Several big risks – including China’s cooling property market, instability in Ukraine and the prospect of tighter global financial conditions over time – still stalk emerging markets in spite of a reduction in overall risk levels compared to last year, the World Bank has said in a report.
In the 154-page report, Global Economic Prospects, the World Bank trims its global Gross Domestic Product forecast for this year to 2.8 per cent year-on-year, down from 3.2 per cent previously, according to the Financial Times.
But, it adds, “Despite the early weakness, growth is expected to pick up speed as the year progresses and world GDP is projected to expand by 3.4 per cent in 2015 and 3.5 per cent in 2016.”
The lion’s share of this optimism, however, is directed at developed countries. Developing countries, by contrast, are on course for flat growth in 2014 and a third straight year of sub-five per cent growth which “reflects a more challenging post-crisis global economic environment”.
Although the World Bank sees developing country growth rising in 2015 and 2016 to 5.4 per cent and 5.5 per cent respectively, it also sees a series of risks that could blow the emerging world – or large parts of it – off course.
Some of these risks are widely heralded. Geo-political risks in Syria remain elevated while in Ukraine, the report said, a sustained escalation of tensions could have a significant impact on global economic confidence, especially if they prompt investors and consumers to hold back on spending.
“A physical disruption of energy and grain supplies would take a further toll on the already weak economies of Russia and Ukraine, and set back a nascent recovery in the Euro Area (a major buyer of Russian energy) although significant mutual interdependence in energy markets reduces the likelihood of such disruptions,” the report said.
A more general threat to developing countries flows from prospects for a robust developed economy recovery.
The report said, “Tighter global financial conditions over the next five years as monetary policy is normalised in high income economies is inevitable…And it will imply weaker financial flows and rising costs of capital for developing countries.”
The key issue is that long-term US rates have increased by less than half of their potential, suggesting that “much more financial sector tightening is yet to come”.
This will push up borrowing costs and spreads for developing countries. Then a re-run of some of the dynamics that roiled emerging markets last year and early this year may occur.
The report said, “If interest rates rise too rapidly or there are sharp pullbacks in capital flows, economies with large external financing needs or rapid expansions in domestic credit in recent years could come under considerable stress.”
The most vulnerable EM countries are likely to be those that rely on financing from portfolio flows (as opposed to less volatile remittances and Foreign Direct Investment). Some 18 developing countries find themselves with external financing needs that exceed their foreign currency reserves, with requirements exceeding 10 per cent of GDP in many cases.
Aside from the prospect of such financial vulnerabilities being exposed by a shift in capital flows, the World Bank also expressed concern over the sustainability of improvements seen in several developing countries’ current accounts.
The report said, “For instance, a significant portion of the improvement in trade deficits last year in Indonesia came from favourable commodity price movements and a surge in mineral-ore exports ahead of a ban on unprocessed exports that came into effect in January and the trade deficit has begun to widen again.
Punch
