9 Current account balances to deterio- rate current account balance as a share of GDP, percent 20 15 Low-and middle-income oil exporters 10 MENA region 5 0 -5 Diversified exporters -10 2005 2006 2007 2008 2009 2010 2011 2012 Source: World Bank in Europe, and whether contagion across countries, and a shift from financial-difficulties to impacts on real-side activity occur, remains the principal risk for the broader region-- carrying substantial effects on the breadth and tenor of export markets. Particularly for the high -income oil exporters (GCC) the problems of banking systems, within a still fragile environment of weak balance sheets and of note, the inability to generate new loans is a continuing concern. Aligned with the risk of slower European (and global) growth is that of a weaker-than anticipated profile for global oil 32 Global Economic Prospects Summer 2010 : Regional Annex South Asia Figure B5.1 Remittances have held up in South Asia Recent developments Remittances inflows declined in all regions in level-terms, except for South Asia Official remittances inflows for 2009 (est.), annual percent change South Asia's GDP on a calendar year basis8 10 began to recover in the second quarter of 2009, 5 and GDP is projected to expand 7.6 percent in 0 -5 volume terms in 2010--posting the second -10 fastest pace of growth among developing regions -15 after East Asia and the Pacific (Table B5.1, line -20 2). This compares with a relatively modest 0.7 -25 percentage point deceleration from 2008 to 2009, Europe and Latin Middle East Sub-Saharan East Asia and South Asia Central Asia America and and North Africa Pacific Caribbean Africa when GDP expanded 5.4 percent (down from 6.1 Source: www.worldbank.org/prospects/migrationandremittances and 9.2 percent in 2008 and 2007, respectively). In contrast, GDP in the rest of the developing Growth in remittances to individual countries world slower by 4.6 percentage points in 2009, and indeed contracted by 6.2 percentage points, Growth of remittances to South Asia is slowing when China is excluded. (See the South Asia Percent* Economic Update at http:// 80 go.worldbank.org/6BU9N0AZM0 for more 60 detail). Nepal 40 Bangladesh Pakistan 20 Although the global financial crisis has had 0 important consequences for economic activity in Oct07 Apr08 Oct08 Apr09 Oct09 Apr10 South Asia, that impact was much less 20 pronounced than in all other developing regions *Year -on-year g rowth of 3-month moving-a verages East Asia. Regional economic activity benefitted Sources: Cen tral Ba nks of the respe cti ve countries from limited exposures to the sub-prime markets and global banking systems--as the region's financial markets are less integrated than months of 2010. elsewhere--and relatively resilient capital inflows, which increased as a share of GDP-- As elsewhere in the global economy, the fall-off from 3.6 percent in 2008 to 3.9 percent in 2009. in activity during 2008 and 2009 (relative to pre- Fiscal and monetary stimulus (especially in India crisis 2007) was concentrated in the financial and, to a lesser extent, in Bangladesh and Sri and industrial sectors (Figure B5.2), with service Lanka), supported activity as well, along with and agricultural sectors less directly affected. the region's relative "niche" of trade in services, Capital inflows to the region more than halved and in agricultural products--which were less from $134 billion in 2007 to $68 billion in 2009 impacted by the crisis than at the global level. (Table B5.3), with net international bank and Remittances also proved to be a key source of bond lending almost completely drying up. strength for the region during the global Among countries within the region, the macro- downturn. Reflecting the diversity of its migrant impacts of the crisis was more severe for those destinations and a rapid and large build-up in the with weaker fundamentals and greater external stock of its migrants abroad in recent years, vulnerabilities at the onset, including Pakistan, remittances inflows to the region expanded 4.9 Maldives and Sri Lanka with significant internal percent in 2009--even as they declined by an and external imbalances. Ongoing conflict and estimated 9 percent in the rest of the developing post-conflict issues also hampered economic world (Figure B5.1). And, while they are activity in Afghanistan, Pakistan, Sri Lanka and growing less quickly, remittances to the region Nepal. have remained positive over the first four 33 Global Economic Prospects Summer 2010 : Regional Annex Figure B5.2 Industrial production growth is eas- manufacturing sector accelerated to 10.8 percent, ing thus fully accounting for the pick-up in factor p g g cost output to 7.4 percent in FY2009/10 from 6.7 Annualized growth of industrial production, 6m/6m 40 percent in FY2008/09. 30 20 Growth has been much less dynamic in Pakistan, partly reflecting the fiscal and balance of 10 payment imbalances that the country carried into 0 the downturn, which limited the scope for 10 expansionary fiscal and monetary policies. This 20 situation was compounded by security issues, 2003M01 2004M01 2005M01 2006M01 2007M01 2008M01 2009M01 2010M01 South Asia India Pakistan which placed additional pressures on the fiscal Source: World Bank deficit and hampered both domestic and foreign investor confidence. Economic activity has also been undermined by structural issues, notably The rebound in activity beginning in the second persistent electricity shortages. As a quarter of 2009 and into 2010 (Figure B5.2) consequence, real GDP is estimated to have initially reflected rebound factors, including a eased to 3 percent in FY2010 (ending June 2010) recovery in external demand and in consumer from 3.7 percent growth in FY2009. and investor confidence. This was followed by a rebound in capital inflows and trade activity. In In Bangladesh, recovery has also been restrained addition, the end to a severe drought in by structural bottlenecks--notably energy Afghanistan and improving macroeconomic supply--particularly in the manufacturing stabilization in the Maldives, Pakistan, and Sri sector. Overall, FY2010 (ending June 2010) Lanka--supported by IMF Stand-By Facilities GDP growth is projected to have slowed to 5.5 reached in 2009 and late 2008--also contributed percent from 5.7 percent in FY2009--a fourth to the uptick in activity. consecutive year of slowing GDP growth. Supply-side constraints dampened private sector The revival of economic activity through the investment and undermined exports (export first half of 2010 can be observed in the fiscal processing zones are not immune to electricity year accounts of several countries. In India, blackouts), which have more than neutralized an growth accelerated from 5.1 percent in expansionary fiscal policy and relatively strong FY2008/09 (April 2008 to March 2009) to 7.7 household consumption growth--the latter percent FY2009/10, with a relatively strong having been supported by continued growth of contribution from consumer and government remittances, and an increase in non-rice demand reflecting expansionary fiscal and agricultural output (and hence rural incomes). As monetary policies.9 (Table B5.4 presents GDP at a result, capacity utilization remains low and factor cost and market prices for India). Despite industrial production growth weak. lower interest rates and rising business confidence, investment grew by half a A potentially worrisome fiscal position has percentage point less quickly than overall GDP. developed in South Asia, as government deficits Net exports and stock building also supported in the region have more than doubled since growth. A poor monsoon--the worst in nearly 2007, and at 8.8 percent of GDP are higher than forty years, with rainfall reaching only 78 in any other developing region. While debt-to- percent of the long-term trend--translated into GDP ratios in South Asia remain much lower very weak 0.2 percent growth in agricultural than in high-income Europe, bringing fiscal output. The services sector continues to be an policy back onto a sustainable path must be a important engine of growth, but the 8.5 percent priority for the authorities in the region. expansion in FY2009/10 was down slightly from Recognizing this, the Government of India has the rate of FY2008/09. Growth in the announced a medium-term adjustment plan to 34 Global Economic Prospects Summer 2010 : Regional Annex Table B5.1 South Asia forecast summary (annual percent change unless indicat ed ot herwise) Est. Fore cast 95-05 1 2007 2008 2009 2010 2011 2012 GDP at market prices (2005 USD) 2,6 6.0 8.5 4.9 7.1 7.5 8.0 7.7 GDP in Calendar year basis 3 6.1 9.2 6.1 5.4 7.6 7.9 7.6 GDP per capit a (unit s in USD) 4.1 6.8 3.4 5.6 6.1 6.6 6.4 PPP GDP 4 6.0 8.5 4.8 7.1 7.4 8.0 7.7 P rivat e consumpt ion 4.7 6.0 5.7 4.4 5.9 6.9 6.6 P ublic consumpt ion 5.0 3.8 18.2 7.8 8.5 6.3 5.4 Fixed invest ment 8.0 12.7 4.0 6.0 10.6 11.1 10.8 Export s, GNFS 5 11.3 7.4 16.0 -4.5 18.3 12.2 12.4 Import s, GNFS 5 10.6 7.0 19.0 -7.2 16.5 11.5 11.8 Net export s, cont ribution to growt h -0.2 -0.3 -1.5 1.0 -0.4 -0.4 -0.4 Current account bal/GDP (%) -0.7 -1.4 -3.1 -2.3 -2.3 -2.2 -2.0 GDP deflat or (median, LCU) 5.9 7.7 9.3 14.1 8.0 7.0 6.4 Fiscal balance/GDP (%) -7.4 -4.4 -8.4 -8.8 -8.0 -7.0 -6.2 6 Me m o i te ms: GDP at marke t pri ce s Sout h Asia excluding India 4.5 6.0 3.9 4.3 4.1 4.8 5.2 India 6.4 9.1 5.1 7.7 8.2 8.7 8.2 at fact or cost 7 9.2 6.7 7.4 8.5 9.0 8.5 Pakist an 4.1 5.7 2.0 3.7 3.0 4.0 4.5 Bangladesh 5.3 6.4 6.2 5.7 5.5 5.8 6.1 Notes: 1. Growt h rat es over int ervals are compound average; growth cont ribut ions, rat ios and t he GDP deflat or are averages. 2. GDP measured in constant 2005 U.S. dollars. 3. GDP figures are present ed in calendar years (CY) based on quart erly hist ory for India. For Bangladesh, Nepal and P akist an, CY dat a is calculated t aking the average growt h over the t wo fiscal year periods t o provide an approximat ion of CY activit y. 4. GDP measured at P PP exchange rates. 5. Exports and import s of goods and non-fact or services. 6. Nat ional income and product account data refer to fiscal years (FY) for the Sout h Asian countries wit h the except ion of Sri Lanka, which reports in calendar year (CY). T he 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 report ing pract ices, Bangladesh, Nepal and P akist an report FY2007/08 data in CY2008, while India reports FY2007/08 in CY2007. 7. GDP at fact or cost is customarily report ed in India and t ends to be higher t han GDP at market prices. GDP at fact or cost excludes indirect taxes and includes subsidies (while GDP at market prices includes indirect t axes and T able B5.4 and excludes subsidies). See t he Sout h Asia Economic Updat e (htt p://go.worldbank.org/6BU9N0AZM0) for more det ail. Source: World Bank bring the debt-to-GDP ratio down to 68 percent from 3.7 percent in FY2001/02 to 18.1 percent of GDP at most by FY2014/15 from 77 percent of GDP in FY2008/09, and in Bangladesh it rose in FY2009/10. Part of the recent fiscal from 1.3 percent to 9.6 percent over the same deterioration reflects the costs of subsidies put in period. The increase was less pronounced place in the wake of the food and fuel crisis, but elsewhere in the region, as in India, subsidies not yet removed. In Pakistan the share jumped increased from 11.3 percent of government expenditures in FY2002/03 to 14.4 percent in Table B5.2 General government fiscal balance as FY2008/09 and in the Maldives, subsidies percent share of GDP (including transfers) rose from 1.6 percent to 5.2 2006 2007 2008 2009 2010 percent, respectively, in 2002 and 2008 (calendar South Asia 5.1 4.2 8.4 8.8 8.0 years).10 India 5.5 4.2 8.8 9.5 8.5 Pakistan 3.7 4.0 7.1 5.1 5.1 While Central Banks in the region responded to Bangladesh 3.3 3.1 6.1 4.0 5.5 the crisis by relaxing monetary policy, the period Nepal 1.5 1.3 4.6 5.4 6.5 of monetary easing appears to be coming to an Sril Lanka 7.0 6.9 7.5 9.8 7.5 end, with central banks having either started to Other developing regions raise rates or signaling their intentions to do so East Asia & Pacific 0.6 0.4 0.7 2.9 2.6 in the near-term. In India, the rebound in Europe & Central Asia 3.0 2.1 0.3 6.3 4.0 international commodity prices (food and fuel) Latin America & Caribbean 1.4 1.2 0.3 3.8 2.3 MiidleEast & North Africa 0.8 0.2 1.7 3.3 4.1 and the poor monsoon have contributed to higher SubSaharan Africa 1.5 0.8 0.5 5.8 4.8 inflationary pressures into early-2010. However, capital inflows increased in the first half of 2010 Source: World Bank. 35 Global Economic Prospects Summer 2010 : Regional Annex as well, putting upward pressure on the currency reflecting to a considerable degree increases in and leading the Reserve Bank of India to seek a food prices. Monetary policy has been very balance between raising interest rates to limit accommodating, witnessed negative real interest inflation, and keeping them low to limit capital rates. inflows and currency appreciation. In contrast, prices continue to fall in In Bangladesh, Pakistan and Sri Lanka, inflation Afghanistan, but the pace of deflation eased in is on the rise, partly reflecting one-off effects late-2009, buoyed by firming of housing and from higher food and fuel prices. In Bangladesh food prices. The monetary targets agreed with and Pakistan, the acceleration in inflation comes the IMF for money circulation growth were despite sluggish growth, and Central Banks in overshot--but given continued deflation, no both countries face the unwelcome prospect of corresponding policy action is anticipated. boosting interest rates even as growth disappoints. Indeed, Bangladesh Bank increased Capital inflows into the region have picked up the Cash Reserve Requirement from 5.0 percent sharply from recent lows. Approximately $60 to 5.5 percent in May and revised the billion in capital (including portfolio and FDI) FY2008/2009 GDP growth estimate down to 5.7 flowed into India in (April 2009 to March 2010), percent from 5.9 percent. Elevated international up from $7 billion in FY08. On a calendar year commodity prices--notably fuel, and in basis, net inflows in 2009 rose less markedly, particular food prices--have also contributed to with much of the uptick expected in 2010, when higher inflationary pressures in some of the net private capital flows are projected to reach smaller economies (including Bhutan and the $66.5 billion for the region compared with $61.9 Maldives). Even in Afghanistan, a period of billion posted in 2009 (Table B5.3). falling prices appears to be coming to an end. In Nepal, broad money growth has also been very rapid, due in large part to strong growth in remittances. Correspondingly, inflation has been in the double digits for the last two years--again Table B5.3 Net capital flows to South Asia $ billions 2003 2004 2005 2006 2007 2008 2009e 2010f 2011f 2012f Financial flows: Net private and official inflows 14.3 21.0 28.2 61.4 134.2 62.7 73.8 Net private inflows (equity+debt) 18.5 21.4 25.3 57.9 129.5 53.2 61.9 66.5 74.2 87.2 ..Net private inflows (% GDP) 2.4 2.4 2.5 5.0 9.0 3.6 3.9 3.4 3.2 3.4 Net equity inflows 13.4 16.6 23.3 36.4 68.4 32.9 66.0 ..Net FDI inflows 5.4 7.6 10.9 26.0 32.3 48.7 41.4 ..Net portfolio equity inflows 8.0 9.0 12.4 10.4 36.1 -15.8 24.6 Net debt flows 0.9 4.4 4.9 25.0 65.8 29.8 7.8 ..Official creditors -4.2 -0.4 2.9 3.5 4.7 9.5 11.9 ....World Bank -2.3 2.3 2.3 2.0 2.0 1.4 2.4 ....IMF -0.1 -0.3 0.0 -0.1 -0.1 3.2 3.7 ....Other official -1.8 -2.4 0.6 1.6 2.8 4.9 5.8 ..Private creditors 5.1 4.8 2.0 21.5 61.1 20.3 -4.1 ....Net M-L term debt flows 3.1 4.1 -0.3 19.8 31.0 12.7 -3.6 ......Bonds -3.7 3.9 -2.8 6.4 10.4 1.7 0.4 ......Banks 6.8 0.5 2.6 13.4 20.4 10.9 -4.1 ......Other private 0.0 -0.3 -0.1 0.0 0.2 0.1 0.1 ....Net short-term debt flows 2.0 0.7 2.3 1.7 30.1 7.6 -0.5 Balancing item 10.1 7.6 -6.6 -3.1 -12.8 -41.7 -15.0 Change in reserves (- = increase) -36.9 -27.6 -6.8 -41.8 -101.1 26.4 -20.8 Memorandum items Workers' remittances 30.4 28.7 33.9 43.0 54.0 72.0 75.0 79.0 83.0 36 Global Economic Prospects Summer 2010 : Regional Annex Outlook suggest that the region should not face any serious financing challenges Regional GDP growth is projected to rebound to 7.6 percent in 2010 (calendar year basis), up Regional growth is projected to accelerate from 5.4 percent in CY 2009. GDP in India further in CY 2011 to 7.9 percent before (about 80 percent of the region's output) is moderating somewhat to 7.6 percent in CY expected to increase by 8.3 percent in CY 2010, 2012. This firming partly reflects a strengthening up from 5.7 percent in CY 2009 and average 8.4 of the recovery in Pakistan, Sri Lanka and percent in CY 2011 through CY 2012 (Table Maldives, where gains have been made in B5.4). Regional growth excluding India, is reducing significant macroeconomic imbalances. projected to expand by 4.1 percent in 2010 Regional growth will also be supported by (slightly less quickly than in the rest of the stronger external demand from high-income developing world excluding India and China), countries--which should bolster regional exports and close to 5 percent for the remainder of the and capital inflows. With relatively strong forecast period. growth prospects, South Asia is expected to draw significant FDI inflows (a rising share of The pick-up in South Asia's output in 2010 those to developing countries), which will reflects a projected rise in the contribution to bolster investment and trade activity. An growth of private consumption and investment, enhanced pace of fiscal consolidation and buoyed by improving consumer and business withdrawal of monetary stimulus measures are sentiment and easing credit conditions. The expected to be the major drivers of the projected government sector is expected to add to overall moderation of growth rates in 2012. demand only marginally, as the stimulus measures begin to unwind, while the With ongoing fiscal consolidation efforts, contribution from net exports should be slightly government deficits are nevertheless projected to positive, as rapid consumer and business demand remain high at 6.2 percent of regional GDP in cause imports to grow nearly as quickly as 2012. Especially with markets' current focus on exports. fiscal sustainability issues, these high deficits and associated repayments will be of growing The recovery in capital inflows already visible in concern (interest payments currently represent monthly data is projected to continue, with total 22 percent of government expenditures in the inflows to the region reaching close to $74.2 region).11 billion in 2010 and $87.2 billion in 2011 and 2012, respectively--although as a share of GDP The moderation of economic growth in 2011 and they are projected to diminish slightly to 3.2 2012, a tightening of credit conditions, stable oil percent in 2011 before firming back to a share of price, along with expectations of a good 3.4 percent in 2012. While more than 33 percent Monsoon in 2010 (the India Meteorological higher than in 2009, flows will remain one-third Department recently projected that the upcoming below their peak 2007 level. Robust growth in monsoon will be normal), suggest that FDI inflows (attracted by relatively strong inflationary pressures should diminish over the growth prospects) are projected to more than coming year. offset a projected fall-off in portfolio inflows (2009 inflows were inflated by the return of Risks stakes that fled the region during the massive outflows of late-2008). Remittances to the region The main risk facing the global economy at this are also expected to strengthen as economic stage, comes from the possibility that the debt activity in donor countries improves. Increased sustainability issues in high-income Europe foreign currency flows from remittances and cause countries in the region to default or impose international capital sources, together with the a major restructuring of debt. Steps so far to region's reduced current account balance, guarantee the short-term solvency of these 37 Global Economic Prospects Summer 2010 : Regional Annex countries have calmed markets, but issues Figure B5.3 Net incurrence of government li- concerning the political (and economic) abilities feasibility of taking the steps necessary to bring this debt under control remain unresolved. in %share of GDP in 2008 (*=2007) 14 Moreover, many banks in the high-income world 12 carry large exposures to debt in these highly- indebted countries. A major default or 10 Domestic restructuring could inflict serious damage on 8 Foreign their balance sheets, with potentially large 6 repercussions on the global financial system-- 4 and such an event would also likely cause a significant increase in risk aversion resulting in 2 higher international interest rates, and 0 uncertainty about fiscal policy could cause risk Maldives Sri Lanka* Bangladesh India Nepal premia to rise. Source: World Bank, GDF Finance database April Further, a prolonged period of heightened 2010 uncertainty could translate into weaker-than- borrowers. projected external demand. Under such a scenario, the estimated total impact in South Outcomes in South Asia will also be sensitive to Asia is for as much as a 2.5 percent cumulative other external conditions, notably remittance reduction in GDP growth between 2010 and flows and international commodity prices. 2012 relative to the forecast presented. (See Should the recovery in high-income countries-- main text, alternative scenarios). Notably, trade notably Europe--stall, sustained high impacts in South Asia would likely be smaller unemployment rates in migrant-destination than in other developing regions--given that countries could lead to a reduction in the stock about 5.7 percent of total exports are with the at- of migrants abroad and a decline in remittance risk high-income European countries (compared flows that are a critical source of income for with 10 percent and 19.3 percent in Europe and countries in South Asia. Similarly, a spike in fuel Central Asia and Middle East and North Arica, or food prices could undermine real incomes, respectively). stymieing progress in reducing poverty. Failure to bring regional fiscal policy back onto On the upside, South Asia might benefit from a a sustainable path would likely exacerbate these larger than projected influx of foreign capital effects further. Here, policy should focus on inflows. While inflows provide significant broadening the revenue base, reining in benefits that are supportive of growth, countries subsidies, and gaining greater efficiency in such as India--which are attracting substantial outlays, in part by focusing expenditure on and rising shares of total capital inflows to projects that alleviate longstanding bottlenecks. developing countries due to their relatively Even in the absence of a high-income crisis, strong growth performance and prospects--face countries in South Asia will face increased some associated risks. Large and sudden inflows competition for global capital and rising can stoke inflationary pressures and contribute to borrowing costs. In this regard, the recourse that asset-price bubbles while creating challenges for countries in the region have had to domestic monetary policy management. borrowing is welcome, because it reduces foreign currency risk associated with international borrowing (Figure B5.3). However, increased sovereign borrowing on domestic markets also has its costs; in particular, it may hamper growth by crowding out private-sector 38 Global Economic Prospects Summer 2010 : Regional Annex Table B5.4 South Asia country forecasts (annual percent change unless indicated otherwise) Est. Fore cast 95-05 2 2007 2008 2009 2010 2011 2012 3 C al e ndar ye ar basi s Banglade sh Real GDP at market prices 5.4 6.3 5.9 5.6 5.7 6.0 6.1 Current account bal/GDP (%) -0.6 1.2 1.2 2.9 1.7 1.5 1.5 India Real GDP at market prices 6.5 9.9 6.4 5.7 8.3 8.6 8.2 Memo: Real GDP at fact or cost 5 - 9.5 7.4 6.7 8.6 8.9 8.5 Current account bal/GDP (%) -0.5 -0.9 -2.3 -2.3 -2.3 -2.2 -2.1 Ne pal Real GDP at market prices 4.0 4.4 5.0 3.8 3.5 4.1 4.2 Current account bal/GDP (%) -3.5 -1.1 3.0 4.0 -1.9 0.0 -0.1 Pakistan Real GDP at market prices 4.2 3.8 2.9 3.3 3.5 4.2 4.5 Current account bal/GDP (%) -1.1 -5.5 -10.1 -5.4 -3.6 -3.8 -3.9 Sri Lanka Real GDP at market prices 4.5 6.8 6.0 3.5 5.8 5.7 5.9 Current account bal/GDP (%) -3.2 -4.6 -9.5 -0.5 -2.8 -3.3 -3.5 Fi scal ye ar basi s 4 Banglade sh Real GDP at market prices 5.3 6.4 6.2 5.7 5.5 5.8 6.1 Current account bal/GDP (%) -0.7 1.4 0.9 2.9 1.9 1.6 1.5 India Real GDP at market prices 6.4 9.1 5.1 7.7 8.2 8.7 8.2 Memo: Real GDP at factor cost 5 - 9.2 6.7 7.4 8.5 9.0 8.5 Current account bal/GDP (%) -0.4 -1.4 -2.4 -2.4 -2.4 -2.3 -2.1 Ne pal Real GDP at market prices 4.1 3.3 5.3 4.7 3.0 4.0 4.2 Current account bal/GDP (%) -0.9 -0.1 2.9 4.1 -2.0 0.0 -0.1 Pakistan Real GDP at market prices 4.1 5.7 2.0 3.7 3.0 4.0 4.5 Current account bal/GDP (%) -0.7 -5.8 -9.7 -5.6 -3.8 -4.0 -3.9 Not es: 1. Afghanist an, Bhut an, Maldives are not forecast owing t o dat a limitations. 2. Growt h rates over int ervals are compound average; growt h cont ributions, ratios and the GDP deflat or are averages. 3. GDP figures are present ed in calendar years (CY) based on quarterly history for India. For Bangladesh, Nepal and Pakist an, CY dat a is calculated t aking t he average growt h over the t wo fiscal year periods to provide an approximat ion of CY act ivit y. 4. National income and product account data refer to fiscal years (FY) for t he South Asian countries wit h the except ion of Sri Lanka, which report s in calendar year (CY). T he fiscal year runs from July 1 through June 30 in Bangladesh and Pakist an, from July 16 through July 15 in Nepal, and April 1 through March 31 in India. Due t o report ing practices, Bangladesh, Nepal and Pakistan report FY2007/08 data in CY2008, while India reports FY2007/08 in CY2007. 5. GDP at fact or cost excludes indirect t axes and includes subsidies, (while GDP at market prices includes indirect taxes and excludes subsidies). Source: World Bank World Bank forecasts are frequently updated based on new inform ation and changing (global) circum stances. Consequently, projections presented here m ay differ from those contained in other Bank docum ents, even if basic assessm ents of countries' prospects do not significantly differ at any given m om ent in tim e. 39 Global Economic Prospects Summer 2010 : Regional Annex Sub-Saharan Africa the value of exports, which fell 45 percent between August 2008 and May 2009 has been recovering rapidly, posting extremely high Recent developments annualized monthly growth rates (Figure B6.1). While export volumes have recovered to within Countries in Sub-Saharan Africa have weathered 5 percent of their August 2008 levels, lower the global crisis better than expected, and better commodity prices mean that, the value of than in previous, milder global economic exports remains only 68 percent of its August slowdowns. In part, this good performance value. reflects the nature of the global downturn, which was concentrated in consumer durables and Figure B6.1 Export growth has boomed investment goods, relatively small sectors in 200 Dollar value of Sub-Saharan African exports, 3m/3m annualized gorwth rate most African economies. The limited extent of financial integration of the region also 150 diminished the size of the initial shock. Perhaps 100 as important, improved macroeconomic fundamentals meant that fiscal policy could react 50 counter-cyclically in many cases in contrast with 0 the past when it often reacted pro-cyclically. Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 -50 Overall, GDP growth in the region decelerated to -100 1.6 percent in 2009, from 5 percent in 2008. Source: World Bank. Excluding South Africa, activity was even more resilient, with GDP growth easing to 3.7 percent from 5.8 percent. Resilience in low-income and In South Africa, the region's largest and most fragile states was also bolstered by a step-up in integrated economy growth strengthened official financial assistance, particularly among significantly, starting with the final quarter of countries emerging from conflict. On average, 2009, when output expanded an annualized 3.2 GDP in low-income countries grew by 3.9 percent, with growth accelerating further in the percent in 2009, about 1.5 percentage points first quarter of 2010 to 4.6 percent (saar). The slower than the rate of growth recorded in the turnaround was strongly correlated with the boom period. The more globally integrated recovery in external demand, resurgence in middle-income economies were among the worst capital inflows and a more generalized revival in affected by the recession, with growth falling investors' interest in emerging markets. Strong from 4.9 percent to 1 percent. Excluding South trade and financial linkages with the global Africa, the deceleration was more moderate, economy helped boost the recovery, just as they from 6 percent to 3.6 percent. And, large oil were responsible for the contraction in the first exporting countries have proven a lot more half of the year. So far the recovery in domestic resilient than initially thought, with growth expenditure in South Africa has been modest; in boosted mainly by non-oil sectors. Many particular household consumption increased only countries in the region benefitted from 1.4 percent (saar) in the fourth quarter, after five disinflationary pressures, on account of lower consecutive quarters of contraction. Going food and fuel prices, and weaker demand, with forward, as employment rises and the lagged the median inflation for the region down to low impact of lower interest rates comes through we single digits in the first months of 2010. expect domestic expenditure growth should recover more strongly. Although high-frequency data for Sub-Saharan Africa are sparse, the region appears to be Other South African Customs Union (SACU) staging a robust recovery, in large part because member countries are experiencing lagged of the strong cyclical rebound in external effects of the global economic downturn. Their demand and stronger commodity prices. And, revenues from SACU have fallen as imports into 40 Global Economic Prospects Summer 2010 : Regional Annex the common external tariff area shrank in 2009. Inflationary pressures in the region have been Overpayments by SACU in 2009 (based on over subsiding in most economies, as food price -optimistic projections for trade growth) have inflation is retreating, and as currencies have triggered automatic repayments into the SACU appreciated (limiting the increase in prices of revenue pool, thus hampering their ability to use imported goods). Despite the fillip that this fiscal stimulus to bolster growth. Overall, South provides to real incomes, domestic demand Africa projects that the transfers under the remains relatively weak in most economies. As SACU revenue sharing agreement will drop of April 2010 the median monthly inflation rate from 27.9 billion rand in 2009/2010 to only 12.9 in the region had declined to 4.7 percent, down billion rand in 2010/2011. In the case of the two from 8 percent in April 2009 (Figure B6.3). countries most dependent on SACU revenues, Nevertheless these lower inflation rates follow a Swaziland and Lesotho, the reduction in SACU period of double-digit inflation in many transfers is equivalent to a revenue loss of 13.3 countries, that has significantly reduced real percent of GDP and 20.4 percent of GDP incomes in the previous years and led to respectively in 2010/11, diminishing growth by increased poverty incidence. Over the last few an estimated 1 and 3 percent respectively in years the prices of staples in several domestic 2010. markets have increased significantly and have become much more volatile, posing a significant Figure B6.2 The shape of the recovery varies threat to both food security and nutrition in the among different groups region. 10 8 Figure B6.3 Median inflation in Sub-Saharan Africa has moderated 6 14 Median annual inflation, percent change 4 12 2 Oil exporters 10 South Africa 8 0 Low-income 6 -2 Oil-importing middle-income countries, excl. South Africa 4 -4 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2 Source: World Bank. 0 Growth in major oil exporters in the region has Source: World Bank. surprised to the upside. Nigeria recorded a modest acceleration in growth to 5.6 percent in 2009, and continued to expand at a robust pace The global crisis has eroded the fiscal space for into the first quarter of 2010, supported by many economies in the region, with the fiscal strong growth in agriculture, wholesale, retail balance turning from surplus of close to 1 trade, and services. Angola managed to expand percent of GDP in 2008 to a deficit of more than by close to 2 percent last year, buoyed by strong 5.5 percent of GDP, with the bulk of the performance in the non-oil sectors, after a double deterioration occurring in oil exporting and digit expansion the previous year. Growth was middle income countries, notably South Africa. undermined, however, by a decline in oil The deterioration in fiscal balance in low-income production, cutbacks in government investment countries was muted, with the budget gap and weak private consumption, as well as large inching up to 4.3 percent of GDP, its highest government payment arrears to domestic level since 2000. In oil­importing middle- suppliers. income countries outside of South Africa the government balances deteriorated by nearly 4.3 41 Global Economic Prospects Summer 2010 : Regional Annex percentage points to 6 percent of GDP in 2009 affected than expected by the recessions in high- relative to the previous year. income countries so far. However, ODA is already lagging donor commitments, including Current account balances deteriorated markedly commitments to double aid to Africa in 2005-10. in Sub-Saharan Africa in 2009, turning from a Furthermore ODA is declining as a share of 0.4 percent surplus in 2008, to a deficit of 2.5 recipient GDP, and based on past behavior percent of GDP. The deterioration was more (Dang and others, 2009) ODA flows could fall marked in countries with stronger trade ties to sharply in the years to come as high-income the global economy, and oil exporters in countries cut back on their own government particular, where current account balances spending, affecting most heavily low income deteriorated by 8 percentage points of GDP as countries and fragile economies. Remittances are oil prices declined and demand for oil was also expected to see a subdued recovery due to affected by the global recession. Current account continued unemployment and spare capacity in balances also deteriorated in oil ­importing high-income source countries. middle-income countries outside of South Africa, by more-than 5 percentage points of Capital flows to Sub-Saharan Africa are less GDP to a deficit of 6.2 percent of GDP. In the ample than to other developing regions, and they case of oil importers, their current account recovered in 2009 mostly on a return of portfolio deficits registered an improvement of 2 percent inflows to South Africa (Table B6.1). The of GDP, while low-income countries also saw decline in FDI was somewhat less sharp than mild improvements in their current account of expected, in part because reduced FDI from high 1.2 percentage points to a deficit of 9.2 percent -income countries was met by stronger South- of GDP. South FDI. Excluding South Africa, FDI inflows declined only 3.6 percent in 2009, much less Remittances (flat for Africa in 2009), and than the decline in developing countries of more official aid flows (ODA to developing countries than 40 percent, supported by FDI flows into declined a relatively small 2.2 percent) were less resource sectors. In particular energy-oriented Table B6.1 Net capital flows to Sub-Saharan Africa $ billions 2003 2004 2005 2006 2007 2008 2009e 2010f 2011f 2012f Financial flows: Net private and official inflows 14.2 22.9 33.4 42.3 52.7 34.4 45.0 Net private inflows (equity+debt) 12.7 20.6 34.5 44.8 50.3 29.4 36.0 37.1 45.2 55.8 ..Net private inflows (% GDP) 2.9 3.8 5.4 6.0 5.9 3.0 4.0 3.6 3.8 4.2 Net equity inflows 13.5 16.6 26.7 37.5 38.1 23.8 37.7 ..Net FDI inflows 12.8 10.0 18.5 20.7 27.9 33.1 28.3 ..Net portfolio equity inflows 0.7 6.7 8.1 16.8 10.1 -9.3 9.4 Net debt flows 0.7 6.3 6.7 4.8 14.6 10.6 7.3 ..Official creditors 1.5 2.3 -1.1 -2.5 2.4 5.0 9.0 ....World Bank 2.2 2.5 2.4 2.0 2.3 1.8 3.0 ....IMF 0.0 -0.1 -0.4 -0.1 0.1 0.7 2.3 ....Other official -0.7 -0.1 -3.1 -4.4 0.0 2.5 3.7 ..Private creditors -0.8 4.0 7.8 7.3 12.2 5.6 -1.7 ....Net M-L term debt flows 0.9 2.7 4.8 -2.1 8.1 0.9 -0.2 ......Bonds 0.4 0.6 1.3 0.3 6.7 -0.7 1.7 ......Banks 1.2 2.4 3.8 -1.7 2.1 1.7 -1.5 ......Other private -0.7 -0.3 -0.3 -0.7 -0.7 -0.1 -0.4 ....Net short-term debt flows -1.7 1.3 3.0 9.4 4.1 4.7 -1.5 Balancing item -6.8 -11.7 -44.0 -46.9 -47.7 -51.2 -44.6 Change in reserves (- = increase) -3.5 -21.7 -20.0 -32.4 -28.8 -8.6 9.1 Memorandum items Workers' remittances 6.0 8.0 9.4 13.0 19.0 21.0 21.0 22.0 23.0 42 Global Economic Prospects Summer 2010 : Regional Annex FDI was less affected, as many companies with some extent by donor-funded infrastructure expertise in energy exploration still have strong spending in the low-income countries, where cash positions, while falling prices of developing growth is expected to accelerate by nearly 1 -country energy assets raised investment percentage point to 4.8 percent. Strong demand attractiveness for minerals from Asia will ensure continued investment in copper, iron, manganese and Encouragingly, foreign investors' interest in the uranium mines in mineral rich countries. But, region has returned swiftly after the crisis, persistently high unemployment in high-income attested by the decline in sovereign spreads to countries will have a negative impact on pre-crisis levels, the successful issuance of the workers' remittances and tourism limiting the first international bond by Senegal in December strength of the recovery in countries dependent 2009, a successful debt exchange by Seychelles on these two sources of income. Growth will in early 2010, and a return to equity markets in remain largely below potential over the forecast the region, although the recovery in equity prices horizon, leaving relatively large output gaps has been more subdued than in other regions. across the region. Job creation will remain anemic and insufficient to absorb a large number Medium-term outlook of new entrants into the labor market, while excess capacity and higher capital costs will Growth in the Sub-Saharan Africa region is keep investment below its pre-crisis level. projected to rebound to 4.5 percent this year and strengthen further to 5.1 and 5.4 percent in 2011 South Africa's economy is projected to expand and 2012 (see Table B6.2). Initially, the recovery 3.1 percent this year. The recovery in private is expected to be driven by a cyclical rebound in consumption is relatively subdued, weakened by external demand and fixed investment, while the persistently high unemployment, high levels of shift in the inventory cycle will also make indebtedness, and strict credit rules applied by marked contributions to growth in some banks, notwithstanding a recovery in wealth as countries. Over time, domestic demand will equity prices have recouped most of their losses. increasingly hold sway. Due to limited and The lagged benefits from the countercyclical rapidly deteriorating fiscal space, Sub-Saharan fiscal policy already enacted will be countered African countries will have to withdraw fiscal by the cutbacks in expenditure as the stimuli more rapidly than warranted by the speed government seeks to bring the fiscal deficit and strength of the recovery. Idiosyncratic down from 6.7 percent of GDP in the fiscal year factors such as weather patterns, inadequate 2009/2010 close to the 3 percent of GDP target. infrastructure, socio-political tensions will The economy will benefit from increased continue to influence growth developments in tourism activity from the month-long Football the region. Despite the expected further World Cup hosted by South Africa as strengthening of growth, spare capacity and expenditure related to the Soccer World Cup is unemployment will continue to characterize the projected to boost South African GDP by around economies of the region in 2012. 0.5 percent during 2010. But preparations for the FIFA matches will also carry longer term The recovery is expected to be broad-based, but benefits for the countryfrom the new and strength will vary markedly across countries. improved international airports; expanded and Middle-income countries that are more refurbished highways and modern public integrated with the world economy and oil transportation systemsreducing many exporting countries are projected to enjoy a infrastructural bottlenecks. However, job stronger recovery. Growth in oil-importing creation will remain disappointing, but there middle-income countries outside South Africa should be some cyclical recovery as output should arebound (see Figure B6.2) from a 1.8 recovers (albeit with a lag). Growth will remain percent contraction in 2009 to 4.4 percent below potential over the forecasting horizon, growth in 2010. Investment will be buoyed to which suggests significant spare capacity in the 43 Global Economic Prospects Summer 2010 : Regional Annex economy in the medium term. and as the government is expected to resume arrears payments to domestic suppliers. Stronger GDP in large oil exporting countries is expected oil prices and higher export volumes will ensure to accelerate in 2010 to 5.7 percent, fueled by a large improvement in the current account stronger oil prices and increased external balances of oil exporting countries in 2010, with demand for oil, as well as renewed investor current account surpluses averaging 4.7 percent interest in mineral rich countries. Nigeria's over the forecast horizon. growth is forecast to remain robust, as performance in the oil sector improves, Donor-funded investments in infrastructure benefiting from the relative calm in the Delta should alleviate somewhat the electricity region. Performance in the non-oil sectors is also shortages in East Africa. Growth performance expected to remain strong, especially in remains dependent on weather patterns which agriculture, wholesale, retail trade, and services, affect both agricultural output and the as the benefits of improved macroeconomic manufacturing sector via hydroelectricity supply. policies have increased the growth potential in Electricity shortages will continue to plague the non-oil economy. Lower oil revenues, a less economic growth over the forecasting horizon. expansionary fiscal policy, and to some extent Improved road infrastructure will increase political uncertainty surrounding the 2011 market access and give a welcome boost to the elections are likely to cause growth to decelerate agricultural and manufacturing sectors. Kenya is slightly in that year. Inadequate infrastructure projected to grow more rapidly this year, as the will continue to act as a deterrent to faster political and economic situation normalizes economic growth over the medium term. further. Tourism is also expected to fare better, Angola's growth is projected to pick-up sharply notwithstanding still weak labor markets in high- to close to 7 percent in 2010, on improved income countries, as it is coming off a low base. performance in both the oil and non-oil sectors, Normalization in rainfall will further support Table B6.2 Summary of projections Sub-Saharan Africa fore cast summary (annual percent change unless indicated ot herwise) Est. Fore cast 95-05 1 2007 2008 2009 2010 2011 2012 GDP at market prices (2005 USD) 2 4.0 6.5 5.0 1.6 4.5 5.1 5.4 GDP per capita (units in USD) 1.4 4.0 3.0 -0.3 2.5 3.0 3.7 PPP GDP 3 -1.6 -4.4 -10.1 3.6 4.2 3.0 3.9 Private consumption 2.0 7.6 3.3 1.1 3.7 4.5 4.7 Public consumpt ion 5.1 5.7 7.4 5.3 5.2 5.0 4.8 Fixed investment 6.7 16.7 12.0 5.0 6.8 7.6 8.2 Export s, GNFS 4 4.8 3.7 4.7 -6.9 9.3 6.5 6.7 Import s, GNFS 4 6.2 11.1 6.5 -4.2 9.8 7.4 7.4 Net export s, cont ribut ion to growt h -0.1 -2.6 -0.8 -0.8 -0.6 -0.6 -0.6 Current account bal/GDP (%) -2.9 -0.4 0.4 -2.5 -1.5 -1.9 -2.2 GDP deflat or (median, LCU) 7.3 7.0 9.2 7.7 4.9 5.1 5.2 Fiscal balance/GDP (%) -2.1 0.5 0.7 -5.6 -4.8 -3.3 -2.3 Me mo i te ms: GDP SSA excluding Sout h Africa 4.5 7.1 5.8 3.7 5.3 6.0 6.1 Oil exporters 5 4.6 8.0 6.2 4.1 5.7 5.8 6.1 CFA countries 6 4.4 4.4 4.1 2.6 3.7 4.1 4.6 South Africa 3.3 5.5 3.7 -1.8 3.1 3.4 3.9 Nigeria 4.6 6.4 5.3 5.6 6.1 5.7 6.4 Kenya 2.9 7.0 1.7 2.6 4.0 4.9 5.4 Not es: 1. Growth rat es over intervals are compound average; growt h contribut ions, rat ios and the GDP deflator are averages. 2. GDP measured in constant 2005 U.S. dollars. 3. GDP measured at PPP exchange rat es. 4. Exports and imports of goods and non-fact or services. 5. Oil Export ers: Angola, Cote d Ivoire, Cameroon, Congo, Rep., Gabon, Nigeria, Sudan, Chad, Congo, Dem. Rep. 6. CFA Count ries: Benin, Burkina Faso, Central African Republic, Cot e d Ivoire, Cameroon, Congo, Rep., Gabon, Equatorial Guinea, Mali, Niger, Senegal, Chad, T ogo Source: World Bank 44 Global Economic Prospects Summer 2010 : Regional Annex economic activity in the agricultural sector, Sub-Saharan exporters are the third most helping to bring down food prices and allowing exposed in the developing world (Figure B6.4). an increase in hydroelectricity generation. Furthermore there is an increased risk of a buildup in inflationary pressures in CFA franc Diamond producing countries are likely to see a zone countries as their currencies depreciate in strong bounce-back in activity in 2010, after line with the euro, making imported goods, and poor performance in 2009, as demand for in particular oil more expensive. Conversely the diamonds has recovered sharply. Botswana and depreciation of the CFA franc will help bolster Namibia are projected to grow 5.8 percent and external competitiveness of member countries 4.4 percent this year, while other mineral rich that maintain a peg to the euro. economies will also benefit from robust external demand, particularly from Asia. The risk of contagion to the African countries' banking sectors of a banking crisis in the Euro After a relatively modest recovery in 2010, Area is not negligible given that European notwithstanding substantial monetary easing, banks, and French banks in particular, are still Ghana's economic growth should receive a predominant in CFA franc zone countries. These strong boost in 2011 when oil production is banks have so far not shown signs of stress, as expected to commence boosting both exports they are locally incorporated, and rely on local and industrial output. deposits. Furthermore, they play a limited financial intermediation role in the local In the CFA countries, growth performance will economies, investing most of their funds in vary dramatically. Growth in Côte d'Ivoire will government debt. Faced with losses from their weaken, with GDP gains easing to 3 percent in exposure to Greece and other EU countries with 2010, largely on account of energy shortages high debt levels, European banks could repatriate coupled with political uncertainty. These will capital from their subsidiaries in CFA franc zone affect investment, and possibly donor support, countries. and delay the normalization of the economic situation in the country. Growth in Gabon and The direct impact of the sovereign debt crisis in Cameroon will also remain subdued this year, as Europe on South African banks is unlikely to be oil production is expected to decline in significant, as their exposure is very limited, Cameroon and rise only modestly in Gabon. estimated at 0.2 percent of their total assets. Burkina Faso, the Republic of Congo, Niger, and There are risks of second round effects through Senegal, will see growth accelerate in 2010, and trade flows and heightened risk aversion among Niger will enjoy a surge in growth in 2011 on investors, as about 30 percent of South Africa's increased mineral output. Growth will inch up exports are destined for European markets and as marginally in Benin, the Central Africa Republic, Mali, and Togo. For CFA franc zone Figure B6.4 Countries with large trade links to countries a weaker currency, in line with a EU-5 weaker euro, will help improve external competitiveness and increase producer prices for S h a re of So u th e r n Eu r o Z on e in to ta l e x po rts agricultural commodity exports (notably cotton), p e rce n t sh a re of tot al e x ports in 2 0 0 8 but also lead to higher costs of imported goods. 20 1 9 .3 15 Risks 1 0 .0 10 8 .8 The possibility of a major disruption emanating 5 .7 4 .5 from concerns over sovereign debt sustainability 5 3 .7 in Europe is real. Many African countries have 0 close trade ties with economies at risk. Twenty E AP L AC Asia SS A E CA M E NA or more percent of the exports of Cape Verde and Cameroon go to the EU-5 countries. Overall, Source: COMTRADE; World Bank. 45 Global Economic Prospects Summer 2010 : Regional Annex the cost of credit could rise significantly for the Another challenge facing policy makers in the private sector. region is that of stimulating creation of productive employment at an adequate rate given Outside of an aggravation of the crisis in Europe, that 7-10 million young Africans enter the labor risks for the region are largely balanced, with the force each year. The prospects of a jobless most important downside risk relating to the recovery in high-income countries increases this strength and sustainability of the global pressure as less migrants find jobs in migration recovery, and in particular that of high-income destination countries with the possibility even countries. The untimely withdrawal of fiscal and that some migrants return to their country of monetary stimuli could weaken the recovery in origin, pushing unemployment higher and the short-term, although as discussed in the main potentially fueling social tensions. text a slow withdrawal of fiscal and monetary stimulus in high-income countries would if delayed too much, lead to macroeconomic imbalances. Volatility in the global economy has increased in the last years--in terms of commodity prices, exchange rates, and financial market developments, and this heightened volatility is taxing economic growth globally. Strong capital inflows also pose additional policy challenges for selected countries in the region, as currency appreciation will reduce external competitiveness. Among the upside risks for commodity exporting countries is the possibility of a stronger-than-expected global cyclical bounce back, which could translate in larger terms-of- trade gains and much stronger external demand adding to the tenor of the recovery. In the wake of the global crisis many financially- constrained countries in the region have a much more limited fiscal space, and their ability to deal with future external shocks, such as might arise from the current situation in high-income Europe is much reduced. The potential for significant declines in aid flows in the years ahead as high-income donors tighten the strings of the fiscal purse, will further squeeze already limited fiscal space. A real challenge will be to maintain existing investment levels in this environment. Failure to do so could impose costs on future growth. Even a small reduction in average growth rates could have large impacts on poverty in the longer term. For example, a 0.5 percent reduction in regional growth rates over a ten year period can be expected to increase poverty in the region by 6.7 million. 46 Global Economic Prospects Summer 2010 : Regional Annex Figure B6.3 Sub-Saharan Africa country forecasts (annual percent change unless indicated otherwise) Est. Fore cast 95-05 1 2007 2008 2009 2010 2011 2012 Angola Real GDP at market prices 8.3 20.3 13.2 1.7 6.9 7.7 7.0 Current account bal/GDP (%) -2.2 17.2 7.6 -3.7 4.6 4.4 4.4 Be nin Real GDP at market prices 4.6 4.6 5.1 3.1 3.3 4.8 5.1 Current account bal/GDP (%) -7.2 -12.0 -6.5 -6.9 -7.8 -7.6 -6.0 Botswana Real GDP at market prices 6.8 4.2 3.1 -6.0 5.8 5.5 5.2 Current account bal/GDP (%) 8.2 11.0 3.8 -5.5 -6.4 -6.9 -5.5 Burkina Faso Real GDP at market prices 6.4 3.6 5.2 3.2 4.6 5.2 5.9 Current account bal/GDP (%) -10.1 -8.7 -11.5 -6.8 -7.7 -8.3 -7.6 Burundi Real GDP at market prices 0.4 3.6 4.5 3.5 3.7 4.1 4.3 Current account bal/GDP (%) -13.7 -15.7 -12.2 -12.2 -10.6 -9.7 -10.2 C ape Ve rde Real GDP at market prices 5.2 6.9 5.9 4.0 4.7 5.4 5.8 Current account bal/GDP (%) -10.1 -13.7 -12.8 -19.3 -25.8 -24.4 -22.8 C ame roon Real GDP at market prices 4.2 3.3 2.9 2.2 2.8 3.4 4.6 Current account bal/GDP (%) -3.2 1.4 -1.8 -2.7 -4.1 -4.7 -5.2 C e ntral African Re public Real GDP at market prices 0.7 4.2 2.8 1.7 3.0 3.3 3.6 Current account bal/GDP (%) -4.4 -6.7 -9.5 -7.8 -8.9 -9.4 -8.5 C had Real GDP at market prices 8.6 0.2 -0.4 -1.4 3.7 4.0 4.3 Current account bal/GDP (%) -36.5 -8.6 -10.2 -28.3 -26.6 -26.6 -23.9 C omoros Real GDP at market prices 2.1 0.5 1.0 1.1 1.7 2.3 2.4 Current account bal/GDP (%) -6.3 -6.8 -11.5 -6.1 -9.1 -8.7 -9.0 C ongo, De m. Re p. Real GDP at market prices 0.1 6.3 6.2 2.9 5.2 6.9 7.2 Current account bal/GDP (%) -2.9 -2.7 -15.1 -12.5 -15.7 -16.9 -17.6 C ongo, Re p. Real GDP at market prices 3.4 -1.6 5.6 7.5 11.0 4.9 2.9 Current account bal/GDP (%) -2.2 -8.4 -1.1 -12.6 0.1 3.1 0.1 C ote d Ivoire Real GDP at market prices 1.6 1.6 2.3 3.8 3.0 4.1 4.5 Current account bal/GDP (%) -0.2 -0.7 2.4 7.3 4.3 3.1 1.1 Eritre a Real GDP at market prices 1.7 1.3 -8.4 4.2 2.7 4.1 4.9 Current account bal/GDP (%) -15.3 -6.4 -5.9 -5.7 -2.2 -2.4 -2.7 Ethiopia Real GDP at market prices 5.5 11.1 11.3 8.8 7.0 7.5 8.5 Current account bal/GDP (%) -3.3 -4.3 -7.2 -5.1 -7.8 -8.0 -8.3 Gabon Real GDP at market prices 1.0 5.6 2.7 -1.3 3.8 4.3 4.4 Current account bal/GDP (%) 10.6 12.2 21.3 11.5 4.5 2.9 2.9 Gambia, The Real GDP at market prices 4.4 6.3 6.1 4.6 4.8 5.0 5.1 Current account bal/GDP (%) -5.3 -12.2 -15.9 -14.4 -14.2 -14.1 -13.3 Ghana Real GDP at market prices 4.7 6.1 7.3 3.8 4.6 17.5 7.5 Current account bal/GDP (%) -5.4 -14.4 -20.0 -5.7 -10.9 -6.3 -7.1 Guine a Real GDP at market prices 3.7 1.5 4.5 -0.6 2.6 3.6 4.1 Current account bal/GDP (%) -5.1 -8.7 -11.6 -9.7 -9.2 -8.8 -8.3 47 Global Economic Prospects Summer 2010 : Regional Annex (annual percent change unless indicat ed ot herwise) Est. Fore cast 1 95-05 2007 2008 2009 2010 2011 2012 Gu i n e a-Bi ssau Real GDP at market prices -1.4 0.6 3.5 3.0 3.4 3.9 3.4 Current account bal/GDP (%) -13.5 4.9 2.1 2.2 -1.7 0.0 -1.5 Ke n ya Real GDP at market prices 2.9 7.0 1.7 2.6 4.0 4.9 5.4 Current account bal/GDP (%) -7.5 -3.8 -6.6 -6.9 -6.6 -6.0 -5.1 Le soth o Real GDP at market prices 2.8 5.1 4.5 1.1 2.7 2.8 4.3 Current account bal/GDP (%) -22.0 13.1 9.5 -1.5 -18.2 -17.2 -15.9 Madagascar Real GDP at market prices 3.1 6.2 7.1 -4.1 0.7 4.1 5.0 Current account bal/GDP (%) -8.6 -14.4 -20.9 -16.1 -14.6 -12.8 -11.8 Mal awi Real GDP at market prices 2.4 8.6 9.8 7.7 5.6 6.0 6.6 Current account bal/GDP (%) -5.7 -1.7 -6.4 -8.4 -2.4 -2.3 -1.4 Mal i Real GDP at market prices 5.8 2.8 5.0 4.2 5.0 5.5 6.3 Current account bal/GDP (%) -8.7 -8.5 -8.4 -9.7 -10.5 -11.4 -10.4 Mau ri tan i a Real GDP at market prices 3.3 1.9 3.7 -1.0 4.9 5.4 6.0 Current account bal/GDP (%) -3.2 -9.7 -15.6 -13.6 -10.9 -11.6 -13.5 Mau ri ti u s Real GDP at market prices 4.8 4.7 4.2 2.2 3.9 4.4 5.0 Current account bal/GDP (%) 0.1 -5.6 -10.4 -8.3 -8.4 -8.7 -8.4 Moz am bi qu e Real GDP at market prices 8.0 7.3 6.7 6.3 5.9 6.7 7.2 Current account bal/GDP (%) -15.1 -9.8 -11.9 -11.8 -13.4 -13.8 -14.2 Nam i bi a Real GDP at market prices 4.2 4.1 2.7 -0.8 4.4 4.8 4.8 Current account bal/GDP (%) 3.0 9.2 2.8 -2.3 -5.8 -5.2 -4.0 Ni ge r Real GDP at market prices 3.5 3.3 8.7 -1.2 3.5 4.3 11.7 Current account bal/GDP (%) -7.1 -8.3 -13.4 -19.9 -21.6 -22.1 -17.4 Ni ge ri a Real GDP at market prices 4.6 6.4 5.3 5.6 6.1 5.7 6.4 Current account bal/GDP (%) 6.5 18.6 20.2 11.2 13.0 11.8 10.6 Rwan da Real GDP at market prices 8.3 7.9 11.2 4.5 5.5 5.8 6.8 Current account bal/GDP (%) -4.7 -4.3 -5.0 -6.8 -7.1 -6.5 -6.9 S e n e gal Real GDP at market prices 4.4 4.8 2.5 1.2 3.2 4.4 4.9 Current account bal/GDP (%) -5.7 -11.6 -10.4 -9.6 -10.1 -10.2 -9.4 S e ych e l l e s Real GDP at market prices 2.8 7.3 -0.9 -7.6 3.5 4.2 5.0 Current account bal/GDP (%) -13.4 -20.5 -44.1 -23.5 -30.4 -29.4 -27.0 S i e rra Le on e Real GDP at market prices 4.6 6.8 5.5 4.0 4.7 6.1 6.5 Current account bal/GDP (%) -12.4 -12.1 -11.1 -8.4 -9.1 -8.7 -8.3 S ou th Afri ca Real GDP at market prices 3.3 5.5 3.7 -1.8 3.1 3.4 3.9 Current account bal/GDP (%) -4.3 -9.2 -7.1 -4.0 -4.5 -5.8 -6.4 S u dan Real GDP at market prices 6.2 10.2 6.8 4.5 5.5 6.2 6.2 Current account bal/GDP (%) -6.3 -12.5 -9.0 -12.8 -8.2 -6.4 -5.8 S waz i l an d Real GDP at market prices 3.5 3.5 2.5 0.2 1.1 2.7 3.4 Current account bal/GDP (%) -0.8 -2.3 -4.9 -6.3 -10.4 -12.3 -12.4 Tan z an i a Real GDP at market prices 5.4 7.1 7.4 6.0 6.3 6.8 7.0 Current account bal/GDP (%) -6.3 -9.4 -10.5 -9.7 -10.1 -9.2 -9.2 Togo Real GDP at market prices 3.2 1.9 2.2 3.1 3.3 3.5 3.7 Current account bal/GDP (%) -9.6 -8.6 -9.9 -6.9 -7.5 -6.4 -5.9 Ugan da Real GDP at market prices 6.4 8.6 8.7 6.6 5.7 5.9 6.6 Current account bal/GDP (%) -6.9 -4.5 -5.0 -5.9 -6.3 -5.1 -6.3 Zam bi a Real GDP at market prices 3.8 6.2 5.7 6.2 5.4 5.9 6.4 Current account bal/GDP (%) -11.8 -6.5 -7.1 -3.6 -2.9 -3.0 -2.5 Zi m babwe Real GDP at market prices -2.4 -6.9 -14.1 4.0 4.1 2.3 3.3 Current account bal/GDP (%) -11.5 -8.1 -23.7 -28.2 -22.8 -17.6 -15.5 Not es: 1. Growt h rat es over int ervals are compound average; growt h cont ribut ions, rat ios and t he GDP deflat or are averages. 2. Liberia, Somalia, Sao T ome and Principe, are not forecast owing t o dat a limit at ions. Source: World Bank World Bank forecasts are frequently updated based on new inform ation and changing (global) circum stances. Consequently, projections presented here m ay differ from those contained in other Bank docum ents, even if basic assessm ents of countries' prospects do not significantly differ at any given m om ent in tim e. 48 Global Economic Prospects Summer 2010 : Regional Annex Notes: 5. IMF Regional Economic Outlook: Western Hemisphere, May 2010. 1. Armenia, Bosnia and Herzegovina, Georgia, Latvia, Romania, and Ukraine entered Stand-by- 6. The low-and-middle income countries of the Arrangements; Moldova and Tajikistan entered Middle East and North Africa region as presented Extended Credit Facilities; Moldova also entered in this report include Algeria, the Arab Republic an Extended Arrangement, and the Kyrgyz of Egypt, the Islamic Republic of Iran, Jordan, Republic entered an Exogenous Shock Facility. Lebanon, Morocco, the Syrian Arab Republic, Additionally, Poland opened a Flexible Credit Tunisia and the Republic of Yemen (low-income Line of 13.7 billion SDRs, but it did not draw country). Several developing countries are not upon it before it expired in early-May 2010. covered owing to data insufficiencies, including Djibouti, Iraq, Libya and the West Bank and 2. Central Bank of Russia (http://www.cbr.ru/eng/ Gaza. High-income economies of the broader statistics/?Prtid=svs). geographic region, including Gulf Cooperation Council (GCC) members, Bahrain, Kuwait, 3. The countries covered in the Europe and Central Oman and Saudi Arabia are covered in this report Asia section of the regional appendix are those under the group of "other high-income that fall into the World Bank's definition of low- countries". But as the GCC has become more and middle-income countries (with economies integrated with the developing economies of the divided according to 2008 GNI per capita, region, a brief discussion of economic calculated using the World Bank Atlas method, developments is a feature of this appendix. with income groups categorized as low income, Among the GCC, insufficient data exists for with income of $975 or less; lower middle inclusion of Qatar and the United Arab Emirates income with $976 - $3,855; upper middle in the database and forecasting model underlying income, with $3,856 - $11,905; and high income this note. with $11,906 or more). The 24 countries are Albania, Bosnia and Herzegovina, Bulgaria, 7. Average growth for the developing Middle East Kosovo, Latvia, Lithuania, Former Yugoslav and North Africa region over the ten-year span Republic of Macedonia, Montenegro, Poland, from 1995-2005, registered 4.4 percent--a fair Romania and Serbia (in the Central European sub estimate for growth of potential output for the -region); Armenia, Azerbaijan, Belarus, Georgia, region's developing countries. Kazakhstan, Kyrgyz Republic, Moldova, Russian Federation, Tajikistan, Ukraine, and Uzbekistan 8. Many countries in the region commonly report (in the Commonwealth of Independent States sub GDP on a fiscal year (FY) basis in contrast with -region); and Turkey. Transition countries most developing (and high-income) countries, include all 24 countries with the exception of which report GDP on a calendar year (CY) basis. Turkey. Among these developing countries, In this annex, this data is converted onto a Bulgaria, Latvia, Lithuania, Poland and Romania calendar year basis in order to ensure are new European Union members. Owing to comparability with data presented for other data limitations, forecasts are not available for countries. The conversion is achieved by Kosovo, Montenegro, and Turkmenistan. The EU calculating CY equivalents for GDP in India -10 countries consist of: Bulgaria, the Czech using quarterly data, and by making an estimate Republic, Estonia, Hungary, Latvia, Lithuania, using appropriately weighted averages of the FY Poland, Romania, the Slovak Republic and data for Bangladesh, Nepal and Pakistan. Sri Slovenia. Lanka reports national income and product accounts on a calendar year basis. The fiscal year 4. The output gap is defined as the difference runs from July 1 through June 30 in Bangladesh between the actual level of industrial production and Pakistan, from July 16 through July 15 in in March 2010 (or latest date) and the level that Nepal, and from April 1 through March 31 in would have been observed if output had India. Because of reporting practices, continued to expand at the average rate between Bangladesh, Nepal, and Pakistan report January 2003 and August 2008, expressed as a FY2008/09 data in CY2009, while India reports percent of that trend rate. FY2008/09 in CY2008. 49 Global Economic Prospects Summer 2010 : Regional Annex 9. The text references GDP at market prices for all countries including India for consistency across developing countries (as GDP at market prices is the metric used by most economies). In some South Asian economies, GDP at factor cost is more widely referenced in the press. GDP at factor cost excludes indirect taxes and includes subsidies--whereas GDP at market prices includes indirect taxes and excludes subsidies. Table B5.4 presents GDP at both factor cost and market prices for India. 10. World Bank, World Development Indicators, and Government sources. 11. World Development Indicators (April 2010). 50 www.worldbank.org/globaloutlook