78486 Global Volume 7 | June 2013 Economic Prospects Less volatile, but slower growth The World Bank A World Bank Group Flagship Report GLOBAL Volume 7 ECONOMIC 2013 PROSPECTS June Less volatile, but slower growth © 2013 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 15 14 13 This work is a product of the staff of The World Bank with external contributions. Note that The World Bank does not necessarily own each component of the content included in the work. The World Bank therefore does not warrant that the use of the content contained in the work will not infringe on the rights of third parties. The risk of claims resulting from such infringement rests solely with you. 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Under the Creative Commons Attribution license, you are free to copy, distribute, transmit, and adapt this work, including for commercial purposes, under the following conditions: Attribution—Please cite the work as follows: The World Bank. 2013. Global Economic Prospects, Volume 7, June 2013, World Bank, Washington, DC. doi:10.1596/978-1-4648-0036-8 License: Creative Commons Attribution CC BY 3.0 Translations—If you create a translation of this work, please add the following disclaimer along with the attribution: This translation was not created by The World Bank and should not be considered an official World Bank translation. The World Bank shall not be liable for any content or error in this translation. All queries on rights and licenses should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washing- ton, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. ISBN (electronic): 978-1-4648-0036-8 DOI: 10.1596/978-1-4648-0036-8 Cover photo: Neil Thomas Cover design: Roula Yargizi The cutoff date for the data used in the report was June 7, 2013. ACKNOWLEDGMENTS This report is a product of the Prospects Group in the Development Economics Vice Presidency of the World Bank. Its principal authors were Andrew Burns and Theo Janse van Rensburg. The project was managed by Andrew Burns, under the direction of Hans Timmer and the guidance of Kaushik Basu. Several people contributed substantively to the report. Several reviewers offered extensive advice and com- The modeling and data team was led by Theo Janse ments. These included Abdul de Guia Abiad, Ahmad van Rensburg, assisted by Trung Thanh Bui, Muham- Ahsan, Sara B. Alnashar, Jorge Araujo, Merli Baroudi, mad Adil Islam and Irina Magyer. The projections, re- Roshan D. Bajracharya, Andrew Beath, Kirida gional write-ups and subject annexes were produced Bhaopichitr, Parminder P.S. Brar, Penelope J. Brook, by Dilek Aykut (Finance, Europe & Central Asia), John Timothy John Bulman, Kevin Carey, Young Hwan Cha, Baffes (Commodities), Damir Ćosić (Commodities), Shubham Chaudhuri, Rodrigo A. Chaves, Nada Allen Dennis (Sub-Saharan Africa and International Choueri, Karl Kendrick Tiu Chua, Punam Chuhan- Trade), Tehmina Shaukat Khan (Middle East & North Pole, Francoise Clottes, Andrea Coppola, Tito Cordel- Africa), Eung Ju Kim (Finance), Sanket Mohapatra la, Augusto de la Torre, Shantayanan Devarajan, Tati- (South Asia and Exchange Rates), Theo Janse van ana Didier, Hinh Truong Dinh, Sebastian Eckardt, Kha- Rensburg (High-Income Countries), Cristina Savescu lid El Massnaoui, Philip English, Pablo Fajnzylber, (Latin America & Caribbean and Industrial Production) Manuela V. Ferro, Daminda Eynard Fonseka, Samuel and Ekaterine Vashakmadze (East Asia & the Pacific Freije-Rodriguez, Bernard G. Funck, Marcelo Giugale, and Inflation). Chorching Goh, Susan G. Goldmark, David Michael Gould, Gloria M. Grandolini, Kiryl Haiduk, Bert Hof- Regional projections and annexes were produced in man, Zahid Hussain, Elena Ianchovichina, Fernando coordination with country teams, country directors, and Gabriel Im, Roumeen Islam, Ivailo V. Izvorski, Carlos the offices of the regional chief economists and PREM Felipe Jaramillo, Sergio Alvaro Jellinek, Markus directors. The short-term commodity price forecasts Kitzmuller, Auguste Tano Kouame, Thomas Blatt were produced by John Baffes and Damir Ćosić. The Laursen, Daniel Lederman, Xiaofan Liu, Sandeep Ma- remittances forecasts were produced by Gemechu hajan, Ernesto May, Deepak Mishra, Denis Medvedev, Ayana Aga, Christian Eigen-Zucchi and Dilip K. Ratha. Lars Christian Moller, Lalita M. Moorty, Claudia Nassif, Simulations were performed by Trung Thanh Bui and Antonio Nucifora, Antonio M. Ollero, Kwang Park, Cat- Theo Janse van Rensburg. alin Pauna, Keomanivone Phimmahasay, Samuel Jaime Pienknagura, Miria Pigato, Mohammad Zia The accompanying online publication, Prospects for Qureshi, Martin Raiser, Susan R. Razzaz, Christine M. the Global Economy, was produced by a team com- Richaud, David Rosenblatt, Frederico Gil Sander, Phil- prised of Marie-Anne Chambonnier, Muhammad Adil ip Schuler, Sudhir Shetty, Maryna Sidarenka, Alexis Islam, Vamsee Krishna Kanchi, Katherine Rollins, and Sienaert, Carlos Silva-Jauregui, Karlis Smits, Vinaya Dana Vorisek, with technical support from David Horo- Swaroop, Mark Roland Thomas, Volker Treichel, Nat- witz, Ugendran Machakkalai, and Malarvishi Veerap- taporn Triratanasirikul, Cevdet Cagdas Unal, M. Wil- pan. lem van Eeghen, Axel van Tortsenberg, R. Gregory Toulmin, Sergei Ulatov, Aristomene Varoudakis, Cynthia Case-McMahon, Indira Chand, and Merrell Mathew A. Verghis, Gallina Andronova Vincelette, Tuck-Primdahl managed media relations and the dis- Ekaterina Vostroknutova, Muhammad Waheed, Marina semination. Kristina Cathrine Mercado managed the Wes, Deborah L. Wetzel, Kirthisri Rajatha Wijeweera, publication process. Hernan Jorge Winkler, Soonhwa Yi, Salman Zaidi, and Albert Zeufack. ACRONYMS ASEAN Association of South East Asian Nations BRICS Brazil, Russian Federation, India, China, and South Africa CDS Credit Default Swap ECB European Central Bank FDI Foreign Direct Investment GDP Gross Domestic Product IMF International Monetary Fund ODA Official Development Assistance OECD Organization for Economic Cooperation and Development OMT Outright Monetary Transactions OPEC Organization of Petroleum Exporting Countries PMI Purchasing Manager’s Index QE Quantitative Easing SAAR Seasonally adjusted annualized rate TFP Total Factor Productivity TABLE OF CONTENTS Main Text …………………………………………………………………………...…...…... 1 Topical Annexes Industrial production …………………. …………………………………………………....... 31 Inflation. …………………………………………………………………..…………….......... 41 Financial markets ……………………………………………..…………...…………….......... 53 Trade ……………………………………………………………………..……….…….......... 67 Exchange rates ………………………………………………………………..……..……..… 77 Commodity markets …………………….……………………………………..….….………. 91 Regional Annexes East Asia & the Pacific ………………………………………………...…...…..……….…… 117 Europe & Central Asia …………………………………………………..……...…..….……. 133 Latin America & the Caribbean ……………………………………...………………….….... 149 Middle East & North Africa ……………………………………………………………..….. 163 South Asia ………………………………………………………….………………................ 181 Sub-Saharan Africa ……………………………………………….…………………...…….. 199 GLOBAL ECONOMIC PROSPECTS | June 2013 Overview and growth, the relaxation of capacity constraints in some middle-income countries, and stronger main messages growth in high-income countries are expected to yield a gradual acceleration of developing-country growth to 5.1 percent this year, and to 5.6 and 5.7 percent in 2014 and 2015, respectively. The global economy appears to be transitioning Most developing countries have recovered from toward a period of more stable, but slower growth. Global gross domestic product (GDP), which the crisis, so room for additional acceleration is slowed in mid-2012 is recovering, and a modest limited acceleration in quarterly GDP is expected during The overall acceleration is not stronger because the the course of 2013. That progress will be masked in majority of developing countries have more-or-less the annual data, however, with whole-year growth fully recovered from the 2008 financial crisis. For for 2013 projected at 2.2 percent, a touch slower many of these countries, current and projected than in 2012. The strengthening of quarterly growth is broadly in line with underlying potential growth will show up in whole-year global GDP growth—leaving little room for acceleration. Thus, growth of 3.0 percent for 2014 and 3.3 percent in 2015 GDP in the East Asia & Pacific region is projected (table 1). to increase 7.3 percent in 2013, but then expand at a broadly stable 7½ percent rate in each of 2014, Financial conditions in high-income countries and 2015. In Latin America, growth is expected to pick up in 2013 to about 3.3 percent, but then to have improved and risks are down, but growth stabilize at just below 4 percent in each of 2014 and remains subdued, especially in Europe 2015. Already, growth in several countries in both High-income countries continue to face challenges regions is being held back by supply-side to restore financial sector health, reform constraints that are manifesting themselves in institutions, and get fiscal policy onto a sustainable inflation, asset-price bubbles, and deteriorating current path. However, the likelihood that these challenges account balances. provoke a major crisis has declined. Many countries in Sub-Saharan Africa are also Although acute risks have diminished, real-side running at, close to, or above potential output, and activity remains sluggish. Among high-income risk building up inflationary pressures. Growth in countries, the challenges are especially difficult in the region is projected to firm over the projection high-income Europe, where growth is being held period to 4.9, 5.2, and 5.4 percent in 2013, 2014, back by weak confidence and continued banking- and 2015, respectively. Growth in South Asia is sector and fiscal restructuring. The recovery is on projected to pick up to 5.2 percent this year, more solid ground in the United States, where a following a very weak 2012 and then to firm only fairly robust private sector recovery is being held gradually to 6.0 and 6.4 percent in 2014 and 2015 back, but not extinguished, by fiscal tightening. as spare capacity is reabsorbed. Meanwhile, in Japan, a dramatic relaxation of macroeconomic policy has sparked an uptick in In developing Europe and the Middle East & activity, at least over the short term. Overall, growth in high-income countries is projected to North Africa, output gaps remain and growth accelerate slowly, with GDP expanding a modest is projected to strengthen 1.2 percent this year, but firming to 2.0 and 2.3 Many countries in developing Europe have still not percent in 2014 and 2015, respectively. recovered from the crisis. Unemployment and spare capacity remain high, because activity has Growth is firming in developing countries, but been weighed down by banking-sector, household, and fiscal restructuring (much like high-income conditions vary widely across economies Europe). As adjustments are completed, growth in In developing countries, GDP is expected to firm the region is projected to strengthen progressively somewhat. Less volatile external conditions, a from 2.7 percent last year to 4.2 percent by 2015. recovery of capital flows to levels that support Growth in the Middle East & North Africa has 1 GLOBAL ECONOMIC PROSPECTS | June 2013 Table 1. The global outlook in summary (percentage change from previous year, except interest rates and oil price) 2011 2012 2013e 2014f 2015f Global Conditions World Trade Volume (GNFS) 6.2 2.7 4.0 5.0 5.4 Consumer Prices G-7 Countries 1,2 5.3 -0.6 -0.1 0.9 1.0 United States 2.4 2.1 2.4 2.5 2.5 Commodity Prices (USD terms) Non-oil commodities 20.7 -9.5 -4.7 -1.1 -1.5 Oil Price (US$ per barrel) 3 104.0 105.0 102.4 101.0 101.0 Oil price (percent change) 31.6 1.0 -2.5 -1.3 -0.1 4 Manufactures unit export value 8.5 -2.1 2.4 2.2 1.9 Interest Rates $, 6-month (percent) 0.8 0.5 0.7 1.1 1.4 €, 6-month (percent) 1.6 0.2 0.5 1.2 1.5 International capital flows to developing countries (% of GDP) Developing countries Net private and official inflows 5.2 5.0 4.7 4.4 4.3 Net private inflows (equity + debt) 5.0 4.9 4.7 4.4 4.3 East Asia and Pacific 5.7 4.6 4.2 3.9 3.8 Europe and Central Asia 5.5 5.7 6.5 6.1 6.0 Latin America and Caribbean 5.4 6.4 5.9 5.5 5.3 Middle East and N. Africa 1.3 1.4 1.1 1.4 1.7 South Asia 3.3 4.0 3.6 3.4 3.3 Sub-Saharan Africa 4.2 3.5 3.8 3.9 4.2 Real GDP growth 5 World 2.8 2.3 2.2 3.0 3.3 Memo item: World (PPP weights) 3.8 2.9 3.1 3.8 4.1 High income 1.7 1.3 1.2 2.0 2.3 OECD Countries 1.5 1.2 1.1 1.9 2.2 Euro Area 1.5 -0.5 -0.6 0.9 1.5 Japan -0.5 2.0 1.4 1.4 1.3 United States 1.8 2.2 2.0 2.8 3.0 Non-OECD countries 4.9 2.8 3.1 3.7 3.9 Developing countries 6.0 5.0 5.1 5.6 5.7 East Asia and Pacific 8.3 7.5 7.3 7.5 7.5 China 9.3 7.8 7.7 8.0 7.9 Indonesia 6.5 6.2 6.2 6.5 6.2 Thailand 0.1 6.5 5.0 5.0 5.5 Europe and Central Asia 5.7 2.7 2.8 3.8 4.2 Russia 4.3 3.4 2.3 3.5 3.9 Turkey 8.8 2.2 3.6 4.5 4.7 Romania 2.5 0.7 1.7 2.2 2.7 Latin America and Caribbean 4.4 3.0 3.3 3.9 3.8 Brazil 2.7 0.9 2.9 4.0 3.8 Mexico 3.9 3.9 3.3 3.9 3.8 Argentina 8.9 1.9 3.1 3.0 3.0 Middle East and N. Africa -2.2 3.5 2.5 3.5 4.2 6 Egypt 1.8 2.2 1.6 3.0 4.8 Iran 1.7 -1.9 -1.1 0.7 1.9 Algeria 2.4 2.5 2.8 3.2 3.5 South Asia 7.3 4.8 5.2 6.0 6.4 6, 7 India 6.2 5.0 5.7 6.5 6.7 Pakistan 6, 7 3.0 3.7 3.4 3.5 3.7 Bangladesh 6 6.7 6.2 5.8 6.1 6.3 Sub-Saharan Africa 4.7 4.4 4.9 5.2 5.4 South Africa 3.1 2.5 2.5 3.2 3.3 Nigeria 7.4 6.5 6.7 6.7 7.0 Angola 3.4 8.1 7.2 7.5 7.8 Memorandum items Developing countries excluding transition countries 6.5 5.0 5.3 5.8 5.9 excluding China and India 4.5 3.3 3.5 4.2 4.4 Source: World Bank. Notes: PPP = purchasing power parity; e = estimate; f = forecast. 1. Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. 2. In local currency, aggregated using 2005 GDP weights. 3. Simple average of Dubai, Brent, and West Texas Intermediate. 4. Unit value index of manufactured exports from major economies, expressed in USD. 5. Aggregate growth rates calculated using constant 2005 dollars GDP weights. 6. In keeping with national practice, data for Bangladesh, Egypt, India, and Pakistan are reported on a fiscal year basis in table 1.1. Aggregates that depend on these countries are calculated using data compiled on a calendar year basis. 7. Real GDP at factor cost, consistent with reporting practice in Pakistan and India. See Table SAR.2, South Asia Regional Annex for details. 2 GLOBAL ECONOMIC PROSPECTS | June 2013 been disrupted by political and social tensions and peak). If prices decline to their longer-term Euro Area weakness. Assuming that tensions in the equilibrium more quickly than assumed in the region gradually ease, growth is projected to slowly baseline, GDP growth among Sub-Saharan African strengthen from 2.5 percent in 2013 to 3.5 percent metal exporters could decline by as much as 0.7 in 2014 and 4.2 percent in 2015. percentage points, while current account and fiscal balances could deteriorate by 1.2 and 0.9 percent of Risks are less pronounced and more balanced than a GDP, respectively. Lower oil prices would have similar impacts for oil exporters (-0.4 percent of year ago, with new risks gaining prominence GDP), but would tend to benefit developing Although acute risks in high-income countries are countries as a whole (+0.3 percent of GDP). down, more modest downside risks linger as these economies continue to adjust. Importantly, downside … and the potential impacts of a withdrawal of risks are now balanced by the possibility of stronger growth should confidence improve more quantitative easing quickly than anticipated in the baseline. Quantitative easing has benefited developing countries by stimulating high-income-country For developing countries that have already GDP, lowering borrowing costs, and avoiding a recovered from the crisis, or that are expected to in financial-sector meltdown. On balance, the 2013, macroeconomic policy may need to be increased liquidity has not generated excessive tightened to contain or prevent inflation, asset- capital flows to developing countries. Net capital price bubbles, and deteriorating current accounts. flows to developing countries have recovered to Tightening would have the further advantage of 4.2 percent of developing-country GDP, but restoring depleted policy buffers. In countries remain well below the 2007 level of 7.2 percent of where unemployment remains high and spare GDP. However, flows have been more volatile. capacity is ample, notably in developing Europe, a Based on this experience, the recent intensification loosening of policy may be in order where policy of monetary easing in Japan should not prove too space exists. The rebalancing effort in China, and its disruptive for developing countries over the unsustainably high investment rate are ongoing medium term, but it could generate large challenges. fluctuations in flows over the short run that are difficult to manage. Most countries need to prioritize structural Once high-income countries begin to pursue reforms to expand their growth potential quantitative easing less actively or begin to unwind While projected growth rates are satisfactory and long-term positions, interest rates are likely to rise. well above the growth rates of the 1990s, they are 1 Higher interest rates will increase debt-servicing –2 percentage points slower than in the pre-crisis costs, and could increase default rates on existing boom period. To achieve higher growth on a loans. Banks in countries that have enjoyed very sustained basis, developing countries will need to strong growth and asset-price inflation, together focus on domestic challenges. These differ across with high levels of government or private sector countries, but share common themes. In general, debt, may be at particular risk. In the longer term, policymakers will need to redouble efforts to higher interest rates will raise the cost of capital in restore and preserve macroeconomic stability and developing countries and can be expected to reduce bottlenecks by streamlining regulations; reduce the level of investment that firms wish to improving their enforcement; and investing in maintain. As investment rates adjust to these higher infrastructure, education, and health. capital costs, developing-country investment spending and growth can be expected to decline by New risks include a faster decline in commodity as much as 0.6 percentage points per annum after three years. prices, ... Over the past year, energy and metals prices have been easing in response to supply and demand-side substitution induced by high prices (metal prices are down 30 percent since their February 2011 3 GLOBAL ECONOMIC PROSPECTS | June 2013 Recent Developments The better financial conditions in the Euro Area, in tandem with the extraordinary monetary policy steps undertaken by the Federal Reserve Bank in the United States, the Bank of England, the ECB, and most recently the Bank of Japan, have flooded The global economy is transitioning into what is markets with liquidity. This in turn has reduced likely to be a smoother and less volatile period. yields on long-term debt and the price of riskier Financial market risk indicators, such as credit assets—including developing-country equities, default swap rates, sovereign debt spreads, and bonds, and bank loans. As a result, by May gross stock market volatility indicators have all improved capital flows to developing countries, which were significantly since June 2012 (figure 1). weak for most of the post-crisis period, have recovered to close-to-peak levels. Bank lending and equity issuance has doubled relative to the same Financial market conditions have period a year ago (figure 2). Nevertheless, as a improved over the past year percent of developing-country GDP, capital flows remain well below pre-crisis levels. The improvement reflects progress toward fiscal sustainability in the Euro Area, reinforced The recovery in bank flows is especially important, assurances that the European Central Bank (ECB) because it suggests that the most acute effects on will do whatever it takes to save the Euro Area, and developing countries of the deleveraging among concrete steps toward reinforcing those aspects of high-income banks have passed. Most of the recent institutional weakness that contributed to Euro recovery in banking flows has benefitted Area difficulties (box 1). developing Europe and Central Asia, which was the developing region hardest-hit by the crisis and These improved financial market conditions have by the Euro Area deleveraging process. Flows in persisted for almost a whole year, despite being most regions, except the Middle East & North subjected to stresses, including elections in several Africa1, were significantly higher than in 2012, with economies, concerns about a potential banking Europe & Central Asia (mainly banking and bond), crisis in Slovenia, the Cyprus rescue package, and and East Asia & Pacific (mainly bond and equity) an extended period of very slow or negative recording the biggest increases. growth. The durability of the improved indicators attests to the improvement in conditions. Despite the improvement in gross flows and Nevertheless, concerns remain, particularly among in financial indicators among high-income banks in high-spread countries, which continue to countries, developing-country financial- be burdened by relatively large quantities of market prices have been weak. Thus, while underperforming loans and relatively weak levels of stock markets in high-income countries capitalization (IMF 2013b). surged in the post – June 2012 period (the Figure 1. Financial indicators worldwide have Figure 2. Gross capital flows to developing countries improved since June 2012 have recovered in nominal terms Gross capital flows to developing countries, 3month ma, $billions Change since June 2012, basis points Change since June 2012, percent 80 300 30 200 20 60 100 10 40 0 0 -100 -10 20 -200 -20 -300 -30 0 2009Q1 2009Q4 2010Q3 2011Q2 2012Q1 2012Q4 CDS Rates Volatility Equity market valuations Bond Yields -400 -40 High-spread Commercial banks High-spread Developing-country VIX U.S. (S&P 500) Europe (STOXX New equity issuance Bond issuance Bank Loans Euro Area Euro Area Euro Area 600) Source: World Bank; Dealogic. Source: World Bank; Bloomberg. 4 GLOBAL ECONOMIC PROSPECTS | June 2013 Box 1. Concrete steps taken to reduce Euro Area fragilities A wide range of significant steps taken over the past few years have calmed investors and led to a significant rebound in key markets. These steps and developments include:  ECB President Mario Draghi’s forceful “whatever it takes” speech on July 26, 2012 and the introduction of a new Outright Monetary Transactions (OMT) facility;  Widespread fiscal consolidation that has brought Euro Area government deficits down from 6.4 percent of GDP in 2009 to an estimated 2.9 percent in 2012 (IMF 2013a), although the deficits of Ireland, and Spain still exceed 5 percent of GDP;  Euro Area agreements to establish a banking union for the area; reinforce monitoring and respect of budgetary rules; require countries to enter into binding fiscal reform contracts; and proposals to increase democratic legitimacy;  Early repayment of more than 25 percent of ECB crisis loans by Euro Area banks during the first quarter of 2013 (the loans were not due until 2014 and 2015). Other developments in 2013 have tested the resilience of this improved climate, including:  Inconclusive elections in Italy and weak polls for other leaders that underscore ongoing political risks;  Uncertainty about government’s willingness to accept conditionality if the OMT were activated;  Fears that the bailing in of depositors during the Cyprus rescue would lead to deposit flight in other European jurisdictions. While these developments led to some widening of credit default swap (CDS) rates and yields on the debt of high - spread Euro Area countries, the increases were modest compared with earlier declines, and yields for high -spread coun- tries are down for the year to date. Italy Italy Ireland Spain Ireland Portugal Box Figure 1.1 Italy Spain Ireland Portugal Portugal Ireland Box Figure 1.2 5-year sovereign CDS rates, basis points Yields on 10-year sovereign debt, basis points 1800 60 Portugal Spain 1600 40 Between January-March Spain Portugal Since March 1400 Portugal 20 1200 1000 0 Portugal Ireland 800 -20 600 Italy 400 -40 Ireland 200 Spain -60 Italy 0 Spain Jan '10 Jul '10 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 -80 Italy Portugal Spain Source: Bloomberg. Italy Source: Bloomberg. Ireland Stoxx Europe 600, Standard & Poor’s 500 The generally better performance of high-income Index, and Nikkei 225 are up 17.5, 18.1, and stock markets in the recent period reflects both a 44.5 percent, respectively), overall indexes for difference in timing (developing-country stocks developing countries have declined. This said, recovered earlier in the cycle), and the relatively some developing-country stock markets have high valuations that developing-country stock shown strong gains, raising concerns about markets had at the start of the crisis. Currently overvaluation. Equity market indexes in price-earnings ratios of major developing-country Indonesia, Malaysia, the Philippines, and firms remain much lower (between 12 and 18) than in Thailand all recorded highs in 2013, partly high-income countries (where they are between 16 reflecting strong inflows of foreign private and 24). capital. Indeed, stock markets in these countries have declined lately as concerns Overall, net capital flows (inflows + outflows) to about high valuations and prospects of developing countries fell by about 7 percent in scaling back of the U.S. stimulus program 2012, reflecting broadly stable net inflows (1.5 weighed in on investor sentiment. percent) and a 28.4 percent increase in outflows, 5 GLOBAL ECONOMIC PROSPECTS | June 2013 Table 2. Net financial flows to developing countries ($ billions) 2008 2009 2010 2011 2012e 2013f 2014f 2015f Current account balance 409.4 233.0 173.3 129.6 -16.7 -74.9 -108.2 -126.3 Capital Inflows 812.7 701.0 1,218.8 1,175.0 1,192.4 1,260.9 1,297.4 1,394.8 Private inflows, net 782.3 620.0 1,145.6 1,145.1 1,178.3 1,250.2 1,290.7 1,391.7 Equity Inflows, net 583.4 541.3 710.5 710.4 758.1 791.1 803.5 863.5 Net FDI inflows 637.0 427.1 582.3 701.5 670.0 719.3 715.7 758.2 Net portfolio equity inflows -53.6 114.2 128.2 8.9 88.1 71.8 87.8 105.3 Private creditors. Net 198.8 78.7 435.1 434.6 420.2 459.1 487.2 528.2 Bonds -8.6 61.0 129.7 123.8 190.3 187.3 164.4 151.9 Banks 223.3 -11.9 37.2 108.2 82.0 104.7 125.3 146.9 Short-term debt flows -17.1 17.8 257.6 189.3 141.0 158.5 188.2 221.1 Other private 1.3 11.7 10.7 13.3 7.1 9.2 10.4 9.8 Official inflows, net 30.4 81.0 73.2 30.0 14.1 10.7 6.7 3.1 World Bank 7.2 18.3 22.4 6.6 4.6 IMF 10.8 26.8 13.8 0.5 -3.9 Other official 12.4 35.9 36.9 22.8 13.4 Capital outflows -321.2 -175.2 -314.1 -284.7 -365.4 -371.3 -416.3 -464.4 FDI outflows -211.8 -144.3 -213.9 -198.0 -238.0 -275.0 -325.0 -370.0 Portfolio equity outflows -32.1 -75.9 -50.6 4.3 -12.4 -17.3 -24.3 -29.4 Private debt outflows -78.3 50.7 -57.3 -81.0 -103.0 -72.0 -61.0 -56.0 Other outflows 1.0 -5.7 7.7 -10.0 -12.0 -7.0 -6.0 -9.0 Net capital flows (inflows + outflows) 491.5 525.8 904.7 890.4 827.1 889.6 881.1 930.4 Net unidentified Flows/a -82.1 -292.8 -731.3 -760.8 -843.8 -964.5 -989.3 -1,056.7 Source: The World Bank Note: e = estimate, f = forecast /a Combination of errors and omissions, unidentified capital inflows to and outflows from developing countries roughly proportionately distributed across foreign despite the improved ratings of developing direct investment (FDI), equity, debt, and other countries, and strong investor appetite for outflows (table 2). Both net inflows and outflows developing-country bonds.2 are projected to rise. Overall net capital inflows should rise by about 5.7 percent in 2013, with Rising spreads, even as demand is strong and much of the increase reflecting the stronger flows growing, may reflect a welcome and ultimately toward the end of 2012. They are expected to rise healthy improvement in market perceptions of the by 2.9 percent in 2014 and 7.5 percent in 2015, riskiness of investing in high-income countries. reaching $1.4 trillion or about 4.3 percent of Part of the decline in developing-country risk developing-country GDP in 2015. premiums over the past five years was due to the increased riskiness of high-income country debt.3 Capital costs are rising, reflecting Now that those risks have receded, investors may be shifting their portfolios back into high-income reduced high-income country risks country assets, resulting in an increase in developing-country yields and spreads and better Not only have developing-country stock markets stock-market performance in high-income underperformed high-income stock markets, countries. developing country sovereign credit default swap (CDS) rates and yields (figure 3) have been rising, 6 GLOBAL ECONOMIC PROSPECTS | June 2013 Figure 3. Developing country borrowing costs have risen Figure 4. Aggregate industrial activity has picked up but remain below historical averages % change in industrial production, 3m/3m saar Basis points EMBIG sovereign bond spreads 20 500 2000-2007 Average 15 China 440 10 380 Other 5 high-income Other developing 320 0 Sep 09-May 11 Average 260 -5 2005-2007 Average Euro area 200 -10 Jul '11 Oct '11 Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 Source: World Bank; JP Morgan. Source: World Bank; Datastream. These developments may also reflect concern on (more than ½ a million jobs were added in the the part of investors about inflation of asset prices first quarter). Investment demand, which was in some developing countries (such as Brazil, unusually weak in the second half of 2012, has Indonesia, Lao PDR, Philippines, Thailand, and also contributed (durable goods orders Turkey) and the recent easing of commodity prices. increased at a 20 percent annualized pace Risk premia could have risen because high asset through March, although order growth has prices have been interpreted as a harbinger of since eased). sharp future correction; or if an expectation of lower commodity prices had raise concerns about  In Japan, the move toward a much more future government revenues and governments’ relaxed monetary and fiscal policy (first capacity to repay existing debt and spending announced in November 2012 but made more programs. concrete during the first quarter of 2013) prompted a sharp acceleration in GDP, which Improved financial conditions are grew at a 4.1 percent annualized pace in the first quarter of 2013. yielding stronger economic activity  In the Euro Area, GDP contracted once again Global economic activity has strengthened over the in the first quarter, declining at a 0.8 percent past several months (figure 4). The turn around, (saar, -0.2% q/q sa), with growth in Germany which began in the East Asia & Pacific region, has turning marginally positive. For the region as a spread more widely. Developing-country industrial whole, industrial production expanded at a 0.7 production grew at a 5.1 percent annualized pace percent annualized rate in the first quarter, and during the first quarter of 2013 (0.6 percent if the annualized pace of decline among high- China is excluded), and high-income-country spread economies eased to only 0.3 percent. industrial production expanded at a 2.9 percent annualized pace. Developing-country growth eased in Despite Euro Area weakness, high-income-country 2013Q1 but remains solid GDP growth strengthened in the first quarter of 2013. Among those developing countries that report quarterly GDP, data suggest an acceleration in  In the United States, GDP rose 2.4 percent in activity during the fourth quarter of 2012—notably the first quarter of 2013, despite sharp payroll in East Asia & Pacific, where quarterly GDP tax increases that have cut into consumer expanded by 8.3 percent in the fourth quarter (for incomes. The strength was supported by a more regional detail, see box 2 and the regional recovering housing market (house prices are at annexes). In South Asia, however, growth a two-year high) and an increase in payroll jobs continued to be weak, with GDP growing at only a 7 GLOBAL ECONOMIC PROSPECTS | June 2013 4.7 percent annualized pace in the final quarter of below post-crisis rates, despite relatively easy policy 2012. Industrial production data, which are stances and amid indications of overheating in available for a wider range of countries, display a some (see discussion beginning on page 17). clearer acceleration trend toward the end of 2012. The sharp recovery in trade appears During the first several months of 2013, however, to be losing momentum the pace of growth in developing countries appears to have slowed, particularly in East Asia, where After contracting for several months, global trade quarterly growth in China, and Indonesia has eased, is expanding once again (figure 6), with the total and actually turned negative in Malaysia and volume of exports and imports rising at a 5.0 Thailand. Elsewhere signs are more mixed. percent annualized pace in the first quarter of 2013. Growth has slowed in Chile, Mexico, and South The upturn in trade was driven by developing Africa, but strengthened in Philippines, Lithuania, country imports, which rose at an 18.0 percent Peru, Turkey, and Ukraine. First quarter GDP in annualized pace in 2013Q1. This helped stir a 2.9 India also disappointed, expanding only 4.8 percent percent annualized increase in high-income y-o-y or about 5 percent q/q saar. country exports in 2012Q4 (figure 6). Available industrial production data confirm this The pick-up in import demand among developing mixed picture (figure 5), with activity rates slowing countries was broadly-based, with import volumes in East Asia & Pacific (to 8.6 percent saar), firming rising in East Asia & Pacific, Latin America & the in Europe & Central Asia (at 2.4 percent), returning Caribbean, and South Asia. Data for the Middle to positive territory in Latin America & the East lag and, as of February 2013, do not show Caribbean (0.5 percent), and easing somewhat in signs of acceleration. The pick-up in global South Asia at a robust 7.7 percent. Available data demand, including in high-income countries, is also show that activity was contracting in Sub-Saharan supporting faster export growth in developing Africa and rapidly in the Middle East & North countries (box 3). Developing countries exports Africa during the three months ending February were expanding at a 15.5 percent annualized pace 2013. during the first quarter of 2013. Although there are some signs of acceleration, Most recently, there are signs of an easing in the output in several large middle-income countries pace of global trade. Developing-country import remains weak, compared with the pre-crisis boom demand slowed to an annualized pace of 10.8 period. Growth rates in Brazil, India, the Russian percent in April, and both export (-5.4 percent) and Federation, Turkey, and South Africa are all well import demand (-3.6 percent) from high-income Figure 5. Regionally, output shows signs of slowing in East Asia & Pacific, and stability or strengthening elsewhere % change in industrial production, 3m/3m saar 20 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 15 10 5 0 -5 -10 -15 -20 East Asia & Europe & Latin America & Middle-East & South Asia Sub-Saharan Pacific Central Asia Caribbean North Africa Africa Source: World Bank. 8 GLOBAL ECONOMIC PROSPECTS | June 2013 Box 2. Recent Regional Economic Developments (The regional annexes to this volume contain more detail on recent economic developments and outlook, including country -specific forecasts.) The East Asia & Pacific region led the rebound in global economic activity during the fourth quarter of 2012. The landscape for trade and industrial production is changing, however, reflecting China’s rebalancing efforts, the yen depreciation, lower commodity prices, capacity constraints (in Indonesia, Malaysia, the Philippines, and Thailand), and a gradual tightening of macroeconomic policies. These factors have combined to reverse earlier output gains in China, Indonesia, Malaysia, Thai- land, and Vietnam contributing to easing of industrial production growth from double digit rates to just 6 percent annualized pace during the first quarter of 2013. Growth rates of both exports and imports are also moderating but regional trade contin- ues to expand at double-digit rates. Industrial activity in the Philippines, which relied less on domestic stimulus measures, continues to expand by a double-digit rate in early 2013, partly because of the country’s strong trade linkages to a rebound- ing Japan. A relatively loose policy stance in the region, excluding China, during 2012 has contributed to a buildup of debt and has fueled goods and asset price inflation. Output in the developing Europe & Central Asia region also improved considerably, growing at a 2.4 percent annualized pace in the three months ending March 2013. With the exceptions of Ukraine and Latvia, all countries had positive industrial production growth, and the rebound was particularly strong in Serbia. The US. dollar value of imports also accelerated during the first quarter, suggesting firming of domestic demand. However, US dollar value of regional exports have slowed with weak growth in Russia and Latvia, despite the strong import demand from developing countries and strengthening import demand from high-income Europe. Inflation has eased slightly since food price hikes and administrative tariffs caused it to gain momentum in the second half of 2012. Economic activity in Latin American & the Caribbean softened in the first quarter of 2013, with industrial production remain- ing relatively flat, after a slight contraction in the fourth quarter. Slower domestic consumption in conjunction with weak exter- nal demand caused economic activity to slow in many countries in the region, with annualized quarterly growth easing in Brazil, Mexico, Chile, and contracting in Venezuela. As elsewhere, regional import demand bounced back in 2012Q4 but has eased to a more sustainable pace of 8.7 percent annualized pace in 2013Q1. Meanwhile, lower commodity prices contribut- ed to significant declines in export revenues. Despite slower growth than during the pre -crisis period, several countries in the region continue to struggle with high and even rising inflation, suggesting structural bottlenecks. Price controls in Argenti na have partially contained inflation but could lead to shortages of certain goods, while in Venezuela the recent currency devalu- ation has exacerbated local price pressures. In Brazil, inflation continues to surprise on the upside on higher food and service prices. Economic outturns in the Middle East & North Africa continue to be dominated by political and social developments. Among oil exporters, hydrocarbon output resumed its downward trend in the second half of 2012 as the boost from Libyan oil production to prewar levels faded. Output among oil importers rebounded at an annualized 10.4 percent pace in Q1, reflect- ing a recovery in Egypt from sharp declines in 2012, but momentum has slowed reflecting rising political tensions in Egypt and Tunisia, spillovers from the Syrian conflict to Jordan and Lebanon, and weak external demand that have dampened ac- tivity among oil importers. With the exception of Iraq and Morocco, inflation remains persistently high across the region, rising over 40 percent in the Islamic Republic of Iran because of a tightening of international sanctions. But there has been a slight easing in some economies as global food prices have moderated. Declining foreign exchange reserves, widening external and fiscal financing gaps (only partly reflecting weak demand from Euro Area trading partners) pose challenges to macroeco- nomic stability and management in the region. Aid from the wealthier economies in the region has helped bridge financing gaps in Egypt, Jordan, Morocco, and Tunisia. Economic activity in South Asia picked up in the second half of 2012, supported by strengthening external demand and fiscal and policy reforms. By the first quarter of 2013, industrial production was rising at different paces in Bangladesh, India, and Pakistan, while in Sri Lanka, it stabilized in 2012Q4. After slowing sharply in 2012, regional export volume growth accel- erated to a 15.7 percent annualized pace in the three months ending in April 2013. Year -on-year inflation rates are moderat- ing across the region, helped in part by an easing of international commodity prices. As inflation moderated, monetary policy eased in Pakistan (in late 2012), in Bangladesh and India (in the first half of 2013), and in Sri Lanka (2012H2 and 2013H1) to support growth. However, inflation momentum remains strong, particularly in Bangladesh and India, mainly reflecting sup- ply-side constraints and entrenched inflationary expectations. Exports from Sub-Saharan Africa were not exempt from the decline in global trade during 2012 (the exception being agricul- tural exporters whose trade held up during the second half of the year). Industrial production slowed sharply in the second half of 2012 among oil exporting economies (Angola, Gabon, and Nigeria), partly because of domestic challenges in Nigeria. Similarly, labor unrest was partly responsible for the flat growth in South Africa’s industrial production in 2012Q2 and Q3. South Africa GDP rebounded to 2.1 percent annualized pace in 2012Q4, before slumping once again in Q1 2013 to 0.9 per- cent (q/q saar). Although more recent data for the rest of the region is not available, a similar mixed result is expected, with stronger global industrial production supporting growth in some, but weaker commodity prices cutting into incomes in others. Earlier policy tightening (particularly in East Africa) and improved harvests in 2012 have contributed to slow regional inflation, with prices rising at a 6.8 percent annualized pace during the first quarter. Rwanda took advantage of low interest rates and investor appetite for higher-yielding assets to issue its inaugural Eurobond in April 2013, while other countries in the region (including Ghana, Kenya, and Nigeria) have plans to follow suit. 9 GLOBAL ECONOMIC PROSPECTS | June 2013 Figure 6. Developing-country imports have led a rebound Figure 7. Commodity prices have been falling de- in trade spite stronger growth, due to increase supply Annualized growth of export and import volumes (3m/3m saar) USD Price index, 2005=100 40 240 Metals and minerals Food 30 220 Agricultural goods Developing Countries (Imports) 20 200 10 Euro Area 180 (Exports) Energy 0 160 Other High-income (Exports) -10 140 -20 120 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 Jan '10 Jul '10 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 Source: World Bank; Datastream; Haver. Source: World Bank. countries turned negative in April. Also, China's Similarly, the coming on stream of new projects in economic growth appears to be losing momentum Latin America (Chile, Peru), Africa (Zambia, as export growth slowed from 12.7 percent (y/y) in Democratic Republic of Congo), and Asia (China, April to one percent (y/y) in May - its slowest Mongolia) have placed substantial downward expansion in 15 months. With China being an pressure on metals prices even as sales have important trading partner in many developing strengthened. But demand suppression has also countries, weaker growth there will weigh down on been at work. Global demand for refined metals the imports of other developing countries. increased 4.5 percent in 2012 (9.9 percent in China), but metal demand by Organization For Commodity prices have weakened in Economic Cooperation and Development (OECD) member countries fell by 3.9 percent in response to new capacity 2012. Despite the strengthening of the global economy, the prices of most industrial commodities have The combination of increased supply and weak been declining (figure 7). While it is still too early to demand has yielded a buildup in global stocks. For be certain, the declines appear to result from both example, combined copper stocks at the major increased supply and increased substitution on the metals exchanges are up 46 percent since 2012. demand side induced by the high prices of the past Aluminum stocks, which have been rising since several years. end-2010, increased 8 during the past 12 months. Since 2000, capital expenditures by major firms in oil and metals markets have quintupled (figure 8). Figure 8. Capital expenditure in the resource sector is up Overall, they increased an average of 15 percent 5-fold since 2000, putting pressure on prices annually since 2005 in the case of oil and 20 Crude Oil Exploration & Production Spending Base Metals Companies' Capex percent in the case of metals. The impact of 600 USD billion USD Billion 150 increased supply is most visible in energy markets 500 125 (figure 9), where higher prices have made technologies economically viable and spurred large 400 100 increases in North American oil and natural gas production and large increases in African oil 300 75 production (see the Commodity Annex for a more 200 50 complete discussion). Recent developments have also been influenced by the recovery of production 100 25 in Middle East countries such as Libya and Iraq. 0 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: World Bank; Bloomberg. 10 GLOBAL ECONOMIC PROSPECTS | June 2013 Box 3. South-South Trade Box .3 As reported in the January 2013 edition of Global Economic Prospects (World Bank 2013a), more than half of developing - country trade is now with other developing countries, up from 37 percent in 2001. China has played a big role in this pro- cess (26 percent of total exports from all developing countries are going to China, up from 14 percent in 2001). But even excluding China’s trade with other developing countries, and not withstanding rhetoric suggesting that developing -country growth has come on the back of high-income imports, growth of trade between the remaining developing countries has also outpaced trade with high-income countries by a wide margin throughout the first decade of this century (box figures 3.1 and 3.2). The U.S. dollar value of trade between developing countries has grown annually by an average of 19.3 percent over the past decade (17.5 percent if trade with China is excluded) versus about 11 percent for developing -country exports to high- income countries. Importantly, every developing region shows the same basic trend, with intra -developing-country trade outstripping developing-developed trade, and by a large margin—except for Europe and Central Asia, where EU integration helped increase trade between the region and high -income countries. Interestingly, the rapid expansion of intra-developing-country trade reflects more than just commodity trade, with the value of developing-country exports of manufactures rising at about the same rate as the value of commodities as a whole. The result is all the more surprising because commodity prices more than doubled over the sample period, suggesting that the volume of manufacturing trade between developing countries was expanding particularly rapidly. The one broad commodity grouping that exceeded manufacturing trade growth was metals and ores, mainly reflecting the very strong demand in Chi- na for these products. Excluding China from developing -country trade, the intra-developing country value of metals and ores trade grew somewhat less quickly than manufactures. Box Figure 3.1 South-South imports, by type Box Figure 3.2 South-South trade by region Average annual growth 2000-2011, percent Average annual growth 2000-2011, percent All developing Developing (excl. China) High-Income Imports All developing 25 25 Developing, ex China Average (excl. China) Average exports to Average High Income countries (excl. China) 20 Average all developing countries 20 Average all developing countries 15 15 10 10 5 5 0 0 East Asia & Europe & Latin Middle-East South Asia Sub-Saharan Agricultural Ores and Fuels, All Fuels, Manufactured Pacific Central Asia America & & North Africa Raw Materials Metals Petroleum Goods Caribbean Africa Source: World Bank; UNCTAD. Source: World Bank; UNCTAD. Expectations are that prices will continue to ease (see Commodity Annex for more details). Food over the medium term. The World Bank forecast, prices are also projected to decline (7.7, 6.0, and 5.5 which calls for the price of a barrel of oil to ease to percent over 2013–15), reflecting a gradual $102 in 2013, and to $101 in 2015, reflects a improvement in supply conditions and reduced technical assumption that oil prices will slowly production costs due to lower energy and fertilizer decline between now and 2025 to a level consistent prices. with the real cost of producing a barrel of oil from the Canadian tar sands using today’s technology Inflationary pressures remain subdued (the Canadian tar sands are among the most abundant and most expensive to produce sources Despite the monetary stimulus in high-income of crude oil). Metals prices are expected to decline countries and an acceleration in developing-country in real terms by 3.7 and 1.4 percent in 2013 and growth in 2012Q4, inflationary pressures remain 2014, respectively, reflecting increased supply and a relatively subdued, although East Asia & Pacific, gradual reduction in the metals intensity of the Middle East & North Africa and South Asia are developing-country (especially Chinese) growth showing signs of rising inflation (figure 10). 11 GLOBAL ECONOMIC PROSPECTS | June 2013 Figure 9. Increased supplies have opened up Figure 10. Inflation is broadly under control arbitrage opportunities Annualized change in consumer prices, 3m/3m saar US$/mmbtu 10 25 Brent 8 20 Developing Countries 6 15 WTI East Asia excl. China P.R. LNG Japan 10 NGas Europe 4 China 5 NGas US 2 High Income Countries 0 0 2009 2010 2011 2012 2013 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 Source: World Bank; Datastream. Source: World Bank; Datastream. Inflation in high-income countries remains low. Although global inflationary pressures remain Inflationary pressures in China appear to have benign, given the lags in monetary policy eased but may be intensifying in Indonesia and Lao transmission, this additional easing may add to a PDR following years of rapid growth and relatively strengthening activity already under way, resulting loose macroeconomic policy, and core inflation in additional inflationary pressures in countries remains high in Vietnam. In the Middle East & operating close to full capacity, without much North Africa, high prices reflect both efforts to payoff in additional output. reduce the fiscal burden of price subsidization by raising some regulated prices, as well as supply disruptions caused by civil and armed strife. In Economic weakness in high-income South Asia, increases in regulated prices have also countries has cut into aid flows played a role, as have tight market conditions despite the relatively slow pace of growth. Ongoing fiscal adjustments and budgetary problems among high-income countries have led to In contrast, inflation rates in developing Europe a decline in aid for two consecutive years for the and Central Asia have declined to close to 7 first time since 1997. According OECD (2013) percent, down somewhat from the 8½ to 9 percent data, net official development assistance (ODA) average during the pre-crisis period. The easing flows in 2012 fell 4 percent in real terms to $125.6 partly reflects still-large output gaps, but structural billion, bringing the total decline since 2010 to 6 reforms have also contributed. percent. As a share of Gross National Income in donor countries, ODA for developing countries Monetary policy in developing countries continues fell to 0.29 percent in 2012 from 0.31 percent in to ease. Since January, the Reserve Bank of India 2011. Cuts to aid budgets were steepest among has cut interest rates by a cumulative 75 basis high-spread Euro-area economies, with Spain points despite still strong inflationary pressures. In having cuts its aid budget by 50 percent, Italy by 35 Mexico, the central bank has cut rates by 50 basis percent, Greece by 17 percent, and Portugal by 13 points—its first interest rate cut since July 2009. percent. ODA increased among only nine reporting Other policy easing included a 100-basis-point cut economies, with Korea (18 percent), Luxembourg implemented by the Bank of Colombia in three (10 percent), and Australia (9 percent) reporting the consecutive actions. Interest rates were also largest increases. Turkey almost doubled its lowered in Albania, Azerbaijan, Belarus, Georgia, assistance to North African countries after the Kenya, Mongolia, Sri Lanka, Thailand, Turkey, Arab spring. Uganda, and Vietnam. Only five developing countries (Brazil, the Arab Republic of Egypt, The outlook for aid remains gloomy for poor Gambia, Ghana, and Tunisia) have raised interest countries. The OECD expects aid flows to recover rates in 2013; Serbia raised and then cut rates. only modestly in 2013 and to remain stable during 12 GLOBAL ECONOMIC PROSPECTS | June 2013 2014 to 2016. The bulk of the increase in flows is percent, respectively. By contrast, developing expected to benefit middle-income Asian regions that are more closely tied to high-income economies, with flows to countries with the largest Europe (figure 11), where the protracted debt crisis Millennium Development Goals gaps declining. has taken a severe toll on economic activity, Bilateral aid to Sub-Saharan economies declined 7.9 experienced much weaker increases in remittances. percent in 2012 in real-terms. Remittance flows to the developing Europe & Central Asia region fell 3.9 percent and increased 1.6 percent in Sub-Saharan Africa in U.S. dollar Outside Europe, remittance flows to terms in 2012, following increases of 13.5 and 4.9 developing countries are largely percent, respectively, in 2011. Flows to Latin America were hit especially hard by the continuing unaffected downturn in Spain, where the unemployment rate rose above 26 percent, forcing many Latin American migrants to return home. The dollar The European debt crisis and rise in value of remittance flows to Latin America rose 0.9 unemployment rates in high-income countries percent in 2012, with absolute declines in some (which account for the bulk of remittance flows to countries like Colombia (-2.3 percent) that have developing countries) has negatively affected significant numbers of migrants in Spain. incomes of migrants and, in turn, their ability to send money home (for a more detailed discussion, The U.S. dollar value of remittance flows to see World Bank 2013a). Nevertheless, migrants developing countries is projected to increase 6.7 appear to have absorbed these shocks to some percent in 2013 and to gradually firm to a 10.2 extent and continue sending remittances to their percent rate of increase in 2015, reflecting a modest family and friends in need. As a result, the value of easing in oil prices and a gradual strengthening of remittances to developing countries rose to $401 growth in high-income countries. Despite the billion in 2012, up 5.3 percent. or about half the increases in nominal terms, flows are projected to 11.5 percent increase recorded in 2011. As a share remain broadly stable when expressed as a share of of recipient-country GDP, remittances rose only developing countries’ GDP. 0.2 percentage point. Global outlook: less This aggregate story masks important differences across countries. For instance, the large number of migrants in the Arabian Gulf generated significant increases in remittance flows from the Gulf Cooperation Council countries—with the U.S. volatility, somewhat dollar value of remittances to South Asia and the Middle East & North Africa rising 12.3 and 14.3 stronger growth Figure 11. Remittances continued to expand in 2012, broadly in line with developing country GDP % of GDP Billions of USD Hard data so far this year point to a global 6 120 economy that is slowly getting back on its feet. However, the recovery remains hesitant and Value of Remittances (RHS axis) 5 Remittances as 100 % of GDP (LHS axis) uneven. Several times since the onset of the crisis 4 80 in 2008, expectations of a firming of growth have 3 60 ended in disappointment. And the current conjuncture is no different. Forward-looking 2 40 indicators, including business surveys, have 1 20 strengthened over the past six months only to weaken again recently (figure 12). 0 0 East Asia & Europe & Latin Middle East South Asia Sub-Saharan Pacific Central Asia America & & N. Africa Africa Caribbean While an important clue as to current and future Source: World Bank. developments, a pessimistic bias has crept into the 13 GLOBAL ECONOMIC PROSPECTS | June 2013 In the United States, the private sector recovery Figure 12. Business confidence has improved, but re- appears to be relatively robust. By some measures, mains weaker than conditions would suggest growth in the first quarter of 2013 was stronger Balance of responses, > 50 implies expansion 59 than expected with industrial production expanding at a 4.4 percent annualized pace, and retail sales at a 56 2.9 percent pace. First quarter GDP growth was High Income non-EU relatively weak at 2.4 percent, in part because of a 53 Developing excl. China decline in government spending. The gathering momentum in the U.S. economy is both reflected 50 in and prompted by an improving labor market China (unemployment has fallen to 7.6 percent) and 47 recovery in the housing market. Euro area 44 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 Progress toward agreeing on a credible plan to Source: World Bank; Haver Analytics; Markit. bring the deficit down to sustainable levels has been slow. However, policy makers have extended both the debt ceiling and spending authorizations relationship between Purchasing Manager’s Indexes well into the future, thereby reducing the likelihood (PMI) and actual output. Based on the historical of a debt-ceiling confrontation and the threat of relationship between industrial activity and the default. On the downside, both the tax increases World Bank’s global PMI indicator (a weighted agreed at the beginning of the year and the average of national and Markit PMI indicators), spending sequester will be a drag on growth in PMIs between 2010 and 2013 have been coming quarters, continuing to offset some of the systematically about 3.0 points lower than they strength from the private sector recovery. Overall, should have been. GDP growth for the year is projected to slow somewhat, compared with 2012, to about 2.0 While this pessimistic bias could be just a statistical percent in 2013, before strengthening to 2.8 artifact, it could also be an indicator of increased percent in 2014 and 3.0 in 2015. caution on the part of firms. Under this interpretation, firms having been disappointed by The economy of the Euro Area remains very weak poor growth outcomes in the past may be skeptical despite improved financial conditions and some of stronger growth now, and could be holding back signs of strengthening. On the positive side, on investment until they are sure that another funding costs in core Euro Area countries have slowing is not in the offing. Such behavior, may be declined, and lending has started to grow again. self-fulfilling and could explain why despite Imports, exports, and industrial production have all improved conditions in financial markets, and the returned to positive (albeit modest) growth. gradual accumulation of pent-up demand for consumer and investment durables, the recovery However, borrowing costs in high-spread (especially in Europe) remains modest. economies remain very high; unemployment continues to rise (including in so-called core A gradual recovery in high-income economies); and weak growth is compromising progress on the fiscal front. Moreover, although countries important structural and fiscal consolidation reforms have been undertaken (see box 1), the pace Activity in high-income countries has been under of progress has eased, leading to concerns of considerable pressure from fiscal and banking reform fatigue, while several elections have sector consolidation and associated uncertainties. highlighted popular discontent with austerity. These pressures are expected to remain over the Finally, unemployment is crushingly high in forecast period, although the drag they are exerting periphery economies (27 percent in Spain and on growth is projected to diminish, in part because Greece, 18 percent in Portugal, 14 percent in much of the necessary adjustment has already been Ireland, and 12 percent in Italy). accomplished. 14 GLOBAL ECONOMIC PROSPECTS | June 2013 Growth in the Euro Area is expected to pick up toward looser monetary policy made in November slowly during the course of 2013, in part because and confirmed with announcements of a large the drag from fiscal consolidation and banking quantitative easing, fiscal stimulus and structural sector restructuring in the core countries is reform policy in January. Growth is projected to expected to become less intense.4 As a result, come in at 1.4 percent this year and in 2014 and at quarterly growth for the Euro Area as a whole is 1.3 percent in 2015. For growth to remain strong expected to return to positive territory in the through 2015, however, Japan will have to middle of 2013 and then gradually gain strength. implement a robust set of productivity enhancing Nevertheless, whole year GDP is projected to policy changes. Measures announced to date, contract by 0.6 percent in 2013, with annual growth include deregulation of the agriculture and slowly strengthening to 0.9 percent in 2014 and to electricity sectors, a relaxation of rules in health about 1.5 percent by 2015. Despite the return to care, investment tax incentives, (including FDI); positive growth, little progress is expected to be some corporate governance reforms; and a partial made in reducing unemployment. Weakness in relaxation of restrictions on the investment high-spread economies where the deepest behavior of pension funds. adjustments are occurring will continue, with growth not turning positive until 2014 and then only to a soft 0.3 percent. Prospects for developing countries Growth in Japan rebounded in the fourth quarter vary widely, reflecting local economic of 2012 and into the first quarter of 2013, and policy conditions expanding at a 4.1 percent annualized pace, with consumer demand rather than investment a major Overall, developing-country GDP is expected to driver—although industrial production expanded firm somewhat in 2013, growing by 5.1 percent and rapidly (8.9 percent in 2013Q1). Trade gradually rising to 5.6 percent in 2014 and 5.7 denominated in U.S. dollars has dropped off percent in 2015 (Box 4 provides a regional precipitously (as of April 2013, it was 8.0 percent breakdown of prospects, while the regional lower than in June 2012), in part because of the 18 annexes provide additional detail). That aggregate percent depreciation of the Yen vis-à-vis the dollar story, however, hides considerable regional and since March 2012. The decline also reflects bilateral country-level variation (figure 13). At least four weakness in Japan’s exports and imports to and classes of developing countries can be identified: from China, apparently linked to tensions over disputed territories.  countries (including many in East Asia and Sub -Saharan Africa) that are growing rapidly and The strength in the Japanese economy partly already close to or above potential, and reflects the effects of announcements of a shift therefore at risk of overheating; Figure 13. Acceleration will be muted in regions already operating at close to full capacity 10 Annual GDP growth, percent 8 2011 2012 2013 2014 2015 6 4 2 0 -2 -4 High Income East Asia & Europe & Latin America & Middle East & N. South Asia Sub-Saharan Countries Pacific Central Asia Caribbean Africa Africa Source: World Bank. 15 GLOBAL ECONOMIC PROSPECTS | June 2013 Box 4. Regional outlook Growth in the East Asia & the Pacific region slowed to 7.5 percent in 2012 largely due to weakening of growth in China (relative to the recent path). The regional growth is projected to slow further to 7.3 percent in 2013 with still weak 7.7 percent growth in China and easing of growth in the region excluding China from 6.2 percent in 2012 to 5.7 reflecting weak global demand and domestic policy tightening. The regional growth is projected to pick up to 7.5 percent in 2014 and 2015 as Chi- na's growth firms up and growth in the region excluding China accelerates to 5.9 percent in 2014 and then 6 percent in 2015 supported by strengthening global trade flows. The main risks to the region are internal, associated with a sharp reduction in Chinese investment, quantitative easing in Japan and rapidly rising debt and asset prices pose risks for Indonesia, Malaysia, Thailand and the Philippines. Efforts to enhance productivity gains through market reforms should deepen, especially in Cambodia, the Lao PDR, Myanmar, and Vietnam, while building buffers against future shocks remains a policy priority in Lao PDR, and small Pacific islands. GDP growth in Europe & Central Asia is estimated to have sharply slowed to 2.7 percent in 2012 from 5.6 percent in 2011 as the region faced significant headwinds including weak external demand, deleveraging by European banks, a poor harvest, and inflationary pressures. While GDP growth in 2013 in the region will be supported by improved agricultural performance and reduced deleveraging pressures, the rebound will nevertheless be constrained by the weak carryover growth caused by low economic activity in 2012Q4; ongoing fiscal adjustments by the region’s economies, and high unemployment. The recov- ery in export demand is expected to be gradual. The region’s growth is expected to reach 2.8 percent in 2013 and 4.2 per- cent by 2015. Medium-term prospects for the region will critically depend on progress in addressing structural constraints to economic growth including capacity constraints, high unemployment, and lack of competitiveness. Growth in Latin America & the Caribbean is expected to strengthen to 3.3 percent in 2013, from 3.0 percent in 2012, sup- ported by stronger demand domestically and abroad. Growth should converge toward potential after very weak growth in 2012 in Brazil (0.9 percent) and Argentina (1.9 percent). Growth in most other countries is expected to ease slightly or decel- erate this year. Growth is expected to decelerate markedly in Venezuela (to 1.4 percent), as highly expansionary policies are reversed. Over the medium term, the regional economy is expected to grow just under 4 percent annually, supported by stronger capital flows (notably FDI), recovering external demand, and structural reforms in some of the larger economies. Such improvements will be essential if the region is to sustain stronger growth over the medium term in the context of slow growth among major trading partners. Risks facing the region include the possibility of overheating in some of the faster - growing economies and the potential impacts of even weaker -than-projected commodity prices. Growth in the Middle East & North Africa region is projected to slow to 2.5 percent in 2013, from 3.5 percent in 2012, re- flecting a second year of recession in the Islamic Republic of Iran, subdued growth in the Arab Republic of Egypt, and a mod- est pickup in Algeria. Political tensions remain high in advance of scheduled elections and referendums, and security risks are dragging down activity and investment. In the wake of lower private capital inflows since 2010, fiscal and external account imbalances among oil importers are increasing, in turn exacerbating funding pressures and undermining fiscal sustainability particularly in Egypt. However, a gradual strengthening of demand in key Euro Area trading partners and the moderation in global food prices could provide some respite in the near term. Among oil exporters, surging government spending has in- creased vulnerability to a sustained fall in oil prices. Medium -term prospects hinge on the resolution of political tensions and security risks, and on the implementation of reforms to place the region’s economies on a more sustainable footing and to boost investment, jobs, and growth. GDP growth in South Asia slipped to 4.8 percent in 2012, mainly reflecting a continued deceleration in India, and slower growth in Sri Lanka and Bangladesh. Growth in Pakistan and Nepal remains sluggish, below regional peers. Regional GDP growth is projected to pick up to 5.2 percent in 2013, before accelerating to 6.1 percent and 6.4 percent in 2014 and 2015, in line with strengthening external demand, normal monsoons (after poor rains in 2012), and a gradual pickup in investment spending. Continued progress in fiscal consolidation and implementation of reforms that reduce structural constraints and lower inflationary expectations will determine the pace of recovery. Domestic risks that have gained in importance include a possible derailing of reforms, a resurgence of inflation, and weaker -than-expected monsoon rains. Growth in Sub-Saharan Africa has remained robust at an estimated 4.4 percent in 2012 (5.4 percent if South Africa is ex- cluded), supported by resilient domestic demand and still relatively high commodity prices. Strengthening external and resili- ent domestic demand, an accommodative policy environment, increasing investment, still high commodity prices, and in- creased export volumes in countries with new mineral discoveries (Sierra Leone, Niger, and Mozambique) are expected to underpin a return to the region‘s pre-crisis growth rate of around 5.2 percent over the forecast horizon (2013–15). Nonethe- less, risks remain tilted to the downside. A weaker -than-expected recovery in high-income countries and sharper-than- expected decline in commodity prices will slow growth in the region and lead to deterioration in fiscal and current account balances, which remain strained in a number of economies in the region. Other domestic risks include overheating in econo- mies operating close to capacity, adverse weather conditions, and political instability. 16 GLOBAL ECONOMIC PROSPECTS | June 2013  countries that appear to be running up against Figure 14. Inflation tends to be higher in countries capacity constraints at growth rates well below with limited spare capacity the growth rates of the pre-crisis period, including several large and economically Tightness * 4.0 important middle-income countries; 3.5 Sierra Leone 3.0  countries with considerable slack in their Ghana economies, whether because of the severity of 2.5 Paraguay Gabon the post-crisis downturn (developing Europe), Central African Republic 2.0 Cambodia Burundi or because of social and political disruptions to 1.5 Laos PDR Cote d’Ivoire economic activity (Middle East & North 1.0 Seychelles Bolivia Indonesia Africa); and finally Chile Pakistan Philippines Togo 0.5 Niger Sri Lanka Mongolia Mauritania Burkina Faso Rwanda 0.0  developing countries where recovery from the -10 -5 0 5 10 15 20 Quarterly inflation (saar), 2013Q1 % crisis appears complete, and there are no * Tightness is the sum of the output gap in 2013 and the difference between the actual and potential growth rates in 2013 outward signs of overheating—this is the Source: World Bank; Datastream. largest group of the four. order. That would be especially desirable in Strong growth and capacity constraints are countries where monetary conditions have been relaxed in recent years, or where structural deficits issues for many countries in East Asia, Sub- are relatively high and the economy could therefore Saharan Africa, and Latin America benefit from restoring some of the fiscal cushions that were expended in responding to the crisis. Policy makers in fast-growing economies that are close to (or above) full capacity should be focusing In China, ongoing rebalancing efforts remain a on avoiding overheating, rebuilding fiscal and priority as does engineering a gradual decline in its monetary conditions, and implementing structural unsustainably high investment rate. Should reforms to allow their economies to sustain the fast investments prove unprofitable, the servicing of growth. Managing macroeconomic policy is existing loans could be come problematic — difficult at the best of times. For fast-growing potentially sparking a sharp uptick in non- economies—especially those that are having performing loans that could require state success in exploiting previously untapped intervention (see World Bank 2013a, for more). potential—the challenge is particularly difficult because judging where an economy is relative to In still other countries, growth in the post-crisis potential is daunting when domestic economic structures are rapidly changing and both foreign period has been weaker than during the boom and domestic investors are expressing strong because of underlying supply-side constraints confidence in an economy’s future (box 5). While there are clear costs associated with overheating, Growth in Brazil, India, Russia, and South Africa especially when fast growth has been accompanied has been 2–3½ percentage points slower since by rapid credit expansion, there are equally clear 2010 than it was during the pre-crisis boom period opportunity costs associated with prematurely of 2003–07 (table 3). While different factors are at slowing an economy and potentially forgoing fast play in each of these middle-income countries, growth and rising incomes. there are several common factors. First, growth during the boom period was much stronger than For countries that combine rapid growth and during the preceding four years or even 10 years. already tight capacity conditions, the risks of Many began to think that these higher pre-crisis overheating are higher; these risks include high or growth rates might be consistent with potential rising inflation or both (figure 14); growing current output growth, a view that the strong bounce-back account deficits (as domestic supply is unable to of growth in the period immediately following the meet rapidly rising demand); and asset price crisis seemed to confirm.5 However, countries have bubbles. In these economies, a tightening of either had difficulty sustaining such rapid growth without or both fiscal and monetary policy might be in generating goods or asset price pressures. This, 17 GLOBAL ECONOMIC PROSPECTS | June 2013 Table 3. Growth post-crisis has been much weaker than during the pre-crisis period in several middle-income countries Average Growth Output Gap Growth in 2012 1995-99 1999-03 2003-07 2010-12 2007 2010 2012 Actual Potential Brazil 1.4 2.3 4.7 1.8 1.7 2.4 -0.8 0.9 3.2 India 6.6 5.4 8.8 6.1 2.5 2.2 0.9 5.3 6.8 Russia -0.4 6.8 7.6 3.9 9.7 -1.9 -1.3 3.4 3.7 Turkey 3.4 3.0 7.3 5.4 4.3 -2.4 -0.2 2.2 4.0 South Africa 2.4 3.4 5.2 2.8 5.0 -0.7 -1.0 2.5 3.0 Note 1: Average annual compound growth rate Note 2: Calendar year average of fiscal year GDP measured at factor cost for India Source: World Bank. plus increasing current account deficits, suggest suggesting limited scope for growth to accelerate in that underlying potential output growth was slower the short run (growth in 2012 was slower than than pre-crisis growth rates might have suggested. potential growth in most of these countries). Indeed, World Bank estimates of potential output Moreover, growth rates in the future are likely to indicate that, in each of these countries, pre-crisis be constrained by the rate of growth of potential, growth was well in excess of potential growth. which although higher than post-crisis averages for Weak post-crisis growth in several of these these countries, remains well below pre-crisis countries has not generated significant spare capacity. growth rates. Rather it has eliminated what were in some cases large positive output gaps in 2007. Of course, there is considerable uncertainty surrounding these (or any) estimates of potential To the extent that current output gaps are relatively output.6 However, inflation increased over the past small (or positive), efforts to increase growth year in two of the five countries in table 3, and through monetary and fiscal stimulus risk being (or current account balances deteriorated in all but may have been) ineffective and might add to debt one. These developments suggest that supply or inflationary pressures without any sustained constrains rather than deficient demand nay be at progress in increasing output or reducing the root of the slower growth during recent years unemployment. (table 4). According to the World Bank estimates in table 3, For all of these countries, if growth is to return to the 2012 output gap in Brazil, India, and Turkey is pre-crisis growth rates on a sustainable basis, much either positive or close to zero (less than 1 percent), more attention will need to be paid to policies that tackle supply-side bottle necks, whether they stem from weak or poorly enforced regulations, Table 4. Inflation is rising or current account deterio- corruption, inadequate or irregular provision of rating in countries with tight output gaps electricity, or inadequate investments to improve Levels (MRV) Change in past year educational and health outcomes. Current Inflation Current Inflation account percentage account Output gaps and unemployment are persistent (y/y) (% GDP) points (% GDP) problems for many countries in developing Brazil 6.5 -2.3 1.4 -0.2 Europe India 9.4 -5.4 -0.9 -1.9 Russia 7.4 3.9 3.6 -1.4 Several countries in developing Europe participated in the excesses of the pre-crisis boom period, with Turkey 6.5 -6.0 -5.0 3.7 both households and firms taking on high levels of South Africa 5.9 -6.2 -0.2 -2.8 debt often denominated in foreign currency and often used to finance consumption rather than Source: World Bank. 18 GLOBAL ECONOMIC PROSPECTS | June 2013 Box 5. Slower growth in the post-crisis period mainly reflects a return to underlying potential growth rates after above-potential growth during the boom period Box table 5.1 Potential output and its determinants Defining potential growth and why it is important Forecasting is always a challenging exercise—even more so 1995-2005 2005-2007 2007-2009 2009-2012 2012-2015 when the global economy is going through a large adjustment. (Average annual percent change) To provide some anchor to the forecasting process, the World Developing countries Bank relies on potential GDP (growth). Actual GDP 4.8 8.3 3.8 6.2 5.5 Potential GDP 4.9 6.3 6.1 5.8 5.7 Potential output is defined as the trend growth in the productive Total Factor Productivity 2.1 2.7 2.5 2.3 2.3 capacity of the economy, that is, it is the estimated level of out- Capital Stock 4.3 7.7 7.9 8.0 7.3 put attained when the entirety of the capital stock and effective Working-Age Population 2.0 1.8 1.7 1.5 1.7 East Asia & Pacific labor supply is employed. It is thus a measure of the maximum sustainable output (growth)—the level of real GDP (growth) in a Actual GDP 7.4 11.6 8.0 8.5 7.5 given year that is consistent with a stable inflation and the way Potential GDP 8.1 9.1 8.9 8.6 8.0 in which the factors of production, capital and labor, are optimal- Total Factor Productivity 4.0 4.9 4.7 4.4 4.2 ly combined in the production process. Capital Stock 9.4 10.5 11.1 11.3 9.5 Working-Age Population 1.6 1.4 1.2 1.1 1.3 Europe & Central Asia In calculating the potential GDP, working-age data comes from Actual GDP 4.0 7.7 -1.5 4.6 3.6 the United Nations, while the capital stock is estimated using Potential GDP 3.2 5.4 4.3 3.7 3.8 the perpetual inventory method from investment data and as- Total Factor Productivity 2.8 2.7 2.0 1.8 1.8 suming a depreciation rate of 7 percent (IMF 2005). TFP was Capital Stock -0.1 7.3 5.8 5.5 5.3 calculated using a Hodrick-Prescott filter through spot estimates Working-Age Population 0.6 0.7 0.8 0.4 0.5 of total factor productivity (TFP) (i.e. the Solow residual). Latin American & Caribbean Actual GDP 2.9 5.5 1.0 4.4 3.7 In the pre-crisis period, developing-country GDP grew 2 percentage Potential GDP 2.9 3.8 3.7 3.6 3.4 points faster, on average, than potential GDP Total Factor Productivity 0.7 1.2 1.2 1.1 0.9 Developing-country GDP grew on average by 8.3 percent each Capital Stock 2.7 4.5 4.6 4.7 4.9 year between 2005 and 2007, approximately 2.0 percentage Working-Age Population 2.0 1.7 1.6 1.5 1.4 points faster than the annual growth of potential output 1 during Middle-East & North Africa that period. As a result, World Bank estimates suggest that de- Actual GDP 4.4 5.6 3.7 1.9 2.4 veloping-country demand was fully 3.5 percentage points higher Potential GDP 4.3 4.3 3.8 3.1 2.8 than supply in 2007 (output was broadly in balance in 2005). Total Factor Productivity 1.0 0.9 0.5 0.1 0.1 Capital Stock 3.3 5.4 6.0 5.1 4.0 The crisis erased excess demand, with most countries returning Working-Age Population 3.2 2.4 2.1 2.1 2.2 reabsorbing spare capacity relatively quickly South Asia With the crisis, developing-country growth slowed sharply from Actual GDP5.8 8.9 5.3 7.3 5.9 8.5 percent to 1.9 percent between 2007 and 2009, broadly the 6.0 Potential GDP 7.4 7.1 6.7 6.1 same slowdown observed in high-income countries in percent- 2.3 Total Factor Productivity 2.9 2.8 2.6 2.4 age point terms (6.6 points for developing countries, 6.3 points 6.4 Capital Stock 9.8 9.3 9.1 7.5 for high-income countries). As a result, the excess demand of 2.4 Working-Age Population 2.1 2.0 1.9 1.9 the end of boom period was erased and a negative output gap Sub-Saharan Africa of 0.9 percent of potential GDP was opened up by 2009. The Actual GDP4.0 6.7 3.6 4.7 5.2 rebound in activity in 2010 more than absorbed the gap, with 3.8 Potential GDP 5.2 5.3 4.9 5.1 positive or close to zero output gaps in all developing regions 1.0 Total Factor Productivity 1.5 1.3 1.2 1.1 except Europe and Central Asia. Slower -than-potential growth 2.4 Capital Stock 5.9 7.1 6.4 6.9 in East Asia & Pacific, and South Asia closed output gaps from 2.8 Working-Age Population 2.7 2.7 2.6 2.7 above, while growth broadly in line with potential in Latin Ameri- ca has kept the gap closed in that region. In Sub -Saharan Afri- Source: World Bank. ca, where estimates of potential are particularly difficult, GDP has grown less quickly than potential in the post -crisis period, Box table 5.2 Output gaps opening up a small negative output gap. 2005 2006 2007 2008 2009 2010 2011 2012 2013 Growth since the crisis has been constrained by domestic bottle- Output Gap ((actual GDP - potential)/potential, %) necks and productivity, stymieing efforts to use expansionary mac- Developing -0.2 1.5 3.5 3.1 -0.9 0.6 1.0 0.1 -0.6 roeconomic policy to boost growth While growth during the post-crisis period has been slower than East Asia & Pacific -2.0 -0.4 2.5 2.2 0.8 1.6 1.5 0.6 -0.2 during the pre-crisis period, it has, on average, been in line with Europe & Central Asia 3.4 6.0 8.0 7.0 -3.6 -2.1 -0.2 -1.1 -1.9 underlying potential growth. Potential growth for all developing Latin America & Caribbean -0.5 1.3 2.9 2.8 -2.5 -0.3 0.4 -0.1 -0.1 regions has slowed relative to the boom period by an estimated 0.5 percentage point. Slower population and TFP growth have Middle-East & North Africa 0.0 0.9 2.6 2.6 2.4 4.1 2.1 -1.0 -2.5 contributed to the slower growth. The rate of growth of the capi- South Asia -0.5 0.8 2.3 0.8 -1.0 1.8 2.4 0.8 -0.1 tal stock for all developing regions increased, but declined if Sub-Saharan Africa 0.4 1.8 3.2 2.9 -0.2 -0.1 -0.3 -0.8 -0.9 China is excluded from the calculation. In terms of contributions Source: World Bank. to potential growth, about ¼ of the slowdown is attributable to slower population growth for the developing world excluding China and ⅔ due to slower TFP growth. The major contributor to slower potential growth in South Asia was slower capital stock accumulation. Weaker TFP growth was the largest driver of slower growth among BRICS, while in Latin America & the Caribbean, weaker population growth was a major factor. To achieve faster growth, developing countries will have to focus on supply-side reforms There is obviously significant uncertainty surrounding measures of output gaps and potential output, particularly among de- veloping countries where the structure of economies is changing so quickly. Nevertheless, these results serve as a reminder that developing countries will need to continue with structural policy reforms that eliminate bottlenecks, enhance productivity, and stimulate capital accumulation if they are to achieve sustainably faster growth rates over the medium term. 1. The data reproduced in this box derive from the World Bank’s macroeconometric model and its estimates of total factor productivity (TFP) and potential output. These estimates are derived following a production-function technique similar to that used by the OECD and the European Commission, as described in (Burns, Janse van Rensburg, and Bui 2013). Future TFP growth, which influences current TFP growth through the employed smoothing algorithm, is assumed to be equal to the average observed in the pre-boom period 1995-2005. 19 GLOBAL ECONOMIC PROSPECTS | June 2013 investments in new productive capacity. In Output gaps are small and appear to be closing addition, the banking sectors in many of these for the majority of developing countries countries had close relations with European banks. As a result, their own difficulties in dealing with rising quantities of nonperforming loans were The bulk of developing countries are in a relatively magnified by a drying up of external funding positive place, with modest output gaps (countries sources upon which many banks had relied. As in close to the center of the figure 16), that are closing high-income Europe, the adjustment that ensued (countries in the green-shaded portions of the following the crisis was brutal. Unemployment graph), either because output growth has slowed soared to record levels, as banks deleveraged and below potential and is therefore easing inflationary households and firms cut into spending in an effort pressures, or because output is growing somewhat to repair damaged balance sheets. Fiscal conditions faster than potential. In these economies, policy deteriorated throughout the region, with severe appears to be broadly on track, although authorities consequences in a few countries where public debt may need to examine the overall stance of fiscal levels had risen even during the boom years. policy to evaluate whether there is scope for a gradual tightening to regenerate buffers consumed The good news is that growth rates for many of the during the crisis period or to tighten monetary hardest-hit countries have recovered to levels close policy and in some cases rebuild reserves to to their underlying potential output. However, provide room for a monetary policy easing should growth has not been strong enough to make the global economy weaken sharply. significant inroads into existing unemployment and spare capacity.7 Arguably, these economies have Post-crisis risks have been caught in a high unemployment equilibrium. Traditional policy advice in situations like this would be to use fiscal and monetary policy to stimulate growth and help close output gaps, but for many countries already high fiscal deficits and receded, with domestic the necessity of restoring bank balance sheets limit the scope for such actions (figure 15). For these challenges gaining countries, policy may have to focus on increasing economic flexibility (including labor retraining) to prominence promote improved competitiveness and take advantage of faster growth elsewhere. The cumulative steps taken by Euro Area countries over the past several years have greatly reduced the fiscal sustainability problems on the continent. The Figure 15. Fiscal space is limited among many Figure 16. Output gaps are small or closing in the economies with large output gap majority of developing countries 5 Speed of gap closure in 2013, percentage points Percent of GDP, 2012 4 0 3 Overhea ng Gap closing from below -1 2 1 -2 Size of output Gap (2012) 0 -5 -4 -3 -2 -1 0 1 2 3 4 5 -3 -1 -2 -4 Output Gap Crashing -3 China Fiscal Deficit Gap closing from above -5 -4 -5 -6 Mali Romania St. Ukraine Bulgaria Slovenia Lithuania Cameroon South East Asia & Pacific Europe & Central Asia La n America & caribbean Vincent Africa Middle-East & North Africa South Asia Sub-Saharan Africa Source: World Bank. Source: World Bank. 20 GLOBAL ECONOMIC PROSPECTS | June 2013 International Monetary Fund (IMF) estimates that  the potential effects of the radical relaxation of ⅔ of Euro Area countries have already done both fiscal and monetary policy in Japan; enough fiscal adjustment (through end of 2013) to achieve debt sustainability and debt reduction (IMF  the potential impacts on revenues, government 2013b, 8). This fiscal consolidation although balances, and growth among commodity enormously painful has, in conjunction with exporters, if the increased supply and demand reassurances offered by the European Central Bank suppression that high commodity prices have (ECB), helped restore confidence in the Euro Area evoked begins to generate strong downward even as concerns about individual countries and pressures on commodity prices; banks remain. Indeed, as the uncertainty evoked by the Cyprus rescue effort illustrated, continued  domestic challenges, including inflationary careful management of conditions at both the pressures and asset price bubbles, and weaker country level and the regional level is required. than pre-crisis growth rates. Much of the uncertainty that surrounded U.S. fiscal policy toward the end of 2012 has dissipated.  The challenges that the eventual withdrawal of Congress has twice extended the debt ceiling well quantitative easing may bring. in advance of reaching it, reducing the likelihood that a return of brinkmanship will cause the debt to go unpaid. The decision to allow payroll taxes to Dealing with sharply relaxed fiscal expire and increase tax rates on some wealthier and monetary policy in Japan individuals, together with the spending cuts associated with the sequester have reduced the U.S. After several months of signaling that they would general government deficit by an estimated 1½ be loosening fiscal and monetary policy, Japanese percent of GDP. authorities announced at the beginning of 2013 a three-pronged macroeconomic growth strategy, Nevertheless, little progress has been made toward comprising new public works spending of ¥10 setting U.S. fiscal policy on a sustainable medium- trillion, a new monetary policy aimed at reaching a term path. At 7.0 percent of GDP in 2012, the 2 percent inflation target in the medium term, and general government deficit remains very high, and structural policies aimed at increasing total factor gross general government debt is projected to productivity growth. For the moment, the precise reach 107 percent of GDP in 2013. As a result, the nature of the programs is not entirely clear—for IMF 2013b) estimates that an additional deficit example, only about half of the announced new reduction of some 8.2 percent of GDP will be spending appears to be net new spending. Similarly, required before fiscal policy in the United States the impact and details of announced to incite firms returns to a sustainable path (almost twice the to invest, reduce protection in the service and estimated cuts required in the Euro Area). In Japan, agricultural sectors and stimulate female labor the same number is more than twice as high again, participation is unclear. The monetary easing, even when seeking the less ambitious objective of which, as announced, would about the same size as reducing general government gross debt to 173 the third round of quantitative easing (QE3) in the percent of GDP. United States, has only just begun. Traditional risks have receded, but Japanese quantitative easing can be expected to affect developing countries in three ways: other risks and challenges have  emerged or grown in stature The yen’s depreciation is likely to dampen developing-country exports (figure 17). However, income elasticities are typically larger than price Even as the post-crisis risks from the high-income sensitivities and in this particular instance, world have declined in importance, a new set of developing countries gain from increased uncertainties and risks are emerging or gaining in import demand from Japan might outweigh stature. For instance, developing countries are the losses associated with the Yen’s (real) increasingly concerned about: depreciation; 21 GLOBAL ECONOMIC PROSPECTS | June 2013 Figure 17. Japanese depreciation has pushed up devel- Figure 18. Since early 2011, metals and energy prices have oping country real effective exchange rates been weakening Real effective exchange rates (January 2005=100) USD price index, Jan 1 2012 =100 160 150 Nickel 140 130 130 120 Copper 110 100 100 90 Crude Oil Jan '06 Jan '08 Jan '10 Jan '12 Developing Countries Europe & Central Asia South Asia China Latin America & Caribbean 70 East Asia excl. China Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Source: World Bank.; IFS; JP Morgan. Source: World Bank; Datastream.  By adding to the looseness of global monetary measures (see the following discussion for more on conditions, through lower global interest rates this point). and perhaps increased capital inflows, potentially adding to overheating pressures, especially in developing East Asia & Pacific; Past investments are boosting the supply of industrial commodities,  Through increased demand for final goods and intermediate products used in Japanese potentially ending the supercycle exports, mainly benefiting countries involved in the supply chains of Japanese exporters. Since early 2011, industrial commodity prices have been weakening, a process that appears to be  Longer-term unless the structural component intensifying in 2013, despite signs that the global of the reform agenda is successful in boosting economy is gaining strength (figure 18). Indeed, productivity and GDP growth, the fiscal and since their peak in early 2011, the price of metals monetary stimulus elements are unlikely to and minerals is down 30 percent and that of energy have a lasting positive effect for developing is down 14 percent, with prices off 12 and 5 country GDP, while increased liquidity and percent, respectively, between January 2013 and the indebtedness could prove destabilizing. end of May 2013. This price weakness has sparked discussion about whether a supercycle in Ultimately the overall impact on individual commodity prices is coming to an end— developing countries will depend in part on the particularly within the metals industry, where large importance of Japan as a trading partner, the size increases in supply are coming on stream in of liquidity leakage from the Japanese economy, the response to investments spurred by the high prices extent that individual developing countries attract of the past several years. 8 additional capital flows, and the extent to which the quantitative easing boosts Japanese final and While the baseline assumption of a gradual easing intermediate demand for the exports of developing in prices over the projection period remains the countries (box 6 and the Exchange Rate Annex most likely outcome, a steeper decline cannot be cover different channels and likely impacts in more ruled out. Table 5 reports the results of two detail). simulations. The first scenario examines the impacts on developing-country GDP, current Finally, the financial impact of Japanese quant- accounts, and fiscal balances of a scenario where itative easing could be attenuated by the scaling oil prices, reach the real long-term supply cost of back or even withdrawal of U.S. quantitative $80 per barrel (industry experts’ current estimate of the cost of profitably extracting oil from the 22 GLOBAL ECONOMIC PROSPECTS | June 2013 Box 6. Potential impacts of Japanese quantitative easing on developing countries The yen’s depreciation caused developing-country exchange rates to appreciate 1.7 to 3.7 percentage points more than would have been the case otherwise Since September 2012, the yen has depreciated in real effective terms by 21 percent. So far, the impact on developing economies is measurable, if relatively muted. Developing -country real-effective exchange rates appreciated by 4.7 percent over the same period, which was 3.5 percentage points more than their average appreciation over any six -month period between 2005 and 2012. Countries in East Asia & Pacific have closer direct trade ties with Japan and their currencies were hit harder, rising by 6.1 percent versus an earlier average appreciation of 2.4 percent. Thailand experienced a sharp 12.5 percent real-effective appreciation of its currency. Simulations suggest that in the absence of the yen’s depreciation, curren- cies in developing countries generally and in East Asian developing countries specifically would have appreciated 1.7 and 3.7 percentage points less quickly. The yen’s depreciation likely to dampen developing-country exports The yen’s depreciation will tend to make imports more expensive for Japanese consumers and will, therefore, initially reduce Japa- nese demand for developing-country imports. However, typically income elasticities are larger than price sensitivities and in this partic- ular instance, developing country exporters’ gains from increased import demand from Japan might outweigh the losses associated with the Yen’s (real) depreciation. Effects are not larger because few developing countries compete directly with Japan Impacts on developing-country exports to the rest of the world would be limited because few compete directly with Japan. Only four developing countries have an export similarity index with Japan in excess of 50 (100 implies an identical export structure), and even for those where similarities are relatively high, impacts may be limited given differences in markets served (Mexico competes in the auto sector, but is focused in the U.S. market, which represents only 22 percent of Japa- nese auto exports). Countries like Thailand and Philippines that are in Japan’s supply chain may benefit from increased Japanese exports Suppliers of parts and components to Japan in regional production networks, particularly Thailand and the Philippines, could benefit from gains by Japanese exporters in global markets and even derive additional benefits through increased potential FDI from Japan. Firms in trade partner countries (including those in East Asia & Pacific) would also benefit from Japanese technology, machinery, and equipment at competitive costs. In the area of service trade, tourists from developing East Asia to Japan would have increased purchasing power that would contribute to further narrowing Japan’s trade deficit with the region. Trade partners in the region and globally would benefit from an increase in Japan’s demand for global im- ports. Quantitative easing will help keep interest rates low and may contribute to the volatility of capital flows The announced quantitative easing component of the Japanese stimulus package is roughly twice the size of QE3 in the United States. However, financial leakages to developing countries are unlikely to be twice those associated with the U.S. QE3 because capital outflows from the United States tend to flow more directly to developing countries than do Japanese outflows (only 3 percent of Japanese portfolio outflows are directed to developing countries, versus 8.3 percent for the Unit- ed States). However, Japanese capital markets are thinner than U.S. capital markets and, therefore, may be less able to absorb the additional capital flows, forcing a larger share to leak out. Finally, IMF (2013d) found that the impacts of QE3 on developing countries was much less marked than earlier episodes because markets were much calmer then (as they are now). Evaluations of the effect of U.S. QE on developing countries offer unclear guidance about the potential impact of Japanese QE Finally, it is not all that clear what the impact of the leakages (however large they may be) will be on developing countries. Research by the Asian Development Bank (2013) suggests that the main impact on developing countries of the U.S. quanti- tative easing was globally positive, mainly because it lowered borrowing costs and boosted demand. Similarly IMF (2013d) suggests that flows to developing countries have not been excessive and have been broadly manageable, although volatili- ty associated with changed sentiment in high -income countries has generated temporary strains and monetary policy chal- lenges. While lower interest rates may be contributing to asset bubbles and excess risk taking, they have also permitted the relatively inexpensive financing of a great deal of capacity enhancing investment. By extending periods of low interest rates and boosting capital flows, Japanese QE could exacerbate regional bubbles Japanese QE will undoubtedly serve to keep borrowing costs down for an even longer period than would have occurred otherwise. That may contribute to asset price bubbles and volatile capital flows, although to what extent is difficult to evalu- ate, just as the evidence concerning the impact of the U.S. policy in this regard is mixed. 23 GLOBAL ECONOMIC PROSPECTS | June 2013 Table 5. Table .5 Impact of a more rapid supply-induced decline in industrial commodity prices Scenario 1: Oil price gradually declines to $80/bbl real by June 2014, other commodity prices react endogenously Real GDP Current Account (% of GDP) Fiscal Balance (% of GDP) 2013 2014 2015 2013 2014 2015 2013 2014 2015 World 0.1 0.4 0.3 0.0 0.1 0.0 High income countries 0.1 0.5 0.4 0.1 0.4 0.5 0.0 0.2 0.1 Developing countries 0.1 0.3 0.1 0.0 0.0 -0.1 0.0 -0.2 -0.3 Oil exporters Developing countries -0.1 -0.4 0.1 -0.3 -1.4 -1.4 -0.2 -1.1 -1.1 East Asia and Pacific 0.1 0.4 0.4 0.0 0.0 0.1 0.0 -0.2 -0.3 Europe and Central Asia -0.2 -0.8 -0.3 -0.5 -2.3 -2.3 -0.4 -1.8 -1.8 Latin America and Caribbean -0.1 -0.3 0.4 -0.2 -0.8 -0.7 -0.1 -0.6 -0.5 Middle East and N. Africa -0.4 -1.4 0.1 -0.8 -3.5 -2.2 -0.4 -2.1 -2.3 South Asia n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Sub-Saharan Africa -0.3 -1.4 -0.8 -0.9 -4.5 -4.4 -0.6 -2.9 -3.3 Oil importers Developing countries 0.2 0.6 0.1 0.2 0.7 0.5 0.1 0.2 0.1 East Asia and Pacific 0.2 0.8 -0.1 0.2 0.8 0.4 0.1 0.2 0.1 Europe and Central Asia 0.1 0.4 0.3 0.2 0.8 0.9 0.1 0.2 0.1 Latin America and Caribbean 0.0 0.2 0.1 0.0 0.2 0.2 0.0 -0.1 -0.2 Middle East and N. Africa 0.1 0.5 0.4 0.1 0.5 0.6 0.0 0.2 0.1 South Asia 0.2 0.9 0.8 0.3 1.4 1.5 0.1 0.7 0.7 Sub-Saharan Africa 0.0 0.2 0.2 0.0 0.2 0.2 0.0 0.0 0.0 Scenario 2: Metal prices gradually decline by a cumulative 20% by June 2014 Real GDP Current Account (% of GDP) Fiscal Balance (% of GDP) 2013 2014 2015 2013 2014 2015 2013 2014 2015 World 0.0 0.0 0.0 0.0 0.0 0.0 High income countries 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 Developing countries 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -0.1 Metal exporters Developing countries 0.0 -0.2 -0.1 -0.1 -0.3 -0.3 0.0 -0.2 -0.3 East Asia and Pacific n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Europe and Central Asia 0.0 -0.2 -0.1 -0.1 -0.3 -0.3 0.0 -0.3 -0.3 Latin America and Caribbean 0.0 -0.1 -0.1 0.0 -0.2 -0.2 0.0 -0.2 -0.2 Middle East and N. Africa n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. South Asia n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Sub-Saharan Africa -0.1 -0.7 -0.5 -0.2 -1.2 -1.2 -0.1 -0.8 -0.9 Metal importers Developing countries 0.0 0.1 0.0 0.0 0.2 0.1 0.0 0.0 0.0 East Asia and Pacific 0.0 0.1 -0.1 0.0 0.2 0.1 0.0 0.1 0.0 Europe and Central Asia 0.0 0.2 0.1 0.1 0.3 0.3 0.0 0.0 -0.1 Latin America and Caribbean 0.0 -0.2 -0.1 -0.1 -0.3 -0.4 0.0 -0.3 -0.3 Middle East and N. Africa 0.0 0.1 0.1 0.0 0.2 0.2 0.0 0.1 0.1 South Asia 0.0 0.2 0.2 0.1 0.4 0.4 0.0 0.2 0.2 Sub-Saharan Africa 0.0 0.0 0.0 0.0 0.1 0.1 0.0 0.0 0.0 Source: World Bank. 24 GLOBAL ECONOMIC PROSPECTS | June 2013 Canadian tar sands) by mid-2014 rather than GDP, and the fiscal balance by nearly 1 declining gradually to that price by 2025, as in the percent. baseline. The faster decline is assumed to come from a shift in expectations about future prices Unlike oil exporters, these impacts are more likely brought about by increasing production and to be binding for developing metals exporters reserve discoveries in the United States and other whose average government and current account nonmembers of the Organization of Petroleum deficits are equal to 2.7 and 6.3 percent of GDP. Exporting Countries (OPEC). In this simulation, Assuming that increases in government deficits the price of other commodities react in line with above the 3 percent level cannot be financed, GDP historical cross-price and output elasticities (energy impacts would increase to -0.5 percent for the is a major cost factor in the production of both metal exporting countries facing financing metals and agricultural commodities). As a result, constraints, versus –0.2 percent for countries metals and food prices also fall, by about 7 and 3½ where there are no financing constraints. percent, respectively, relative to the baseline. Notwithstanding the 16 percent decline in oil In this scenario, global GDP is positively affected prices between their March 2012 peak and May (up 0.4 percentage point in 2014 relative to 2013, commodity prices are much higher than they baseline), because the positive effects on oil- were at the turn of the century. For example, importing economies outweigh the negative impact between their 2001 record lows and 2012, nominal on oil-exporting countries. The GDP of oil prices are up more than 300 percent, while developing-country oil exporters is projected to metals and agricultural prices are up 225 and 157 decline by a relative modest 0.4 percent in this percent, respectively. scenario in 2014, but the effects on current account and fiscal balances are larger—-1.4 and -1.1 percent of GDP, respectively. The simulation assumes that The eventual tightening of monetary exporters are able to finance the deterioration in policy in high-income countries may these balances. If they were unable to do so, GDP impacts would be substantially larger. For the most slow growth in developing countries part, developing-country oil exporters are still running current account surpluses, but fiscal Although much of the current debate in developing deficits exceed 3 percent of GDP in 6 of 16 countries concerns the potential impacts of countries for which data exist. If countries could Japanese quantitative easing (see earlier discussion), not finance additional deficit, they could be forced the implication for developing countries of backing into a procyclical tightening of policy that would away from current levels of stimulus and even the exacerbate the cycle. withdrawal of stimulus are at least equally important. Although Japan has embarked on a new The second simulation analyzes the impact of a stimulus policy, there are increasing signs that the more rapid decline in metals prices, which are United States will soon either reduce the size of or assumed to fall by a further 20 percent by June stop its QE efforts. If that happens, not only will 2014 relative to the baseline, in response to the net effect of Japanese easing likely be offset (at additional capacity coming onstream following past least partially) by tighter policies in the United investments (see earlier discussion). In this States, but over the medium term, developing scenario, the effects on global and oil-importing countries are likely to face tighter financial country GDP are broadly unchanged, in part conditions, with potentially important real-side because, unlike oil, the share of metal and minerals implications.9 in the imports of most countries is small (even in China, which consumes a disproportionate share of As monetary policy in high-income countries the world’s metals, metals and minerals represent begins to be less accommodative, long-term only 16 percent of total imports). The impact on interest rates can be expected to rise. Currently, metals exporters is more severe. Among Sub- U.S. long-term interest rates are some 110 basis Saharan African metal exporters, GDP could fall points below their pre-crisis level and 140 basis by as much as -0.7 percent in Sub-Saharan Africa, points lower than their long-term average in real balance of payments declining by 1.2 percent of terms. Assuming that a relaxation of quantitative 25 GLOBAL ECONOMIC PROSPECTS | June 2013 easing leads U.S. long-term interest rates to rise to Higher interest rates could also their long-term average in real terms, and that developing-country interest rate spreads remain expose risks in countries with high constant, developing-country borrowing costs debt levels would rise by the same amount as long-term U.S. rates. In addition to the longer-term effects that a return Econometric evidence suggests, however, that to higher capital costs would have, there is also the developing-country spreads tend to rise when base risk that the transition to higher rates occurs in an rates increase. Work done for the 2010 edition of abrupt and disruptive fashion (IMF 2013d). In such Global Economic Prospects suggests that a 100-basis- a scenario, rather than a gradual increase in long- point increase in high-income-country base rates is term rates as monetary stimulus eases, markets associated with a 110 to 157 basis point increase in react preemptively, causing rates to jump quickly, developing-country yields (World Bank 2010; potentially trapping some participants in vulnerable Kennedy and Palerm 2010, 2013and IMF 2013a). positions that appeared manageable under low interest rates but proved not to be under suddenly If real base rates return to their long-term averages, higher interest rates. they would rise from about 188 basis points today to around 322 basis points (the mean level between Developing countries that have run up private and 1990 and 2007). Based on historical experience, public sector debt during the low-interest period that could cause developing-country yields to rise could be particularly vulnerable. So too would be by between 150 and 270 basis points, with countries with relatively weak domestic financial countries with relatively good credit histories and sectors and elevated current account or low spreads at the bottom end of the range and government deficits that might make them those with less good records toward the upper end vulnerable to either a sharp increase in capital costs of the range. This is broadly in line with recent or a reduction in flows. IMF (2013a, 38–39) estimates that suggest that three-fourths of the 465 basis point decline in Although the majority of developing countries developing-country yields since December 2008 appear to be in good condition in this regard, has been caused by external rather than domestic public debt levels are high and proving difficult to factors.10 manage in countries such as Cape Verde, Egypt, Eritrea, Jamaica, Jordan, Lebanon, Pakistan, and Simulations suggest that the associated increase in Sudan. IMF statistics suggest that gross general the cost of capital would cause desired capital-to- government debt exceeds 50 percent of GDP in 36 output ratios in developing countries to decline, low- and middle-income countries and increased in resulting in slower investment growth for an 12 of these by 10 or more percentage points of extended period as well as a slower rate of growth GDP between 2007 and 2012 (figure 19). of potential output of around 0.6 percentage points per annum after three years during the transition period to a lower capital-output ratio. Longer term, Figure 19. Several developing countries combining high and rapidly rising government debt are potential output could be lower by between 7 and at risk 12 percent unless measures are undertaken to % of GDP 160 Debt in 2012 reduce domestic factors that contribute to the high 140 Change in debt since 2007 (percentage points) cost of capital in developing countries. Efforts in 120 this regard could more than completely offset the impact of tighter global conditions. 100 80 60 40 20 0 Source: IMF. 26 GLOBAL ECONOMIC PROSPECTS | June 2013 Figure 20. Private sector debt levels, as well, are elevated in some developing countries Albania Colombia Private Domestic Debt (% GDP)* External Private Debt (% GDP) Macedonia, FYR Zimbabwe Russian Federation El Salvador Samoa Guatemala Costa Rica Serbia Malaysia Bangladesh Guyana Honduras India Turkey Turkey Belarus Bhutan Mongolia Chile St. Vincent & the Grenadines Bosnia and Herzegovina Nepal Lithuania Armenia Maldives Macedonia, FYR Bosnia and Herzegovina Montenegro Jamaica Ukraine Jordan Dominica Belize Lao PDR Brazil Serbia Cape Verde Vanuatu Georgia Chile Lithuania Morocco Bulgaria Kyrgyz Republic Jordan Nicaragua Fiji Tunisia Romania Grenada Moldova Latvia Lebanon Ukraine Mauritius Kazakhstan Thailand Panama Bulgaria St. Lucia Papua New Guinea Vietnam Malaysia Latvia South Africa Seychelles China 0 20 40 60 80 100 120 0 40 80 120 160 Source: World Bank; International Debt Statistics; World Development Indicators; IMF IFS. Note 1: External private debt include private nonguranted external debt with short- and long-term maturity. Note 2: Domestic credit to private sector refers to financial resources provided to the private sector, such as through loans, purchases of nonequity securi- ties, and trade credits and other accounts receivable, that establish a claim for repayment. For some countries these claims include credit to public enterprises. Note 3: Orange bars indicate low income countries. Individual country exposure is not limited to bond markets) suggest a number of countries general government debt. In several economies, where debt levels are especially high (second panel private sector debt has been increasing rapidly as of figure 20.) However, interpreting the data is well. And private debt can rapidly become a public- difficult, because while debt to GDP levels can sector problem as the recent financial crisis reflect vulnerability, they also reflect the extent of illustrated for high-income countries and the East intermediation — which is generally associated Asia crisis for developing countries. In this respect, with stronger growth and higher incomes. 18 developing countries have private external debt exposures in excess of 30 percent of GDP. Three- Countries where debt levels are high, and have quarters of these are in developing Europe and been rising rapidly, may represent the greatest risk. Central Asia reflecting strong banking and inter- In East Asia for example, combined nonfinancial company linkages with high-income Europe. In the corporate and household debt has increased in case of Seychelles and Papua New Guinea, the several countries, reaching 130 percent of GDP in gross private sector debt reflects a thriving offshore China and Malaysia in 2012. For the East Asia -banking system (figure 20). While that changes the region as a whole, private debt has increased by 19 nature of the associated risk, it does not eliminate percentage points of GDP since 2007, while in it, as the recent experiences of Cyprus, Iceland, and Latin America it has increased by 9 percentage Ireland illustrate. points. Household debt (only by deposit-taking corporations) in Thailand has risen 15 percentage While external debt is sometimes more points since 2007 and now stands at 63.4 percent problematic, because exchange rate movements can of GDP (see World Bank 2013 for more). Total affect domestic agents’ ability to service loans, local household debt is estimated to be about 77 percent currency debt can also problematic — especially if of GDP in Thailand and almost 80 percent of problems with domestic debt provoke a local GDP in Malaysia. banking crisis. Data on domestic banking claims on the private sector (such data exclude debt associated with local 27 GLOBAL ECONOMIC PROSPECTS | June 2013 Concluding remarks The external risks facing developing countries have also evolved:  The recent decline in industrial commodity prices is, perhaps, signaling an end to the Overall, the global economy is moving into a new upward phase of the commodity cycle. Policy and hopefully less volatile phase. The extreme risks makers in commodity-exporting countries need and swings in perceptions that have driven global to take a close look at the potential capital and output markets have eased significantly, consequences of a sharper-than-anticipated even as new risks and challenges have gained in decline in commodity prices for growth, prominence. government finances, and their external financing needs. The majority of developing countries have navigated the crisis and immediate post-crisis  For countries in East Asia, the recent period very well. With the exception of some intensification of monetary easing in Japan countries in developing Europe and the Middle could prompt strong and disruptive capital East & North Africa, they recovered relatively inflows, adding to already existing inflation and quickly from the crisis and have enjoyed solid, if currency pressures. less rapid than boom period, growth rates. With the demand gaps opened up by the crisis largely  Longer term, as high-income monetary policy filled, future growth will increasingly be determined becomes less accommodative, interest rates in by the success with which countries succeed in developing countries will rise. Higher rates may addressing supply-side bottlenecks, including gaps generate difficult adjustments and possibly in physical, social, and regulatory infrastructure: domestic crises, especially in countries where public and private sector indebtedness has  In many countries, policy attention is been on the upswing. appropriately returning to simplifying regulations, opening up to trade and foreign  Over the longer term, higher interest rates will investment, investing in infrastructure and translate into increased capital costs, potentially human capital. These are the policies that have slowing developing-country growth by as underpinned the acceleration in developing much as 0.6 percentage points per annum after country growth over the past 20 years, and it is three years as firms reduce debt levels to more only through continued reform and progress in manageable levels. these policies that the strong productivity growth of the past 20 years can be maintained.  For the many countries operating at close to or even above full capacity, macroeconomic policy may need to be tightened—both to reestablish fiscal space that was used up in response to the crisis and to prevent inflationary pressures and asset bubbles from building up. 28 GLOBAL ECONOMIC PROSPECTS | June 2013 Notes 1. Equity flows to the Middle-East & North Africa completely dried up in the first four months of 2013, with just one bond issue from Lebanon ($1.1 billion) and two syndicated bank deals worth about $643 million. 2. Traditionally, risk premiums are measured as the difference between developing-country yields or CDS rates and those of similar U.S. assets, with the idea that the U.S. assets proxy for the risk-free rate of return. As the crisis hit, the riskiness of U.S. financial assets clearly went up, even if yields did not, either in the short run because of flight- to-quality effects or later because of quantitative easing. At the same time, spreads on developing-country financial assets declined. Only part of that decline can be explained by improved credit quality (IMF 2013b), the rest being explained by the increased riskiness of the base rate and the reduced cost of credit. 3. Since January 2013, 10 developing-country borrowers have been upgraded and only six downgraded. In addition, over the past 18 months, eight developing countries (or developing-country governments)—Angola, Bolivia, Honduras, Mongolia, Paraguay, Rwanda, Tanzania, and Zambia —have issued bonds for the first time (in Bolivia’s case, for the first time in more than 90 years). Since 2010, 14 countries have entered international bond markets for the first time. 4. The IMF (2013a) estimates an overall fiscal contraction for the Euro Area of 0.7 percent of GDP, compared with 0.5 percent in 2012 and 2.1 percentage points in 2011. 5. The measures of potential used here are based on a production function method and rely on estimates of trend total factor productivity growth as well as assumptions that the full capacity rate of employment (employment divided by working-age population) are constant over time and that all of the services of the capital stock are available —where the capital stock is estimated as equal to the sum of all past investments depreciated at a 7 percent rate. 6. For instance, the South African Reserve Bank’s latest estimate of annual long -run potential output growth is 3.5 percent. However the bank also notes that “our estimates for South Africa over the same period as the ECB study reflect a decline from an average of 3.9 per cent (2000–07) to 2.8 per cent (2008–10); more or less similar to the estimated magnitude of decline in the euro area and the United States” (Ehlers and others 2013, 10). 7. For negative output gaps to close, growth must temporarily exceed the rate of growth of potential and vice versa. 8. Heap (2005) argues that industrial commodities go through a super-cycle where prices are likely to stay high for an extended period of time. Jerrett and Cuddington 2008 have empirically visualized the hypothesis for a number of metals. Erten and Ocampo (2012) identify four super-cycles in real commodity prices during the period 1865-2009, ranging between 30-40 years with amplitudes 20-40 percent higher or lower than the long run trend (similar cycles have been identified by Cuddington and Zellou (2013) for metals). 9. See World Bank 2010, chapter, 3 for a more detailed discussion of the impact of higher borrowing costs. 10. The IMF work differs from the World Bank work in citing high-income-country stock market volatility as the main external factor underpinning the decline in spreads. The World Bank (2010) includes high-income stock-market volatility with a much wider range of risk appetite indicators to derive a synthetic price-of-risk indicator that simultaneously determines developing country and high-income country risk premiums. 29 GLOBAL ECONOMIC PROSPECTS | June 2013 References Asian Development Bank. 2013. Asian Development Outlook, 2013: Asia’a Energy Challenge. Asian Development Bank, Manilla, Phillipinnes. Alan Heston, Robert Summers and Bettina Aten, Penn World Table Version 7.1, Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania, Nov 2012. Burns, A., T. Janse van Rensburg, and T. Bui. 2013. “Estimating Potential Output in Developing Countries”. World Bank Prospects Paper. forthcoming Cuddington, John T. and Abdel M. Zellou (2013). “A Simple Mineral Market Model: Can it Produce Super Cycles in prices?” Resources Policy, vol. 38, pp. 75 -87.Cuddington, John T. and Abdel M. Zellou (2013). “A Simple Mineral Market Model: Can it Produce Super Cycles in prices?” Resources Policy, vol. 38, pp. 75 -87. Ehlers, N., L. Mboji, and M. M. Small. 2013. “The Pace of Potential Output Growth in the South African Economy.” South African Reserve Bank Working Paper WP/13/01, South African Reserve Bank, Pretoria. Erten Bilge and Jose Ocampo. 2012. “Super-Cycles of Commodity Prices since the Mid-Nineteenth Century.” Initiative for Policy Dialogue ,Working Paper Series, Columbia University. Heap, Alan. 2005. “China—The Engine of a Commodities Super Cycle.” Citigroup Smith Barney, New York. IMF (International Monetary Fund). 2005, World Economic Outlook. Washington, DC: IMF. ______. 2013a, Fiscal Monitor Report. April, Washington, DC: IMF. ______. 2013b, Global Financial Stability Report. April, Washington, DC: IMF. ______. 2013c, World Economic Outlook. April, Washington, DC: IMF. ______. 2013d, Unconventional Monetary Policies—Recent experience and prospects. May, Washington, DC: IMF. International Energy Agency (IEA). 2012a, Oil Market Report (13 November 2012). OECD/IEA, Paris. ______. 2012b, World Energy Outlook 2012. OECD/IEA, Paris. Jerrett, Daniel and John T. Cuddington. 2008. “Broadening the Statistical Search for Metal Price Super Cycles to Steel and Related Metals.” Resources Policy, vol. 33, pp. 188-195. Kennedy, Michael, and Angel Palerm. 2010.“Emerging Market Bond Spreads: The Role of World Financial Market Conditions and Country- Specific Factors.” World Bank Prospects Working Paper, Washington, DC. Downloaded 5/24/2013 http://siteresources.worldbank.org/INTPROSPECTS/Resources/334934 -1295458722434/ProspectsPaper2010Nov.pdf ______. 2013. “Emerging Market Bond Spreads: The role of global and domestic factors from 2002 to 2011”, Journal of International Money and Finance. Forthcoming. OECD Briefing Note. 2013. "Aid to poor countries slips further as governments tighten budgets" http://www.oecd.org/dac/stats aidtopoorcountriesslipsfurtherasgovernmentstightenbudgets.htm World Bank. 2011B. Global Economic Prospects: Finance, Maintaining Progress amid Turmoil. World Bank. Washington DC. _____. 2012A. Global Economic Prospects: Uncertainties and Vulnerabilities. World Bank. Washington DC. _____. 2012B. Global Economic Prospects: Managing Growth in a Volatile World. World Bank. Washington DC. _____. 2013A. Global Economic Prospects: Assuring growth over the medium term. World Bank. Washington DC. ______. 2013B, Migration and Development Brief, No. 20. Washington, DC. World Bank. http://siteresources.worldbank.org/ INTPROSPECTS/Resources/334934-1288990760745/MigrationDevelopmentBrief20.pdf 30 GLOBAL ECONOMIC PROSPECTS | June 2013 Industrial Production Annex Annex GLOBAL ECONOMIC June PROSPECTS 2013 INDUSTRIAL PRODUCTION GLOBAL ECONOMIC PROSPECTS | June 2013 Industrial Production Annex Overview Recent economic developments Growth in industrial sectors in the post 2008-2009 period has been unimpressive globally, with the exception of East Asia and Pacific, and China in particular. After bouncing back in the immediate Industrial production growth aftermath of the crisis global industrial production strengthened to an above trend pace growth weakened again in the second half of 2010, and after a short-lived acceleration dipped again in in early 2013 mid-2011 and in the second half of 2012. Financial turmoil in high-income countries, and uncertainties Output strengthened in much of the world toward surrounding the course of policy actions in high- the end of 2012 and into the first quarter of 2013, income countries combined in some cases with with global output expanding at a close to 3.4 policy-induced slowdowns in some of the larger percent annualized pace in the three month leading developing countries and/or capacity constraints to March, supported by strengthening final demand have restrained the pace of activity. and rising inventories (figure IP.1). Overall, more than four years after the financial Developing countries industrial output expanded at crisis began, global industrial output is only 5.3 about a 5.1 percent annualized pace during the first percent higher than its pre-crisis peak. Output in quarter of 2013, with East Asia and Pacific’s high-income countries is still 6.5 below pre-crisis industrial production growing at a 8.6 percent levels, with output in the Euro area and Japan annualized pace and China’s industrial output sharply lower and output in the United States expanding at a 9.7 percent annualized pace in the having almost regained pre-crisis levels. Output in first quarter of 2013 (figure IP.2). Industrial output developing countries outside China is 2.6 percent growth in other developing regions has varied higher than its pre-crisis peak. markedly, but has been generally much softer. Growth has remained unimpressive in Latin Growth in developing countries has been most America and the Caribbean as performance in dynamic in East Asia and Pacific mainly reflecting Mexico has been softening and despite a modest double-digit IP growth in China, where output is improvement in growth in Brazil (figure IP.3). 67.9 percent higher than the pre-crisis high, versus Output growth remained relatively flat in Europe 12 percent in the remaining countries in the region. & Central at 2.4 percent annualized pace in the first Industrial output in South Asia and Europe and quarter of 2013, on account of relatively weak Central Asia are 19.6 and 2 percent higher respectively than their pre-crisis peaks. Industrial output in Latin America and the Caribbean and Fig IP.1 Global industrial production expands at an above-trend pace in Q1 2013 Sub Saharan Africa is more or less in line with the Percent, 3m/3m saar pre-crisis levels. Middle East and North Africa is 20 the only developing region where industrial output 10 is lower than four years ago, largely due to the fall in production associated with the socio-political 0 unrest during the Arab Spring. -10 -20 -30 -40 Jan '06 Jan '08 Jan '10 Jan '12 Developing Countries High Income Countries World Source: World Bank; Datastream. 33 GLOBAL ECONOMIC PROSPECTS | June 2013 Industrial Production Annex Fig IP.2 Strong industrial production growth in Fig IP.3 Industrial production growth recovers in East Asia in Q1 2013 Europe and Central Asia in Q1 2013 Percent, 3m/3m saar Percent, 3m/3m saar 20 20 10 0 0 -10 -20 -20 -30 -40 Jan '10 Jul '10 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 Jan '10 Jul '10 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 South Asia Sub-Saharan Africa East Asia and Pacific Europe & Central Asia Middle East & N. Africa Latin America & Caribbean Source: World Bank; Datastream. Source: World Bank; Datastream. performance in Russia and Turkey. Growth production was behind the improved outturns. remained strong in the South Asian subcontinent Excluding Germany, where output performance despite a deceleration of growth in India expanding has been more robust (up 1.2 percent annualized at an 7.7 percent annualized pace in the first pace in the first quarter of 2013), the improvement quarter of 2013. Data for the Middle-East and in industrial sector performance is less dramatic as North Africa and Sub Saharan Africa lags, but was output declined most rapidly among the high- still declining in both regions in the three months spread economies that are enduring the harshest to February. fiscal consolidations. Among high-income countries outside of the Euro Capital-goods orders point to increased global Area industrial output also accelerated – reaching capital spending in early 2013, but momentum may 3.5 percent up from 0.7 percent in the fourth be weakening. After a sharp decline in mid-2012, quarter of 2012, mostly on rapid expansion in the G3 capital goods orders recovered briskly in the United States and Japan. A recovering housing latter part of 2012, with shipments following a market and the creation of more than half a million similar path (figure IP.4). Capital- goods orders payroll jobs in the first quarter of 2013 have supported the acceleration in activity, boosting consumer demand. Investment demand has also Fig IP.4 Capital goods orders are picking up in both high income and developing countries recovered with capital goods orders rising at a 20 Percent, 3m/3m saar percent annualized pace in the first quarter of 2013. 60 As a result industrial production in the U.S. expanded at a 4.4 percent annualized pace in the 40 first quarter of 2013, up from the 2.6 percent 20 annualized pace recorded in the final quarter of 2012, despite a significant fiscal drag. In Japan, the 0 relaxation of both monetary and fiscal policies, have prompted a sharp rebound in activity, with -20 industrial production growth rebounding to 9 -40 percent annualized pace in the first quarter of 2013. -60 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 In the Euro area industrial production stabilized, expanding 0.7 percent annualized in the first Developing countries capital Germany Japan USA goods imports quarter of 2013 compared to a 8.1 percent annualized pace of decline in the fourth quarter of Source: World Bank; Datastream. Note: US capital goods orders exclude defense and aircrafts orders. 2012. An increase in energy and capital goods Capital goods import orders for developing countries. 34 GLOBAL ECONOMIC PROSPECTS | June 2013 Industrial Production Annex rose at a rapid pace in the first quarter of 2013, Business sentiment in the U.S. is weighed down by with US capital goods orders rising at a 21.4 the fiscal drag, with higher taxes likely to weigh on percent annualized pace, up from a 13.8 percent consumer spending, and budget sequestration expansion in the fourth quarter of 2012. In Japan, further limiting domestic demand growth. The US after a robust recovery in the last quarter of 2012 manufacturing ISM index softened at the end of (15.5 percent) capital goods orders growth the first quarter and dropped below the 50 growth accelerated markedly to 31.8 percent in the first mark in May, on softer domestic demand and quarter of 2013, while in Germany capital goods notwithstanding a boost in external demand. orders rose 3 percent over the same period, almost Meanwhile the business sentiment as gauged by the half the pace recorded in fourth quarter of 2012 Markit PMI deteriorated to a six-month low in (8.3 percent). In developing countries, capital April, before inching up to 52.2 in May, remaining goods orders eased only slightly, rising at an 22 in growth territory. percent annualized pace in the first quarter of 2013, down marginally from the 19 percent pace PMIs in major developing countries such as recorded in fourth quarter of 2012, pointing Brazil, China, India, Russia and Turkey all to sustained investment growth in these declined for two or more consecutive economies. months. Data for April suggest however that the pace The moderation in output in East Asia is expected of expansion of capital goods orders might be to be relatively broad, as suggested by PMI indexes. easing in the US in the second quarter of the The May PMI has been weaker than expected in year. Similarly capital import orders by China, where the PMI retreated 1.2 points to 49.2. developing countries are also showing signs In China industrial output growth has decelerated of moderating. further to 7.4 percent annualized pace in the three months leading to April. Interpreting the trade and ...but there are signs of moderation in industrial output data for East Asia is made more difficult by the timing of the Lunar New Year the pace of expansion into the which fell in February this year. second quarter Although PMIs improved in the Euro area in May, to the highest level since 2012, they continue to Forward-looking indicators like purchasing indicate contraction albeit at a slower pace. manager’s indexes suggest a slower pace of activity Sentiment improved in Germany, France, Italy, and for the second quarter, as fiscal tightening in the Spain (albeit from depressed levels). Meanwhile US cuts into activity there and capacity constraints sentiment in Japan improved for a fifth consecutive in many developing economies moderate growth – month, to its highest level in more than a year, as which should nevertheless continue to expand inventories are relatively low while orders are broadly in line with underlying potential. Indeed rising. the step down in the global manufacturing Markit PMI in April to the lowest level since December Noteworthy is the fact that despite stabilizing at a (but still above the 50 mark that indicates higher level than the one recorded in the fourth expansion) followed by a marginal increase in May quarter of 2012, business sentiment remains at suggest that global manufacturing output growth is historically low levels globally, suggesting business moderating into the second quarter of 2013. confidence remains fragile and is yet to return to Sentiment regarding leading indicators components pre-crisis levels. such as new orders and finished goods inventories improved only modestly. …nevertheless growth is expected to Notably high-income and developing countries remain solid at a trend like pace PMIs moved in opposite directions in May, with sentiment improving in most high-income Industrial production growth in developing countries surveyed and deteriorating in three countries is expected to moderate to a more quarters of developing countries. sustainable pace over the short term, with growth 35 GLOBAL ECONOMIC PROSPECTS | June 2013 Industrial Production Annex in China remaining in the low double-digit range, Growth in Middle East and North Africa will while output elsewhere in East Asia moderates. recover but remain subdued despite large excess The continuation of supportive fiscal policy with a capacities, in part due to weak domestic demand. front-loading of infrastructure spending is expected to benefit China’s industrial production. In In the Euro Area output is projected to strengthen addition, according to recent surveys labor demand modestly in the second half of the year, as the pace continues to outpace labor supply, especially of fiscal consolidation eases and pent-up demand in the service sector, and might lead to forces should support growth. increased labor income in the months ahead, which should be supportive of private consumption. The recent declines in commodity prices, including oil and metals prices appear to mainly reflect higher Some of the manufacturers in the region may be supply (see commodity annex and main text). challenged by the large depreciation in the Japanese Lower input prices rather than suggesting slower yen, induced by monetary easing, and may lose demand going forward, should provide a fillip to market share over the short-term, although other activity, both by increasing real incomes and than China and Thailand, most countries in the reducing production costs. region do not compete directly with Japan (see Main Text). Japanese output is expected to In order for growth in global industrial production continue to post a robust recovery, following an 8 to return to its long time trend over the medium percent annualized bounce back in the first quarter term the pace of growth in high-income economies of 2013. needs to accelerate as they still account for a significant share of global industrial output, and Growth in industrial output is also expected to lead in global innovation for local markets, which is remain soft in countries with capacity constraints, expected to support growth in industries such as including some of the larger developing economies. automobile, chemicals, machinery and Industrial output performance will remain weak in pharmaceutical (McKinsey 2012). Brazil, despite significant stimulus from the government, as high production costs, and capacity In terms of growth rates industrial sectors were constraints continue to weigh on growth. much more dynamic in developing countries, Furthermore retail sales growth has decelerated expanding at an annual pace of 8.5 percent over the markedly, as rising inflation has caused real wage 2002-2007 period compared to 2.6 percent in high- growth to slow. Quarterly industrial production income countries (figure IP.5). Among developing growth in South Asia is projected to countries East Asia and Pacific was the most moderate, as growth in India slows from dynamic region (11.2 percent average annual pace), unsustainable levels. followed by South Asia (9.4 percent) and Europe In Latin America, the weakness in the Mexican industrial sector should be reversed in mid-2013, as Fig IP.5 Growth in major developing economies the Mexican manufacturing sector growth will re- is weaker than in the pre-crisis period link with the better performing U.S. manufacturing. Percent, 3m/3m saar 20 However, performance in Argentina’s industrial sector is likely to be weak as a result of recent 15 policies that restrict access to foreign currency for 10 essential capital imports. 5 0 Growth in industrial production is expected to strengthen in the second half of 2013 in Europe -5 and Central Asia, supported by modestly stronger -10 domestic and high-income European demand, -15 which should help narrow the still wide output gap 1992 1996 2000 2004 2008 2012 in the region. Still weak private credit growth will India South Africa Brazil China continue to weigh on industrial sector activity this year. Source: World Bank; Datastream. 36 GLOBAL ECONOMIC PROSPECTS | June 2013 Industrial Production Annex Fig IP.6 Contribution to global industrial production Fig IP.7 Regional contributions to developing growth country industrial production percentage points Percentage points 12 40 30 10 20 8 10 6 0 4 -10 2 -20 0 -30 -2 -40 1995 1998 2001 2004 2007 2010 -4 1995 1998 2001 2004 2007 2010 High-income Developing South Asia Latin America & Caribbean East Asia & Pacific Middle East and Africa Europe & Central Asia Source: World Bank. Source: World Bank. and Central Asia (8.1 percent). Latin America and economies with large infrastructure gaps such the Caribbean’ performance was less impressive as India and Brazil, whose infrastructures are (5.1 percent), expanding at the same pace as that of perceived as inadequate given their level of Sub-Saharan Africa. Middle East and North Africa economic development (WEF 2012-2013). expanded at a slowest pace among developing regions (4.1 percent). Overall growth in the industrial sector, and manufacturing in particular, stands to gain from the During the boom years (2002-2007) global shift in demand towards developing economies. industrial production expanded at an average pace Output in industries that need to be close to of 4.1 percent a year, with developing countries consumers due to cost structures (high accounting for about 54 percent of growth in transportation costs) and that produce products global industrial production (figure IP.6). East Asia that are not heavily traded (food processing) is and Pacific contributed more than 36 percent to likely to expand rapidly as income in developing global growth, with China alone accounting for countries continue to rise. almost a third. Among developing regions the second largest contributor to growth in global industrial production was Latin America and the Caribbean (8.7 percent), followed by Europe and Central Asia (6.4 percent) and South Asia (5.4 Risks and percent) (figure IP.7). vulnerabilities A significant part of the expansion in the global industrial production came from rapid growth in the construction, mining, and utilities sectors in developing countries. The downside risks of a further deterioration These sectors together accounted for close to in performance in the Euro area, of steeper 30 percent of overall global growth during fiscal consolidation in the United States and the 2000-2010 period, with China accounting Japan, persist although the probability for more than half of that contribution (17 associated with these risks has declined since percent). The expected slowdown in our January 2013 edition. An additional risk investment in China over the coming years, is that of an abrupt slowdown in investment partly as the property market cools down, in China which would have significant may subtract from the global industrial consequences for exporters of capital goods production trend growth if not supplemented in particular in East Asia but also Germany by stronger growth in other major emerging and the United States. 37 GLOBAL ECONOMIC PROSPECTS | June 2013 Industrial Production Annex If commodity prices decline markedly capital expenditures, which have risen sharply during the boom years especially in oil and metals markets, could slow significantly, affecting capital goods producing countries. Lower commodity prices and lower fuel prices in particular could boost real disposable incomes and bolster demand for other manufactures. There is also an upside risk associated with the performance of the U.S. economy and its resilience in the face of the fiscal drag. Similarly the performance in the Euro Area could be stronger than in our baseline. As policies in high-income countries become less accommodative the cost of capital is likely to rise over the medium term and costlier capital could limit investment and growth in industrial production. (GEP 2010). 38 GLOBAL ECONOMIC PROSPECTS | June 2013 Industrial Production Annex References McKinsey Global Institute. November 2012 Manufacturing the future: The next era of global growth and innovation. WEF (World Economic Forum). 2012-2013 Global Competitiveness Report. Washington DC. World Bank. 2010. Global Economic Prospects: Crisis, Finance, and Growth. World Bank. Washington DC. 39 GLOBAL ECONOMIC PROSPECTS | June 2013 Inflation Annex Annex GLOBAL ECONOMIC June PROSPECTS 2013 INFLATION GLOBAL ECONOMIC PROSPECTS | June 2013 Inflation Annex Global inflation is subdued as cost from more accelerated growth over the past two quarters. pressures related to commodity prices continue to ease and demand T he r ecent down tick in developing countr y inflation is notable, pr es umably factors in high income countries s ignaling an end to the gradual rise that remain weak began in the summer of 2012 — prompted by the upturn in international grain prices related to droughts in the US, Eastern Despite loose global monetary conditions and an Europe and Central Asia and shortage of acceleration in economic activity, global consumer grain supplies. prices rose at a modest 2.7 percent annualized rate in the three months ending April of 2013 (figure Among developing countries, inflation in low INF.1). income economies has shown the fastest declining trend throughout 2012, both on a This was the slowest first quarter increase in year-over-year and a quarterly annualized global consumer prices since 2009, reflecting basis. subdued high-income country growth and a moderation of global commodity prices The year-over-year inflation in these (figure INF. 2). economies is now about half of the 14 percent rate recorded a year ago (figure INF.2 Core inflation1 eased insignificantly in the majority and 3). of countries for which consistent data series are available. For the OECD country group as a whole, Quarterly inflation on an annualized basis quarterly core inflation declined to 1.6 percent in bottomed out in August of 2012 after slowing 1Q2013 compared to 1.9 percent in 1Q2012. to a 5.5 percent rate with price acceleration partly reflecting the temporary increase in Developing country inflation ticked international food prices in Q42012 (see above). down in April 2013 on declining commodity prices More recently, as commodity prices have eased and growth has weakened, quarterly inflation has also moderated falling back to a Developing country prices 2 rose at a 6.9 5.5 percent annualized rate in the three percent annualized rate in the three months months ending April of 2013. to April of 2013 showing some moderation Fig INF.1 Global inflation slowed in Q1 2013 Fig INF.2 Inflation decline reflect easing commodity prices CPI, % change, 3m/3m, saar 8 Price indexes, % change, year-on-year 50 16 Developing 40 14 6 12 30 10 20 8 4 10 6 High income 0 4 10M10 11M04 11M10 12M04 12M10 12M4 -10 2 2 -20 0 International Energy (LHS) International Food (LHS) 0 Developing CPI (RHS) Low Income CPI (RHS) Apr '11 Jul '11 Oct '11 Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13 Developing Local Food CPI (RHS) Source: World Bank; Datastream. Source: World Bank; Datastream; ILO. 43 GLOBAL ECONOMIC PROSPECTS | June 2013 Inflation Annex In Japan, the sharp depreciation of the yen since Fig INF.3 Low-income country inflation has shown the fastest decline September 2013 (see main text and exchange rate CPI, % change annex) has pushed quarterly inflation into a 14 positive territory in January and February. 12 More recently however, price pressures in Japan 10 eased again reflecting moderating global 8 commodity prices. Quarterly inflation on an annual 6 basis dropped to a negative 0.6 percent in the three months to April and the year-over-year inflation 4 stood at a negative 0.7 percent — well below the 2 authorities new 2 percent annual inflation target. 0 Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13 Global monetary conditions continue to be loose with Japan implementing 3 month-over-3 month year-over-year Source: World Bank and Datastream. aggressive monetary easing High-income country inflation remains In high-income countries low interest rates are weak combined with the Federal Reserve’s Federal Open Market Committee’s continued monthly purchases Year-over-year inflation in high-income of $85 billion of housing-market debt and countries has remained under 2 percent since Treasuries and quantitative easing in the UK and April 2012, while quarterly inflation has Japan and further policy easing in the Euro Area displayed more volatility partly reflecting with the interest rate cut by another 25 basis points changes in energy prices (figure INF. 4). to 0.50 percent implemented in May. Quarterly core inflation on an annualized basis for the G-7 country group declined to Developing country monetary policy 1.4 percent in 2013Q1 compared to 1.7 has loosening bias in general percent in 1Q2012. The low trend rate of inflation in high-income countries reflects The majority of the developing country central still ample spare capacity, and the weakness banks continue to keep their interest rates on hold of the recovery especially in the Euro Zone at historical low levels in their effort to stimulate and Japan. domestic demand as global economic activity Fig INF.4 Unconventional monetary policy helped major high-income economies to avoid disinflation but Japan is still caught in disinflationary trap CPI, % change, 3m/3m, saar CPI, % change, year-over-year 8 5 7 6 4 5 4 3 3 2 2 1 1 0 -1 0 -2 -3 -1 Jan '11 Apr '11 Jul '11 Oct '11 Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13 High income Euro Area USA UK Japane High income USA Japan Euro area UK 2011 average 2012 average 2013 year to date Inflation target Source: World Bank; Datastream. 44 GLOBAL ECONOMIC PROSPECTS | June 2013 Inflation Annex remains weak and inflation pressures sharp output contraction in the first quarter generally subdued. Some developing countries of 2013. implemented additional rate cuts most recently following quite disappointing Monetary policy was tightened by about six Q12013 growth outcomes in the overall developing central banks in 2013, including context of moderating global price pressures. Brazil, Ghana, Gambia, Serbia 3 , Tunisia and Egypt in an attempt to curtail inflationary About twenty developing and seven high- pressures fueled by domestic factors, income countries and economic unions including rapid credit expansion and currency implemented policy rate cuts in the first depreciation, particularly in Egypt. months of 2013. This included a cumulative 75 basis point rate cut implemented by the Reserve Bank of India and a 50 basis point Monetary policy globally and in rate cut in Mexico – first easing since July developing countries is increasingly 2009. Other policy easing measures in LAC included a 100 basis point rate cut (to 3.25 embracing inflation targeting percent) by the Bank of Colombia in three monthly consecutive rate cuts and a 50 basis The Central Banks in most of the major countries points rate cut by the Bank of Jamaica. are now following some type of inflation targeting regime.4 For the most part, inflation remains within In Sub-Saharan Africa Angola, Kenya, Sierra inflation target (figure INF. 5) — with the notable Leone and Uganda continued to ease policy exception of some large middle income countries, and Botswana and the West African States including Indonesia, Brazil, Russia, Turkey and implemented their first rate cuts in few years. South Africa, where headline inflation has tended In ECA — where growth has weakened and to exceed targets due to recurring price pressures price pressures have generally moderated — related to supply constraints. policies have been eased in a number of developing countries, including Albania, Azerbaijan, Belarus, Georgia, Macedonia and Loose policy stance in developing Turkey. countries may be counterproductive In the EAP Mongolia cut its policy rate by in countries operating at full capacity 175 basis points, Vietnam implemented a 100 basis point cut this year and Thailand In general, the central banks worldwide are keeping implemented a rate cut in May following a rates low with major focus still on downside risks in the global economy. Accommodative policy Fig INF.5 With some exceptions inflation is Fig INF.6 Developing country inflation outcomes are anchored within the targeted rates increasingly reflecting local conditions CPI, % change, year-over-year CPI, % change, 3m/3m, saar 11 12 9 10 7 8 5 6 3 4 1 2 Uganda Philippines South Africa Indonesia Colombia Russia Mexico Japan Armenia Thailand USA Turkey India Georgia Chile China Nigeria Peru Brazil UK Euro area -1 0 -3 East Asia & ECA excludes LAC (excludes Sub-Saharan MENA (excl. South Asia Pacif ic Belarus) Venezuela) Af rica Iran and Syria) Apr-13 Upper bound of inflation target 2011 (average) 2012 (average) 2013 (year-to-date) Source: World Bank; Datastream. Source: World Bank; Datastream. 45 GLOBAL ECONOMIC PROSPECTS | June 2013 Inflation Annex stance may be adequate in the economies with In China, although the headline inflation rate remaining output gaps and subdued demand. remains under the central bank target of 3.5 percent, price pressures are present. Quarterly Some developing regions continue to experience inflation accelerated to a 3.7 percent annualized price pressures reflecting local conditions despite rate in the three months to February, the highest benign global inflationary pressures (figure INF.6). since October 2011, but eased in March in response to tightening of monetary conditions and In the economies that are operating at full capacity administrative measures addressed toward curbing the loose policy stance may be counterproductive property prices. contributing to domestic price pressures without much payoff in additional output. In Indonesia, inflation has been building up rapidly, with the quarterly inflation Moreover, a loose policy stance and low rates are accelerating to a 9.5 percent annualized rate encouraging risk taking attitude, fueling asset in the three months to April reflecting bubbles and pushing domestic debt to risky levels currency depreciation and hikes in food prices in the economies that are operating above their full due to trade restrictions. Core inflation in capacity.5 Indonesia eased to 4.21 percent (year-over-year) in March from February's 4.29 percent but remains high. Headline inflation in East Asia and In Malaysia and Thailand currency appreciation the Pacific region accelerated in early combined with broadly stable commodity prices 2013 reflecting a strong rebound in has helped curb inflationary pressures. Inflation also eased in Mongolia to 10.4 percent (year-on- economic activity and year) in April which was the lowest rate observed accommodative policies since July 2011 reflecting a slow-down in economic activity. Inflation has ticked up in a number of countries in Overall, the headline inflation remains within the the East Asia and the Pacific region in the first central bank targeted range in the majority of the quarter of 2013 after declining through much of EAP countries, with the exception of Indonesia. 2012. Annualized quarterly inflation in the East Given limited spare capacity in the region, the Asia and the Pacific region accelerated to 3.5 generally loose stance of macroeconomic policy percent rate in the three months to March 2013 could stoke inflationary pressures and amplify the compared with 2 percent a year earlier (figure INF. credit and asset price risks, especially in case of the 7) reflecting price acceleration in China, Indonesia volatile capital inflows including from Japan in and Lao, PDR. relation to the latest quantitative easing. Fig INF.7 Price pressures are building up in Fig INF 8 Inflation eased in ECA EAP CPI, % change, 3m/3m, saar 16 CPI, % change, 3m/3m, saar 14 14 12 12 10 10 8 8 6 6 4 4 2 0 2 -2 0 Jan '11 May '11 Sep '11 Jan '12 May '12 Sep '12 Jan '13 May '13 Jan '11 May '11 Sep '11 Jan '12 May '12 Sep '12 Jan '13 May '13 ECA (excl. Belarus) Central & Eastern Europe Turkey EAP (excluding China) Indonesia Lao, PDR Malaysia Russia China Source: World Bank; Datastream. Source: World Bank; Datastream. 46 GLOBAL ECONOMIC PROSPECTS | June 2013 Inflation Annex Inflation has moderated in Europe and easing commodity prices contributed to moderating price pressures in 2013. Quarterly Central Asia but price pressures are high in inflation slowed to 5.3 percent (q/q saar) and large middle income countries year-over-year at 6.4 percent (saar) in April 2013 was at the lower point of the 6-8 percent annual inflation target band. In Europe and Central Asia, inflation has eased recently due to declines in food prices In Belarus, quarterly inflation remains high at following last summer’s poor crop (figure 35.8 percent (saar) in the three months to INF. 8). Besides, in most economies, ample April 2013. Price pressures increased in the spare capacity and high unemployment is first quarter of 2013 following a significant keeping inflationary pressures at bay. decline to 10.3 percent annualized rate in the three months to November from the earlier Azerbaijan, Bulgaria, Georgia and Macedonia hikes in response to stabilization measures. have been experiencing considerable easing in Belarus has been experiencing high level of consumer price inflation since the end of inflation since 2011 following almost a 2012 reflecting weak domestic demand and threefold devaluation of the national currency easing commodity prices with Georgia against the US dollar implemented to correct experiencing deflation since October 2012. external macroeconomic imbalances. The year-over-year inflation remains high in some large economies (notably Turkey and Although inflation remains sticky in Russia), reflecting limited spare capacity. the largest countries of the region, Quarterly inflation in those economies eased most recently reflecting slowing growth and price pressures moderated across declining commodity prices, but the timing the rest of the Latin America and the and the pace of easing price pressures diverge and reflect domestic policies. Caribbean Quarterly inflation has slowed to 3.8 percent Quarterly inflation in Latin America and the annualize rate in the three months to April in Caribbean (excluding Venezuela) eased to 5 Russia where monetary policy remained tight percent in 1Q2013 from 5.9 percent in despite slowing growth. The headline 4Q2012 indicating easing of price pressures, inflation at 7.2 percent in April was partly reflecting moderating commodity nevertheless above the central bank’s 5 -6 (notably food) prices (figure INF.9). percent targeted rate. 6 Policy easing in Turkey contributed to Fig INF.9 Diverging inflation trends across LAC accelerating inflation to 9.7 percent CPI, % change, 3m/3m, saar annualized rate in the three months to March 14 40 2013. Turkey’s quarterly core inflation eased 12 to 6.5 percent in 1Q2013 compared to 9.6 10 30 percent in 1Q2012. The headline inflation 8 also dropped to 6.1 percent in April reflecting global decline in commodity prices, but 6 20 remains above the central bank’s 5 percent 4 annual inflation target. 2 10 0 In Kazakhstan, adjustments in regulated -2 0 prices put a temporary upward pressure on Jan '11 Apr '11 Jul '11 Oct '11 Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13 inflation with quarterly inflation increasing to LAC (excl. Venezuela) Argentina Colombia 7.9 percent annualized rate in the three Brazil Venezuela (RHS) Mexico months to November 2012. Tight policy and Source: World Bank; Datastream. 47 GLOBAL ECONOMIC PROSPECTS | June 2013 Inflation Annex Inflation outcomes across countries mirror In the Middle-East & North Africa high diverging policy stances, with Colombia, Chile, Peru and Mexico seeing strong growth prices reflect both supply disruptions combined with moderate consumer price caused by civil and armed strife as inflation. well as the measures addressed at Brazil has been on the other hand trapped in adjusting large macro-economic slow growth and high inflation equilibrium. Headline inflation was 6.5 percent in April imbalances 2013 — just at the upper limit of the central bank’s 4.5 percent +/ -2 inflation targeting Average inflation in the Middle-East & North band. Africa exceeds 22 percent with quarterly inflation even higher. Prices pressures Till very recently monetary policy had been emanate from variety of sources, including easing contributing to a cumulative 525 basis high costs associated with importing food point cut between August 2011 and end of and fuel (Jordan and Tunisia) due to the 2012. Brazil was however one of the few region’s high dependence on internationally developing countries that starts to tighten its traded food commodities, supply shortages policies in 2013 by implementing two caused by political and armed conflict in consecutive rate cuts in April and May some countries and international sanctions in (cumulative 75 basis point rate increase). others (Iran and Syria), and currency depreciation and administered price increases Currency devaluation has exacerbated local adding to pressures in some countries (e.g. price pressures in Venezuela, where the year- Egypt) (figure INF.10). over-year inflation reached 35.2 percent in May — 12.6 percentage points higher than last year. In South Asia consumer price based index remains high but the wholesale In Argentina, quarterly inflation on an annualized basis, which has accelerated in price index-based inflation moderated Q42012 eased most recently partly reflecting significantly, especially in India moderating commodity prices. However, the year-over-year inflation remains stubbornly Year-over-year inflation ticked down in South high partly reflecting import restrictions Asia region in April on moderating combined with loose policies. commodity prices, but quarterly inflation still Fig INF.10 Inflation accelerated in MENA Fig INF.11 Inflation remains high in South Asia CPI, % change, 3m/3m, saar CPI, % change, 3m/3m 35 19 30 15 25 20 11 15 7 10 5 3 0 -5 -1 Jan '11 Apr '11 Jul '11 Oct '11 Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13 Jan '11 May '11 Sep '11 Jan '12 May '12 Sep '12 Jan '13 May '13 MENA (excl. Iran and Syria) Tunisia Marocco MENA South Asia Pakistan Bangladesh Shri-Lanka Egypt India Source: World Bank; Datastream. Source: World Bank; Datastream. 48 GLOBAL ECONOMIC PROSPECTS | June 2013 Inflation Annex shows some acceleration. This mainly reflects energy reflecting raising household incomes an upward adjustments to domestic fuel combined with tight supplies related to prices (figure INF. 11) implemented over the bottlenecks and structural constraints in the past months. production and distribution of food and utilities. On a country level, in India, year-over-year consumer-based inflation declined below 10 percent in April, and the wholesale price Inflation experienced a steep decline index-based inflation declined below 6 in Sub-Saharan Africa, but price percent for the first time in more than three years. However quarter-over-quarter pressures prevail in a number of consumer-price based inflation continued to large countries reflecting capacity rise and stood at 11.3 percent annualized rate in the three months to April. constraints and loose policies Other countries in the region, including In Sub-Saharan Africa (excluding South Bangladesh and Pakistan, and Sri-Lanka until African republic) quarterly inflation eased by most recently, have been experiencing about 6 percentage points since last year moderating price pressures recently reflecting reflecting commodity price moderation and decline in commodity prices with both tight monetary conditions (see main text). quarterly and annual inflations easing during the first quarter of 2013 in line with the But with many countries operating at little or global trends. no spare capacity, loose policies directly contribute to consumer price inflation. Several countries in the region eased Ghana and Kenya, for example have seen monetary policy between mid-2012 and 1Q their quarterly inflations accelerating in April 2013 as they saw core inflation coming down. to 15.4 percent annualized rate and 8.5 Those countries include Pakistan, which cut percent respectively reflecting easing its key policy rate by a cumulative 250 basis policies. points between August and December 2012, and Sri-Lanka and India where policy rates In South Africa, year-over-year inflation has have been eased more recently. been around the upper limit of the Central Bank targeted rate since some time despite Price pressures in South Asia continue to slow growth due to weakening of the rand stem from growing demand for food and and wage hikes. Core inflation also accelerated to 5 percent (y/y) in 1Q2013. INF.11 FigINF.12 Fig Inflation has recently eased in Sub- Saharan Africa but selected countries In some countries of East Africa, notably are experiencing price pressures Uganda and Tanzania, inflation remains CPI, % change, 3m/3m, saar contained following a massive decline in 2012 50 (figure INF.12). In West Africa, moderating 20 16.4 40 commodity prices and tight policies 30 contributed to easing price pressures. In 12.8 Nigeria, for example, the year-over-year 9.2 20 inflation eased to 8.6 in March 2013 — the 10 lowest level in five years. Inflation also 5.6 0 remained low in the countries of West African Economic and Monetary Union 2 Jan '11 Apr '11 Jul '11 Oct '11 Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13 -10 (WAEMU) (Benin, Burkina Faso, Cote d’Ivoire, Guinea Bissau, Mali, Niger, Senegal, Sub-Saharan Africa (excl. South Africa Ghana South Africa) Nigeria and Togo). Source: World Bank; Datastream. 49 GLOBAL ECONOMIC PROSPECTS | June 2013 Inflation Annex Some developing countries continue while destabilizing currencies and exerting upward pressure on inflation. This risk is however unlikely to experience high inflation rates or to unfold over a short term period given the weak severe disinflation due to country pace of recovery in high-income countries and in the context of the latest (May 2, 2013) interest rate specific conditions cuts in Euro Area. Year-over-year inflation exceeded 15 percent in In the near term, global inflation is likely to remain only seven developing countries in the first quarter at around 3 percent (year-on-year) largely due to of 2013 including Belarus (>20%), Iran (>40%), depressed price pressures in the high-income Malawi (>35%), South Sudan (>24%), Sudan countries. Developing country inflation is projected (>40%), Syria (>49%), and Venezuela (>35%). to accelerate to 7 percent in the case of a continued loose monetary policy environment. Burundi, Eritrea, Ethiopia and Guinea all experienced sharp inflationary peaks in 2012, The inflation outlook is subject to any supply-side but managed to reduce price pressures shock related risk. Upside risks may entail a containing inflation rate below 15 percent as moderate acceleration – but even with this increase of April of 2013. inflation is likely to remain below its 2011 levels. Global oil supply risk is related to a possible deterioration in political conditions in the Middle Outlook and risks East but can also stem from the technical problems. A major supply cutoff could limit supplies and result in prices spiking well above US$ 150/bbl depending on the severity, duration and response from OPEC, emergency reserves, and The inflation outlook mirrors the growth outlook demand curtailment. and remains uncertain. Under the baseline scenario, which assumes global economic recovery and Downside risks include further easing in inflation moderating commodity prices, inflation is in high-income countries in case of continued low projected to pick up only gradually with confidence and weak economic activity. There is strengthening global demand as it remains to be also a downside risk related to slower economic predominantly anchored around the targeted rates. growth, especially by emerging economies, Moreover, the impact of accelerating inflation in including China. developing countries will be counterbalanced by subdued price pressures in the high-income While the Fed and ECB’s interventions have economies, reflecting a continued low consumer helped to avoid the worst potential effects of confidence and slow economic activity. Price banking-sector de-leveraging and liquidity pressures are likely to persist in a selected number constraints in high-income Europe, the ultra-loose of economies such as Brazil, India, Russia, Turkey, monetary policy in high-income countries, South Africa with supply bottlenecks, especially in including in Japan, could once again be sowing the case of demand stimulating policies. seeds for the kinds of disruptive, inflationary, and asset-bubble creating capital inflows that In addition, many developing countries remain characterized the second half of 2010. vulnerable to medium-term price pressures through excessive credit and debt build-up, feeding into Moreover, in some developing countries monetary asset prices. Moreover, with international reserves policy has also been very loose, while debt burdens declining and/or deficit countries relying on have risen rapidly. Although global inflationary foreign capital inflows, there is not only limited pressures remain benign, given the lags in monetary scope for monetary easing, but there is a medium- policy transmission, additional easing may add to a term risk that a “normalization” of monetary policy strengthening activity already underway resulting in in developed countries may encourage capital flight additional inflationary pressures in countries and put "unwanted pressure" on foreign exchange operating close to full capacity, without much markets and potentially (further) erode reserves, payoff in additional output. 50 GLOBAL ECONOMIC PROSPECTS | June 2013 Inflation Annex Notes: 1. Consumer prices, all items non-food, non-energy. OECD data and classification. 2. Developing country inflation is calculated on a GDP weighted basis. 3. Following earlier tightening Serbia has recently cut its policy rate by 25 basis points. 4. The UK has a 2 per cent inflation target with no explicit upper bound. If inflation rises more than 1 percentage point above the target the Governor of the Bank must write an open letter to the Chancellor explaining the reasons for the deviation. 5. EAP Update, April 2013, WB, Philippine Economic Update, April 2013, WB, Global Financial Stability report, April 2013, IMF. 6. Formally the Bank of Russia will finalize its move to inflation targeting by 2015. Currently, it is still using the currency corridor and uses interventions, although recently the Central Bank of Russia has largely refrained from using currency interventions allowing the ruble to float. 51 GLOBAL ECONOMIC PROSPECTS | June 2013 Finance Annex Annex GLOBAL ECONOMIC June PROSPECTS 2013 FINANCIAL MARKETS GLOBAL ECONOMIC PROSPECTS | June 2013 Finance Annex Recent developments Fig FIN.1 CDS rates for most developing regions re- mained stable despite the events in March in financial markets 500 5-year sovereign CDS rates, basis points Middle East & N. Africa 400 300 The “risk-off” phase in global financial Europe & Central Asia markets has continued since the 200 Latin America & Caribbean beginning of the year 100 East Asia & Pacific 0 Global financial markets have been mostly calm Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13 since the beginning of the year following the substantial improvements during the second half of Source: World Bank; Bloomberg. 2012 (GEP 2012 January). Investor confidence, as proxied by risk premia and credit default swap (CDS) rates, has remained relatively strong despite Fig FIN.2 Argentina’s CDS rates surged in March negative developments in Euro Area (box FIN.1), from already very high levels including continued economic weakness, political 4000 5-year sovereign CDS rates, basis points gridlock in Italy that has stalled reforms, and the Cyprus crisis that culminated in the imposition of 3500 capital controls—a first in the Euro Area. 3000 Developing-country CDS rates have in general 2500 remained at low levels (figure FIN.1). Increases in 2000 Egyptian and Argentinean CDS rates were the main exceptions (figure FIN.2). Egyptian spreads 1500 rose due to the rising deficit and debt tied to the 1000 economic consequences of political turmoil, while 500 Argentinean rates increased due to the uncertainty 0 generated by a US court decision concerning the Apr '11 Sep '11 Feb '12 Jul '12 Dec '12 May '13 repayment to creditors that did not participate in Source: Bloomberg. the 2005 and 2010 restructuring of Argentinean debt.1 Developed country stock markets Fig FIN.3 Developed country equities are outper- forming developing country have outperformed developing MSCI Equity Index (Jan.2011 = 100) countries so far in 2013 125 120 115 MSCI Emerging Markets The developed country equity stock market indices 110 MSCI Developed Markets gained value during the five months of 2013 but 105 have declined since late May as the concerns about 100 possible tapering of United States quantitative 95 easing have increased. The total year to date gain 90 was 11.1 percent (figure FIN.3). The benchmark 85 S&P 500 index for the United States reached a new 80 record level on May 19th as improving economic 75 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 data reports seemed to confirm that the U.S. economy was gaining momentum (figure FIN.4). Source: Bloomberg. 55 GLOBAL ECONOMIC PROSPECTS | June 2013 Finance Annex Box FIN.1 Recent developments in the Euro Area. A wide-range of significant steps taken over the past few years have calmed investors and led to a significant rebound in key markets. These steps and developments include:  ECB President Draghi’s forceful “whatever it takes” speech on July 26 th 2012  The introduction of a new Outright Monetary Transactions (OMT) facility  Wide-spread fiscal consolidation that has brought Euro Area government deficits down from 6.4 percent of GDP in 2009 to an estimated 2.9 percent in 2012 (IMF, 2013), although the deficits of Ireland, Poland, and Spain still ex- ceed 5 percent of GDP  Euro Area-wide agreements to establish a banking union; to reinforce monitoring and respect of budgetary rules; to require countries to enter into binding reform contracts; and proposals to increase democratic legitimacy through direct election of European Commission President in 2014.  Early repayment of more than 25 percent of ECB crisis loans by Euro Area banks during the first quarter of 2013 (the loans were not due until 2014 and 2015). Other developments in 2013 have tested the resilience of this improved climate, including:  Inconclusive elections in Italy and weak polls for other leaders that underscore ongoing political risks.  Uncertainty about government’s willingness to accept conditionality if the OMT were activated.  Fears that the bailing in of depositors during the Cyprus rescue would lead deposit flight in other European jurisdic- tions. While these developments led to some widening of CDS rates and yields on the debt of high -spread Euro Area debt, the increases were modest compared with earlier declines, and yields for high -spread countries other than Italy are down for the year to date. Italy Italy IrelandSpain Ireland Portugal Box Figure Italy 1.1 FIN Spain Ireland Portugal Portugal Ireland 5-year sovereign CDS rates, basis points Yields on 10-year sovereign debt, basis points 1800 60 Portugal 1600 40 Between January-March Spain Portugal Since March 1400 20 1200 1000 0 rtugal Ireland 800 -20 600 Italy -40 400 200 Spain -60 Italy 0 Spain Jan '10 Jul '10 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 -80 Italy Portugal Spain Italy Source: World Bank; Bloomberg Ireland Fig FIN.4 Performance in selected stock markets Similarly, the Japanese Nikkei stock market Stock Market Index (Jan. 2011 = 100) 155 index gained almost 50 percent in value Nikkei between January and May reflecting the 145 expectations related to the monetary easing 135 program announced by the Bank of Japan 125 (box FIN.2). Nevertheless, the year to date 115 S&P500 gain for the index was only 23 percent after 105 the sharp decline since late May. Investor 95 Stoxx 600 appetite in Europe has been also positive but 85 less robust due to the region’s weak economic 75 outlook. After a similar adjustment since Apr Jul Oct Jan Apr Jul Oct Jan Apr '11 '11 '11 '12 '12 '12 '12 '13 '13 May, the year to date gain for European stock market index was only 5.4 percent. Source: Bloomberg. 56 GLOBAL ECONOMIC PROSPECTS | June 2013 Finance Annex Overall, equity markets in Europe and Japan have may help explain why yields on developing recovered more than 80 percent of their 2007 country debt are rising (see below). value, versus a more than full recovery in the United States. Developing country bond yields have In contrast with the strong performance in high- risen since January despite the income markets earlier in the year, the developing country stock market performance has been general “risk-off” phase in global relatively weak since the beginning of the year. financial markets… Stock market indeces declined in Brazil (-13.4 percent) and Russia (-10 percent), whereas they Indeed, the cost of international bond financing — remained more or less stable in China (0.1 percent) proxied by 10-year U.S. Treasury bond yield + and India (0.7 percent). The weakness in EMBIG cash bond spread—has gone up this year developing country stock markets partly reflects after reaching a record low level in early January weak corporate earnings and country specific (figure FIN.5). Unlike previous episodes, the recent factors. Recent curbs on property markets in rise in the yields did not occur during a period of China, for example have contributed to the heightened global risk-aversion. Moreover, the weakness in share values, while easing in widening in secondary-market bond spreads was commodity prices have affected stock market not associated with a decline in benchmark US performances in Brazil and Russia. Equity markets yields. US treasury yields tend to fall during the in several East Asian countries—Indonesia, the periods of heightened risk-aversion in global Philippines, and Thailand—reached record highs financial markets as they are considered safe assets. earlier in the year, helped by strong foreign private Over the past few years, developing country bond capital inflows. yields have tended to remain relatively constant, even as benchmark yields (US 10 year treasury The earlier decoupling in the equity market yield) fluctuated—implying that spreads have risen performance of developed and developing as benchmark yields fell. During the first half of countries also likely reflects a decline in the 2013, however, developing-country spreads have investors’ perceptions of the riskiness of high increased amid rising benchmark US 10-year -income country financial assets, and growing Treasury yields (figure FIN.6)—and despite the concerns about asset prices bubbles and continued trend toward upgrading of developing growth prospects in some middle-income country debt by rating agencies.2 countries. Such a revaluation would likely induce investors to shift their portfolios away These developments could be consistent with the from developing to developed markets, and beginning of a new trend where the price of risk FIN.5 Fig FIN.5 Fig Cost of bond financing increased in Febru- Fig FIN.6 Bonds spreads widened despite “the risk- ary and March off” phase Percent EMBIG Sovereign Bond Spreads excluding Argentina, basis points 7 500 Implicit yield = Yield on US 10 year treasury 450 + EMBIG bond spread 6.4 400 5.8 350 Sep 09-May 11 5.2 The record low borrowing Average cost on Jan 3rd = 4.2% 300 4.6 250 2005-07 Average 4 200 Sep '11 Jan '12 May '12 Sep '12 Jan '13 May '13 Jul '11 Oct '11 Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13 Source: World Bank; JP Morgan. Source: JP Morgan. 57 GLOBAL ECONOMIC PROSPECTS | June 2013 Finance Annex returns to levels that are more normal. The trend Fig FIN.7 Gross flows have remained robust since decline in spreads for developing countries over September 2012 the last five years has been partly explained by their $billion improved credit quality. Much of the improvement 75 however reflects the very low policy rates and 60 quantitative easing in high-income countries (World Bank, 2010; IMF, 2013), with easy 45 monetary conditions having suppressed the price of risk in both developed and developing countries. 30 Recent increases possibly reflect market expectations that the pace of quantitative easing in 15 the United States may ease soon even though 0 Fed policymakers have reassured the markets Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13 that they will remain accommodative. Equity Issuance Syndicated Bank Lending Bond Issuance Despite the weak performance of the Source: World Bank; Dealogic. stock markets, gross capital flows to developing countries remained robust Fig FIN.8 Syndicated bank lending has risen since during the early months of 2013 July 2012 due to less deleveraging 3-month moving average, $ billion 30 During the first five months of 2013, gross capital flows (international bond issuance, 25 cross-border syndicated bank loans and 20 equity placements) to developing countries rose by 63 percent year-on-year and reached a 15 historic high at $306 billion (figure FIN.7). All types of flows posted around 60 percent 10 increase, with record levels of international bond issuance by developing countries. Flows 5 strengthened in every region except North 0 Africa and Middle East (box FIN.2). The Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 sharpest increase was in Europe and Central Asia, where the flows more than doubled. Source: World Bank; Dealogic. Syndicated bank lending to developing countries totaled $91 billion during the first five months of Fig FIN.9 Both the average spread on bank loans and the 2013, 69 percent higher compared with a year ago. average term of bank loans remained stable Despite the relative weakness in April, bank 350 Basis points Years 7 lending has been on a rebound since the second Average Term of Loans (RHL) quarter of 2012 (figure FIN.8). While many factors 6 290 were at play, an easing in the deleveraging process 5 by European banks has been the key. As early as 230 June 2012, three quarters of European banks had 4 complied with the ECB’s capital ratio 3 requirements. Moreover, according to the April 170 ECB Bank Lending Survey, Euro Area banks have Average spread 2 eased the pace of tightening of their credit 110 1 standards.3 Euro Area banks have begun repaying ECB crisis loans and have already started to repay 50 0 some of the loans well in advance (box FIN.1). 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: World Bank; Dealogic. 58 GLOBAL ECONOMIC PROSPECTS | June 2013 Finance Annex Box FIN.2 Regional gross capital flows Gross capital flows to developing countries rebounded in all regions, except North Africa and Middle East. A surge in bank lending to firms in the Russia Federation helped to boost flows to the European and Central Asia region to about $105 bil- lion during the first five months of 2013, more than twice their $46 billion level of last year. Bank lending to Russia increased more than threefold from last year with syndicated loans from European lenders more than doubling. All types of capital flows increased in the East Asia and Pacific region, where capital flows totaled $92 billion during the first five months of 2013 compared with $55 billion the same period in 2012. Syndicated bank lending in the region almost dou- bled, reaching $27 billion compared with $14 billion in 2012. Flows to South Asia strengthened mainly due to strong bond issuance by India. Meanwhile, Sub -Saharan Africa saw a marked strengthening in bank lending (led by South Africa and Nigeria) and bond issuance which were more than enough to offset a decline in equity and bond flows. Notably, Rwanda came to the international bond market for the first time with the $400 million 10 -year bonds, benefiting from growing inves- tors’ appetite for riskier developing -country debt. In contrast, gross capital flows to the Latin America and Caribbean region increased by 23 percent from a year ago, reach- ing about $79 billion in the first five months of 2013. Equity placement rose by 154 percent due to a strong issuance activity from Brazilian firms including the largest developing -country corporate bond issuance on the record ($11 billion) by the Bra- zilian oil company Petrobras. In contrast, bank lending to the region fell by 34 percent. Capital flows to Middle East and North Africa have been weak so far in 2013, with only one syndicated loan deal for Jordan ($288 million) and two bond issues for Lebanon and Morocco ($1.1 billion and $750 million, respectively). For equity issu- ance, only Tunisia were able to raise $119 million through four transactions. Box figure FIN 2.1 Regional gross capital flows ($billions) East Asia & Pacific Europe & Central Asia Latin America & Caribbean 30 Equity Bond Bank 35 Equity Bond Bank 35 25 30 30 25 25 20 20 20 15 15 15 10 10 10 5 5 5 0 0 0 Jan-12 May-12 Sep-12 Jan-13 May-13 Jan-12 May-12 Sep-12 Jan-13 May-13 Jan-12 May-12 Sep-12 Jan-13 May-13 Middle East & North Africa South Asia Sub-Sahran Africa 7 7 7 6 6 6 5 5 5 4 4 4 3 3 3 2 2 2 1 1 1 0 0 0 Jan-12 May-12 Sep-12 Jan-13 May-13 Jan-12 May-12 Sep-12 Jan-13 May-13 Jan-12 May-12 Sep-12 Jan-13 May-13 Source: World Bank; Dealogic. Almost 70 percent of the bank lending during the trade finance declined by 11 percent during the first five months of 2013 went to resource-related first five months of 2013 compared with the same companies, mostly for acquisition and trade period last year, while the average maturity of the finance purposes. The average cost of bank loans increased for one year. financing declined by 18 bps to 3.3 percent as the benchmark 6 month US libor rate has eased in The increase in equity flows—initial public 2013, while average bank spreads have remained offering (IPO) and follow-on issuance—was due stable (figure FIN.9). The average maturity of the to the strong follow-on issuance from East Asia, bank loans declined slightly to 5.4 years, with the Europe and Central Asia, and Latin America and share of long-term syndicated bank lending (at the recovery of the overall IPO activity from last least five years of maturity) falling to 35 percent year’s low level. While China still dominates from 55 percent in 2012. Syndicated lending for overall equity volume, equity issuance also 59 GLOBAL ECONOMIC PROSPECTS | June 2013 Finance Annex increased in other countries, including Indonesia, Fig FIN.10 Corporates dominated the bond flows Malaysia, Philippines, Thailand, Brazil, Russia, Chile, and Mexico. $ billion 45 40 International bond flows to developing countries 35 have been particularly robust, reaching a 30 historically high level at $158 billion for the first 25 five months of the year with the record monthly 20 issuance of $45 billion in April. Developing 15 countries have issued more than 20 billion per 10 month since September 2012 with the exceptions 5 of seasonally low December and February when 0 the Chinese Lunar New Year was this year (figure Sep '12 Oct '12 Nov '12 Dec '12 Jan '13 Feb '13 Mar '13 Apr '13 May '13 FIN.10). The heavy issuance has been supported by investors’ robust risk appetite and low borrowing cost. Corporate (IG) Corporate (non-IG) Sovereign (non-IG) Sovereign (IG) The strong appetite for higher-yield developing- Source: World Bank; Dealogic. country debt has been driven by low yields in high- income countries because of quantitative easing. This has created an opportunity for several non- Fig FIN.11 FDI inflows to developing countries investment-grade (non-IG) companies to tap into $ billion 180 international bond markets. In fact, the share of non-investment grade corporate issuance rose to 160 31 percent of the value of bonds issued by developing countries (compared with 18 percent in 140 2012) and 46 percent of the number of bonds (34 percent in 2012) (figure FIN.10). In addition, there 120 has been a long line of first-time sovereign bonds issuers including Honduras ($500 million) and 100 Rwanda ($400 million). Even Papua New Guinea is planning to tap the international debt market soon. 80 Foreign direct investment inflows to 60 2009Q1 2009Q4 2010Q3 2011Q2 2012Q1 2012Q4 developing countries remained robust Source: World Bank; Central banks of selected countries. in 2012 after the increased uncertainty in global financial markets Fig FIN.12 Almost half of the global FDI inflows in earlier in the year. $ billion 2012 went to developing countries 350 After slowing down during the first half of 2012, 300 Developing Countries foreign direct investment (FDI) inflows to High-Income OECD 250 developing countries picked up strongly in the final quarter of the year. Nevertheless, flows totaled 200 $670 billion, 5 percent lower than $701 billion in 150 2011 (figure FIN.11).4 The weakness in the flows earlier in the year was mostly the result of increased 100 uncertainty in global financial markets due to Euro 50 Area problems. The impact of the uncertainty was much more profound for high-income economies 0 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 where FDI inflows declined by 32 percent (figure FIN.12). Most developed countries experienced Source: World Bank; Central banks of selected countries. 60 GLOBAL ECONOMIC PROSPECTS | June 2013 Finance Annex declines compared to 2011. While Finland, Several countries in emerging Europe, including Russia Netherlands and Belgium experienced net and Serbia, have announced plans to accelerate disinvestments in 2012, FDI inflows declined by privatization efforts this year. FDI flows are expected to almost 90 percent in Denmark and Germany. The increase by 7 percent reaching $719 billion in 2013. relative resilience of FDI in developing countries mostly reflects stable re-invested earnings and intra-company loans. The share of developing Hot money flows: a new heat wave countries in global FDI inflows reached its highest from the East? level at 45 percent in 2012. The loose monetary policy run by high-income FDI inflows were weak in most of the developing countries since the 2008/09 crisis has prompted regions. The largest contraction was in South Asia investors to borrow cheaply and invest in high- where flows declined around 20 percent due to yielding markets. Investors have been attracted to slow growth and regulatory uncertainties in India developing country local currency assets (equity and Pakistan. FDI inflows to the East Asia region and bonds) because of their stronger growth also declined with China, Malaysia, and Thailand potential, and interest rate differentials. This has all experiencing contractions. Despite the 8 led to significant levels of the flows to equity and percent drop in FDI inflows due to the ongoing local currency debt securities (also referred as hot structural changes in its economy, China was the money flows). Flows to a few large middle-income top FDI recipient in the world in 2012. Similarly, FDI countries were particularly strong in 2010 (See inflows declined in most Eastern European GEP January 2011). Managing the fluctuations in economies, reflecting economic weakness in high- these flows, which tend to be quite volatile, can be income Europe with largest drops in Latvia, quite challenging and some countries have Lithuania, and Serbia. introduced special measures including capital controls. In contrast, FDI inflows to Latin American The data for these flows—portfolio investment economies rose by 10 percent supported by still with a breakdown of issuance in the country—are high (if weakening) commodity prices and only available for few countries and exhibit a increased investment from the United States, mixed picture for 2013 (figure FIN.13). Despite especially to Argentina, Chile and Colombia. the current relatively low risk environment and high liquidity in the market, flows to local stock Limited high frequency data indicate a mixed and bond markets have moderated for Turkey but picture so far in 2013: robust flows to Chile, India have picked up in Brazil. While flows to Mexico and Russia and easing in other developing surged in the last quarter of 2012 and were at countries. Flows to other developing countries will record high levels in 2012, the data for 2013 are likely rebound in the second half of the year. not available. Fig FIN.13 Mixed picture for hot money flows Fig FIN.14 The flows to EM Mutual Funds declined sharply after January Foreign investment in equity and local currency bond markets (% of GDP) 9 $ billions 40 8 7 30 Brazil Mexico Turkey 6 5 20 4 10 3 2 0 1 0 -10 -1 Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13 -2 2009Q1 2010Q1 2011Q1 2012 Q1 2013 Q1 EM Fixed-Income Funds EM Equity Funds Source: World Bank; Central banks of selected countries. Source: World Bank; Haver. 61 GLOBAL ECONOMIC PROSPECTS | June 2013 Finance Annex Box FIN.3 Japan’s monetary easing and developing countries In November 2012, the Bank of Japan (BoJ) signaled that it would undertake monetary easing measures to fight against deflation. The BoJ announced the actual quantitative and qualitative easing measures on April 4 th this year. These measures include the monthly purchase of ¥7.5 trillion ($75 billion) of the Japanese govern- ment bonds aiming to double its monetary base in two years. It will also expand the average maturity of bonds that it purchases from three to seven years. More importantly, the BoJ will continue these “as long as neces- sary”. The BoJ’s quantitative easing (QE) program is similar to the QE3 program in the US. The $75 billion monthly purchase of government bonds is similar in size to the Fed’s monthly $85 billion purchase under QE3. Both programs seek to depress the return on low - risk assets, in order to push investors into riskier assets. While the immediate beneficiary of the program is domestic assets, spillover into international capital markets is inevitable. In the case of the Japanese program, the size of the outflows may be larger, in part because at $8.8 trillion for bonds and $3.3 trillion for equities, the Japanese market is only 22 and 8 percent the size of U.S. markets. The bulk of these flows are likely to go to other high - income countries, only 2.4 percent of Japa- nese external holdings are in developing countries. However, Japanese investors have been actively investing in local currency bond and equity markets in some developing countries (box table). There are already indications that Japanese institutional investors have been recently increasing their expo- sure to developing countries via Uridashi funds (typically foreign currency bonds) and larger Toshin invest- ment trust funds (predominantly equity). According to the Investment Trusts Association of Japan, Japanese portfolio investment in local debt securities increased in Mexico (by 34 percent), Turkey (28 percent) and Thailand (17 percent) during the first two months of 2013. The increase was less pronounced in Philippines (5.9 percent) and South Africa (4.4 percent). Although the depreciation of yen will make the assets abroad relatively more expensive, the Japanese QE program might also increase direct investment by lowering the cost of capital for Japanese multinationals. Developing countries receive a larger 20 percent share of these outflows. Asian developing countries in turn receive two thirds of these flows. Rising outward FDI flows from Japan in recent years have been particularly important for Thailand, accounting for 40 percent of that country’s FDI inflows in 2012, up from 28 percent in 2009. Box table FIN 3.1 Japanese outward investment position by destination, 2011 ($ billion) FDI Portfolio Investment Total PI: Equity PI: Debt Total 935.4 3,279 647 2,632 Developed Countries 742.5 3,203.5 618.6 2,584.9 Developing Countries 192.8 75.6 28.3 47.3 P.R.China 73.5 10.3 9.8 0.5 Thailand 31.0 2.3 1.5 0.9 Indonesia 13.9 5.8 3.3 2.6 Malaysia 9.9 4.3 1.6 2.7 Philippines 9.0 2.7 0.3 2.5 Viet Nam 5.6 0.1 0.1 0.0 India 13.6 5.0 3.4 1.6 Mexico 2.6 11.6 0.5 11.1 Brazil 30.0 28.1 5.6 22.4 Russia 1.5 2.0 1.2 0.8 R.South Africa 2.2 3.2 0.9 2.3 ASEAN 107.6 27.2 13.3 13.9 Source: Bank of Japan. 62 GLOBAL ECONOMIC PROSPECTS | June 2013 Finance Annex As an alternative measure, high-frequency data on If the current trend gains momentum in coming flows to Emerging Market (EM) Mutual Funds— months, some developing countries might face which only represent a portion of such flows— challenges in managing the impact of these flows indicate a decline in recent months (figure FIN.14). on their economy. The fall has been particularly sharp for EM equity funds with net outflows in March and May. The fall Prospects partly reflects weak corporate earnings and country specific factors (discussed earlier). In addition, downside risks for the returns on these assets have also risen, in particular if US Treasuries were to rise earlier and higher than expected. Looking forward, Japan’s decision to begin a The level of net private capital inflows going to quantitative easing program may reverse the trend developing countries is set to rise in nominal terms in these flows (box FIN.3). The Bank of Japan’s but as a percent of total developing country GDP, (BoJ) commitment to purchase $75 billion of net inflows are forecast to ease by 2015. After the government bonds a month (just short of the Fed’s 1.4 percent increase in 2012 reaching $1.2 trillion monthly purchase of $85 billion) is likely to weaken (4.9 percent of developing countries’ aggregate returns in Japanese markets, and make developing- GDP), net capital inflows to the developing world country assets more attractive than otherwise. had a strong start in 2013 (figure FIN.15 and table While Japanese investors’ tend to have a stronger FIN.1). They are expected to increase to $1.3 home-bias than US investors, the Japanese trillion (4.7 percent of GDP) with another record domestic market is smaller than the U.S. and as a level of bond flows, rebounding bank lending and result the impact on domestic asset prices is likely robust FDI inflows. to be larger, and the incentive to invest abroad larger. How large of an impact on developing While the prospects for capital flows to developing country assets will depend on whether investors countries remain positive in the medium-term, some of turn to high-income country or developing assets. the factors that have been in play over the last few years Here, Japanese investors tend to allocate a smaller are expected to weaken. For example, while developing share of their external assets to developing countries will continue to grow relatively faster than countries than American investors do, although developed countries and their credit quality has improved, they have been active in many developing country the growth differential is expected to narrow as growth in local currency debt markets. Their portfolio high-income countries picks up. Perceptions of the investment tends to be geographically diverse with riskiness of high-income country investments have also a significant presence in Brazil, Mexico and declined, which should lead to a portfolio shift in their Turkey. favor over the medium term. Expectations of policy actions have already bolstered portfolio outflows with an increase in Fig FIN.15 Net private capital flows are set to rise in nominal terms flows to developing countries. For example, the $ trillion Percent flows to Toshin funds (investing in local and 1.4 9 international equity and bond markets) and 1.2 8 Uridashi funds (typically foreign currency bonds) 1 7 have been very robust since the beginning of the 0.8 6 5 year. According to the Investment Trusts 0.6 4 Association of Japan, Japanese portfolio 0.4 3 investment in local debt securities increased 0.2 2 in Mexico (by 34 percent), Turkey (28 0 1 percent) and Thailand (17 percent) during the -0.2 0 first two months of 2013. The increase was 2004 2006 2008 2010 2012 2014 2016 less pronounced in Philippines (5.9 percent) As a share of GDP(RHS) Bank lending Portfolio Equity and South Africa (4.4 percent). STdebt Bond flows FDI Inflows Source: World Bank. 63 GLOBAL ECONOMIC PROSPECTS | June 2013 Finance Annex Table FIN1. Net capital flows to developing countries ($ billions) 2008 2009 2010 2011 2012e 2013f 2014f 2015f Current account balance 409.4 233.0 173.3 129.6 -16.7 -74.9 -108.2 -126.3 Capital Inflows 812.7 701.0 1,218.8 1,175.0 1,192.4 1,260.9 1,297.4 1,394.8 Private inflows, net 782.3 620.0 1,145.6 1,145.1 1,178.3 1,250.2 1,290.7 1,391.7 Equity Inflows, net 583.4 541.3 710.5 710.4 758.1 791.1 803.5 863.5 Net FDI inflows 637.0 427.1 582.3 701.5 670.0 719.3 715.7 758.2 Net portfolio equity inflows -53.6 114.2 128.2 8.9 88.1 71.8 87.8 105.3 Private creditors. Net 198.8 78.7 435.1 434.6 420.2 459.1 487.2 528.2 Bonds -8.6 61.0 129.7 123.8 190.3 187.3 164.4 151.9 Banks 223.3 -11.9 37.2 108.2 82.0 104.7 125.3 146.9 Short-term debt flows -17.1 17.8 257.6 189.3 141.0 158.5 188.2 221.1 Other private 1.3 11.7 10.7 13.3 7.1 9.2 10.4 9.8 Official inflows, net 30.4 81.0 73.2 30.0 14.1 10.7 6.7 3.1 World Bank 7.2 18.3 22.4 6.6 4.6 IMF 10.8 26.8 13.8 0.5 -3.9 Other official 12.4 35.9 36.9 22.8 13.4 Capital outflows -321.2 -175.2 -314.1 -284.7 -365.4 -371.3 -416.3 -464.4 FDI outflows -211.8 -144.3 -213.9 -198.0 -238.0 -275.0 -325.0 -370.0 Portfolio equity outflows -32.1 -75.9 -50.6 4.3 -12.4 -17.3 -24.3 -29.4 Private debt outflows -78.3 50.7 -57.3 -81.0 -103.0 -72.0 -61.0 -56.0 Other outflows 1.0 -5.7 7.7 -10.0 -12.0 -7.0 -6.0 -9.0 Net capital flows (inflows + outflows) 491.5 525.8 904.7 890.4 827.1 889.6 881.1 930.4 Net unidentified Flows/a -82.1 -292.8 -731.3 -760.8 -843.8 -964.5 -989.3 -1,056.7 Source: The World Bank Note: e = estimate, f = forecast 2 /a Combination of errors and omissions, unidentified capital inflows to and outflows from developing countries In addition, the uniformly accommodative stance The impact of tighter external financial of monetary policy in high-income countries may conditions will be evident for bond flows to become more diverse as the United States reduces developing countries — both international the extent of quantitative easing and Japan expands issuance and foreign investment into local it. A gradual transition toward monetary policy currency bond markets. After reaching record tightening in the US is likely to increase the cost of highs in 2012 and 2013 bond flows are capital for developing countries and expectations expected to fall gradually in 2014 and 2015. of such a move may lead to an easing in flows even earlier. This may be partially offset by the Bank lending on the other hand is expected quantitative easing in Japan, if investors there to rise gradually particularly now that intense substantially increase their appetite for developing deleveraging pressures have eased — although country asset. The overall effect is likely to tighter the extent of the bounce back may be limited external financial conditions for developing by a stricter regulatory environment. countries. 64 GLOBAL ECONOMIC PROSPECTS | June 2013 Finance Annex FDI inflows to developing countries are projected Despite the expectation that private capital flows to increase through the forecast period, reaching to developing countries will increase, the outlook $758 billion (2.4 percent of GDP) by 2015. is subject to significant downside risks. First, Despite considerable real-side uncertainties in the despite the recent progress towards a resolution short term, multinational corporations continue to for Euro Area debt crisis, considerable be attracted to developing countries’ medium-term uncertainties remain and as highlighted by the growth prospects, large and growing consumer Cyprus bailout, event risk persists. Any major base, natural resources, and still low labor costs. In setback could lead to a renewed crisis of addition, many developing countries are removing confidence. Similarly, lack of progress in dealing barriers to foreign investment. For example, with fiscal challenges in the United States has a following its recent World Trade Organization similar potential to generate confidence issues. accession, Russia has committed to reducing restrictions on foreign investors in a number of Another factor that might generate volatility in the service industries. Other countries in Eastern global financial markets is the process of Europe have been pursuing privatization in their unwinding of monetary easing in the United services sector. Similarly, India may attract an States. As discussed earlier, the expectations influx of investment in the coming years now that related to a possible ease in the pace of the cap on foreign ownership in multi-brand retail quantitative easing have already led to the recent and aviation businesses has been raised. As long as increase in US 10-year Treasury yields Japanese monetary easing reduces the cost of accompanied widening in spreads. Hence, any capital for its multinationals, it should also support rapid shift in the expectations related to the FDI flows to Asian economies, particularly process might generate sharp adjustments in the Thailand and Vietnam in the short-term. financial markets and capital flows to developing countries. While remaining the main FDI destination among developing countries, FDI inflows to China are expected to ease over the medium term. The Chinese economy has been going through structural adjustments with rising wages and production costs, which will continue to limit the efficiency-seeking FDI. The fall will be partly compensated, however, by the market-seeking FDI flows as multinationals would like to serve its growing middle-income population. 65 GLOBAL ECONOMIC PROSPECTS | June 2013 Finance Annex Notes 1. Argentina defaulted a record $95 billion in sovereign debt in 2001. The country managed to restructure 92 percent of the debt in 2005 and 2010. Since then, Argentina has been in a long legal fight with bondholders who did not entered debt swaps. In the fall of 2012, a U.S. court ruled that Argentina had to repay the unrestructured debt, which prompted fears that the country would have to default once again on its unrestructured debt. As of yet the issue remains unresolved. According to a recent report published by the International Monetary Fund, ongoing litigation against Argentina could have pervasive implications for future sovereign debt restructurings by increasing leverage of holdout creditors. (http://www.imf.org/external/np/pp/eng/2013/042613.pdf) 2. Since January 2013, the sovereign ratings of 11 developing country borrowers have been up graded versus 5 downgrades. 3. According to the April ECB report, net tightening of credit standards declined for loans to businesses in the Euro area. Net tightening for firms is now below its historical average. Credit standards also declined for households, although they remain higher than the historical average. 4. Historical FDI data have been revised as several countries have started to report under Balance of Payments and International Investment Position Manual (BPM6). 66 GLOBAL ECONOMIC PROSPECTS | June 2013 Trade Annex Annex GLOBAL ECONOMIC June PROSPECTS 2013 TRADE GLOBAL ECONOMIC PROSPECTS | June 2013 Trade Annex Recent Developments to ease. In both Q4 2012 and Q1 2013, this import rebound gained strength in part because of the firming derived demand it generated in high- income and other developing countries. However, weaker growth momentum in some large After a cyclical rebound in global developing countries (including Brazil, China, trade, the pace of trade expansion is India, Russia and South Africa) is reflected in the slowing down of the aggregate developing country decelerating once again import demand, even if still remaining robust. Indeed, in the three months to April 2013, Following the slump in Q2 2012, global trade developing country import demand was expanding began a cyclical rebound in Q3, led by an at a 10.9 percent pace (down from the 18.0 percent acceleration in developing country imports, which pace registered in March). Nonetheless, sparked an uptick in both high-income country and developments differ across developing regions (see developing-country exports.1 As high-income box TRADE.1). country activity picked up, so too did their import demand helping to further boost overall trade in Similar to the slowdown observed in developing the fourth quarter and into the first quarter of countries, high-income country import demand 2013. However, reflecting ongoing fragility in the also weakened in recent months. However, unlike global economic recovery, particularly in high- the still positive import demand growth in income countries, the pace of trade expansion has developing countries (reflecting stronger domestic slowed in recent months. Indeed, in the three demand conditions there), high-income countries months leading to April 2013, global trade import demand growth contracted in the three expansion had decelerated to a below trend pace of months leading to April (-3.7%, 3m/3m saar). 0.8 percent (3m/3m saar) compared with 10.9 Although on aggregate import demand among high percent in March (figure TRADE.1). -income countries decelerated in April, developments have not been uniform across The deceleration in import demand individual economies (figure TRADE.2). has been broad-based, impacting US import demand growth both developing and high-income decelerates, after earlier cyclical countries rebound. The rebound in developing country import demand began almost as soon as the Euro Area The ongoing steady strengthening of US private financial market tensions of May-June 2012 began sector economic activity, (GDP grew at 2.4 percent in Q1 2013, q/q saar compared with 0.4 percent in Q4 2012) was supportive of the rebound in its Fig TRADE.1 Divergence in import growth among import demand. After contracting for four high-income countries consecutive months between August 2012 and 40 (import volumes, %ch 3m/3m saar) November 2012, US import demand growth started expanding once again in December, 30 peaking at 5.9 percent (3m/3m saar) in January Nonetheless, by March, business sentiment Developing 20 indicators for the US began declining. This decline in sentiment was reflected in real-side activity as 10 World both US industrial production and trade expansion slowed. Indeed, in March, US import demand 0 growth contracted at a 2.5 percent (3m/3m saar) High-Income pace. And although there was an uptick in April -10 (0.3 percent, 3m/3m saar), import demand is still Jan '10 Jul '10 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 expanding below trend. A strengthening US Source: World Bank; Datastream. 69 GLOBAL ECONOMIC PROSPECTS | June 2013 Trade Annex Box TRADE.1 Regional import developments Import demand in East Asia & the Pacific registered a solid rebound in both Q4 2012 and Q1 2013 (Box fig TRADE 1.1). The robustness of trade in the region also reflects increasing trade and financial integration, alt- hough concerns have been raised about the potential impact on regional trade of the decline in Sino - Japanese trade and from the sharp depreciation of the yen (see main text). Indeed, declining business sentiment for some of the larger economies in the region suggest a weakening of this expansion in Q2 2013. Available data for April shows that the pace of import momentum decelerated to 13.4 percent (3m/3m saar) from 25.4 percent in March. In Europe and Central Asia, import demand in the two largest economies in the region, Russia and Turkey, has rebounded rapidly — rising at a 19.7 percent pace in Russia and at 12.1 percent in Turkey in Q1 2013 — partly reflecting the advanced stage of recovery in these economies. In those developing European countries with closer ties to the Euro Area, output gaps remain elevated and the recovery in import demand has lagged, the expansion in import demand has been weaker. On aggregate import demand in the region expanded at 16.8 percent rate in the three months ending March 2013. Strong domestic demand in Latin America’s largest economy (Brazil), supported by loose monetary policy and household tax incentives, contributed to solid import demand in the region. Indeed in Q1 2013, import demand in Brazil grew at an above trend 21.3 percent pace. However, for the region as an aggregate import demand was 5.9 percent in Q1 2013. The weaker aggregate regional expansion in Q1 2013 reflects recent deceleration in import demand in both Argentina and Mexico. In April Brazil’s import growth contracted, but strengthening import demand from other countries in the region supported the acceleration of the region’s import demand to 6.1 percent (3m/3m saar). In South Asia where India, dominates trade activity, the replenishing of depleted stocks and earlier monetary policy easing, contributed to the robust expansion in South Asia’s imports. However, India’s export growth has not kept apace with its import demand, thus contributing to a growing trade balance and current account deficit. The latest available region wide data for Sub Saharan Africa and the Middle East and North Africa is Febru- ary 2013 (Box fig Trade 1.2). Fortunes for both regions however, diverge. As was the case for other developing regions, import demand in Sub Saharan Africa strengthened through February to a robust 17.5 percent pace (slightly higher than the developing country average of 16.6 percent at the time) from 13.1 percent in the previ- ous month. However, in the Middle East and North Africa, the contraction in import demand which commenced in August 2012 was sustained through February 2013 ( - 4.8 percent, 3m/3m saar), even if at a weaker pace. The weakness in import demand in the region in part reflects the effects of political challenges on demand condi- tions in some countries in the region. Box fig TRADE 1.1 Import volume growth among Box fig TRADE 1.2 Import volume growth among selected developing regions selected developing regions 60 (import volumes, %ch 3m/3m) 60 (import volumes, %ch 3m/3m saar) East Asia & Pacific 40 40 20 20 0 0 Latin America & Caribbean -20 -20 Jan '10 Jul '10 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 South Asia Europe & Central Asia Sub-Saharan Africa -40 Jan '10 Jul '10 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 Middle East & N. Africa Source: World Bank; Datastream. Source: World Bank; Datastream. 70 GLOBAL ECONOMIC PROSPECTS | June 2013 Trade Annex Fig TRADE.2 Import demand in selected high-income Fig TRADE.3 External demand is mitigating the weak- economies ness in Euro Area domestic demands 30 (import volumes, %ch 3m/3m saar) $ billions 0.80 (quarter-on-quarter GDP growth, 20 0.60 0.40 10 0.20 0 0.00 -0.20 -10 -0.40 -20 -0.60 Net exports 2010 2010 2011 2011 2012 2012 2013 -0.80 Domestic Demand GDP Japan Euro Area United States -1.00 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 Source: World Bank; Eurostat. Source: World Bank; Eurostat. economy should be supportive of global trade as the US contraction of 0.6 percent in output (figure still remains the world’s largest importer, accounting for TRADE.3). Since exports tend to have a large some 12.5 percent of global imports in 2011. import component, the acceleration in imports in 2013 Q1 likely reflects better exports as well as After contracting for several months, modest strengthening in the Euro Area economy. import demand in high-income Europe begins expanding once Japanese imports demand has again. rebounded in recent months. Notwithstanding a steady trend decline in its Japan accounts for 6.5 percent of global trade, market share, the European Union still remains the hence developments there remain important, world’s largest trading bloc and customs union, particularly so in the East Asia region where it is an hence developments in Europe are of significant important final market for several economies. importance in global trade. Euro Area import demand began expanding once again in February After several months of contracting import 2013 (3.5 percent, 3m/3m saar) – the first demand (between August 2012 and February expansion in ten months— and has continued 2013), import demand in Japan has begun expanding through March (3.4 percent, 3m/3m accelerating once again, consistent with the saar). The pick-up in Euro Area imports has strengthening of economic activity recorded in Q1 occurred not with standing the weak domestic 2013 (3.5 percent, q/q saar up from 0.3 percent in demand conditions there: rising and record high Q4 2012) as the effects of strong government unemployment, tight lending conditions, ongoing stimulus measures begin to impact real side activity. fiscal uncertainty, and lingering uncertainty Indeed, in the three months to April import weighing down on investor confidence. The demand accelerated to 6.3 percent compared with a strengthening of import demand could reflect the 12.9 percent pace of contraction that occurred in rebuilding of inventories after several months of December 2012. contracting imports demand, rather than strengthening of domestic demand conditions in the bloc. Exports have lagged imports but are growing rapidly — with all regions Overall, net exports demand in the Euro Area is contributing to mitigating the weakness in Euro participating in the trade rebound Area demand. For instance, in 2012, net exports contributed 1.6 percentage points to Euro Area Supported by the rebound in global economic GDP growth, notwithstanding the overall activity (as observed by the pick-up in import 71 GLOBAL ECONOMIC PROSPECTS | June 2013 Trade Annex Table TRADE.1 Export growth in developing regions Export Volume Growth 2012 (q/q, saar) 2013 (3m/3m, saar) Regions Q2 Q3 Q4 Q1 April East Asia & Pacific 23.2 -12.2 17.5 26.1 11 Europe & Central Asia 8.3 -10.5 9.2 1.8 -3 Latin America & Carribbean -6.1 -4.1 10.6 -7.5 5 Middle East & North Africa -21.5 -42.9 38.7 South Asia -6.4 -11.8 9.6 25.8 15.3 Sub Saharan Africa 48.4 -34.2 4.9 Source: World Bank; Datastream. demand), developing country exports strengthened in Data for both Sub Saharan Africa and the Middle Q4 2012 (14.8 percent, q/q saar), and this pick-up East lags behind other developing regions. Latest was sustained through Q1 2013 (15.5 percent, q/q available for the region is February 2013. In both saar), albeit at a different pace across individual regions, export growth had rebounded from the developing regions (table Trade.1). Nonetheless, contracting activity in the months prior to along with the deceleration in global import November 2012. Indeed, in the three months to demand, the pace of export growth is showing February export growth was accelerating at 19.7 signs of deceleration, with developing country percent in Sub Saharan Africa and 12.8 percent in export growth expanding at an annualized pace of the Middle East and North Africa. 7.8 percent in the three months to April 2013 compared with the 15.4 percent recorded in the Medium Term previous month. During Q1 2013 the pace of export expansion was strongest in East Asia (26.1 percent, q/q saar) led by China and also in South Asia (23.2 percent, q/q Prospects for Global saar) led by India. Central and Eastern European countries are benefitting from the strengthening Trade import demand in the Euro Area with exports from the region expanding by a solid 14.5 percent (3m/3m saar) annualized pace in Q1 2013. However stagnant export growth from Russia and After its slump in 2012 (2.8 percent growth), global the sharp decline in Turkey’s export growth trade growth is projected to pick-up in 2013 and weighed down on the overall Europe and Central gradually strengthen through 2015. Underlying Asia exports. Hence in Q1 2013 overall exports in this pick-up in activity is the expected the region expanded by only 1.8 percent—well strengthening of the Euro Area economy (largest below the developing country growth of 15.4 trading bloc) by Q3 2013, and the ongoing steady percent. Latin America and the Caribbean region recovery in the US and robust developing country was the only developing region where export growth expected to continue through 2015. growth contracted in Q1 2013, mainly due to contracting export growth in Mexico (-7.4 Global trade in goods and services is projected to percent, q/q saar) and Brazil (-4.4 percent, increase by 4.0 percent in 2013, before q/q saar). However, a pick- up in Brazil’s strengthening to 5.0 percent in 2014 and reaching export volumes in supported the rebound 5.4 percent in 2015. Despite this relatively strong observed for the region in April (5.0 growth projection, global trade volumes will percent , 3m/3m saar) remain below their pre-crisis trend — potentially suggesting a slowing in the long-term trend for 72 GLOBAL ECONOMIC PROSPECTS | June 2013 Trade Annex Box TRADE.2 The Re-orientation of South-South Trading Partners in Recent Years Though accounting for about a third of global trade, the faster projected trade growth for developing countries (between 6.4 percent to 8.4 percent annual growth over forecast horizon) compared to high -income countries (2.8 percent to 4.3 percent over forecast horizon) between 2013 and 2015 is expected to be a key driver in the expansion of global trade. As document- ed in GEP 2013A, over the past decade, the most dynamic segment of global trade is trade among developing countries – so called “South-South” trade. Indeed, over the past decade the USD value of trade between developing countries has grown annually by an average of 19.3 percent (17.5 percent if trade with China is excluded) versus about 11 percent for developing country exports to high -income countries. This trend is expected to continue over the forecast horizon. One significant element that has driven this South -South trade has been the growing role of East Asia as a major global trading bloc. Together this region, accounts for about half of the re- orientation towards South-South trade, with China, being the most dynamic trading partner. Indeed, without exception, every single developing region has increased its trade with China, while contemporaneously reducing their trade dependency on high-income markets (Box Figure Trade 2.1). The developing regions to have most re -oriented and increased their trade with China over the past decade have been those with a comparative advantage in natural resources. Between 1999 to 2011 Sub Saharan Africa increased their exports to China from 2.23 percent of their total exports to 22.73 percent, Latin America in- creased theirs from 1.0 percent to 11.5 percent and the Middle East and North Africa from 2.21 percent to 15.29 percent. Reflecting the strong integration of production networks in East Asia, the share of exports from other East Asian economies to China has increased from 4.5 percent in 1999 to 18.6 percent in 2011. Box Fig TRADE 2.1 Cumulative change in share of regions Box Fig TRADE 2.2 Intra-regional import shares among total exports going to China and high- developing regions ( percent) income countries, 2000—2011 (percent). 25% 30 20% EAP LAC MENA South Asia Sub-Saharan Africa ECA Trade 15% with 25 China 10% 20 5% 0% 15 1999-2000 Trade with -5% US, Japan and 2010-2011 Euro Area -10% 10 -15% -20% 5 -25% 0 -30% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 ECA LAC SSA EAP South MENA Asia Source: UN COMTRADE. Source: UN COMTRADE. The rapidly growing South-South trade has however not been driven by only China but also other developing regions, in particular the rest of the East Asia region. However, outside of China and East Asia Pacific region, in general, the diversifica- tion of trading partners towards other developing regions, though occurring, has been less dynamic compared to that with the East Asia region (see Box Table TRADE 2.1). Indeed, outside of trade with the East Asia region, the most significant re -orientation has been increasing exports from both the Middle East and North Africa. Excluding this, the re -orientation of trade with other developing regions has been some- what less dynamic (see Box Table TRADE 2.1). More surprising however is the relatively slow progress towards increased integration among developing countries in the same region, with the exception of East Asia where regional trade integration (share of intra-regional imports) almost tripled since 1999. Indeed, excluding China which tends to export a greater share to high-income countries, the share of the other East Asian countries exports to the East Asia region increased by 20 percent- age points (from 7.1 percent to 30.3 percent of their total exports). This is not the case in other developing regions. Although Europe and Central Asia remains the second most trade-integrated developing region (thanks to many countries benefitting from multiple trade agreements in the region, especially those associated with the European Union) part of the progress made in regional integration appears to have been eroded by the weak demand post crisis, as intra -regional trade having risen to 27.8 percent by 2008 (from 19.2 percent in 1999), has since declined to 25.5 percent in 2011 (see Box Fig TRADE 73 GLOBAL ECONOMIC PROSPECTS | June 2013 Trade Annex 2.2). For both Latin America regional trade integration has steadied around 16 percent over the past decade. And in Sub Saharan Africa, after increasing by some 5 percentage points between 1999 and 2002, the share of regional trade has also steadied at around 12 percent of total trade, reflecting significant cross border barriers as well as increased external com- petition due in part to unilateral tariff liberalization. Among developing regions, the Middle East and North Africa and in South Asia remain regions with the least intra -regional trade, about 3 and 4 percent of their total trade is carried among regional neighbors. Not surprising several analytical studies (including those using gravity models) continue to point to the underperformance of intra-regional trade in the Middle East and North Africa (Dennis, 2006; Devlin and Yee, 2005; Zarrouk, 2003 Al-Atrash and Yousef, 2000), as well as in South Asia (Kumar etal 2009) and in Sub -Saharan Africa (Buys etal. 2010). While trade in natural resources, in particular ores and metals has been the fastest growing commodity category of imports among developing countries, the growth in trade in manufactured goods among developing countries has also been solid - growing as fast as petroleum imports and faster than agricultural raw material imports. The strength of importance of ores and metals is however accentuated by the inclusion of China. Excluding China, manufactured goods has been the fastest component of south-south trade, reflecting increased production chain interlinkages among developing countries, particu- larly in the East Asian region. Box table TRADE 2.1 The diversification of trading partners between developing regions has been most dy- namic between all developing regions and the East Asia region EXPORT MARKET (additional increase in exports share going to import market, in percentage points) ( e.g. an additional 18.0% of SSA share of its total exports was re-oriented towards the EAP region) IMPORT MARKET EAO EAP ECA LAC MENA SAS SSA East Asia excl. China (EAO) 6.3 4.2 0.5 1.0 -0.2 2.2 0.5 East Asia & Pacific (EAP) 20.4 8.0 3.6 10.8 11.1 8.5 18.0 Europe Central Asia (ECA) 1.4 3.1 6.2 1.0 1.3 2.9 0.8 Latin America & Carribean (LAC) 1.3 4.1 0.0 1.3 -0.6 2.7 0.5 Middle East & North Africa (MENA) 0.4 0.6 0.5 0.6 0.4 1.4 -0.7 South Asia (SAS) 2.5 2.5 0.5 1.2 6.6 1.5 0.5 Sub Saharan Africa (SSA) 0.4 1.0 0.2 0.7 0.4 2.5 5.2 Source: UN COMTRADE. rapidly growing developing country market shares. changed over the past six months. Nevertheless, trade is expected to continue Nonetheless, unlike earlier periods where the reorienting itself toward developing countries (box balance of risks were weighted on the Trade.2). Partly as a result of this trend, downside, these are now more balanced (see increasingly more of developing country trade is main text). Downside risks continue to now with other developing countries — both include a worsening of conditions in the Euro reflecting increases in inter-regional and intra- Area, the possibility that markets react badly regional trade, especially the in the East Asian region. to a failure of either the United States or Japan to map out a credible medium-term deficit reduction strategy, a rapid decline in Risks Chinese growth and geopolitical concerns. To these may be added the possibility that high commodity prices, which have supported the value of global trade — if not the volume — could decline rapidly with deleterious consequences for incomes and imports of Fragile global economy. Downside risks to the commodity exporting countries, but benefits forecasted uptick in global trade activity have not for importers. 74 GLOBAL ECONOMIC PROSPECTS | June 2013 Trade Annex However, outturns in the global economy, The resurgence in announced bilateral and particularly from high-income countries could surprise on the upside, compared to the regional trade agreements among high- subdued uptick embedded in our current income countries could mitigate the forecasts (high-income growth of 1.2 percent in 2013 strengthening to 2.3 percent by 2015 acceleration of developing country trade. – see main text for details). This could arise from another of reasons including the pent- Notable among these are the US-EU free trade up demand in high-income countries, low agreement and the Trans Pacific Partnership (US levels of inventories, and improved credit and nine other economies, including high-income flows to real economy in high-income countries such as Japan, Australia, New Zealand, countries. If this were to occur, this would Singapore and Chile). While bilateral and regional lead to a rapid rise in not only high-income preferential trade agreements have proliferated in trade but also that of developing country past decades, these new accords (if agreed to) are trade than currently embedded in our much larger in scope. A trade agreement between forecasts. the US and the EU alone would be unprecedented in size - accounting for some 40 percent of global A rise in protectionism. With unemployment trade! Hence were the preferences included in a remaining at elevated levels, weak global demand potential deal between the US and the EU, not and little progress in multilateral trade talks, the extended to other developing countries within the incidence of new restrictive trade measures, while multilateral trading system this could disadvantage slowing down compared to a year ago, still reveals developing countries. some worrisome trends. The World Trade Organization reports that in the five months A principle concern with agreements is the extent leading to mid-October 2012, an additional 71 new to which non-participant third parties will be trade restricting or potentially distorting measures affected by trade diversion, potentially leading to a were introduced. The most frequent measure used decline in global welfare, even if the agreement was the initiation of anti-dumping investigations, benefits the parties to it. Given the size of high- followed by stringent customs procedures. This income countries, these potential trade-diverting represents a decline from the 108 new measures impacts from preferential trade agreements are introduced a year ago. Nonetheless, although the further magnified and developing countries are pace of imposition of new restrictions dropped, likely to be the loosers from such an agreement, recent experience suggest that, once imposed it is were it to be trade-diverting. Hence, efforts to difficult to remove such restrictions, inevitably due clinch a multilateral deal (Doha Round) will over to the political constituencies that they build. For the long-term maximize global welfare. instance, only 21 percent of new trade-restricting measures introduced since October 2008 by G-20 countries have been removed, thereby leading to a cumulative increase in the stock of trade restrictions. Indeed on a net basis (i.e. accounting from removal of restrictions), current existing measures imposed by G-20 countries since October 2008, is estimated to affect some 3.5 percent of global trade (as of October 2012), up from 2.9 percent in May 2012. 75 GLOBAL ECONOMIC PROSPECTS | June 2013 Trade Annex Notes 1. The null hypothesis that developing country import volumes do not granger cause high-income export volumes is rejected at 1 percent level, after 3 lags. Similarly the null hypothesis that high-income import volumes do not granger cause developing country export volumes is rejected at 1 percent level, after 4 lags. References Aggarwal, A., (2008). Regional Economic Integration and FDI in South Asia—prospects and problems. Macroeconomics Working Papers No. 22141, East Asian Bureau of Economic Research. Al-Atrash, H. and T. Yousef (2000). Intra-Arab Trade: Is it too Little?, IMF Working Paper WP/00/10. Buys, P., Deichman, U., Wheeler, D (2010). Road Network Upgrading and Overland Trade Expansion in Sub Saharan Africa, Journal of African Economies, 19(3): 399-432. Dennis, A (2006). The Impact of Regional Trade Agreements and Trade Facilitation in the Middle East and North Africa, Policy Research Working Paper, World Bank. Devlin, Julia and Peter Yee (2005). "Trade Logistics in Developing Countries: The Case of the Middle East and North Africa". The World Economy, Vol. 28, No. 3, pp. 435-456, March 2005. Kumar, R., and M. Singh (2009). India’s Role in South Asia Trade and Investment Integration. World Bank (2012). Light Manufacturing in Africa. World Trade Organization (2012). Report to the TPRB from the Director General on Trade -Related Developments. WT/ TPR/OV/W/6. Zarrouk, J (2003). "A Survey of Barriers to Trade and Investment in Arab Countries", in Gala, A. and B. Hoekman (eds), Arab Economic Integration., Brookings Institution Press, Washington DC. 76 GLOBAL ECONOMIC PROSPECTS | June 2013 Exchange Rates Annex Annex GLOBAL ECONOMIC June PROSPECTS 2013 EXCHANGE RATES GLOBAL ECONOMIC PROSPECTS | June 2013 Exchange Rates Annex Recent developments have contributed to the sharp depreciation of its abovementioned currency. Some possible implications of the large yen depreciation are discussed in box ExR.1. Real exchange rates in high income The appreciation of the euro in trade- weighted real effective terms since mid-2012 countries since mid-2012 have been (discussed in the January 2013 edition of the driven mainly by accommodative Global Economic Prospects report) continued into the first half of 2013, partly because of the monetary policies Japanese depreciation and partly because financial market tensions remained subdued. Policy measures in high income countries By February 2013, the euro had appreciated 9 designed to restore financial market percent in REER terms from its trough in confidence and support economic growth July 2012. 2 Since February, the continued have played a significant role in movements economic weakness in the Euro Area and of trade-weighted real effective exchange uncertainties surrounding Italian elections rates (REER) of both high income and (February) and Cyprus’ banking sector developing countries in recent months. 1 problems (March) tempered the euro’s earlier Among the major high income currencies, the appreciation, bringing the total rise since July Japanese yen depreciated by a steep 21 2012 to 7.1 percent in REER terms by April percent in real effective terms between 2013. September 2012 and April 2013 (figure ExR.1). This depreciation came about as Despite these large fluctuations, the US dollar markets reacted to initial announcements of has remained broadly stable in real-effective macroeconomic policy changes to raise terms — holding approximately the same inflationary expectations and support Japan’s level in April as in July 2012. In between growth. These announcements were followed times, it first depreciated during the second up by the introduction of an explicit 2 half of 2012, and then rebounded in early percent inflation target in January 2013, and 2013 as the yen declined. Since January, the by a commitment in early April to aggressive US dollar is up by 2.5 percent in real effective monetary easing — including near-zero interest terms. rates and an asset purchase program that would double Japan’s monetary base by the But recent swings in G3 currencies mask end of two years — in pursuit of that target. Although Japan’s expansionary policies were important medium term trends undertaken primarily for domestic goals, they Notwithstanding its steep depreciation since September 2012, the yen was only 2.3 percent Fig ExR.1 Depreciation of the yen and appreciation of lower in REER terms in April compared with euro in trade-weighted real effective (REER) its level in mid-2008 prior to the global terms since mid-2012 financial crisis. And despite its strong Real effective exchange rate (January 2011 = 100) 110 appreciation since mid-2012, the euro is 12.7 105 percent lower (REER terms) than its pre- 100 financial crisis level. By contrast, the US 95 dollar has appreciated 3.1 percent in REER terms since mid-2008. In addition to the 90 effect of the recent yen depreciation, the 85 relative strength of the dollar over the longer 80 period partly reflects the status of the US 75 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 dollar as a “safe haven” during times of Japan United States Euro Area market turmoil and heightened risk aversion, Source: World Bank; IFS; JP Morgan. when investors sought the safety of US government bonds and other financial assets. 79 GLOBAL ECONOMIC PROSPECTS | June 2013 Exchange Rates Annex ExR.1 Box ExR.1 Box Yen depreciation: Some implications The yen weakened to a four - year low of 103 against the US dollar in May 2013, depreciating 25 percent from its level in September 2012, mainly in response to announcements of expansionary monetary policies. In trade - weighted real effective (REER) terms, the yen depreciated 21 percent between September and April. Together with gradually strengthening global demand, the weaker yen appears to have halted an earlier slide in Japan’s exports (Japanese exports fell by 24 percent in US dollar terms between June 2012 and January 2013 due to weak global growth and a territorial dispute with China, its largest trade partner). Between January and April, Japanese exports rose 9.5 percent in US dollar terms, while imports contracted 5.8 percent. Japanese GDP accelerated to a 4.1 percent annualized pace in Q1 2013, from 1.2 percent in Q4 2012. Sentiment improved among Japanese automobile manufacturers in the first quarter, in part due to improved prospects for exports. The above trends are broadly consistent with empirical studies which find that large real exchange rate depreciations tend to stimulate exports, and in turn, economic growth (see, for instance, Hausmann, Pritchett and Rodrik (2005) and Freund and Pierola (2012) for cross - country evidence, and Thorbecke and Kato (2012) for evidence from Japanese consumption exports). Conversely, Kappler et al. (2012) using a cross - country dataset find that large exchange rate appreciations result in a reduction in real exports and a deterioration of current account balances. The implications of the large yen depreciation for Japan's trade - partner countries need to be considered with some caveats. The unprecedented monetary easing in the current episode together with fiscal stimulus may raise Japan’s aggregate demand substantially. As income elasticities are typically larger than price sensitivities, in this particular instance, developing - country exporters’ gains from increased import demand from Japan might eventually outweigh the losses associated with the Yen’s (real) depreciation. The effect of the yen depreciation on exports of trade partner countries would also vary depending on the extent of their complementarities and competition with Japanese exports in world markets. For instance, using industry - level data, Li, Liu and Song (2010) find that Japan and China’s export structure tends to be complementary, while Japan and South Korea compete in exports of technology - intensive products. The study found that a real depreciation of the yen had a positive impact on China’s (relatively more labor - intensive) exports, but a negative impact on South Korea’s (relatively more high tech and capital intensive) exports. 3 Moreover, countries that import capital goods or intermediate products from Japan or those that are part of Japanese firms’ regional production chains (e.g., Thailand, Philippines, India) could benefit from a weaker yen through reduced costs of imported inputs. Outward investment flows resulting from Japanese monetary easing may also benefit developing countries (see GEP Finance Annex ). Larger and higher productivity firms in trade - partner countries may be able to absorb some of the exchange rate changes in their markups, reducing the sensitivity of their exports to exchange rate movements (see Berman, Martin and Mayer (2012) for evidence from French firm - level data). Over the longer term, however, the benefits for developing countries are contingent on Japan raising its longer - term potential growth through structural and policy reforms. In the short - term, Japanese quantitative easing could add to the looseness of global monetary condition, through lower global interest rates and potentially strong and disruptive capital flows to developing countries, and could raise overheating pressures, particularly in East Asian countries. For Japan itself, studies suggest that competitiveness gains from REER depreciation may be temporary and difficult to sustain over time, and may even introduce costly distortions in the real and financial sectors of the economy (Haddad and Pancaro (2010)). Indeed, despite a rise in exports following depreciation episodes in the past, Japan’s share in global trade has declined almost steadily during the last two decades, from over 9 percent in 1991 to 4.6 percent by 2012. Moreover, the eventual adjustment of prices of non - traded goods over time implies that a shift in the monetary policy stance alone cannot be used to sustain a particular real exchange rate that is misaligned with fundamentals (Eichengreen 2008). Overall, the evidence indicates that a real exchange rate depreciation may provide a temporary boost to exports, but structural reforms that bring about sustained improvements in productivity and reduce barriers to trade, investment and labor mobility are likely to play a larger role in a longer - term growth strategy. 80 GLOBAL ECONOMIC PROSPECTS | June 2013 Exchange Rates Annex Given the protracted debt crisis in the Euro internationally-traded currencies of typically Area during this period and financial market middle-income emerging market economies uncertainties, unconventional monetary were influenced by: movements in high policies undertaken by the US Federal income currencies (in particular, the large yen Reserve in the form of several rounds of depreciation); a rebound in private capital quantitative easing may have possibly inflows to developing countries; elevated prevented an even stronger appreciation of international commodity prices; strengthening the US dollar in REER terms compared with economic activity and exports in the group of its pre-financial crisis level. 4 developing countries; and country-specific differences in policies and performance. The trend appreciation of developing The 21 percent REER depreciation of the yen country currencies has picked up since September 2012 appears to have pace since mid-2012 resulted in significant appreciation pressures in Japan’s trade partners, particularly among countries in the East Asia region. Simulations Together with easing of financial market suggest that in the absence of the steep yen tensions since mid-2012 and the large yen depreciation, on average trade-weighted real depreciation, the appreciation of developing effective exchange rates in the East Asia and country currencies picked pace in the second Pacific region would have appreciated 3.7 half of 2012 and early 2013. The GDP- percentage points less quickly during this weighted average of trade-weighted real seven-month period (compared to the actual effective exchange rates (REER) for 6.1 percent appreciation), and the average developing countries rose by 4.7 percent REER for the group of developing-countries between September 2012 and April 2013 — a would have appreciated 1.7 percentage points significantly faster pace compared with the less than that observed. almost flat trend (0.7 percent annual appreciation) during the previous 24 months In addition to the yen depreciation, a (figure ExR.2). The steep appreciation during rebound in private capital flows since the this recent 7-month period was also faster third quarter of 2012 and elevated commodity than the 5.4 percent annual REER prices appear to have contributed to appreciation of developing-country currencies observed prior to the financial crisis, between January 2005 and August 2008. The earlier Fig ExR.2 A faster appreciation of developing- country real effective exchange rates strong appreciation had occurred during a (REERs) since mid-2012 boom in international commodity prices, Real effective exchange rates (January 2005=100) sustained inflows of foreign capital into 150 developing countries, and a faster pace of 140 growth and higher rate of productivity increases in developing countries compared 130 with high income countries (see Global 120 Economic Prospects July 2012 edition). And prior to that, the average REER for 110 developing-country currencies was broadly 100 unchanged in 2004 compared with its level in 1995. 90 Jan '06 Jan '08 Jan '10 Jan '12 Developing Countries Europe & Central Asia South Asia Notwithstanding the overall REER China Latin America & Caribbean East Asia excl. China appreciation in the group of developing countries since the second half of 2012, there Note: The four developing regions shown in the chart account for close to 90 percent of GDP of developing countries. Sub -Saharan Africa was significant variation in the magnitude of, (SSA) and the Middle East and North Africa (MENA) regions are not and factors contributing to, currency shown in the chart, but are included in the overall Developing Country aggregate. movements in individual countries. The Source: World Bank; IFS; JP Morgan. 81 GLOBAL ECONOMIC PROSPECTS | June 2013 Exchange Rates Annex appreciation pressures in several emerging may be playing a role in buoying these currencies in market countries. Private capital flows to recent months. countries in Europe and Central Asia, East Asia and Pacific, and South Asia have risen Strengthening global trade since the third quarter robustly since mid-2012 (see GEP Finance of 2012 and a recovery in developing-country Annex ). Some studies suggest that surges in exports have also contributed to increased foreign capital inflows are likely to be associated with currency revenues in developing countries. appreciation of real effective exchange rates However, in a few countries, country-specific of recipient countries (see Magud and Sosa factors seem to have been more significant (2010) for developing countries, and contributors to movements in real effective Jongwanich and Kohpaiboon (2013) for exchange rates. The factors relevant for different emerging Asia). The average REER developing countries and regions are discussed appreciation of large emerging economies below. appears to be positively related with a decline in their sovereign credit default swap (CDS) Both yen devaluation and robust capital inflows rates, an indicator of financial risk (figure ExR.3). contributed to appreciation pressures in East Asia International commodity prices strengthened in early 2013 on an improving global outlook, but East Asian currencies faced significant appreciation have eased in more recent months following an pressures from both the large depreciation of the improvement in supply conditions (see GEP yen as well as from a surge in private capital Commodity Annex). Notwithstanding these shorter- inflows since the second half of 2012. In inflation- term movements, industrial commodity prices in adjusted terms, between September 2012 and April 2012 and early 2013 were elevated compared to 2013, bilateral real exchange rates of several both the immediate post-financial crisis period and countries in East Asia appreciated 25-30 percent the period prior to 2007. Real effective exchange relative to the Japanese yen, while Thailand’s rates of commodity exporters have typically moved currency appreciated a larger 34 percent (figure together with international commodity prices ExR.5).5 (figure ExR.4). But they have diverged in the most recent period, with real effective exchange rates Because of the relatively large weight appreciating despite the recent easing of (compared with other developing regions) of commodity prices, suggesting that other factors Japan in their trade, the average GDP- Fig ExR.3 Real effective exchange rates in emerging Fig ExR.4 Industrial commodity prices and real economies tend to appreciate withimprovements effective exchange rate of commodity in financial market conditions, and vice-versa exporters tend to move together, except in the most recent period REER of selected emerging markets excl. China (GDP-weighted avg.) CDS spreads of selected emerging market countries excl. China [Right] 150 200 130 600 180 500 140 120 160 400 130 110 300 140 200 120 120 100 100 REER of commodity exporters 100 90 0 110 Industrial commodities price index [Right] Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 80 Notes: GDP-weighted averages of CDS spreads and REERs for 100 60 Brazil, Chile, Colombia, Indonesia, Mexico, Malaysia, Peru, Russia, Sep-08 Aug-09 Jul-10 Jun-11 May-12 Apr-13 Thailand and Turkey. China is excluded from the chart due its man- aged exchange rate regime. Source: World Bank; IFS; JP Morgan. Source: World Bank; IFS; JP Morgan. 82 GLOBAL ECONOMIC PROSPECTS | June 2013 Exchange Rates Annex Currencies in Latin America & Caribbean Fig ExR.5 East Asian currencies appreciated in real effective (REER) terms since September 2012 and Eastern Europe & Central Asia were Percent appreciation September 2012-March 2013 influenced by capital inflows and international 20 40 commodity prices 15 30 In the Latin America & Caribbean region, despite an easing of commodity prices in recent months 10 20 (although prices remain elevated relative to recent years—see GEP Commodity Annex), several Latin 5 10 American currencies have appreciated in REER terms since early or mid-2012 (figure ExR.6).6 The 0 REER 0 Mexican peso rose 8.3 percent since September Bilateral RER relative to US dollar 2012 together with an upturn in the United States -5 Bilateral RER relative to Yen [Right] -10 (Mexico’s largest trading partner) and rising demand for Mexican exports, and strong portfolio inflows into government bonds. Source: IFS, JP Morgan and World Bank. Chile’s currency has risen 6 percent in REER terms since early 2012 as a result of robust commodity weighted REER for developing countries in revenues and private capital inflows. The Brazilian the East Asia & Pacific region has real rose 7.4 percent in real effective terms since appreciated strongly by 6.1 percent since September 2012—after depreciating 12 percent September 2012, versus 3.7 percent for other during the previous 1½ years following imposition developing regions. The Thai baht of capital control measures. The financial appreciated 12.5 percent in REER terms in transactions tax (IOF) on foreign currency inflows this period — as strong capital inflows added into Brazil’s domestic debt markets was reduced to to upward pressures from the yen zero in early June 2013. The challenges that depreciation — while currencies of China and developing-country policymakers face when Indonesia appreciated 5.9 and 5.4 percent, confronted with surges in capital inflows that result respectively. By contrast, the South Korean in appreciation of real effective exchange rates, and won appreciated a smaller 3.9 percent in some of the measures that have been used to REER terms, in part due to political tensions. alleviate their impacts are discussed in box ExR.2. Fig ExR.6 Real effective exchange rates in several emerging economies in Latin America & Caribbean and Europe & Central Asia have appreciated in recent months, building on earlier upward trends Real effective exchange rate (January 2008=100) Real effective exchange rate (January 2008=100) 130 130 120 118 110 106 100 94 90 82 80 70 Jan '08 Jan '10 Jan '12 Jan '08 Jan '10 Jan '12 Brazil Colombia Mexico Chile Peru Russia Turkey Romania Bulgaria Source: World Bank; IFS; JP Morgan. 83 GLOBAL ECONOMIC PROSPECTS | June 2013 Exchange Rates Annex Box ExR.2 How should developing countries react to capital flows-induced real exchange rate appreciation? The shifts in monetary policy stances in high income countries since the global financial crisis—although designed primarily to support their domestic goals of reviving domestic growth and raising inflationary expectations, rather than facilitate depreciation of their currencies or engage in “competitive devaluation”—have still raised concerns among developing country policymaker about their unintended consequences in the form of surges in private capital flows, real exchange rate appreciation and possi- ble loss of export competitiveness (Eichengreen (2013) and Kappler et al. (2012)). Recent research finds that the direct contri- bution of quantitative easing measures in the United States on capital flows into emerging market economies was relatively modest (see Fratzscher, Lo Duca, and Straub (2012) and Morgan (2011)). However, other studies suggest that the indirect impact of the extended period of unconventional monetary policies in high income countries in terms of reducing global risk aversion and lowering the cost of capital, together with stronger economic performance of emerging economies, may have been important factors behind surges in capital flows into developing countries in recent years (see, for instance, Ghosh et al. (2012) and Forbes and Warnock (2012)). Cross-country and country-specific studies indicate that these inflows have often been associated with appreciation of real effective exchange rates in recipient countries (see, for instance, Magud and Sosa (2010), Combes, Kinda and Plane (2011), Jongwanich and Kohpaiboon (2013), and Ibarra (2011)). The interrelated goals of maintaining exchange rate and financial stability and open capital accounts in a situation of unconven- tional monetary policies in high income countries and abundant global liquidity complicates the task of developing country au- thorities. For instance, lowering interest rates to discourage foreign inflows may exacerbate existing domestic credit and asset price bubbles and cause overheating in certain sectors. But raising interest rates to curb credit growth can risk attracting even more capital inflows and further appreciate the exchange rate (which, in turn, can attract even more short -term speculative in- flows)—with potentially destabilizing consequences for sovereign and firm balance sheets if these flows were to reverse sud- denly. Moreover, for countries that have relatively less flexible exchange rate regimes, this lack of exchange rate flexibility can create incentives for taking on foreign debt and thereby increase the share of foreign currency credit in overall credit (Magud, Reinhart, and Vesperoni (2012)). The “impossible trinity” of not being able to achieve all three policy objectives of exchang e rate stability, free capital mobility, and an independent monetary policy - and a fourth related objective of financial stability - has sometimes been cited as a reason for developing countries to impose some form of controls on capital flows (see Eizenman (2010)). Emerging economies faced with disruptive short-term foreign capital inflows (“hot money”) have resorted to various measures to correct the resulting temporary deviation of exchange rates from underlying fundamentals, and to alleviate the impact of the- se flows on credit markets. These include direct foreign exchange interventions, interest rate policies, prudential regulations (e.g., restrictions on banks’ borrowing from abroad, limits on domestic lending to certain sectors), and various forms of capital controls—such as taxes and fees on capital inflows, minimum holding periods for government bonds, withholding taxes on capi- tal gains, and minimum waiting periods to repatriate capital, among others (see Ostry et al. (2012)). Brazil’s earlier financ ial transactions tax (IOF) on foreign currency inflows into domestic debt markets is a well -known example (This tax was reduced to zero in early June). Earlier, Thailand had imposed withholding taxes on foreign holdings of government bonds in 2010, while Indonesia had imposed a six-month holding period for central bank bonds and limits on short -term foreign borrowing by banks in 2011 (IMF 2012). Peru’s central bank raised reserve requirements on dollar -denominated deposits several times in 2012 and in the first half of 2013, citing the need to moderate inflows of foreign capital and control credit growth; and intervened in foreign exchange markets in the first half of 2013 to stem appreciation of the sol. Turkey has also used prudential measures, including allowing banks to hold part of their required reserves in foreign exchange, which can alleviate pressures from the foreign ex- change market when capital inflows are strong. Colombia intervened periodically in foreign exchange markets during 2012 to moderate the rise of its currency against the US dollar. The evidence on the effectiveness of controls on volumes of capital flows is however mixed (Magud, Reinhart and Rogoff (2011)), although these measures may alter the composition of inflows (Ostry et al. (2012)). Fratzscher (2012) finds that rather than being motivated by capital flows volatility, capital controls have typically been associated with significantly undervalued exchange rates, in addition to concerns about signs of overheating, such as high credit growth and rising inflation. Neverthe- less, when faced with a surge of capital inflows that threaten to overwhelm domestic financial markets and result in asset price volatility and bubbles, credit booms, and real exchange rate appreciation, capital flow management (CFM) measures such as temporary controls on foreign capital, domestic prudential measures, and interventions in foreign exchange markets may re- duce exchange rate volatility and provide space for the domestic economy to adjust to the changed external circumstances (IMF (2012)). But if these result in real exchange rates that are persistently out of line with underlying macroeconomic funda- mentals in the medium-term, capital controls can cause distortions and suboptimal investment and production decisions across tradable and non-tradable sectors, and impose unnecessary economic costs. 84 GLOBAL ECONOMIC PROSPECTS | June 2013 Exchange Rates Annex Among developing countries in the Europe & Until recently, movements of the rand tended to Central Asia region, the Russian ruble appreciated track closely South Africa’s terms of trade, 3.8 percent in REER terms since September 2012 adjusting flexibly to international commodity price on the back of a surge in syndicated bank lending movements (see Global Economic Prospects June 2012 and buoyant crude oil revenues (figure ExR.6). edition), and in turn, facilitating internal economic Notwithstanding weakening GDP growth, the adjustment. This historical link appears to have Turkish lira rose 7.1 percent in REER terms in the been broken in the most recent period, as the rand same period, partly reflecting robust capital inflows weakened in REER terms in the second half of and an improvement in its export performance, as 2012 despite a rally in international commodity robust exports to the Middle East offset weakening prices. The rand’s performance was adversely demand from the Euro Area. The Turkish lira has affected by mining sector tensions, a downgrade of exhibited one of the largest appreciation among South Africa’s sovereign rating, and weak growth regional currencies, strengthening by 17 percent in in 2012; and by further weakening of activity in the REER terms since January 2012, although it still first quarter of 2013. The Indian rupee has also remains 3 percent below its level in early 2008 prior been weak due to slower growth and a widening to the global financial crisis. The Romanian leu current account deficit, but stabilized somewhat in appreciated by a strong 10.4 percent in REER REER terms in the second half of 2012 and early terms between September 2012 and April 2013, 2013, mostly due to robust portfolio inflows after also reflecting robust inflows into local currency announcement of a number of reforms, including bond markets (see GEP Finance Annex). raising limits on foreign direct investment in the retail, broadcasting and aviation sectors. Commodity exporting developing countries in the Europe & Central Asia region and in Latin America & Caribbean typically have weaker trade Current account balances of linkages with Japan compared to that of East Asian developing countries deteriorated and countries, and were therefore less affected by the yen depreciation. international reserves as a share of imports have fallen Domestic developments played a more The weak global economy and decline in the pace significant role in South Africa and India of expansion in international trade in 2012, together with rebalancing of China towards Some notable exceptions to the general domestic sources of growth in recent years, have appreciation trend among developing countries sharply reduced the overall current account balance include countries with growth concerns, in of developing countries (figure ExR.8). Oil particular, South Africa and India (figure ExR.7). exporters among developing countries gained from Fig ExR.7 Domestic factors played a role in weakening of Fig ExR.8 Combined current account surplus of devel- REERs in India and South Africa oping countries has disappeared Real effective exchange rate (January 2008=100) Current account balance as share of developing-country GDP (Percent) 130 5 5 Oil exporters (Developing) China 118 4 Oil importers excl. China 4 All Developing 3 3 106 2 2 94 1 1 0 0 82 -1 -1 70 Jan '08 Jan '10 Jan '12 -2 -2 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 India South Africa Source: World Bank. Source: World Bank; IFS; JP Morgan. 85 GLOBAL ECONOMIC PROSPECTS | June 2013 Exchange Rates Annex Capital flow management measures and exchange rate restrictions should ideally be transparent, targeted, temporary and non -discriminatory (IMF (2012)). For instance, prudential measures such as restrictions on bank lending to reduce overheating in certain sectors may be preferable to direct capital controls that discriminate on the basis of residency. Macro -prudential measures may, however, raise implementation issues and conflict with other domestic policy objectives. Moreover, for coun- tries with weak financial systems and limited capacity to manage volatile capital flows, controls on short -term capital move- ments may need to be part of their policy toolkit over the medium -term. Overall, such measures should not aim to maintain a real exchange rate that is persistently out of line with underlying macroeconomic fundamentals, and not be seen as a substi- tute for structural and labor market reforms that are needed for improving productivity and longer -term competitiveness. sustained high international oil prices during 2011- of strong commodity revenues and robust capital 2012 and in early 2013, although a modest 2.5 inflows. percent decline in crude prices is projected for the whole year (see GEP Commodity Annex). By Notwithstanding declining import cover across contrast, robust domestic demand and high crude developing regions, reserves still stand well above oil prices in recent years (up until early 2013) the critical 3 months of imports in the vast contributed to strains on oil importers’ trade and majority of developing countries, with a few current accounts balances. exceptions. However, the number of developing countries with reserves equivalent to less than 3 At the same time, developing countries’ holdings months of imports rose to 17 countries as of April of international reserves have declined as a share 2013 from 11 in January 2010 (figure ExR.10). For of imports since 2010 (figure ExR.9). Reserves instance, in Egypt and Pakistan, international have fallen the most among oil importers in the reserves have fallen below 3 months of imports. Middle East and North Africa region (a decline equivalent to 3.5 months of imports) and in South Smaller reserves relative to imports may increase Asia (decline equivalent to 3.9 months of imports). the risk of sudden depreciation of real exchange Reserves in Europe and Central Asia declined to rates due to shifts in investor sentiment or other 2.3 months of imports as regional trade and external shocks. It should be noted, however, that investment was adversely affected by the weakness reserves in months of import cover are a relatively in Western Europe. The decline in average reserve crude measure of reserve adequacy and may need coverage of imports in other regions is smaller: by to be complemented with other measures that take 1 month in East Asia and Pacific excluding China, into account a country’s overall external financing and by 0.3 month in Sub-Saharan Africa. By needs. Moreover, reserve adequacy depends, contrast, international reserves in months of among other factors, on the exchange rate regime: imports remained broadly stable in the Latin countries with flexible exchange rates and without America and Caribbean region in this period the need to defend a particular exchange rate may (rising by 1 month of imports), mainly on the back require a lower reserve coverage of imports. Fig ExR.9 Import cover has fallen across developing Fig ExR.10 Number of developing countries with reserves regions except in Latin America & Caribbean less than 3 months of imports has risen International reserves in months of imports Number of developing countries 16 40 14 35 12 30 Jan. 2010 10 25 Apr. 2013 or MRV 20 8 15 6 10 5 4 Jan '09 Jan '10 Jan '11 Jan '12 Jan '13 0 Less than 3 3 to 6 6 to 8 8 to 10 10 to 12 12 or more East Asia excl. China MENA Oil importers Europe & Central Asia South Asia International reserves in months of import cover Latin America & Caribbean Sub-Saharan Africa Source: World Bank; IFS; Datastream. Source: World Bank; IFS; Datastream. 86 GLOBAL ECONOMIC PROSPECTS | June 2013 Exchange Rates Annex Conclusions fundamentals) may face destabilizing currency pressures resulting from surges in capital inflows. In specific circumstances, temporary controls on capital flows and macro-prudential measures may help in reducing exchange rate volatility caused by The weaker current account and reserve position of external events (IMF 2012). But over the longer- developing countries can imply increased vulnerability to term, such controls can cause unnecessary shifts in investor sentiment. The trade balances and distortions and suboptimal investment and reserve positions of developing countries have production decisions, especially if they result in real started to improve in line with a pickup in exports exchange rates that are persistently out of line with and easing of international commodity prices. But underlying macroeconomic fundamentals. as discussed, these indicators remain significantly Therefore, exchange rate policies and related weaker compared with the levels in 2010. Although capital flow management measures should not be buoyant private capital flows have helped to seen as a substitute for structural and labor market finance the larger current account deficits of the reforms, and investments in infrastructure and group of developing countries excluding China and human capital that are necessary to raise crude oil exporters, they also render their balance productivity and growth over the longer term. of payments and real exchange rates vulnerable to sudden shifts in investor sentiment and reversal of capital inflows. This can happen, for instance, in response to domestic problems (e.g., weaker than expected growth, recognition of asset price bubbles); increased risk aversion resulting from renewed fiscal and debt tensions in high income countries; or from an unanticipated move towards a tighter monetary policy stance in some high income countries. Increased coordination on policies affecting currencies can help to mitigate the spillovers of domestic policies across borders. Given that domestic policies of large countries aimed at boosting their own growth can have significant unintended spillovers on currencies of other countries, greater international coordination on policies that affect currencies may prove mutually beneficial (Eichengreen (2013), IMF (2012), Ostry, Ghosh and Korinek (2012), Hoekman (2013); see also the G-7 Statement (2013) and G-20 Communiqué (2013)). For instance, coordination in monetary policies across large economies can ensure that spillovers of domestic policies on other countries and effects on exchange rates are minimized (Basu (2013)). Developing countries should try to adjust to persistent foreign currency inflows and maintain real exchange rates that are consistent with macroeconomic fundamentals. Maintaining flexible market-determined exchange rates can facilitate adjustment of the domestic economy to changes in capital inflows, commodity revenues, and other external shocks. However, in the shorter term, as discussed earlier, developing countries (including those with sound macroeconomic 87 GLOBAL ECONOMIC PROSPECTS | June 2013 Exchange Rates Annex Notes 1. Since the global financial crisis of 2008-09, central banks in the G3 economies (United States, Euro Area, and Japan) have maintained a highly accommodative policy stance —reducing short-term policy interest rates to below 1 percent and implementing unconventional monetary policies, including large-scale financial asset purchases—in order to restore financial market confidence and support economic growth (see GEP Finance and Inflation Annexes). 2. In late July 2012, the head of the European Central Bank Mario Draghi promised to stand behind the currency union after financial market tensions intensified during mid-year. Subsequent measures taken by Euro Area authorities to restore financial market confidence —including, among others, the Outright Monetary Transactions bond purchase program announced in September 2012 and extension of Greek debt in November 2012 —resulted in an easing of financial market tensions and reduced the tail risk of exit of periphery countries from the Eurozone. Despite fiscal contraction, accommodative monetary policies in general appear to have contributed to increased market confidence in the ability of the Euro Area currency union to weather negative shocks (see GEP Finance Annex for more details). 3. The extent of complementarity, however, may have declined since the 1997-2004 period covered by the study as China has moved towards production of higher value-added products in recent years. See also Auboin and Ruta (2013) on other studies on the relationship between exchange rates and trade. 4. The US Federal Reserve has undertaken three rounds of quantitative easing (QE) since November 2008. Recent research finds that the dollar weakened significantly in real trade-weighted terms following QE announcements (Glick and Leduc 2013). An unanticipated QE announcement equivalent to a 1 percentage point reduction in federal funds interest rate futures resulted in a 0.5 percentage point depreciation of the dollar in REER terms following the announcement. Fratzscher, Lo Duca, and Straub (2012), however, find that QE1 and QE2 had opposite effects on the US dollar. QE1 measures undertaken in the immediate aftermath of the global financial crisis in late 2008 were associated with inflows into US financial assets, which, in turn, appreciated the US dollar. But QE2 measures implemented from August 2010 onwards triggered a portfolio rebalancing from US financial assets toward emerging market equities, resulting in a marked depreciation of the US dollar 5. South Korea, Singapore, and Hong Kong SAR, China which are part of geographic East Asia, are considered high income countries according to the World Bank’s income classification, and are therefore not included in the East Asia and Pacific (EAP) regional aggregates. 6. The evidence suggests that the effect of capital flows and commodity revenues on real effective exchange rates of commodity-exporters tends to be larger in countries that are relatively more integrated with international financial markets (see January 2013 edition of the Global Economic Prospects). References Aizenman, Joshua. 2010. “The Impossible Trinity (aka The Policy Trilemma)” The Encyclopedia of Financial Globalization. Working Papers, UC Santa Cruz Economics Department, No. 666. Auboin, Marc, and Ruta, Michele. 2013. “The Relationship between Exchange Rates and Trade: A Review of the Literature.” forthcoming, World Trade Review. Basu, Kaushik. 2013. “Monetary Policy Now Needs Global Teamwork”. Op-Ed, The Age (Australia), April 26th. 88 GLOBAL ECONOMIC PROSPECTS | June 2013 Exchange Rates Annex Berman, Nicolas, Philippe Martin and Thierry Mayer. 2012. “How Do Different Exporters React to Exchange Rate Changes?” Quarterly Journal of Economics, vol. 127, pp. 437-492. Bernanke, Ben S. 2013. “Monetary Policy and the Global Economy.” Speech at the Department of Economics and STICERD, London School of Economics, on March 25. Chen, Qianying, Andrew Filardo, Dong He, and Feng Zhu. 2011. “International Spillovers of Central Bank Balance Sheet Policies.” Manuscript, Bank for International Settlements, November. Combes, Jean-Louis, Patrick Plane, and Tidiane Kinda. 2011. “Capital Flows, Exchange Rate Flexibility, and the Real Exchange Rate.” IMF Working Paper 11/9, Washington, DC: International Monetary Fund. Eichengreen, Barry. 2008. “The Real Exchange Rate and Economic Growth.” Working Paper No. 4. Commission on Growth and Development, Washington, DC: World Bank. Eichengreen, Barry. 2013. “Currency War or International Policy Coordination?” Manuscript, University of California, Berkeley. Forbes, Kristin J., and Francis E. Warnock. 2012. “Capital Flow Waves: Surges, Stops, Flight, and Retrenchment.” Journal of International Economics , vol. 88, pp. 235-251. Fratzscher, Marcel. 2012. “Capital Controls and Foreign Exchange Policy.” European Central Bank (ECB) Working Paper No. 1415, February. Fratzscher, Marcel, Marco Lo Duca, and Roland Straub. 2012. “A global monetary tsunami? On the spillovers of US Quantitative Easing.” CEPR Discussion Paper No. 9195, October. Freund, Caroline, and Martha D. Pierola. 2012. “Export Surges.” Journal of Development Economics, vol. 97, pp. 387-395. G-7 Statement. 2013. “Statement by G7 Finance Ministers and Central Bank Governors”. G7/8 Finance Ministers Meeting. February 12 (http://www.g8.utoronto.ca/finance/fm130212.htm). 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Ibarra, Carlos A. 2011. “Capital Flows and Real Exchange Rate Appreciation in Mexico.” World Development, vol. 12, pp. 2080-2090. 89 GLOBAL ECONOMIC PROSPECTS | June 2013 Exchange Rates Annex IMF 2012. “The Liberalization and Management of Capital Flows: An Institutional View.” IMF Staff Paper, November, Washington, DC: International Monetary Fund. Jongwanich, Juthathip, and Archanun Kohpaiboon. 2013. “Capital flows and Real Exchange Rates in Emerging Asian Countries.” Journal of Asian Economics, vol. 24, pp. 138–146. Kappler, Marcus, Helmut Reisen, Moritz Schularick, and Edouard Turkisch. 2012. “The Macroeconomic Effects of Large Exchange Rate Appreciations.” Open Economies Review. June. Li, Muqun, Wei Liu, and Shunfen Song. 2010. “Export Relationships among China, Japan, and South Korea.” Review of Development Economics, vol. 43(3), pp. 547-562. Magud, Nicolas, Carmen M. Reinhart, and Kenneth Rogoff. 2011. “Capital Controls: Myth and Reality -A Portfolio Balance Approach.” NBER Working Paper #16805, February, Cambridge, MA: National Bureau of Economic Research. Magud, Nicolas, Carmen M. Reinhart, and Esteban Vesperoni. 2012. “Capital Inflows, Exchange Rate Flexibility, and Credit Booms.” IMF Working Paper 12/41, February, Washington, DC: International Monetary Fund. Magud, Nicolas, and Sebastian Sosa. 2010. “When and Why Worry About Real Exchange Rate Appreciation.” IMF Working Paper 10/271, December, Washington, DC: International Monetary Fund. Morgan, Peter J. 2011. “Impact of US Quantitative Easing on Emerging Asia.” ADB Working Paper 321, November, Manila: Asian Development Bank. Ostry, Jonathan D., Atish R. Ghosh, Marcos Chamon, and Mahvash S. Qureshi. 2012. “Tools for Managing Financial Stability Risks from Capital Flows.” Journal of International Economics , vol. 88, pp. 407-421. Ostry, Jonathan D., Atish R. Ghosh and Anton Korinek. 2012. “Multilateral Aspects of Managing the Capital Account.” IMF Staff Discussion Note, September, Washington, DC: International Monetary Fund. Thorbecke, Willem, and Atsuyuki Kato. 2012. “The Effect of Exchange Rate Changes on Japanese Consumption Exports.” Japan and the World Economy vol. 24, pp. 64-71. 90 GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex Annex GLOBAL ECONOMIC June PROSPECTS 2013 COMMODITY MARKETS GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex Overview There are a number of risks to the baseline forecasts. Downside risks include weak oil demand if growth prospects deteriorate sharply, especially in emerging economies After strengthening in early 2013 due to improved where most of the demand growth is taking economic outlook, most industrial commodity pric- place. Over the longer term, oil demand es retreated below their end-2012 levels (figure could be dampened further if the substitution COMM.1). Food prices have been declining as between crude oil and other types of energy well, mainly a reflection of improved supply condi- accelerates. On the upside, a major oil supply tions (figure COMM.2). The price of crude oil disruption due to political turmoil in the Mid- (World Bank average) dropped to US$ 99/bbl in dle-East could result in prices spiking by $50 April, 8 percent below its February peak. The metal or more. The severity of the outcome would price index is down 13 percent since its February depend on numerous factors, including the 2013 peak. Precious metals are down as well, 15 severity and duration of the cutoff, policy percent since February and more than 25 percent actions regarding emergency oil reserves, de- since the all time high of August 2011. mand curtailment, and OPEC’s response. In the baseline scenario, which assumes no A key uncertainty in the outlook is how major macroeconomic shocks or supply dis- OPEC (notably, Saudi Arabia) reacts to ruptions, oil prices are expected to average changing global demand and non-OPEC sup- US$ 102/bbl in 2013, down from US$ 105/ ply conditions. Since 2004 when crude oil bbl in 2012 (table COMM.1). Agricultural prices started rising, OPEC has responded to prices are projected to decline almost 6 per- subsequent price weakness by cutting supply, cent in 2013 (food, beverages, and raw mate- but has not been as willing to intervene when rials down by 5.5, 8.9, and 5.8 percent, re- prices increase. However, as non-OPEC sup- spectively), under the assumption of average plies continue to come on stream and demand crops. Metal prices will to decline marginally (a lit- moderates in response to higher prices, the tle more than 1 percent) and therefore will remain sustainability of this approach may come un- 17 percent lower than their 2011 average. Fertilizer der pressure. prices are expected to decline more than 7 percent, mainly reflecting low natural gas prices in the Unit- OPEC’s spare capacity has averaged 4.6 mb/d dur- ed States. Precious metals prices are expected to ing the first four months of 2013, almost 30 per- decline more than 10 percent as institutional inves- cent higher than a year ago but only marginally tors are increasingly considering them less attrac- higher than average of the past decade—it had tive “safe haven” alternatives, which comes on top dropped below 2 mb/d in the middle of 2008 of weak physical demand. when oil prices reached US$ 140/bbl. OECD in- Fig COMM .1 Commodity price indices Fig COMM.2 Food price indices $US nominal, 2005=100 $US nominal, 2005=100 250 300 Metals 200 250 Edible Oils Agriculture 150 200 Energy 100 150 Grains 50 100 Jan '07 Jan '08 Jan '09 Jan '10 Jan '11 Jan '12 Jan '13 Jan '07 Jan '08 Jan '09 Jan '10 Jan '11 Jan '12 Jan '13 Source: World Bank. Source: World Bank. Energy, 2005=100, current$ (World (all countries)) Metals Energy 93 Metals Agriculture, and minerals, 2005=100, 2005=100, current$ current$ (World (all (World (all countries)) countries)) Agriculture GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex Table COMM.1 Nominal price indices-actual and forecasts (2005 = 100) ACTUAL FORECAST CHANGE (%) 2008 2009 2010 2011 2012 2013 2014 2011/12 2012/13 2013/14 Energy 182 114 145 188 187 183 181 -0.4 -2.1 -1.2 Non-Energy 182 142 174 210 190 181 179 -9.5 -4.7 -1.1 Metals 180 120 180 205 174 172 173 -15.3 -1.3 0.8 Agriculture 171 149 170 209 194 182 179 -7.2 -5.9 -1.8 Food 186 156 170 210 212 200 192 0.7 -5.5 -4.0 Grains 223 169 172 239 244 242 226 2.4 -1.0 -6.4 Fats and oils 209 165 184 223 230 209 202 3.3 -9.0 -3.2 Other food 124 131 148 168 158 150 147 -5.9 -5.0 -2.1 Beverages 152 157 182 208 166 151 153 -20.2 -8.9 0.8 Raw Materials 143 129 166 207 165 156 162 -20.0 -5.8 4.1 Fertilizers 399 204 187 267 259 241 229 -2.9 -7.1 -4.8 Precious metals 197 212 272 372 378 338 328 1.7 -10.7 -3.0 Memorandum items Crude oil ($/bbl) 97 62 79 104 105 102 101 1.0 -2.5 -1.3 Gold ($/toz) 872 973 1,225 1,569 1,670 1,500 1,450 6.4 -10.2 -3.3 Source: World Bank. ventories averaged 2.7 mbd during the first five ment released by the US Department of Agricul- months of 2013, remarkably similar to the corre- ture in May 2013, the global maize market will be sponding period in 2012. better supplied in the coming, 2013/14, season. However, because stocks are still low by historical Price risks on raw materials, especially metals, de- standards, any adverse weather event could induce pend both on the speed at which new supply sharp increases in maize prices—as it did in the comes on stream and on China’s growth prospects. summer of 2012 when maize prices rallied almost Metal prices have declined 30 percent since their 40 percent in less than two months. The wheat early 2011 highs, and by 8 percent between Febru- market, which is currently better supplied than ary and May 2013. The price weakness reflects both maize, could also come under pressure either due moderate demand growth and strong supply re- to a bad crop or in sympathy with higher maize sponse, in turn a result of increased investments of prices—as the crops are competing for the same the past few years, induced by high prices. For land. In contrast, price risks for rice are on the some metals, stocks have increased considerably as downside, especially in view of the large public well. For example, combined copper stocks at the stocks held by Thailand. Edible oil and oilseed major metals exchanges are up 46 percent since markets have limited upside price risks as well due 2012. Aluminum stocks, which have been rising to well supplied oilseed (mostly soybeans in South since end-2010, increased 8 during the past 12 America) and edible oil (primarily palm oil in East months. Asia) markets. Global supplies of the major 8 edi- ble oils are expected to reach a record 155 million The prospects for the metal market depend im- tons this season, up from last season’s 152 million portantly on Chinese demand, as the country ac- tons. Global oilseed supplies will experience similar counts for almost 45 percent of global metal con- growth. sumption. However, if robust supply trends contin- ue and weaker than anticipated demand growth Trade policy risks (similar to 2008 and 2010) ap- materializes, metal prices could follow a path con- pear to be low as evidenced by the virtual absence siderably lower than our baseline, with significant of export restrictions since the summer of 2012, consequences for metal exporters (see simulations despite sharp increases in grain prices. Finally, in main text). growth in the production of biofuels is slowing as policy makers increasingly realize that the environ- In agricultural commodity markets, the key risk is mental and energy independence benefits from weather. According the global crop outlook assess- biofuels are not as large as initially believed. 94 GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex Crude oil centage points lower compared to the January 2011 -May 2013 average of 17.7 percent and the lowest since January 2011 (figure COMM. 4). Oil prices have fluctuated within a remarkably tight Downward pressures on mid-continental prices band around US$ 105/bbl (figure COMM.3) over have eased, partly in response to some 760 thou- the past 18 months. Fluctuations have been driven sand barrels a day in rail shipments in 2013Q1 mainly by the geopolitical concerns in the Middle from oil producing regions to refineries—an 8-fold East on the supply side and European debt issues increase from 90,000 barrels per day in 2011Q1— along with changing developing-country growth according to the June 2013 assessment by the As- prospects on the demand side. Price increases earli- sociation of American Railroads. Downward pres- er in 2013 reflected some geopolitical tensions in sures on West-Texas crude will abate further when the Middle East and improving global outlook pro- the new pipelines to the U.S. Gulf become opera- spects. However, as supply conditions improved tional or reversal of existing pipelines that carry oil and market concerns over the Euro Area eased from the East Coast to Mid-Continent U.S. are once again, crude prices began weakening. And completed—currently expected some time in late they are now 5 percent lower than at the beginning 2014 or early 2015. of the year. The decline in non-OPEC output growth in Recent Developments 2011 appears to have reversed. Non-OPEC producers added 0.7 mb/d to global supplies in 2012 and an additional 0.5 mb/d in Large supplies of Canadian crude oil (especially 2013Q1, mainly reflecting earlier large-scale from tar sands) to the United States, combined investments. In the United States horizontal with rapidly rising U.S. shale liquids production drilling and hydraulic fracturing have contrib- have contributed to a build-up of stocks at a time uted almost 1.5 mb/d of crude oil production when U.S. oil consumption is dropping and natural during the two years since 2011Q1 (figure gas supplies are increasing rapidly. COMM.5). Currently, the U.S. States of Texas and North Dakota, where most of shale oil Although the price of Brent crude (the internation- production takes place account for almost 45 al marker) topped US$ 117/bbl in February, West percent of total U.S. crude oil supplies, up Texas Intermediate (WTI, the U.S. mid-continent from 33 percent a year earlier. Indeed, the price) averaged US$ 21/bbl less due to the large IEA projects that global crude oil supply will built up of stocks at Cushing, Oklahoma, the deliv- increase by 8.4 mb/d by 2018 up 5 percent ery point of WTI. The Brent-WTI price differential from the 91 mb/d in 2012. The increase declined to less than 10 percent in May, nine per- mainly reflects surging North American crude Fig COMM.3 Oil prices and OECD oil stocks Fig COMM.4 Brent/WTI price differential $US per bbl million bbl percent 140 Oil Price, World Bank average (left axis) 2900 30 25 120 2800 20 January 2011 to 100 May 2013 Average 15 80 2700 10 60 5 2600 OECD oil inventories (right axis) 40 0 20 2500 -5 Jan '07 Jan '08 Jan '09 Jan '10 Jan '11 Jan '12 Jan '13 Jan '10 Jul '10 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 Source: World Bank; International Energy Agency (IEA). Source: World Bank. 95 GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex output (2.3 mb/d from US “light tight oil”, which includes production from shale, and Fig COMM.5 US crude oil production 1.3 mb/d from Canada’s oil sands). mb/d 5 Although shale liquid (also referred to as tight oil) and shale gas techniques have great potential to be 4 applied worldwide, there are public concerns re- garding the ecological impacts of such technolo- 3 Other gies. In addition, several countries that are believed to have similar reserves to those in the United 2 States may be slow to utilize that potential due to Texas & N. Dakota difficulties in accessing drilling rights, poor regula- 1 tory frameworks, and limited “know-how” in ex- ploring and developing the resources. 0 Jan '07 Jan '08 Jan '09 Jan '10 Jan '11 Jan '12 Jan '13 Oil production among OPEC member countries averaged 36.9 mb/d in 2013Q1, down from previ- Source: U.S. Energy Information Administration. ous quarter’s 37.2 mb/d. Yet, this is 10 mb/d high- er than 2002Q2, the lowest of the Organization’s recent history but still higher than the official 30 Fig COMM.6 OPEC spare capacity mb/d quota. Iraq—still outside OPEC’s quota— mb/d 8 has reached pre-war levels of production, currently standing slightly over 3 mb/d. Libya’s oil output is about 80 percent of pre-war levels of 1.4 mb/d. 6 Iran’s oil exports were 0.8 mb/d in April, a decline of 60 percent since June 2011 when sanctions took effect, and may tumble even further as new sanc- 4 tions take effect from July 2013. The post-2010 net growth in OPEC oil production 2 reduced spare capacity among its member coun- tries from to 6.3 mb/d in 2009Q4 to 3.1 mb/d in 0 2012Q2, a 50 percent decline (figure COMM.6). Jan '07 Jan '08 Jan '09 Jan '10 Jan '11 Jan '12 Jan '13 However, OPEC’s spare capacity reversed the Source: IEA. downward trend, standing at 4.6 mb/d during the first 4 months of 2013, of which nearly two thirds is in Saudi Arabia. The Saudi government has promised to keep the global market well supplied Fig COMM.7 World oil demand growth (and has the ability to do so), but also deems US$ mb/d, year over year growth 100/bbl to be a fair price. 4 According to IEA, spare capacity in the global oil 2 market is expected to rise to more than 7 mb/d in 2014, almost three times higher than the 1.5-3.0 mb/d range between 2004 and 2008. It should then 0 begin to decline by 2016 as growth in the United States will slow while demand growth remains firm. -2 World oil demand increased modestly, a little more than 1 percent, or 0.9 mb/d in 2012 -4 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 (figure COMM.7). Japan is the only OECD Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 economy for which crude oil consumption increased (by 1 mb/d) in 2012. Most of that Source: World Bank; IEA. OILDEMGRO_OECD 96 China Non-OECD, ex China GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex increase was to fill the loss of nuclear power World demand is expected to grow at less generation capacity as a result of the Tohoku than 1.5 percent annually over the projection earthquake. Oil consumption among OECD period, with all the growth coming from non- countries has fallen by almost 5 mb/d, or 10 OECD countries as has been the case in re- percent, from its 2005 peak. Non-OECD de- cent years (figure COMM.8). Growth in oil mand remains robust. In fact, non-OECD consumption among OECD countries is ex- economies are expected to consume more oil pected to continue to be subdued due to low than OECD economies during 2013Q2, for growth, and efficiency improvements in vehi- the first time in history (44.5 mb/d the for- cle transport induced by high prices — mer versus 45 mb/d the latter). IEA expects including a gradual switch to hybrid, natural non-OECD demand to reach 54 percent of gas and electrically powered transport. Pres- global demand by 2018. sures to reduce emissions due to environmen- tal concerns are expected to further dampen Outlook and Risks in the Oil Market oil growth demand at global level. Growth in oil consumption in developing coun- Nominal oil prices are expected to average tries, on the other hand, is expected to remain rela- US$ 102/bbl during 2013 and decline to US$ tively strong in the near and medium term. In the 101/bbl in 2014. Over the longer term, oil longer-term, however, it is expected to moderate as prices are projected to fall in real terms, due the share of low-energy using services in these to growing supplies of conventional and economies grow, subsidies are phased out, and (as (especially) unconventional oil, efficiency noted above) other fuels become incorporated into gains, and substitution away from oil (box the energy mix. COMM.1 discusses the substitution possibili- ties between oil and other types of energy). On the supply side, non-OPEC oil produc- The assumptions underpinning these projec- tion is expected to continue its upward climb, tions reflect the upper-end cost of developing as high prices have prompted higher levels of additional oil capacity, notably from oil sands exploration (including deep water offshore in Canada, currently assessed by the industry and shale liquids) and the implementation of at about US$ 80/bbl in constant 2013 dollars. new extractive technologies to increase the While it is expected that OPEC will continue output from existing wells (figure COMM.9). to limit production to keep prices relatively Significant production increases are expected high, the Organization is also sensitive to let- in Brazil, the Caspian, and West Africa, which ting prices rise too high, for fear of inducing together with the United States and Canada innovations that would alter fundamentally are likely to more than offset declines in ma- the long term path of oil prices. ture areas such as the North Sea. Fig COMM.8 Crude oil consumption Fig COMM.9 Crude oil production mb/d mb/d 55 55 50 50 OECD Non-OPEC 45 45 40 40 Non-OECD 35 35 OPEC 30 30 25 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 25 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Jan '01 Jan '03 Jan '05 Jan '07 Jan '09 Jan '11 Jan '13 Source: IEA. Source: IEA. 97 OECD Non-OECD GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex Box COMM.1 A Global Energy market? lent terms but they diverged from European natural gas Until the mid-2000s, the prices of the world’s key natural and Japanese liquefied natural gas (LNG) prices (figure gas markets (U.S., Europe, and Japan) had been tied to Box COMM 1.2). oil prices. Thus, in addition to moving in a synchronous manner with each other and with oil, both natural gas and Will natural gas prices converge? There are numerous oil were priced the similar levels in terms of energy con- market (both demand and supply) and policy constraints, tent. In other words, natural gas and crude oil markets the removal of which is likely to induce coupling of natural were integrated—though due to administered pricing gas prices in the longer term. mechanisms, not market forces. Coal, which has been priced independently, was traded about one third the price  Supply—Increased unconventional gas supplies of oil, in energy equivalent terms (figure Box COMM. 1.1). outside the U.S. Unconventional gas production has tak- en place almost exclusively in the United States. Yet, un- The energy price boom of the early 2000s changed all conventional natural gas reserves, are plentiful in many that. First, it delinked U.S. natural gas prices from oil pric- regions, including North America, Latin America, and most es and from European and Japanese natural gas prices. importantly Asia Pacific. Industry estimates show that Second, it generated a gap between WTI (the mid- more than 40 percent of known global natural gas re- Continent US price) and Brent (the international marker). serves recoverable at current prices and technology are Third, it linked US natural gas and coal prices. This box unconventional. Reasons for the slow technology adoption elaborates on the reasons behind such changing patterns include poor property rights, limited know-how, and envi- and concludes the following. The WTI-Brent gap will close ronmental concerns. soon, perhaps as early as 2014 or 2015 at the latest. The  Trade—Construction of LNG facilities and gas pipe- coupling of U.S. natural gas and coal prices is likely to re- lines. Currently, 31 percent of natural gas crosses interna- main (and, perhaps, strengthen). Natural gas price con- tional borders—21 percent through pipelines and 10 per- vergence will depend on various investment and policy cent in LNG form (by comparison, nearly two thirds of factors, thus it may take some time before it materializes. crude oil is traded internationally, 46 percent as oil and 20 Yet, the future relationship between natural gas and oil percent as products.) As more LNG facilities come on prices is more complex to analyze. It will depend on board and new gas pipelines are constructed, trade of nat- whether induced innovation takes place—something that ural gas will increase, thus exerting upward (downward) cannot be evaluated or projected. price pressure in producing (consuming) regions. Never- theless, it should be noted that regardless of how much Induced innovation in the extraction of natural gas through natural gas trade increases, LNG will be traded at much fracking and horizontal drilling techniques (often referred higher prices than gas through pipelines because of the to as “unconventional” gas), primarily in the U.S. was fol- high costs of liquefying and transporting. lowed by supply increases in turn lowering US natural gas prices. Low gas prices made it an attractive alternative to  Demand—Relocation of energy intensive industries. some U.S. energy intensive industries, especially electrici- In addition to the substitution from coal to natural gas by ty generation, which are gradually switching from coal to the energy intensive industries in the U.S., there is evi- natural gas. Indeed, the US has experienced a marked re- dence that industries are moving to the United States to duction in coal use, 10.5 percent down from 2006 -08 to take advantage of the “natural gas dividend”, in a way re- 2009-11, when global consumption increased 9 percent. versing the long standing trend of U.S. industries moving As a result, beginning in 2009 US natural gas and coal to Asia (and elsewhere) in response to the “labor cost divi- have been traded at similar price levels in energy equiva- dend.” Four energy-intensive industries that are taking (or Box figure COMM. 1.1 Energy prices Box figure COMM. 1.2 Natural gas prices $US/mmbtu $US/mmbtu 25 20 Crude Oil 20 15 Japan (LNG) 15 Natural Gas (US) Europe 10 10 5 US 5 Coal 0 0 Jan '01 Jan '03 Jan '05 Jan '07 Jan '09 Jan '11 Jan '13 Jan '01 Jan '03 Jan '05 Jan '07 Jan '09 Jan '11 Jan '13 Source: World Bank. Source: World Bank. 98 Europe Japan (LNG) US Europe Japan (LNG) GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex will take) advantage of lower energy prices in the U.S. are plies along with increasing crude inflows from Canadian oil paper, aluminum, steel, and chemicals, whose energy sands caused decoupling of WTI from Brent with the latter costs as a share of total material costs ranges between 5 being traded 18 percent above the former after January and 9 percent (the share for total US manufacturing is 3 2011 (figure Box COMM. 1.3). Historically (1983 -2005), percent, 4-5 times more energy intensive than agriculture, WTI was traded with a 6 percent premium over Brent, be- see box COMM.3). cause the mid-Continent US was a “deficit” region. Follow- ing increased imports from Canadian oil sands during  Substitute product—Coal. More trade in coal is likely 2006-10, WTI and Brent were traded in par. After January to take place, thus further facilitating convergence of natu- 2011, however, Brent has been traded with a premium ral gas prices and also strengthening the convergence of over WTI following increased domestic shale oil supplies— coal and natural gas prices, already underway. Indeed, it averaged 18 percent between January 2011 and May between 2005 and 2012 global coal exports almost tripled 2013. The premium may persist for another two years, un- (from 258 to 758 million tons) pushing coal traded as a til a new pipeline begins transferring surplus oil from Cush- share of production to almost 15 percent. Furthermore, an- ing, Oklahoma to the US Gulf (some oil is currently moving ecdotal evidence points to even further increases. For ex- by truck and rail). The WTI discount is likely to stabilize ample, a recent article (“Tata Eyes Coal Assets Freed by around 5 percent, (a mirror image of the pre -2006 premi- Global Fracking Boom”, Bloomberg, April 30, 2013) noted um) when the market reaches equilibrium—oil supply in that Tata Power, India’s second largest electricity produc- the mid-Continent US exceeds demand and the surplus er, is seeking coal supplies from the U.S., Colombia, and moves to the Gulf at the lowest possible cost. Canada (they account for 13.9, 1.5, and 0.9 percent of global coal production; China’s share is 50 percent). What about convergence of natural gas and oil prices?  Policies—US energy exports, nuclear energy, prop- Because more than half of global crude oil supplies go to erty rights. Three types of policies are expected to in- the transportation industry, the prospects of substitutability crease trade in natural gas and, consequently, price con- between crude oil and other types of energy will depend vergence. First, the U.S. is gradually removing re- on the degree to which vehicles can switch from crude oil - strictions on energy exports, most of which were intro- base fuels to natural gas or electricity. As discussed in the duced after the oil crisis of the 1970s in response to ener- January 2013 edition of Global Economic Prospects: Com- gy security concerns. Second, several countries are re- modity Market Outlook (p. 7, box 1), contrary to natural considering nuclear energy policies, especially after the gas, crude oil products have convenient distribution net- Tohoku accident; some plan not to replace aging nuclear works and refueling stations that can be reached by cars power units while others contemplate early decommission- virtually everywhere in the world. Thus, in order for the ing. Thus, nuclear power’s diminishing contribution to glob- transport industry to utilize natural gas at a scale large al energy consumption —which has already declined from enough to make a dent in the crude oil market, innovations its 2001 peak of 6.4 percent to 4.9 percent in 2011—will must take place such that the distribution and refueling be substituted by coal, natural gas, and to a lesser extent costs of natural gas become comparable to those of crude renewables (see table COMM 1.1 for historical and current oil. The second alternative, electricity, has its own draw- energy consumption shares). Third, countries with large backs, namely, storage capacity and refueling time. Con- unconventional reserves are likely to introduce policies to sider that a truck with a net weight capacity of 40,000 strengthen property rights, a key reason for not devel- pounds were to be powered by lithium-sulphur batteries oping them. for a 500-mile range, the batteries would occupy almost 85 percent of the truck’s net capacity, leaving only 6,000 Subsequent to the natural gas boom, fracking and hori- pounds of commercial space. Hence, as was the case in zontal drilling were applied to the US oil sector, which, as natural gas, for large scale electricity use by vehicles, in- expected, induced similar supply response. These oil sup- novation in battery technology must take place. Box figure COMM. 1.3 Brent and WTI prices Box table COMM 1.1 Shares of global primary energy consumption (percent) $US per bbl 140 Oil Gas Coal Nuclear Hydro Other 1965-69 42.6 16.8 34.7 0.2 5.6 0.0 120 Brent 1970-74 47.3 18.6 27.7 0.9 5.4 0.1 1975-79 46.5 18.9 27.0 2.1 5.5 0.1 100 WTI 1980-84 41.4 20.3 28.3 3.7 6.2 0.1 1985-89 39.0 21.2 28.2 5.3 6.1 0.2 80 1990-94 38.7 22.3 26.3 6.0 6.3 0.4 60 1995-99 38.4 22.9 25.5 6.2 6.5 0.5 2000-04 37.3 23.4 26.4 6.1 6.1 0.7 40 2005-09 34.7 23.4 29.0 5.4 6.3 1.1 2010-11 33.1 23.7 30.3 4.9 6.4 1.6 20 Source: BP Statistical Review. Jan '07 Jan '08 Jan '09 Jan '10 Jan '11 Jan '12 Jan '13 Note (1): “Other” includes biofuels, solar, wind, geothermal, and bio- mass Source: World Bank. Note (2): The shares were calculated in oil equivalent terms 99 GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex Metals contracted in European Union (7.7 percent) and Brazil (5.2 percent) on the back of continued eco- nomic weakness. Aluminum consumption contin- ues to benefit from substitution away from copper, Following the post-2008 financial crisis collapse, mainly in the wiring and cable sectors (copper pric- metal prices regained strength and increased almost es are now more than four times higher than alumi- continuously to reach new highs in February 2011 num prices, whereas the two were similar prior to when the World Bank price index reached 229 the 2005 boom). Substitution is expected to contin- (2005 = 100), up 164 percent since its December ue for as long as the aluminum prices remain twice 2008 low (figure COMM.10). This increase (along as high as copper prices, according to industry analysts. with the sustained increases prior to the financial crisis) generated large new investments inducing a Aluminum supply was up marginally by 3.2 per- strong supply response. cent, down from 7.5 percent growth in 2011. Out- put was constrained by high energy costs, which Most of the additional metal supply went to meet account for nearly 40 percent of total production demand from China, whose consumption share of costs. Supply growth is coming from countries with world refined metals reached 44.2 percent at the abundant (or, often, subsidized) energy, including end of 2012, up from 42 percent in the previous China (up 12 percent), United States (up 4.4 per- year (figure COMM.11). Metal prices, however, cent), and United Arab Emirates (up 6.2 percent). have been weakening since 2011. This decline Nevertheless, aluminum production has declined along with the drop in energy prices and (an even sharply in the European Union (down 19 percent) sharper) decline in precious metal prices has on environmental pressures and adverse economic prompted economists and analysts to argue that developments, Canada (down 6.9 percent) due to that the so-called commodity super cycle may be labor disputes. Brazil and Russia have experienced coming to an end (see box COMM.2 for a discus- marginal declines as well. Aluminum stocks at the sion on super-cycle and how it relates to global London and Shanghai exchanges (combined) are metals reserves). up 8 percent for the year (end-May 2013/end-May 2012). Stocks have been rising for some time, and Recent Developments are currently (May 2013) 20 percent higher than their end-2010 levels. However, significant amount of aluminum inventories are tied up in warehouse Aluminum demand increased by 6.8 percent in financing deals and unavailable to the market. 2012 according to World Bureau of Metal Statistics (WBMS), led for the second year by double digit Copper demand expanded by 4.7 percent in demand growth in China (15 percent) and a 7.5 2012, up from 1.4 percent the year before, accord- percent increase in Indian demand. Consumption ing to WMBS data with China’s apparent demand Fig COMM.10 Metal Prices Fig COMM.11 Consumption of key metals $'000/ton $'000/ton millions tons 60 Copper (right axis) 10 50 Nickel (left axis) China 8 40 45 6 30 Other 30 4 20 OECD 15 2 10 Aluminum (right axis) 0 0 0 Jan '01 Jan '03 Jan '05 Jan '07 Jan '09 Jan '11 Jan '13 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: World Bank. Source: World Bureau of Metal Statistics. 100 Copper (right axis) OECD China Aluminum (right axis) Other Nickel (left axis) GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex increasing 11.7 percent, up from 7.2 in 2011. How- Nickel Pig Iron (NPI) in China, which sources low- ever, it is unclear how much of this demand in- grade nickel ore from Indonesia and the Philip- crease was due to stock build-up and how much pines. China’s production capacity may soon be was actually consumed. Estimates of stock build-up constrained, though, given that Indonesia has an- in Chinese bonded warehouses indicate an increase nounced that it will develop its own NPI industry of more than 160 percent in 2012 to some 850,000 and has introduced export quotas and may ban tons. Elsewhere, demand for copper has recovered, nickel ore exports by end-2013. Nickel stock were including Brazil (up 8.6 percent) after declining the built up during 2012 as supplies exceeded the con- previous year, Mexico (up 20 percent), and the sumption—LME stocks were 68 percent in May United States (up 3.3 percent). Demand was espe- 2013 compared to a year ago. cially weak in the European Union (down 7.7 per- cent) and Japan (down 1.3 percent). Outlook and Risks in Metal Markets Supply of refined copper continued to expand at a modest 2.9 percent pace in 2012, down from 3.2 Metal prices are expected to experience a modest percent increase in 2011. However, output of decline in 2013, which will come on the top of the mined copper rose 4.4 percent in 2012, up from 1.2 15 percent decline experienced last year. Aluminum percent growth during 2009-2011. High copper prices are expected to decline marginally in 2013 prices have induced a wave of new mines and ex- and following and upward trend thereafter in re- pansions of existing ones that are expected to come sponse to rising power costs and the fact that cur- on-stream soon. For example, Escondida in Chile, rent prices have pushed some producers at or be- the world’s largest copper mine, is on track to in- low production costs. Nickel prices are expected to crease its production by 20 percent in 2013. Mined decline 3 percent in 2013, and to follow a slightly copper output rose 7.1 percent in Africa in 2012, upward trend thereafter. Although there are no with several mines coming on stream in Zambia physical constraints in these metal markets, there and the Democratic Republic of Congo. The Oyu are a number of factors that could push prices even Tolgoi mine in Mongolia began production in 2013 higher over the forecast period, including declining and is expected to be one of the top five producing ore grades, environmental issues, and rising energy copper mines in the World and increase that coun- costs. On the contrary, copper prices are expected try’s production capacity four-fold. Copper stocks to decline almost 7 percent in 2013 with more de- at the London, New York and Shanghai exchanges clines in the subsequent years, mostly due to substi- (combined) are up 95 percent in May 2013 com- tution pressures and slowing demand. Over the pared to the year ago. medium term, stainless steel demand is expected to remain robust, growing by more than 6 percent Nickel demand expanded 6.1 percent in 2012, annually, mainly driven by high-grade consumer down from 17 percent growth in 2011. The sharp- applications, as emerging economies are increasing- est decline was in China, where apparent demand ly mimicking consumption patterns of high income rose 17.4 percent, versus 46 percent in 2011. China countries. now accounts for 40 percent of global stainless steel production (a major source of nickel demand), Most of the risks on metal prices are on the down- up from 4 percent a decade ago. Demand contract- side, especially weakening of China. As discussed in ed in most high income countries, including the the main text, if metal prices decline sharply (say, EU (down 8 percent) and Japan (down 8.3 percent) 20 percent over the course of next year, relative to and the US (down 6.2 percent). the baseline), while it will not have much of an im- pact of global GDP, the decline will impact metal Nickel supply grew by 13 percent in 2012, a second exporting countries, especially Sub-Saharan African year of double digit growth, slightly down from 16 metal exporters, whose GDP and fiscal balance percent growth in 2013. A wave of new nickel mine may decline as much as 0.7 and 1 percent, respec- capacity is likely to keep nickel prices close to mar- tively, compared to the baseline. ginal production costs. Several new projects will soon ramp up production, including Australia, Bra- zil, Madagascar, New Caledonia, and Papua New Guinea. Another major global source of nickel is 101 GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex Box COMM.2 Global reserves, demand growth, and the “super-cycle” hypothesis In 1990, the world consumed less than 43 million tons in terms of years of current production (the so-called re- metals. In 2012 it consumed 91 million tons. All this serves-to-production ratio, R/P), evaluated at two 2 -year growth was driven by China—in 1990 China accounted for periods (2000-01 and 2010-11) spanning the recent price a mere 4 percent of global consumption; today it accounts and consumption boom. (According to the U.S. Geological for almost 45 percent. In 1990, the world consumed 66 Survey, reserves refer to the part of the reserve base million barrels of oil per day (mb/d), 37 percent of which which could be economically extracted or produced at the was consumed by OECD economies. In 2012, it exceeded time of determination but does not imply that extraction 90 mb/d, half of which is consumed by non -OECD econo- facilities are in place and operative). mies. Despite these strong consumption growth patterns, this box shows that the assumed resource depletion that Numerous stylized facts emerge from the analysis. First, has occupied headlines often is less of an issue now than the R/P ratios for various metals paint a mixed picture it used to be. Nevertheless, problems exist, including envi- regarding resource scarcity. Specifically, the ratio in- ronmental concerns, concentration of resources, and the creased in three of the nine cases: nickel (from 43 to 46 high cost of extracting such resources. years), copper (from 26 to 41), and silver (from 16 to 22). It did not experience any appreciable change for gold and Metal consumption by China during the past decade has zinc but declined marginally for lead (from 21 to 19 years). been so strong that it reversed the downward trend of Yet, three metals exhibited significant declines: Tin (from global metal intensity (that is, metal consumption per unit 34 to 19 years), iron ore (from 136 to 65 years), and baux- of GDP), a turnaround that continues today. Thus, metal ite (from 180 to 133). Second, the declines in the R/P intensity now is the same as it was the early 1970s—on ratios reflect increased production, not declining reserves. the contrary, food and energy intensities have continued In fact, with the single exception of tin (whose reserves their long term downward trend. On the other hand, de- declined nearly 40 percent during the 10 -year period un- spite the strong demand growth of oil by non-OECD econ- der consideration) and gold (where reserves increased omies, they still consume 2.6 barrels per year on a per only 4 percent), reserves increased between 16 percent capita basis, as opposed to 13.7 by OECD economies. (bauxite) and 94 percent (copper). Third, the two largest declines in the R/P ratio—iron ore, down by 71 years, and The strong growth in consumption of industrial commodi- bauxite, down by 47 years—took place in markets where ties by emerging economies along with the likelihood that the respective metals are relatively abundant, hence less they will sustain high growth rates, inevitably raises the of a need to invest in exploration and development activi- issue of resource depletion. The issue of non-adequacy of ties. Thus, of the nine metals examined here, tin appears resources to sustain projected population and income to be the only reserve-constrained commodity. growth rates has been debated frequently, especially in periods of high prices. Examples include the peak oil hy- What about energy? Figure COMM. 2.2 depicts R/P ratios pothesis for crude oil reserves and the Club of Rome ar- for natural gas and crude oil between 1980 and 2011. In guments regarding food supplies (Meadows and others both markets the ratios have been increasing, a significant 1972). 3.1 percent per annum for crude oil and a marginal 0.4 percent for natural gas. In fact, the R/P ratio for crude oil Based on US Geological Survey data, figure COMM 2.1 exceeded 54 years in 2011 for the first time. (According reports global reserves for two ores (bauxite, iron ore), to BP, “[reserves] are generally taken to be those quanti- five base metals (nickel, copper, zinc, lead, tin), and two ties that geological and engineering information indicates precious metals (gold, silver). The reserves are expressed with reasonable certainty can be recovered in the future Box Fig COMM 2.1 Global metal reserves Box Fig COMM 2.2 Global oil and gas reserves years (reserves to production) 70 Natural Gas Reserves Bauxite Iron Ore 60 Nickel Crude Oil Reserves Copper 50 Silver Zinc 40 Gold Avg 2000-01 30 Tin Avg 2010-11 Lead 20 0 20 40 60 80 100 120 140 160 180 1980 1986 1992 1998 2004 2010 Reserve-to-production ratio in years Source: US Geological Survey. Source: BP Statistical Review. 102 GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex from known reservoirs under existing economic and oper- Last, a key issue on resource adequacy and prices will be ating conditions.”) the strength of demand. The future of metal markets will depend on the metal intensity of Chinese economy. Oil The increases of crude oil reserves during the 1980s is consumption will depend on demand by emerging econo- due to additions by OPEC members. The 1999 uptick mies and whether their energy intensities emulate that of reflects the addition of 120 billion barrels from Canada’s oil high income countries. Consider, for example, that in per sands (equivalent to 4 years of current global consump- capita terms, OECD countries consume 5 times more crude tion) while during the mid-2000s global reserves increased oil than non-OECD countries or more strikingly, the U.S. due to Venezuela’s Orinoco Belt oil, currently estimated at consumes 23 times more oil than India (figure COMM 2.3). 220 billion barrels (7 years of global consumption). The R/ P ratios for both crude oil and natural gas are likely to Many observers (see, for example, Heap 2005) looking at increase enormously when the unconventional reserves the extremely robust demand for metals, and the rapidly are added in the economically recoverable resource pool. rising metals intensity of the Chinese economy, as well as Indeed, industry experts have noted that when all global the strong oil demand by emerging economies, argued that recoverable reserves are considered, the world may have these commodities go through a super cycle where prices as much as 2 centuries worth of natural gas, evaluated at are likely to stay high for an extended period of time. The current consumption rates, prices, and technology. so-called “super cycle hypothesis” has been empirically verified for a number of metals (Jerrett and Cuddington While adequacy of reserves per se does not seem to be a 2008). Super-cycles of this nature, especially for extractive problem, at least in the foreseeable future, there are sev- commodities, have taken place in the past rather infre- eral issues of concern, including environmental issues, quently (for example, during the industrial revolution in the concentration of ownership, further demand strengthening, United Kingdom, and the westward expansion of the late and increasing extractions costs. First, by their very na- 1800s/early 1900s in the United States). Erten and Ocampo ture, extraction of these resources may be associated with (2012) identified four such super cycles in real prices of environmental issues, such as contamination of ground agriculture, metals, and crude oil during 1865 -2009; the water resources or concerns that excessive fracking may length of the cycles ranged between 30 -40 years with am- be linked to increasing frequency of earthquake activity. plitudes 20-40 percent higher or lower than the long run trend (similar estimates have been given by Cuddington Second, as we move forward, the reserves will become and Zellou (2013) for metals.) Furthermore, the mean of more concentrated. For example, currently OPEC ac- each super-cycle was lower than for the previous cycle, counts for more than 72 percent of oil reserves, nearly half thus supporting the view that nominal prices of primary of which are located in Saudi Arabia and Venezuela. Natu- commodities grow at a lower rate than nominal prices of ral gas reserves are concentrated as well, with the Rus- manufacturing commodities (Prebisch-Singer hypothesis). sian Federation and Turkmenistan accounting for over one third and Iran and Qatar accounting for nearly 28 percent. Indeed, energy and metal prices (expressed as ratio to (The Herfindahl concentration indices for crude oil and manufacturing prices) experienced the largest and longest natural gas reserves were 9.8 and 10.7 percent in 2011.) boom since WWII (figure COMM 2.4). While most of the conditions behind the post-2004 price boom are still in Third, extracting these resources is becoming increasingly place, there are signs that some conditions may be easing. costly. For example, the marginal cost of oil is currently Perhaps, the 2008 and 2011 twin peaks of commodity pric- estimated at US$80/bbl for Canadian oil sands (this cost es marked the beginning of the end of the current super forms the basis for the World Bank’s long term oil price cycle. If so, the current super-cycle will be much shorter assumptions). than previous ones. But, it is too early to tell. Box Fig COMM 2.3 Per capita oil consumption Box Fig COMM 2.4 Commodity prices, MUV-deflated 25 barrels per person per year Index 2005=100, MUV deflated 300 Average 1965-66 Average 2010-11 20 250 Agriculture 15 200 150 10 Metals 100 5 50 Energy 0 World OECD US EU Non- China India 0 OECD 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 Source: BP Statistical Review; UN; OECD; Eurostat. Source: World Bank. 103 GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex Precious Metals Fertilizers Following 18 months of relative stability, precious Fertilizers prices, a key input to the production of metals prices declined sharply during 2013Q2—the most agricultural commodities especially grains and World Bank metal price index declined 20 percent oilseeds, experienced a 5-fold increase between in the past 6 months (figure COMM.12). The de- 2003 and 2008, the largest increase among all key cline marked a reversal of eleven straight years of commodity groups (figure COMM.13). In addition increasing prices precious metal prices. The price to strong demand, the price hikes reflected increas- drop reflects changing perceptions of global risk, es in energy prices, especially natural gas—some given gold’s status as a “safe-haven” investment fertilizers are made directly out of natural gas. In- asset. Holdings of gold by EFTs are down more deed, fertilizer prices are now three time higher than 18 percent for the year. In contrast, holdings than a decade ago, remarkably similar to the 3-forld of silver and platinum are up, 12 and 32 percent increase in energy prices. respectively by end-May 2013. Most recently fertilizer prices have been easing. High gold prices have attracted considerable invest- The World Bank’s fertilizer index declined 4 per- ment in the gold mining industry, for both existing cent in 2013Q1 after declining 3 percent in 2012. and new mines. China has announced a new pro- The declines were more pronounced in potassium duction target of 450 tons per year by 2015, up and phosphate, each 8 percent down. Other types from 400 tons in 2012 when output grew12 per- of fertilizers changed only marginally. Weak de- cent. Production in South Africa declined 13 per- mand, especially by India and China has been the cent in 2012, in what might signal a long-term de- key factor behind the weakness (demand by the US cline as it was a fourth consecutive annual de- and Latina America has been strong). cline—although it also reflected very serious labor disputes in late 2012, which disrupted production Fertilizer prices are expected to ease consid- of both gold and platinum. erably in the medium term; more than 7 per- cent in 2013 and another 5 percent in the The precious metal index is expected to decline next two years — primarily reflecting lower almost 11 percent in 2013 (gold, silver, and plati- production costs due to the projected moder- num down by 10, 13, and 3 percent). Most risks are ation of natural gas prices as well a number on the downside due to supply improvements, of projects coming on-stream, especially in even as the pace of global recovery improves, in- the United Arab Emirates and the Former cluding easing of financial tensions in Europe. Soviet Union, both important natural gas producers. Fig COMM.12 Precious metal prices Fig COMM.13 Fertilizer prices $/troy oz ¢/troy oz US$/mt 2500 5000 1400 DAP 1200 2000 4000 1000 1500 3000 Potassium Chloride 800 600 1000 2000 Platinum (left axis) 400 Silver (right axis) Urea 500 Gold (left axis) 1000 200 0 0 0 Jan '01 Jan '03 Jan '05 Jan '07 Jan '09 Jan '11 Jan '13 Jan '07 Jan '08 Jan '09 Jan '10 Jan '11 Jan '12 Jan '13 Source: World Bank. Source: World Bank. 104 Aluminum (right axis) Potassium Chloride DAP DAP Urea Nickel (left axis) GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex Agriculture Recent developments in agricultural markets Grain prices have been declining steadily since With the exception of grains, most agricultur- the spike in the summer of 2012 as news for a bet- al prices have been declining almost continu- ter supplied 2013/14 season were gradually emerg- ously since their early 2011 peaks (figure ing (figure COMM.15). Between July 2012 and May COMM.14). Beverages and raw materials are 2013, maize and wheat prices have declined 11 down 32 and 35 percent, respectively between and 8 percent, respectively, partly eliminating the their February 2011 peaks and May 2013. gains during July and August of 2012. In its May Non-grain food prices are down as well — 2013 update (the first for the 2013/14 crop sea- edible oils down 16 percent and other food son), the U.S. Department of Agriculture, placed its prices down 17 percent. Initially, grain prices global maize production assessment at 966 million followed a similar (declining) path, but they re- tons, up from 2012/13 season’s 857 million tons, versed course sharply after the heat wave in sum- in turn increasing the stock-to-use ratio from 14.4 mer of 2012 caused considerable damage in maize- percent to 16.6 percent. Similarly, the global wheat producing areas in the Midwestern United States, production assessment for 2013/14 stands at while severe drought conditions in Eastern Europe slightly over 700 million tons, up from current sea- and Central Asia affected wheat production. The son’s 655 million tons, inducing a marginal increas- World Bank food price index gained almost 11 per- ing in the stock-to-use ratio as well. cent in just one month—from June to July 2012. Since then supply conditions have improved con- After dropping below the US$ 600/ton mark in siderably across most food groups. For example, November 2011, rice prices have fluctuated within both the edible oil and oilseed markets are well a very tight band around US$ 540/ton. They ex- supplied, with the global edible oil production ex- ceeded US$ 600/ton only twice: towards the end of pected to reach new record. Grain supplies are im- 2011 when there were some reports of flood dam- proving as well. In its May 2013 assessment (the age to the Thai crop and last year when the Thai first for next season’s crop), the U.S. Department government introduced its purchase program—a of Agriculture projected a marked improvement in public stock-holding mechanism. According to maize conditions for 2013/14, a comfortable wheat U.S. Department of Agriculture’s May 2013 assess- crop, and a well-supplied rice market. In response ment, global rice production is expected to reach to this outlook most food prices have receded— almost 480 million tons in 2013/14, 9 million tons the food price index has lost most of its summer above the 2012/13 record. The stocks-to-use ratio 2012 gains. Yet, upside risks exists, especially in maize, as is expected to reach almost 27 percent, remarkably any adverse weather event to upset global markets. similar to that of 2012/13 and well within historical Fig COMM.14 Agriculture price indices Fig COMM.15 Wheat, maize and rice prices 2005=100 US$/mt US$/mt 260 1000 500 Rice (left axis) Food 220 800 400 Wheat (right axis) 180 Beverages 600 300 140 400 200 Maize (right axis) Raw materials 100 200 100 Jan '07 Jan '08 Jan '09 Jan '10 Jan '11 Jan '12 Jan '13 Jan '07 Jan '08 Jan '09 Jan '10 Jan '11 Jan '12 Jan '13 Source: World Bank. Source: World Bank. 105 Food Raw materials Beverages Maize (right axis) Rice (left axis) Wheat (right axis) GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex norms. Trade in rice has improved as well reaching two to three times higher than food commodities a new record of 38.6 million tons during last calen- as well as cotton (key raw material) and coffee, dar year, aided in part by a surge in Chinese im- whose growth is roughly aligned with population ports (2.9 million in 2012, up from 0.5 million tons growth. The main exception is maize, which during a year earlier). And, early reports indicate that his 2004-12 grew by an annual average of 3.7%, a re- year may be another record for rice trade, perhaps flection of biofuel demand. The four periods cap- as high as 40 million tons. ture different price regimes, namely, increasing commodity prices up to the first oil crisis (1960- Edible oil prices have declined almost 20 per- 73), declining prices (1974-85), stable and low pric- cent since their summer 2012 peak, as measured by es (1986-2003), and high prices during the recent the World Bank’s edible oil price index, effectively boom (2004-12). eliminating all the gains during the first half of last year. The decline reflects an improved South Edible oils are, perhaps, the only commodity group American soybean crop as well as a better reas- whose income elasticity is high not only for low sessment of the U.S. soybean crop, for which yields and middle income countries but also for high in- turned out to be higher than originally thought. come countries. This reflects the fact that as in- Palm oil supplies from Indonesia and Malaysia come increases, people tend to eat more in profes- have improved as well—these two countries ac- sional establishments and consume more pre- count for 80 percent of global palm oil supplies. packaged food items, both of which are utilizing Soybean prices have weakened as well during the more edible oil than otherwise. past 9 months, down almost 28 percent from their September 2012 highs (figure COMM.16). The Beverage prices have declined as well. The extended soybean price spike during 2012 also re- World Bank’s beverage price index (comprised of flects the overall tightness in the animal feed indus- coffee, cocoa, and tea) is down 32 percent since its try. Soybean meal and white maize (the latter pro- February 2011 record high. The earlier surge (and duced primarily in the United States) are close sub- recent decline) in beverages reflects mostly coffee stitutes as they both are key inputs to the animal prices—specifically arabica—which reached a US$ industry. 6.00/kg during 2011, the highest nominal level ever (figure COMM.17). The increase in arabica reflect- Edible oils experienced the fastest production (and ed a shortfall in Colombia production (the world’s consumption) growth rates of agricultural com- second arabica supplier after Brazil). However, as modities during recent decades, and this is likely to Colombian production recovered partially, and cof- be the case for the future. Table COMM.2 reports fee companies began using more robusta in their production growth rates for 8 commodities and blends, arabica prices declined and they are now shows that in all four sub-periods since 1960, palm traded at half their early 2011 highs. Global coffee oil and soybeans exhibited growth rates that are output reached 145 million bags in 2012, up from Fig COMM.16 Edible oil prices Table COMM.2 Production growth of key commodities US$/ton US$/ton 1400 Soybeans (right axis) 700 1960-73 1974-85 1986-2003 2004-12 1200 600 Maize 4.1% 3.9% 1.8% 3.7% Rice 3.3% 2.9% 1.2% 2.0% 1000 500 Wheat 3.9% 2.8% 0.8% 2.1% 800 400 Coffee 3.4% 2.2% 2.5% 1.8% Palm oil Cotton 2.7% 2.8% 1.4% 2.9% 600 300 Sugar 2.2% 2.6% 2.3% 1.9% Palm oil 8.6% 10.1% 7.8% 6.8% 400 200 Jan '07 Jan '08 Jan '09 Jan '10 Jan '11 Jan '12 Jan '13 Soybeans 7.5% 6.8% 4.0% 4.7% Source: World Bank. Source: U.S. Department of Agriculture. 106 GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex 137 million bags in 2011. Furthermore, Brazil, by historical standards; global production is ex- world’s top coffee supplier, is expected to have a pected to be 25.1 million tons in 2013/14, and con- bumper crop in 2013/14 (April-March), currently sumption at 24.3 million tons. An estimated 1 mil- estimated at almost 47 million bags. Coffee sup- lion tons will be added to global stocks, pushing plies from Vietnam (world’s largest robusta suppli- the stocks-to-use ratio to 77 percent, the highest er), Colombia, and Indonesia are also expected to since the end of World War II. Approximately 9 be large as well. After declining nearly 35 percent million tons of cotton have gone to the state re- during 2011, cocoa has been traded at around US$ serves of China during the past two seasons, ex- 2.35/kg. The weakness of cocoa prices reflects plaining the relative strength of cotton prices partly weak demand in Europe, traditionally a key (International Cotton Advisory Committee 2013). consumer of cocoa for chocolate manufacturing. Nevertheless, cotton prices increased the least dur- Global cocoa production is expected to reach 3.96 ing the post-2004 commodity price boom—up 37 million tons in 2012/13, down from last season’s percent between 1997-2004 and 2005-12 as op- 4.06 million tons. Declined by Central and South posed to a 75 percent increase of the overall agri- America will offset increases by West Africa. Last, cultural price index—primarily because of the in- sugar prices (not part of World Bank’s beverage crease in yields by China and India following the price index) have been weakening as well, down 22 adoption of biotechnology (Baffes 2011). percent since a year ago and 40 percent lower than their 2011 peak. The sugar market is faced with a Natural rubber prices have been remarkably sta- large surplus. Global sugar production exceeded ble during the past two quarters, following their 182 million tons in 2012, up from 173 million tons sharp decline from their early 2011 peak (similar to in 2011 while consumption in both years averaged cotton). The decline in rubber prices reflected both 163 million tons. Good crops in both South Amer- increased supplies and fears of demand deteriora- ica (especially Brazil) and Asia have contributed to tion, especially from China—most natural rubber the surplus. Brazil, world’s top sugar supplier, in an goes towards tire production, and China is the fast- attempt to boost prices, announced a tax credit to est-growing market for tires. Crude oil prices play a ethanol producers; yet, the announcement failed to key role in the price of natural rubber as well, be- support prices. cause synthetic rubber, a close substitute to natural rubber, is a crude oil by-product. Global natural Raw material prices have been relatively sta- rubber production reached 11.3 million tons during ble during the past two quarters after declining the 12-month period ending May 2013, 60 percent sharply from their early 2011 peaks—down 35 per- of which is supplied by Thailand and Indonesia. cent from February 2011 to August 2012 (figure Almost 40 percent of global rubber consumption is COMM.18). Cotton prices have found some accounted by China, which has been growing at strength recently—they have gained 8 percent since more than 5 percent during the past few years. January 2013. The cotton market is well supplied That makes the longer term prospects of the rub- Fig COMM.17 Coffee prices Fig COMM.18 Raw material prices US$/kg US$/kg 7 7 6 6 5 5 Arabica Natural Rubber 4 4 3 3 Robusta 2 2 Cotton 1 1 Jan '07 Jan '08 Jan '09 Jan '10 Jan '11 Jan '12 Jan '13 Jan '07 Jan '08 Jan '09 Jan '10 Jan '11 Jan '12 Jan '13 Source: World Bank. Source: World Bank. 107 GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex ber market sensitive to China’s growth outlook, as Fig COMM.19a is the case with most metals and mineral commodi- Global Maize Supplies ties. Timber prices have been remarkably stable as well during the past two quarters. Initial expecta- percent million t Stocks-to-use Ratio (left axis) Production (right axis) tion for a boom in timber demand (and prices) for 40 1000 post-Tohoku earthquake reconstruction did not materialize while global demand for timber prod- 32 900 ucts has weakened considerably. 24 800 Outlook and risks for agricultural commodities 16 700 8 600 Agricultural prices are projected to decline 5.9 per- cent in 2013 with most of the decline to be ac- counted by beverages (–8.9 percent), followed by . 0 2000 2002 2004 2006 2008 2010 2012 500 2014 Raw material (-5.8 percent), and food commodities (-5.5 percent). Within the food group, edible oils are expected to decline the most (-9.0 percent), Fig COMM.19b Global Wheat Supplies followed by other food (-5.0 percent), and grains (- 1.0 percent). The largest declines among key food percent million t commodities will be experienced by soybeans (-8.7 40 Stocks-to-use (left axis) Production Production(right axis) (right axis) 700 percent), palm oil (-13.9 percent), followed by oth- Stocks-to-use Ratio (left axis) er edible oils. Grains will change marginally (maize and rice down by about 1 percent and wheat mar- 30 ginally up). The decline in beverages will be led by 600 arabica coffee (-18.5 percent) and less so cocoa (- 20 5.9 percent), while Malaysian longs and rubber will account for most of the weakening in raw materials 500 (-11.2 and -9.7 percent, respectively). A number of 10 assumptions (along with associated risks) underpin the outlook for agricultural commodities, namely, crop conditions, energy prices, biofuels, macroeco- 0 400 2000 2002 2004 2006 2008 2010 2012 2014 nomic environment, and trade policies. A detailed assessment of these risks is given below. Fig COMM.19c Crop conditions Global Rice Supplies It is assumed that crop production in the Southern percent 40 Production Production (right (right axis) axis) million t 500 Stocks-to-use (left axis) Hemisphere will not experience any adverse weath- er conditions, and next season’s outlook will return Stocks-to-use (left axis) to normal trends. In its May 2013 outlook assess- 30 450 ment (the first for next season), the U.S. Depart- ment of Agriculture estimated the 2013/14 crop season’s global grain supplies (production plus 20 400 starting stocks) at 2.56 billion tons, up 5.7 percent from 2012/13, thus replenishing most of the losses 10 350 due to the 2012 summer heat wave. If history is any guide, when markets experience negative sup- ply shocks similar to the 2012 drought, production 0 300 comes back within one (or, perhaps two) seasons 2000 2002 2004 2006 2008 2010 2012 2014 through resource shifting, as has been the case in previous episodes (for example, maize in 2004/05, Source: US Department of Agriculture, May 2013 update. 108 Production (right axis) Stocks-to-use (left axis) GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex wheat in 2002/03, and rice in 2001/02, see figure In the longer-term there is much uncertainty about COMM.19a-c). However, it may take up to three biofuel production. If biofuel production increases seasons before stocks are fully replenished— at the rates suggested by some forecasts (more than subjecting the maize and (less so) wheat prices to 5 percent annually), as much as 10 percent of glob- upside risks. As discussed earlier, the rice market is al land area allocated to grains and oilseeds could well supplied also reflected in the remarkable stabil- be producing biofuel crops (evaluated at world av- ity of rice prices. erage yields) within the next two decades. Such assumptions are supported by the baselines of the Oil prices joint OECD/FAO Agricultural Outlook as well as the IEA Energy Outlook, published in May 2013. How- The outlook assumes that in 2013 crude oil prices ever, policy makers are increasingly realizing that will ease marginally and fertilizer prices will experi- the environmental and energy security benefits of ence a 7 percent (both fertilizer and crude oil are biofuels may not outweigh their costs, thus biofuels key inputs to agriculture, especially grains and policies are likely to ease. Indeed, biofuels grew oilseeds). However, because of the energy intensive very little during the past two years with similar nature of agriculture—the industry has been esti- expectation for this and next year (figure COMM.20). mated to be four to five times more energy inten- sive than manufacturing—an energy price spike Yet, the likely long-term impact of biofuels on could trigger proportional food price increases. The food prices is complex, as it goes far beyond land energy price cross-price elasticity of agriculture diversion, subsidies, and mandates. The impact is goods ranges from 0.2 to 0.3 (depending on the likely to depend more on the following factors: (i) commodity), implying that a 10 percent increase in the level at which oil prices make biofuels profita- energy prices will induce a 2-3 percent increase in ble and (ii) whether technological developments of agricultural prices. biofuel crops (or even new crops) could increase the energy content of the respective plants, thus, Biofuels making them more attractive sources of energy. Thus, high energy prices along with likely techno- Despite an only marginal increase in global logical innovations could pose large upside risks for biofuel production in 2011 and 2012, the out- agricultural prices in the longer term (box COMM look assumes biofuels will continue to play a 3 elaborates further on this issue). key role in the behavior of agricultural com- modity markets. Currently, biofuels produc- Macroeconomic environment tion represents about the equivalent of 1.3 mbd crude oil production and are projected The last assumption is associated with the risk of a to grow moderately over the projection period. sharp reversal to the loose macroeconomic envi- ronment, including low policy rates and quantita- Fig COMM.20 Biofuel production Fig COMM.21 Commodity assets under management mbd of oil equivalent US$ billion 1.4 350 1.2 300 1 250 0.8 200 150 0.6 100 0.4 50 0.2 0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Source: BP statistical Review of World Energy; OECD. Source: Barclay Hedge. 109 GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex tive easing. There are two channels through which well-supplied. If the baseline outlook materi- interest rates affect commodity prices—all com- alizes, policy actions are unlikely and, if they modities, not just agriculture. The first operates take place, will be isolated with only limited through physical demand and supply: Low interest impact. For example, when the market condi- rates may affect stock-holding behavior because of tions for rice and cotton were tight (in 2008 the lower cost of capital, they may induce right- and 2010, respectively), export bans induced ward shift in demand because of expansion in cur- price spikes. However, last year’s Thai rice rent consumption, and they may increase invest- purchase program and India’s export ban on ment lower borrowing costs and hence a rightward cotton did not have any discernable impact shift of future supply. Thus, the effect of interest on the respective prices. Interestingly, cotton rates can be either positive, negative, or, even zero, prices declined more the day after Indian ex- depending on the relative elasticities. The interest port ban on cotton was announced (March rate elasticity for food commodities appears to be 2012) than they gained the day of the an- near-zero (see Baffes and Dennis (2013) for elastic- nouncement. In fact, there may be a down- ity estimates and a literature review). Research at side price risk for rice if Thailand releases the World Bank (currently under way) shows some (or all) of the stocks it accumulated that the interest rate elasticity for metal pric- through the purchase program, not an unlike- es may be positive, implying that the shift of ly scenario given that the costs of the pro- supply schedule due to the lower cost of capi- gram account for as much as 1 percent of the tal overwhelms shifts in demand (the impact country’s total GDP (World Bank 2012). through stockholding is not as important in metals and minerals). Recent trends in domestic food prices The second channel operates through invest- ment fund activity, the so-called financializa- The discussion thus far has focused on price move- tion of commodities — a controversial and ments in U.S. dollar terms. However, what matters hotly-debated topic. Investment fund activity most to consumers is the price they pay for food in which has been increasing over the course of their home countries. It is not uncommon for pric- the last ten years, exceeded US$ 330 billion es paid by consumers in an individual country to during 2012, according to BarclayHedge, differ considerably from international prices, at which tracks developments in the hedge fund least in the short run. Reasons for this include ex- industry (figure COMM.21). Most of the change rate movements, trade policies intended to funds have been invested in energy and agri- insulate domestic markets, the long distance of domestic cultural commodity markets. The relationship trading centers from domestic markets (adding considera- between investment fund activity and com- bly to marketing costs), quality differences, and differ- modity prices is a highly debated topic. Some ences in the composition of food baskets across have argued that these funds have sufficiently countries. large weight to unbalance the market, thus impairing the price discovery mechanism. Table COMM.3 reports changes in domestic Others have praised these investment vehi- wholesale prices of three commodities cles claiming that they inject liquidity in com- (maize, wheat, and rice) for a set of low- and modity markets. Despite some contrasting middle-income countries — the selection of views, the empirical evidence is, at best, countries was driven, in part, by data availa- weak. While it is unlikely that these invest- bility. These changes are compared to the ments affect long term price trends, most corresponding world price changes (reported likely they have affected price variability. in the top row of each panel). The periods chosen are 2013Q1 against 2012Q4 Trade policies (capturing short run responses) and 2013Q1 against 2012Q1 (intended to capture longer Given the 2008 (and less so 2010) experience, term effects). The table also reports price the outlook assumes that policy responses changes between 2006-07 and 2011-12, effec- will not upset agricultural markets, an as- tively capturing the entire food price boom sumption that relies on markets remaining period. 110 GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex World prices of all three grains changed little between 2012Q4 and 2013Q1 (maize and Table COMM.3 Wholesale grain prices in (nominal local currencies, percent changes) wheat down 3.8 and 9.6 percent, respectively and rice up 0.7 percent); the US dollar did 2013Q1/ 2013Q1/ 2006-07/ 2012Q4 2012Q1 2011-12 not change much either. The corresponding Maize (17 countries) median domestic price changes were – 0.6, World (US$) -3.8 9.8 106.7 5.8, and 0.2 percent. Focusing at the variabil- Uganda 20.9 31.4 153.3 ity of price changes, however, a different pic- Nicaragua 18.6 20.6 73.8 ture emerges. The relative calm in world pric- Tanzania 17.7 46.6 130.9 es was reflected in the domestic prices of Honduras 11.0 24.3 26.8 rice, less so in wheat, but not in maize where M ozambique 10.7 23.5 77.4 5 countries experienced double digit increases Dominican Republic 8.4 0.9 70.0 Bolivia 7.6 -6.9 49.3 despite the moderate decline in world price. Ukraine 4.7 23.1 131.9 A mixed picture emerges as well when Costa Rica -0.6 4.4 109.3 2013Q1 is compared to 2012Q1. Thailand -0.8 1.2 42.6 Rwanda -1.3 10.4 68.4 Again, the median domestic price increases El Salvador -3.7 -23.8 48.4 are somewhat similar to those of world pric- Panama -3.8 -9.5 94.4 es, but there is high variability around these Peru -4.0 -7.5 40.9 medians for maize and wheat (but not for Guatemala -4.2 -8.1 51.9 Ethiopia -6.6 2.5 196.7 rice). For example, the world and the domes- Kenya -15.4 -2.2 128.2 tic median price of maize increased 9.8 and Median -0.6 2.5 73.8 2.5 percent, respectively. Yet, six of the 17 Wheat (8 countries) countries in the sample experienced price de- World (US$) -9.6 15.3 40.8 clines while seven countries experienced in- Bolivia 9.9 -4.9 88.5 creases exceeding 20 percent. Sudan 8.9 31.5 132.1 India 7.8 38.3 34.3 The last column reports price changes be- Ukraine 5.8 30.9 124.4 Peru 2.6 2.6 25.3 tween 2006-07 and 2011-12, periods long El Salvador 2.5 70.5 43.6 enough not be affected by the presence of Ethiopia -1.3 6.0 154.3 lags in any significant way. During these two Bangladesh n/a 20.1 20.7 2-year periods, the world price of maize, Median 5.8 25.5 66.0 wheat, and rice went up by 107, 41, and 75 Rice (19 countries) percent. Not surprisingly, all countries expe- World (US$) 0.7 3.6 75.2 rienced large domestic price increases in all Bangladesh 11.8 4.2 50.1 three commodities, with corresponding medi- Tanzania 11.2 -1.1 120.9 Dominican Republic 7.2 1.5 19.5 an increases at 74, 66, and 48 percent. As was Niger 6.7 -1.5 40.4 the case with the shorter periods, there is India 4.6 14.9 67.1 considerable variation across countries. For Guatemala 2.2 5.2 47.8 example, rice prices increased by 130 percent Panama 1.4 2.7 51.1 in East Africa (average of Tanzania and Uganda 1.2 -4.7 140.6 Uganda) but only 44 percent in West Africa M ali 0.5 -5.8 35.2 (average of Niger, Mali, and Burkina Faso). Honduras 0.2 9.2 21.4 Burkina Faso 0.0 2.7 57.0 Nicaragua -0.3 6.7 68.7 The tentative conclusion from this brief anal- Philippines -0.6 -2.6 39.5 ysis is that in the short term, domestic prices Peru -0.7 -6.4 32.8 move, for the most part, independently of Thailand -1.8 4.9 47.4 world prices. A stronger link is present in the Cambodia -1.9 0.0 74.1 longer term but large differences across coun- El Salvador -3.6 -8.0 33.5 tries are present, implying that domestic fac- Bolivia -4.8 0.9 28.6 tors play a dominant and persistent role in Rwanda -12.4 0.1 60.9 Median 0.2 0.9 47.8 the food price determination process of local markets. Source: World Bank; FAO (http://www.fao.org/giews/pricetool/). 111 GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex Box COMM.3 The complex interplay among food, fuels, and biofuels The interaction between food and energy commodities is biofuel use. The first went up to the mid -19th century, when an important, complex, (sometimes) misunderstood, and the chief uses of biofuels were cooking and lighting. The hotly debated subject. This box identifies some of the key second period, the early 20th century, saw the expanded interaction channels between energy and food markets use of biofuels in the internal combustion engines. The (figure COMM 3.1). It argues that high energy prices may third, covering the mid- to late-20th century, includes main- affect food prices through four channels, namely, higher ly the oil crises of the 1970s. The fourth period, the 21st cost of producing food, biofuel policies, profitable biofuels, century, reflects environmental and energy independence and increasing biofuel profitability through induced innova- concerns. Indeed, biofuels constituted the largest demand tion. The box concludes that, in the longer term, energy growth component of grains and oilseeds during the past could play an even more important role in the determina- decade. Currently, they account for about 2-3 percent of tion of food prices. area allocated to grains and oilseed and represent the equivalent of 1.2 million barrels of crude oil per day. Most The Cost Link (A and B/C). The strong relationship be- of biofuel production comes from maize -based ethanol in tween energy and non-energy prices was established long the United States (48 percent share), followed by sugar- before the post-2004 price boom. Gilbert (1989) estimated cane-based ethanol from Brazil (22 percent), and edible oil transmission elasticity from energy to non -energy com- -based biodiesel in Europe (17 percent). Numerous stud- modities of 0.12 and from energy to food commodities of ies have examined the impact of biofuels on food prices, 0.25. Hanson, Robinson, and Schluter (1993) based on a and give a wide range of estimates. Mitchell (2008) found General Equilibrium Model found a significant effect of oil that the expansion of biofuels and the policy reactions that price changes to agricultural producer prices in the United higher prices induced, were responsible for almost three States. Borensztein and Reinhart (1994) estimated trans- quarters of the food price increases during 2000 -08. Gil- mission elasticity to non-energy commodities of 0.11. A bert (2010) finds that at most one-quarter to one third of strong relationship between energy and non -energy prices the rise in food prices over 2006–2008 can be directly was found by Chaudhuri (2001) as well. Baffes (2007) attributed to biofuels. Roberts and Schlenker (2010) con- estimated transmission elasticities of 0.16 and 0.18 for clude that U.S. biofuel mandates increase maize prices non-energy and food commodities, respectively. Moss, roughly 20 percent. Livanis, and Schmitz (2010) found that U.S. agriculture’s energy demand is more sensitive to price changes than More recently, the impact of biofuels on food prices has any other input. Pindyck and Rotemberg (1990) concluded been studied through the link between energy and non - that various unrelated primary commodity prices not only energy prices. Serra (2011) found a long run linkage be- co-move, but also co-moved in excess of what the macro- tween ethanol and sugarcane prices in Brazil and also that economic fundamentals could explain. The strong ener- crude oil and sugarcane prices lead ethanol prices but not food price link is also evidenced by the input -output values vice versa. Saghaian (2010) established strong correlation of the GTAP database, which show that the direct energy among oil and other commodity prices (including food) but component of agriculture is four to five times higher than the evidence for a causal link from oil to other commodi- manufacturing sectors (figure COMM 3.2). ties was mixed. Gilbert (2010) found correlation between the oil price and food prices both in terms of levels and The Policy-Driven Biofuel Link (D/F): In addition to be- changes, but also noted that it is the result of common ing a key cost component, energy plays an important role causation and not a direct causal link. Zhang and others on the demand side through the diversion of some food (2010) found no direct long-run relationship between fuel commodities to the production of biofuels. The role of bio- and agricultural commodity prices and only a limited short - fuels is not new. Kovarick (2012) identified four periods of run relationship. Reboredo (2012) concluded that the pric- Box Fig COMM 3.1 The Energy/Food Price Link Box Fig COMM 3.2 Energy Intensities WORLD Energy Manufacture prices HIGH INCOME Agriculture DEVELOPING A SSA US Biofuel Food Fertilizer Canada H D production prices prices EU-12 China E Brazil India Turkey Policies 0 3 6 9 12 15 18 Source: Baffes (2013). Source: World Bank; GTAP database. 112 GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex es of maize, wheat, and soybeans are not driven by oil example. One hectare of land produces 10 tons of maize price fluctuations. generating US$ 2,500 in farmgate revenue either by sup- plying maize to the food and feed industry at US$ 250/ton Overall, despite a nearly 6-fold increase in biofuel produc- or selling it to ethanol industry at US$ 0.63/liter (assuming tion during the first decade of the millennium, the price link 4,000 liters maize-to-ethanol conversion). If an improved between energy and food commodities is not as clear -cut maize variety were to increase the ethanol content by 10 as some would have expected. This may partly be ex- percent, it would generate US$ 2,750/hectare in farmgate plained by the non-market influence of mandates, which revenue, raising the cost of maize to the food and feed caused biofuel production to rise (and perhaps influence industries to $275/ton, since this is how much the ethanol food prices) independently of what was happening to oil industry would pay. Furthermore, the innovation in the prices. Consider an exogenous shock which pushes crude energy content of maize would induce proportional price oil prices up, in turn, lowering fuel consumption. Under a increases in all crops that could be grown on that land. mandated ethanol/gasoline mixture ethanol and maize While the above example is hypothetical, it does illustrate prices will decline, ceteris paribus, leading to a negative how innovations in the energy content (or in the efficiency food-oil price relationship (de Gorter and Just 2009). of extracting ethanol) of existing or new crops could trigger food price increases, even in the absence of changes in The Link through Profitable Biofuels (G1): A more im- energy prices or demand and supply conditions of food portant issue is the level at which energy prices provide a commodities. floor to food prices. If biofuels are profitable at current energy prices, the income elasticity of food will rise toward The food-fuel-biofuel link can be summarized within two oil the higher elasticity of the larger (figure COMM 3.3) ener- price scenarios (figure COMM 3.4). Though less likely, the gy market, a point highlighted by numerous authors, in- “Low” oil price scenario could materialize if a sharp slow- cluding Lustig (2008), Heady and Fan (2010), and Baffes down in emerging economy growth takes place. It could and Dennis (2013). Various rules of thumb to determine also materialize in response to innovation in battery tech- when biofuel production becomes profitable have been nology and/or large scale utilization of natural gas that posited. One such rule suggests profitability is reached could unleash substitution away from crude oil to electrici- when the US$ barrel price of crude oil is 50 percent or ty and natural gas by the transportation industry. Under more than the US$ price of a ton of maize. Another places low oil prices, the energy costs to agriculture will decline it at US$ 3/gallon of gasoline at the pump (in the U.S.). A leading to lower food prices—scenario I(b). Furthermore, World Bank (2009) report argued that because of the low oil prices may ease biofuel policies, lowering food strong correlation between the maize and crude oil prices prices even further—scenario I(a). Interestingly, while above US$ 50/barrel, crude oil dictate maize prices. The scenario I(a) is consistent with a strong link between oil US Government Accountability Office (2009) noted that oil and food prices (through production costs), scenario I(b) above the $80-$120/barrel range may make biofuels prof- weakens the link (because of the mandated nature of bio- itable (depending on the circumstances). Babcock (2011) fuels). Now consider the “High” oil price scenario. As not- noted that high crude oil prices would have created market ed above, high oil prices are likely to make biofuels profita- -driven investment incentives in the US ethanol industry ble, in which case food and oil prices will move in a syn- even in the absence of policies. chronous manner—scenario II(a). Moreover, profitable biofuels may induce innovation in the energy content of Induced Innovation Link (G2): Profitable biofuels may crops, in which case food prices could increase even fur- induce innovations by increasing the energy content of ther—scenario II(b). Under scenario II(b), the oil-food price biofuel crops hence increasing food prices even further. link may weaken since food prices may increase even if To see the likely impact of biofuels -related induced inno- demand and supply conditions for food and energy mar- vation on food prices consider the following illustrative kets do not change. Box Fig COMM 3.3 Global Energy Shares Box Fig COMM 3.4 Oil and Food Price Scenarios Oil 32.6% OIL PRICES Wind 58.1% Coal 29.8% Biofuels 27.2% I II Natural gas 23.9% Low High Hydro 6.5% Solar 11.6% Biofuel policies ease Biofuel policies are Biofuels become Innovation in or are removed retained profitable biofuels (A, B/C) (D/F) (G1) G2) Nuclear 5.2% Geothermal 3.2% Renewables 1.8% I(a) I(b) II(a) II(b) Very low food Low food prices High food prices Very high food prices and strong and (perhaps) weak and strong food-oil prices and weak 0% 10% 20% 30% 40% 0% 20% 40% 60% 80% food-oil price link food-oil price link price link food-oil price link Source: BP Statistical Review and author’s calculations Source: World Bank; BP Statistical Review. 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The imports of competitive technology, machinery and slowdown was due to slower growth in China, equipment. which has started to shift its economy away from excessive reliance on investment and Japanese quantitative easing is likely to exacerbate net exports. capital inflows, potentially contributing to demand price pressures, asset price inflation and a further Growth in the rest of the region accelerated to 6.2 rise in domestic debt encouraged by low borrowing percent, 1.6 percentage points faster than the costs. Although net capital flows are not expected average of the preceding decade and comparable to to generate sustained pressures on regional growth during the boom and bounce-back years of exchange rates, low Japanese interest rates could 2007 and 2010. increase capital flows and exchange rate volatility. With virtually all countries in the region having The recent decline in global commodity prices may recovered from the 2008 crisis—largely thanks to reflect a turning point as past investments came on domestic stimulus—rising debt levels and asset stream. Should this easing accelerate, fiscal and bubbles are increasingly a source of concern current accounts, and incomes and growth in especially in the context of strong capital flows and commodity exporters like Indonesia, Malaysia, weak external demand environment. Mongolia, Papua New Guinea (PNG), Timor Leste and Solomon Islands could come under pressure, Economic outlook: GDP growth in the even as lower prices would benefit importers. The region is projected to slow to 7.3 percent in 2013 negative impact is expected to be muted in reflecting weak global conditions and waning Malaysia and Indonesia where the decline in oil effects of stimulus measures. China is projected to prices will contribute to an improvement of budget slow to 7.7 percent rate in 2013 but accelerate to balances through a reduction in fuel subsidies. about 8 percent in 2014 and 2015 as global conditions improve. Policy recommendations: With most of the region having fully recovered from the financial Growth in the rest of the region is expected to crisis, and many countries growing at historically slow to 5.7 percent in 2013 due to fiscal tightening, high rates, policies could become less capacity constraints and a negative contribution accommodative. Should capital flows make from net exports reflecting exchange rate adjusting monetary policy difficult a larger share of movements and weak external demand. Growth is the burden may have to be borne by fiscal projected to firm up to about 6 percent in 2014 tightening, while macro-prudential measures would and 2015 as external conditions improve. gain in importance to safeguard financial stability. Fiscal consolidation can perhaps be achieved by Risks and vulnerabilities: The risk of a rationalizing current spending, which would allow serious crisis emanating from high-income structural reforms and growth enhancing countries has declined, but the strength and timing infrastructure investment programs to continue. of recovery in Europe remains uncertain. Rebuilding buffers to absorb future shocks, Developments throughout the region will remain remains a priority in Cambodia, Lao PDR, sensitive to outturns in China and Japan. The main Vietnam, the Pacific islands and Mongolia where risk related to China remains the possibility that gradual global and regional integration has high investment rates prove unsustainable, benefitted growth, but also made these economies provoking a disorderly unwinding and sharp more vulnerable to global and regional business economic slowdown. cycles and commodity price fluctuations. 119 GLOBAL ECONOMIC PROSPECTS | June 2013 East Asia and the Pacific Annex Recent developments This strong annual performance came despite a mid-year slowdown, caused by slower growth in China and the mid-year ramp-up in Euro Area financial market tensions. After slumping sharply mid- year, real-side activity (industrial production, and exports) picked up pace in the fourth quarter (figure EAP.2). Although growth in the East Asia and the Pacific region slowed to 7.5 Many countries swiftly reacted to the percent in 2012, its contribution to mid-year slowdown and to the weak global growth was still an impressive external demand by loosening 40 percent macroeconomic policy Monetary policy was relaxed, with the majority of The growth slowdown was largely due to slower the central banks—Malaysia being a notable growth in China as it started to reduce its reliance exception—cutting policy rates during 2012. on net-exports and investment. China’s growth declined to Vietnam implemented the most aggressive easing, 7.8 percent in 2012—the weakest rate since 1999. cutting interest rates by 600 basis points, unwinding a tightening of equal magnitude Outside China, regional growth accelerated from implemented the year before. 4.6 percent in 2011 to 6.2 percent in 2012. This was 1.6 percentage points faster than the annual Fiscal policy was broadly accommodative with average growth rate attained over the preceding many countries in the region, including Indonesia, decade and comparable only to the growth rates Malaysia and Thailand accelerating public-sector observed during the boom and bounce-back years investment programs through budget and state- of 2007 and 2010. owned enterprise activity, and local government investments, particularly China. Malaysia stepped- This acceleration partly reflected Thailand’s up its cash transfers and civil service bonuses, recovery from the devastating floods in 2011(figure Thailand enlarged its rice subvention scheme and EAP. 1). GDP grew 6.5 percent in 2012 versus implemented the significant car buyer incentive programs. only 0.1 percent in 2011. But the acceleration was more widespread, if less spectacular elsewhere. Sixty Partly as a result, real credit growth in the region percent of countries in the region grew faster in 2012 than accelerated sharply, reaching 20 percent rate in in 2011, and more than two thirds grew faster than 6 Indonesia, 14.6 percent in China and 10 percent in percent. Malaysia and Thailand (figure EAP. 3). Fig EAP.1 Economic rebound of the East Asia and Fig EAP.2 Diverging trends in industrial output the Pacific region has been impressive growth across the region Industrial production, % change, 3/3m, saar GDP, % change, quarter-over-quarter, saar 45 18 31 13 17 8 3 3 -2 11Q111Q211Q311Q412Q112Q212Q312Q413Q1 -11 -7 -25 Jul '12 Oct '12 Jan '13 Apr '13 ASEAN 4 China China Philippines East Asia (excl. China) Malaysia Developing excl. EAP World excl. EAP Japan Indonesia Source: World Bank; Datastream. Source: World Bank; Datastream. 120 GLOBAL ECONOMIC PROSPECTS | June 2013 East Asia and the Pacific Annex Fig EAP.3 Credit growth accelerated across the The combination of the loose macro region during 2012 policy and fast growth has Real credit growth, % change, year-over-year 50 contributed to a significant rise in 40 private and public-sector debt levels 30 in the region 20 Government debt remains well below high-income levels (it exceed 100 percent of GDP in some 10 European countries, including Greece, Italy and 0 Portugal, the United States and Japan), but have 07M03 08M03 09M03 10M03 11M03 12M03 13M3 continued to rise despite high rates of GDP -10 growth in Thailand, Malaysia and China. China Indonesia Malaysia Philippines Thailand Vietnam Non-government debt has also been rising in Source: World Bank; IFS; IMF. China, Malaysia and Thailand and now exceeds 150 percent of GDP in China and Malaysia and is above 100 percent of GDP in Thailand (figures The stimulus measures coincided with a EAP. 4 & 5). revival in global capital flows and demand (see capital flow section below), partly Household debt represents the larger share of that because of the lags involved with macro total, at around 77 percent of GDP in Thailand policy, and contributing to a sharp (consolidated debt to deposit taking corporations acceleration in economic activity, with and other financial corporations), and is estimated regional quarterly GDP rebounding at a 8.4 at around 80 percent of GDP in Malaysia. percent annualized rate in 4Q2012. Rapid growth of household debt resulted from a Reflecting the stimuli, central budget deficits combined effect of low interest rates and strong deteriorated across the region exceeding 3 demand. Present levels of household debt are percent of GDP in all countries except about 2-3 times higher of their pre-1997 crisis China, Indonesia, PNG and the Philippines. levels in China, Malaysia and Thailand. Consolidated budget deficits, including local budget financing had exceed 3 percent of In China, non-Government sector debt is GDP in China. concentrated in the corporate sector (about 2/3s Fig EAP.4 Non-financial corporate debt is the Fig EAP.5 Household debt in Malaysia and largest portion of China’s total debt Thailand is high and expanding Share of GDP Share of GDP 90 80 Indonesia 70 60 Thailand 50 40 30 China 20 10 Malaysia 0 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 0 50 100 150 200 Indonesia China Thailand Malaysia General Government Non-Financial corporations HH Other Note: Decomposition of Malaysia’s debt is an estimate. For Thailand, deposit taking corporations only. Source: World Bank; BIS; IMF. Source: World Bank; BIS. 121 GLOBAL ECONOMIC PROSPECTS | June 2013 East Asia and the Pacific Annex of total non-Government sector debt). The surge in imports, including for capital goods. At the composition of non-Government debt is more same time, the terms of trade of commodity balanced and corporate debt is lower than its pre- exporting countries (Indonesia, Malaysia, Mongolia 1995-1997 crisis levels in Indonesia, Malaysia and and Papua New Guinea) deteriorated on weaker Thailand. commodity prices (figure EAP. 6). At the same time, the overall external Regional exports meanwhile came under pressure position of the key Asian economies has been from global weakness. A combined effect of those significantly strengthened over the past developments put further pressure on net-exports decades through build-up of foreign asset and (exports-imports) which have been an increasingly strengthening of reserve base. The East Asia large drag on growth (figure EAP. 7). economies are also better prepared to cope with external headwinds in the context of the Net-exports subtracted 4 percentage points from flexible exchange rate regimes that they have overall GDP growth in Malaysia and about 1.5 been increasingly adopting. percentage points in Indonesia and Thailand in 2012. In the Philippines, on the other hand the net- While fast growing Asian economies still have export contribution to growth was positive partly fiscal room to counter-act a possible financial reflecting the post-Tokohu earthquake reconstruction crisis, the rapid build-up of debt during the related exports to Japan. low-interest rate period increased the exposure of the major regional developing economies and raises certain concerns. It is The bulk of developing countries in recommended that favorable growth period East Asia & the Pacific region have could be used to strengthen buffers to counteract future external shocks and reduce completed their recovery from the vulnerabilities. crisis Robust, policy-fueled demand The relatively small hit to regional output in the immediate wake of the crisis and the strong growth conditions boosted import demand since, means that the output gaps (the difference across the region while exports between demand levels and underlying supply potential) either only slightly negative or positive in remained weak three quarters of countries in the region in 2012. Less than 1/5th of the countries in the region have This increased demand for imports was primarily been operating at or above their potential since driven by high rates of investment, which led to a 2011. Fig EAP.6 Imports expanded at double digit Fig EAP.7 Exporter landscape changes partly reflect- rates across the region ing the REER moves, but China retains its Import volume, % change, 3m/3m, saar lead exporter position despite renminbi 60 appreciation Export volume, % change, 3m/3m, saar 50 36 40 30 12 20 10 -12 0 -10 -36 -20 -30 -40 -60 Jul '12 Oct '12 Jan '13 Apr '13 -50 Jul '12 Oct '12 Jan '13 Apr '13 China Japan Indonesia China Philippines Indonesia East Asia (excl. China) Thailand Philippines East Asia (excl. China) Japan Source: World Bank; Datastream. Source: World Bank; Datastream. 122 GLOBAL ECONOMIC PROSPECTS | June 2013 East Asia and the Pacific Annex Strong growth in the last part of 2012 with the earlier sharp adjustments from a peak level of 10.1 percent of GDP in 2007. has contributed to some overheating pressures in a number of countries in Along the region’s smaller economies, Mongolia’s current account deficit expanded the region further reaching about 1/3rd of the country's GDP reflecting both weaker commodity The overheating pressures manifested themselves prices and increased investment (with high in growing current account deficits (as domestic import content) in the mining sector. Lao and supply was unable to meet rapidly rising demand), Cambodia continued to record large current in rising inflation, asset price pressures and high account deficits (16 percent and 11.5 percent property prices depending on specific country of GDP respectively). circumstances and policy context. Inflation in the region as a whole Strong domestic demand, partly due picked up in the first quarter of 2013, to high investment rates has but at a 3.1 percent annualized pace contributed to a deterioration in remains relatively modest regional current account positions This aggregate situation masks significant This deterioration happened despite falling intra-regional variation and mainly reflects commodity prices, which should have worked in relatively modest inflation of 2.7 percent in the other direction for the majority of countries in China (3m/3m saar) versus the rest of the the region. For the ASEAN-4 countries, the region where it has climbed to 5.1 percent deterioration was particularly marked (2.2 percent (3m/3m saar) in the three months to April of GDP), although the group’s current account (figure EAP. 9). remained in surplus. In Indonesia, the quarterly inflation rate accelerated Most of this decline was due to an $26 billion, or to 9 percent (3m/3m saar) rate in the first quarter 3.0 percent of GDP adjustment in Indonesia’s reflecting capacity constraints, but also currency current account position reflecting a record trade depreciation and a rise in food prices due to trade deficit of $1.7 billion (figure EAP. 8). restrictions. Inflation has also accelerated strongly in Lao, PDR and core inflation remains high and In China, the current account surplus seem to have the headline inflation extremely volatile in Vietnam stabilized at around 2.6 percent of GDP, consistent despite a slowing of growth. Fig EAP.8 Current account positions have general- Fig EAP.9 Selected countries in the region experi- ly deteriorated especially for the com- ence price pressures modity exporters CPI, % change, 3m/3m, saar 14 USD billions USD billions 50 500 12 40 400 10 30 300 8 20 10 200 6 0 4 2007 2008 2009 2010 2011 2012 100 -10 2 0 -20 0 -30 -100 Jan '11 May '11 Sep '11 Jan '12 May '12 Sep '12 Jan '13 May '13 Malaysia Thailand Indonesia EAP (excluding China) Indonesia Lao, PDR Malaysia Philippines China (RHS) China Source: World Bank; Datastream. Source: World Bank; IMF; IFS; Datastream. 123 GLOBAL ECONOMIC PROSPECTS | June 2013 East Asia and the Pacific Annex In China, where growth has been slowing, inflation Chinese stocks and record highs reached by pressures are less of a concern and the headline some ASEAN country stocks. ASEAN inflation rate remains anchored around the central markets boomed with some markets bank’s revised 3.5 percent inflation target. However (Indonesia, Thailand, Lao, PDR and The price pressures are present in certain rapidly Philippines) advancing by 30-50 percent since growing segments of the economy, including last May (table EAP. 1). real estate. The rapid increase in stock prices combined Excess demand pressures and loose with high price-earnings ratios (between 17 and 22 still below those in high-income monetary conditions may also be countries) are raising concerns about contributing to asset price bubbles in overvaluation of stocks. In fact, the top performing East Asian developing market the region stocks (Indonesia, the Philippines and Thailand) have seen about a 7-8 percent Overall, the region’s stock market performance decline in past few weeks from this year — has been mixed. The regional stock market around mid-May — picks. composite, the MSCI EMF Asia Index, up only about 10 percent since June 2012 and Property prices continued to increase with dropped by about 2 percent in the first four the average square meter prime property months of 2013. Nevertheless, it price about two times more than the average outperformed the global emerging market per capita income in Cambodia 1, 1.3 times — benchmark indicator which registered an of that in China and about 60 percent of the overall 4 percent loss so far this year. average per capita income in Indonesia and Thailand (compared with about 10 to 30 The modest performance of the regional index percent of the average per capita income in masks diverging trends i.e. underperformance of high income and developing countries). Table EAP.1 Asian stock performance as of June 10, 2013 as of May 16, 2013 Year To Year To Value Date: 1-Year: Value Date: 1-Year: MSCI EMF Asia 651.267 -1.91% 9.70% 679.07 0.84% 10.00% Philippines Stock Exchange PSEi Index 6,875.60 19.95% 38.43% 7,310.94 27.35% 53.84% Vietnam Ho Chi Minh Stock Index / VN-Index 524.56 28.92% 25.81% 490.34 20.05% 13.21% Jakarta Stock Exchange Composite Index 4,777.37 12.00% 26.28% 5,078.68 18.40% 30.62% Stock Exchange of Thailand SET Index 1,528.55 11.81% 36.18% 1,617.89 18.32% 42.52% Laos Securities Exchange Composite Index 1,338.82 10.21% 31.87% 1,376.45 13.31% 33.35% FTSE Bursa Malaysia KLCI Index 1,787.80 7.71% 17.43% 1,766.72 5.94% 19.23% Hong Kong Hang Seng Index 21,615.09 -3.01% 17.67% 23,082.68 2.43% 24.08% Korea Stock Exchange KOSPI Index 1,932.70 -3.11% 4.75% 1,986.81 -0.51% 7.97% Shanghai Stock Exchange Composite Index 2,210.90 -2.03% -1.83% 2,251.81 -0.69% -1.57% Mongolia Stock Exchange Top 20 Index 14,998.14 -14.83% -20.45% 13,543.99 -23.09% -33.32% Tokyo Stock Exchange Tokyo Price Index TOPIX 1,111.97 30.64% 55.80% 1,245.23 46.16% 72.01% S&P 500 Index 1,642.81 16.30% 26.86% 1,654.90 16.96% 27.73% NASDAQ Composite Index 3,473.77 15.68% 23.49% 3,479.36 15.84% 23.11% Dow Jones Industrial Average 15,238.59 17.67% 24.69% 15,260.43 17.71% 24.45% Source: Bloomberg. 124 GLOBAL ECONOMIC PROSPECTS | June 2013 East Asia and the Pacific Annex Fig EAP.10 Net capital flows recovered to their Capital flows 2011 levels in nominal terms, but fell short of average levels as share of GDP observed over the past decade The improvement in global financial market Share of GDP Billions of US Dollars conditions during the second half of 2012 (see 600 8 GEP January 2013) combined with the strong 500 7 growth in the East Asia and the Pacific region attracted 6 increased capital flows to the region towards year-end. 400 Decade avarage (% of GDP) 5 Overall net flows reached $457.8 billion — about 10 percent lower than in 2011 or about 300 4 4.6 percent of regional GDP (figure EAP. 200 3 10). The composition of the net capital flows 2 to the region has changed reflecting local 100 1 conditions. Equity flows, reached about 74 0 0 percent of the total inflows to the region 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 reflecting a US$54.8 billion (about 38 percent USD billions Share of GDP (RHS) y/y reduction) decline of short-term debt Source: World Bank; Datastream. flows due to lower trade financing (table EAP.2). Gross rental yields increased to 9 percent in Indonesia 2 and 6-7 percent in the Philippines FDI inflows, which represent the bulk (more and Thailand, which is two-three times than 90 percent) of total equity inflows higher than high income and developing declined by 8.3 percent (by US$ 27.9 billion country average. in nominal terms), while net portfolio equity inflows quadrupled (from US$ 8.4 billion in 2011 to US$31 billion in 2012) recovering to their pre-2011 level in nominal terms. The Bond issuance in the region, rose Table EAP.2 Net capital flows to East Asia and the Pacific ($ billions) 2008 2009 2010 2011 2012e 2013f 2014f 2015f Capital Inflows 206.9 255.1 516.5 510.1 457.8 471.8 481.9 515.3 Private inflows, net 207.3 251.2 513.5 508.7 457.6 471.9 483.2 517.2 Equity Inflows, net 203.8 183.9 329.5 343.2 337.9 325.6 327.7 331.6 Net FDI inflows 211.3 153.7 289.7 334.9 306.9 302.9 300.3 298.2 Net portfolio equity inflows -7.6 30.2 39.8 8.4 31.0 22.7 27.4 33.4 Private creditors. Net 3.6 67.3 184.0 165.4 119.7 146.3 155.5 185.6 Bonds 1.2 8.4 20.8 18.9 35.4 39.6 33.7 29.6 Banks 17.9 -6.1 13.2 1.8 -2.4 8.1 10.3 12.3 Short-term debt flows -13.3 65.0 148.9 144.9 90.1 98.3 111.3 143.2 Other private -2.3 0.03 1.1 -0.2 -3.4 0.3 0.2 0.5 Official inflows, net -0.4 3.9 3.0 1.4 0.2 -0.1 -1.3 -1.9 World Bank 1.2 2.2 2.7 0.9 0.3 IMF -0.05 0.1 -0.02 -0.03 -0.2 Other official -1.5 1.6 0.3 0.6 0.1 Source: The World Bank Note : e = estimate, f = forecast 125 GLOBAL ECONOMIC PROSPECTS | June 2013 East Asia and the Pacific Annex insignificantly to $35.4 billion in 2012 (a 16.5 over-quarter saar, from 8.7 percent in percent increase) from what was a robust 2012Q4. In Indonesia, GDP expanded at an pace of issuance ($18.9 billion) in 2011. estimated 5.3 percent (q/q saar) in the first quarter of 2013, after a brisk 6.9 percent increase in 2012Q4 (figure EAP. 11). Economic outlook Regional industrial production activity also slowed to 6.0 percent (q/q, saar) in the first quarter, reflecting modest slowdown in China and a much sharper correction among ASEAN economies. While signs of overheating appeared Prospects for the region going in several economies in 2012, the forward point to a modest pace of expansion has eased in acceleration in activity during the rest 2013Q1 reflecting fiscal tightening, of 2013, but annual growth is and slow recovery of external projected to be lower than in 2012 demand Forward looking indicators suggest positive and Output growth slowed in China and in the other broadly-based, if somewhat weaker, growth going fast growing ASEAN-4 economies, particularly in forward. For instance, Purchasing Managers’ Malaysia and Thailand following a sharp Indexes (PMI) for all countries in the region acceleration in the second half of 2012. In recovered above the 50 threshold in April, but Malaysia, first quarter GDP growth came at a remain volatile showing some recent strengthening negative 2.5 percent saar, slowing from 8 percent for Indonesia and weakening for Vietnam (figure rate in 2012Q4 mainly reflecting fiscal EAP. 12). consolidation but also negative contribution from net-exports. Thailand’s output has contracted The projected pick up in activity will nevertheless sharply in Q12013 following a revised 11.7 percent deliver somewhat slower growth in the region with quarter-on-quarter saar growth in 2012Q4. China estimated to growth at 7.7 percent in 2013 slightly below a 7.8 percent rate of 2012. In China and Indonesia, the slowing was less pronounced. China’s first quarter GDP This will be combined with some quite growth declined to a 6.6 percent quarter- significant easing in ASEAN economies (5.7 Fig EAP.11 Quarterly growth eased in Malaysia and FigEAP.12 East Asia & Pacific PMIs signal eco- Thailand nomic expansion Difusion index, greater than 50 indicates expansion GDP growth, q/q , saar 60 55 45 55 35 25 50 15 5 50 -5 08Q1 09Q1 10Q1 11Q1 12Q1 13Q1 45 -15 -25 40 -35 May '10 Sep '10 Jan '11 May '11 Sep '11 Jan '12 May '12 Sep '12 Jan '13 May '13 -45 Malaysia Thailand China Japan Vietnam South Korea Indonesia Indonesia China Source: World Bank; Datastream. Source: World Bank; Datastream. 126 GLOBAL ECONOMIC PROSPECTS | June 2013 East Asia and the Pacific Annex percent in 2013 versus 6.2 percent in 2012) policy in response to inflationary and asset price (table EAP.3). Output growth pattern in pressures and growing debt levels, but also weak ASEAN reflects a combination of continued recovery of global demand, including a projected strong growth in Indonesia and certain easing decline in demand for imports from Japan due to in Malaysia, Thailand and the Philippines yen depreciation. from record high levels achieved in 2012. Monetary conditions remain relatively loose with Regional growth is projected to the majority of the central banks on hold or easing, including recent rate cuts in Mongolia, Vietnam recover to 7.5 percent in 2014 and and Thailand. 2015 on improved external Cambodia, Lao, Mongolia and Myanmar are conditions, but the dramatic change projected to continue to deliver strong growth in Japanese policy introduces benefiting from a dynamic economic transformation, although the prospects for the region’s small(er) significant uncertainty into the economies are mixed. forecast for developing East Asian Output gains from the completion of a new and the Pacific region gold mine in Lao PDR have already been realized and so growth is projected to slow. The projected slowdown of economic growth in In Cambodia, a rebound in global trade these three countries is reflecting capacity should support further improvements in constraints and an expected fiscal tightening of garment production and exports. Table EAP.3 East Asia and Pacific forecast summary (annual percent change unless indicated otherwise) Est. Forecast 00-09a 2010 2011 2012 2013 2014 2015 b GDP at market prices 8.1 9.6 8.3 7.5 7.3 7.5 7.5 (Sub -region totals-- countries with full NIA + BOP data) c GDP at market prices c 8.1 9.7 8.4 7.5 7.3 7.6 7.5 GDP per capita (units in US$) 7.3 8.9 7.6 6.8 6.7 6.9 6.9 PPP GDP 8.0 9.6 8.3 7.5 7.3 7.5 7.5 Private consumption 6.0 7.3 8.0 8.2 8.0 8.0 7.9 Public consumption 7.4 9.7 9.0 8.4 8.2 8.1 7.5 Fixed investment 10.8 11.4 8.8 8.2 6.8 6.4 5.6 Exports, GNFS d 10.3 23.7 8.6 4.4 8.7 9.5 10.1 Imports, GNFS d 9.6 19.5 6.2 5.4 8.4 8.9 9.3 Net exports, contribution to growth 0.8 2.7 1.5 0.0 0.8 1.0 1.1 Current account bal/GDP (%) 4.6 3.8 2.7 2.2 2.0 1.9 1.9 GDP deflator (median, LCU) 5.4 5.3 5.6 4.4 3.9 5.1 4.0 Fiscal balance/GDP (%) -1.8 -1.6 -1.4 -1.9 -2.3 -2.5 -2.4 Memo items: GDP East Asia excluding China 4.4 6.9 4.6 6.2 5.7 5.9 6.0 China 9.4 10.4 9.3 7.8 7.7 8.0 7.9 Indonesia 4.6 6.2 6.5 6.2 6.2 6.5 6.2 Thailand 3.5 7.8 0.1 6.5 5.0 5.0 5.5 Source : World Bank. a. Growth rates over intervals are compound weighted averages; average growth contributions, ratios and deflators are calculated as simple averages of the annual weighted averages for the region. b. GDP at market prices and expenditure components are measured in constant 2005 U.S. dollars. c. Sub-region aggregate excludes Fiji, Myanmar and Timor-Leste, for which data limitations prevent the forecasting of GDP components or Balance of Payments details. d. Exports and imports of goods and non-factor services (GNFS). 127 GLOBAL ECONOMIC PROSPECTS | June 2013 East Asia and the Pacific Annex Table EAP.4 East Asia and Pacific country forecasts Est. Forecast 00-09a 2010 2011 2012 2013 2014 2015 Cambodia GDP at market prices (% annual growth) b 7.2 6.0 7.1 7.3 7.0 7.0 6.2 Current account bal/GDP (%) -10.7 -10.1 -8.7 -11.5 -10.1 -9.3 -9.0 China GDP at market prices (% annual growth) b 9.4 10.4 9.3 7.8 7.7 8.0 7.9 Current account bal/GDP (%) 5.0 4.1 2.8 2.6 2.5 2.5 2.4 Fiji GDP at market prices (% annual growth) b 1.3 0.1 1.9 2.1 2.2 2.3 2.3 Current account bal/GDP (%) -7.7 -7.7 -7.8 -7.5 -22.5 -7.8 -7.5 Indonesia GDP at market prices (% annual growth) b 4.6 6.2 6.5 6.2 6.2 6.5 6.2 Current account bal/GDP (%) 2.5 0.7 0.2 -2.4 -2.5 -1.9 -1.9 Lao PDR GDP at market prices (% annual growth) b 6.2 8.5 8.0 8.3 8.0 7.7 8.3 Current account bal/GDP (%) -2.5 -6.4 -10.6 -16.0 -21.8 -20.9 -20.2 Malaysia GDP at market prices (% annual growth) b 3.9 7.2 5.1 5.6 5.1 5.1 5.3 Current account bal/GDP (%) 12.6 11.1 11.1 7.7 4.6 3.1 2.4 Mongolia GDP at market prices (% annual growth) b 5.8 6.4 17.5 12.3 13.0 11.5 9.9 Current account bal/GDP (%) -6.3 -14.3 -30.3 -30.5 -22.8 -19.4 -19.4 Myanmar GDP at market prices (% annual growth) b 9.7 5.3 5.5 6.3 6.5 6.6 6.7 Current account bal/GDP (%) -0.7 -1.3 -2.6 -4.1 -4.2 -4.8 -5.1 Papua New Guinea c GDP at market prices (% annual growth) b 3.0 7.6 9.0 9.0 4.0 7.4 20.0 Current account bal/GDP (%) -0.1 -25.6 -36.4 -28.4 -20.2 -13.0 9.0 Philippines GDP at market prices (% annual growth) b 4.0 7.6 3.6 6.8 6.2 6.4 6.4 Current account bal/GDP (%) 1.5 4.5 3.1 2.8 2.8 2.7 2.6 Solomon Islands GDP at market prices (% annual growth) b 4.3 7.8 10.5 4.8 4.0 4.0 5.1 Current account bal/GDP (%) -19.8 -30.8 -6.0 -5.8 -10.6 -8.7 -8.5 Thailand GDP at market prices (% annual growth) b 3.5 7.8 0.1 6.5 5.0 5.0 5.5 Current account bal/GDP (%) 3.3 3.1 1.7 0.7 0.0 0.0 0.1 Timor-Leste GDP at market prices (% annual growth) b 3.3 9.5 10.6 10.6 10.4 10.2 9.0 Current account bal/GDP (%) 18.4 48.1 55.0 43.5 36.2 25.0 24.0 Vietnam GDP at market prices (% annual growth) b 6.6 6.4 6.2 5.2 5.3 5.4 5.4 Current account bal/GDP (%) -8.8 -3.8 0.2 5.9 5.6 3.3 1.0 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. Samoa; Tuvalu; Kiribati; Democratic People's Republic of Korea; Marshall Islands; Micronesia, Federated States; N. Mariana Islands; Palau; and Tonga are not forecast owing to data limitations. a. GDP growth rates over intervals are compound average; current account balance shares are simple averages over the period. b. GDP measured in constant 2005 U.S. dollars. c. The start of production at Papua-New-Guinea-Liquefied Natural Gas (PNG-LNG) is expected to boost PNG's GDP growth to 20 percent and shift the current account to a 9 percent surplus in 2015. Source: World Bank. 128 GLOBAL ECONOMIC PROSPECTS | June 2013 East Asia and the Pacific Annex Projections for Mongolia have been revised economies through supply chains, especially downwards, due to delays in major mining projects in generally weak demand environment. and lower commodity prices. In Myanmar, the reform momentum and continued improvements Those negative impacts are expected to be in the international environment are projected to balanced by potential gains through supplies drive growth gradually toward 6.5 percent in of parts and components. The economies, 2013/14 and 6.6 percent in 2014/15. such as the Philippines, and Thailand that are The outlook for the Pacific Islands is positive, but important suppliers of parts and components given the small size of many economies, the to Japan in regional production networks, precise shape of the forecast will depend on the could benefit from gains by Japanese timing with which ongoing and planned investment exporters in global markets. In addition, projects in the extractive sector come on stream increased demand for a number of key (table EAP.4). regional export commodities (e.g. gas from Malaysia) despite the overall deceleration of Japan’s import demand, are also expected to Countries in East Asia and the Pacific benefit the region. Additional benefits are region which have close direct trade expected through competitive imports, which would allow the regional firms and businesses ties with Japan have seen their to benefit from the ability to import Japanese currencies hit harder by yen’s technology, machinery and equipment at lower costs. depreciation than other developing economies If sustained over time, the depreciation of the yen could eventually alter the dynamics of trade in the region. It would help cut the Thailand experienced a sharp 13.4 percent region‘s trade deficits even further, especially real-effective appreciation of its currency between the EAP region and Japan, as Japan since July 2012 as the yen depreciated in real is EAP‘s largest source of imports and fourth effective terms by over 22 percent (figure largest export destination. In the medium- EAP. 13). In the short-term, exchange rate term and assuming that Japan’s growth depreciation is likely to hurt the exports of accelerates and imports eventually pick-up, countries that compete in the same kinds of trade partners in the region would benefit markets as Japan (South Korea, Singapore, from an increase in Japan‘s demand for Taiwan, China) and those linked to those regional imports. In general, Japan’s recovery as well as Fig EAP.13 East Asia & Pacific regional REER recovery of its exports will depend on depth moves Real Effective exchange rate index, July 2011=100 of the structural reforms and its ability to 120 boost productivity (figure EAP. 14). Overall, 115 as competitive pressures increase, the 110 developing economies in the East Asia and 105 the Pacific region should continue to focus 100 on financial stability and accelerate structural 95 reforms to alter their productivity and 90 competitiveness. 85 80 Less certain is the likely impact of Japanese 75 quantitative easing on Japanese capital flows 70 toward regional economies. For countries Jul '12 Sep '12 Nov '12 Jan '13 Mar '13 May '13 already operating at close to full capacity, China Japan Thailand Malaysia Indonesia additional capital inflows can be expected to increase upward pressure on currencies, or if Source: World Bank; Datastream. monetary authorities intervene upward 129 GLOBAL ECONOMIC PROSPECTS | June 2013 East Asia and the Pacific Annex may encourage further risk taking and credit Fig EAP.14 Selected country shares of global growth. Rising debt levels and asset prices in the exports over the past two decades emerging East Asia & Pacific economies are Export market share already the growing source of vulnerability (see 14 discussion on page 4-5). Should these trends 12 intensify, a disorderly unwinding of these pressures, including perhaps a domestic banking-sector crisis, 10 cannot be ruled out, potentially. In ordered to 8 reduce the likelihood of such an outturn fiscal policy likely needs to be tightened already in 2013 6 and monetary policy focus should be shifted to 4 financial stability and tail risk considerations. In the medium-term, if Japan manages to escape its 2 1991M01 1998M05 2005M09 2013M01 deflation and rekindle growth with the measures taken, all developing economies in the region South Korea Japan would benefit through various channels, including USA Germany through an increase in Japan’s demand for imports Source: World Bank; Datastream. (see also EAP Economic Update and Main text). pressure on money supply, credit and A strong supply increase in extractive commodity inflation. How large these effects may be will markets following a quintupling in capital depend on the extent to which outward flows expenditures globally has already put downward increase and the extent to which developing pressure on prices. If these were to intensify, countries are destinations for these flows (see commodity exporting countries, including discussion in main text and for more detail in Indonesia, Malaysia, Mongolia, PNG could see the exchange rate annex). government revenues and current account balances, which are in some cases already very high (e.g. more than 30 percent of GDP in Mongolia) Risks and come under significant pressure — even as lower prices would benefit importers. In such a lower price scenario, if investment projects are cancelled vulnerabilities and anticipated increases in output not materialized, countries could find themselves in financial difficulty. External debt is especially high in Mongolia (more than 130 percent of GDP), and in Papua New Guinea (about 100 percent of Uncertainties related to economic recovery in high GDP). income countries have subsided, but are still present. Regional risks have gained importance. The regional outlook remains sensitive to outturns Policy in China, with the main risk stemming from the possibility of an abrupt decline in China’s high investment rates (see World Bank, 2013a for more). recommendations In addition, as discussed above, there are considerable uncertainties surrounding the impact of Japan’s shift in macroeconomic policy. Overall, Ensuring strong and stable consumption through weak yen could affect the dynamics of trade in raising household incomes to sustain growth is a manufactures in the region in the short-term. By priority in China along with the reorientation of extending periods of low interest rates and investments toward agriculture, human capital and boosting capital flows, Japanese QE could also services and increased efficiency of investment. contribute to further pressures on asset prices and The process of rebalancing also involves a gradual 130 GLOBAL ECONOMIC PROSPECTS | June 2013 East Asia and the Pacific Annex shift in the structure of China’s debt toward a Over the medium-term, the East Asia & Pacific reduction of corporate sector debt, including economies will benefit from continued efforts to through reduction of non-performing assets deepen structural reforms and to keep their global accumulated during the years of investment-led competitive edge in the context of intensifying growth. global and regional competition. Countries need to place greater emphasis on ensuring that market Policymakers in fast-growing-close to (or above) forces are given sway to incite investment flows full capacity ASEAN economies where policies into the most productive assets, including human have been relaxed in recent years, including capital which will over time boost potential output. Indonesia, Malaysia, Thailand and the Philippines should be focusing their actions on avoiding Rebuilding buffers to deal with future shocks, overheating and rebuilding fiscal and monetary including with commodity shocks remains a buffers which will be challenging in a continued priority in Lao PDR, Vietnam, the Pacific islands weak external demand environment. Slower growth and Mongolia where gradual global and regional in conditions of overheating may be desirable. integration has benefitted growth, but also made these economies more vulnerable to global and However, while there are clear costs associated regional business cycles and commodity price with overheating, especially when fast growth has fluctuations. The effectiveness of the on-going been accompanied by rapid credit expansion, there economic transformation in Myanmar, establishing are equally clear opportunity costs associated with a track record of reforms under the WTO prematurely slowing an economy and potentially accession framework by Lao, and progress in forgoing fast growth and rising incomes. Countries implementing market oriented reforms in that are too quick to respond to changes in the Cambodia and Vietnam are also important global environment, risk the of inadvertently elements of ensuring sustainable growth. running pro-cyclical policies. A balanced approach in implementing policy tightening is recommended. Macroeconomic policy needs to be more closely driven by local economic conditions, including the level of activity, building on the previous efforts toward de-coupling the economies from external demand. 131 GLOBAL ECONOMIC PROSPECTS | June 2013 East Asia and the Pacific Annex Notes: 1 Footnote 1 (Price per square meter / GDP per capita)*100 2. The gross annual rental income, expressed as a percentage of property purchase price. This is what a landlord can expect as return on his investment before taxes, maintenance fees and other costs. References _____World Bank, 2013a, January 2013 Global Economic Prospects _____World Bank East Asia and the Pacific regional Economic Update, April 2013 _____World Bank, China 2030 study, 2012 _____World Bank, Regional Economic Updates for Indonesia and for The Philippines), 2013 _____IMF, World Economic Outlook, April, 2013 132 GLOBAL ECONOMIC PROSPECTS | June 2013 Europe and Central Asia Annex Annex GLOBAL ECONOMIC June PROSPECTS 2013 EUROPE and CENTRAL ASIA REGION 133 GLOBAL ECONOMIC PROSPECTS | June 2013 Europe and Central Asia Annex Overview unemployment in several countries, particularly in developing Europe. Growth in the two biggest economies in the region—Russia and Turkey—has been held back by supply bottlenecks. While growth in Russia is projected to slow to 2.3 percent The Europe and Central Asia region suffered a in 2013, from 3.4 percent in 2012, growth in significant economic slowdown in 2012 as the Turkey is expected to increase to 3.6 percent from region faced significant headwinds, including weak 2.2 percent, supported by relatively loose external demand, deleveraging by European banks, macroeconomic policies. As a result, Turkey’s poor harvest and inflationary pressures. As a result, current account deficit is expected to widen further growth fell to 2.7 percent in 2012, compared with to 6.9 percent in 2013. 5.6 percent in 2011 with a sharp slowdown in developing Europe and less severe adjustments Going forward, growth in the region should firm among Commonwealth of Independent States. to 3.8 percent in 2014 and 4.2 percent in 2015 as the fiscal and financial restructuring that has been a External conditions have significantly improved in drag on growth within the region and in the Euro 2013 with calmer financial markets and the Area loses intensity. Several domestic factors, recovery in global trade. As a result, capital flows to including fiscal and monetary policies and policies the region have increased with the sharpest addressing structural issues, are expected to improvement in cross-border syndicated bank generate differentiation in economic performance lending. The pick-up in bank-lending partly reflects among countries in the region. the moderation in the pace of Euro Area bank deleveraging and going forward, this should ease Risks and vulnerabilities: While overall the supply-side credit constraints. In addition, risks are less pronounced than a year ago, the several sovereigns and corporates successfully region’s economic outlook is still subject to tapped international bond markets. Similarly, various challenges. First, although the risk of following the sharp decline in 2012, FDI in the a serious Euro Area crisis has diminished, region is expected to rebound this year. Despite the outturns in developing Europe will remain recovery in global trade, the region’s export sensitive to the speed of the recovery in the performance has been mixed. Export growth has region’s high -income neighbors. Another risk been weak in Russia and Latvia but considerably is related with commodity prices. The growing strong in Romania, Lithuania and Turkey. Several supply and demand substitution brought on by countries have benefited from the increased high prices have recently weakened commodity diversification in terms of export destination in prices. A sharper decline in commodity prices recent years. would have potentially important adverse consequences for commodity exporting countries Outlook for 2013-2015: GDP growth in in the region. Europe and Central Asia is projected to rise only slightly in 2013 to 2.8 percent. While Developments in the global financial markets growth in the region will be supported by better remain important for the region. A sudden harvest and improved external conditions, the reversal of global financial conditions — due rebound will be constrained by the weak carry-over to unexpected developments in Euro-area or from last year, ongoing fiscal adjustments, and high in the United States—might affect significantly those countries with high external financing Box ECA.1 Country coverage needs (current account deficits and amortization of external debt). In the longer For the purpose of this note, the Europe and Central Asia term, the cost of capital is likely to rise as region includes 21 low– and middle-income countries with income of less than $12,276 GNI per capita in high-income countries step back from 2010. These countries are listed in the table ECA.3 at the quantitative easing. Initially this could expose end of this note. This classification excludes Croatia, the vulnerabilities in the region that have built up Czech Republic, Estonia, Hungary, Poland, Slovakia, during periods of sustained low borrowing and Slovenia. The list of countries for the region may dif- costs. In the long-term, it will reduce growth, fer from those contained in other World Bank documents. capital flows and FDI to the region. 135 GLOBAL ECONOMIC PROSPECTS | June 2013 Europe and Central Asia Annex Recent Developments Bulgaria and Serbia, following the contraction during the second half of 2012. The acceleration in economic activity in these countries was more than offsetting a 10.6 percent decline in Ukraine. After the significant headwinds of the The USD value of imports in the region accelerated sharply during the first quarter, rising at past two years, there are signs of a a 25.2 percent annualized pace (3m/3m saar) in rebound during the first quarter of this March suggesting significant firming of domestic demand. The rebound was particularly evident in year Romania where the USD value of imports grew at a 3 percent pace (3m/3m saar) after a strong contractions in Hit hard by the weakness in high-income Europe, 2012Q4. That said there has been some easing in import the Europe and Central Asia region suffered a value growth in Latvia during the same time. significant economic slowdown in 2012 (box ECA.1). The region’s growth fell to 2.7 percent in While remaining above the expansion/ contraction 2012 compared with 5.6 percent the year before. level of 50, business confidence indicators such as The slowdown was particularly severe in Eastern Markit’s Purchasing Manager Index (PMI) suggest European countries, whose GDP grew less than 1 a slight easing in economic activity for Russia and percent and actually declined in the case of Serbia. Turkey in April. While the adjustment among Commonwealth of Independent States (CIS) countries was less severe, they also grew less quickly in 2012 than in 2011. Despite the recent pick-up in global trade, the region’s exports have The early months of 2013 suggest that economic activity may have bottomed out for the Eastern contracted so far in 2013 European countries. While first quarter GDP data is available for only a few countries, they point to a As discussed in the main text, much of volatility rebound in economic activity. In Lithuania, for that characterized the period from 2008 until June example, the real GDP grew 3.5 percent (y/y saar) 2012 appears to have eased, and after declining in 2013Q1, up from 3 percent in the 2012Q4. The sharply in mid-2012 global trade is recovering, acceleration was boosted by strong export growth driven by developing countries import demand (see at 14.9 percent (3m/3m saar), which helped offset trade annex). Even in the Euro Area, import demand slowing retail sales. In Serbia, GDP growth growth has turned positive during the first few rebounded strongly to about 1.7 percent (y/y saar) months of 2013. in the first quarter, mainly due to Fiat production, exports and base effects. Ukraine’s growth Fig ECA.1 Rebound in economic activity in most remained negative at -0.7 percent (y/y saar), but the economies pace of decline was significantly slower than the 2.5 IP volume growth (3m/3m saar) 30 percent (y/y saar) fall in the final quarter of 2012, suggesting that output picked up in the fourth quarter. 20 Serbia Higher frequency data for industrial production Turkey 10 also point to strengthening activity in the region, Russia ECA with annualized growth of 2.4 percent rate in 0 2013Q1 (figure ECA.1). Industrial output grew particularly strongly in Serbia (rising at a 19 percent -10 annualized pace). Other countries also reported Kazakhstan Ukraine positive growth including Romania (8.1 percent, -20 3m/3m saar), Turkey (3.8 percent), Kazakhstan (3.4 percent), Bulgaria (3 percent), Lithuania (1.8 -30 percent) and Russia (1.4 percent). The strong Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13 rebound mostly reflects base effects, especially for Source: World Bank; Datastream; Haver. 136 GLOBAL ECONOMIC PROSPECTS | June 2013 Europe and Central Asia Annex The recovery in import demand, particularly Iran (as payment for natural gas import) resumed in developing-country import demand has led a February but at a much slower pace than in 2012.1 recovery in high-income and developing-country exports (see main text), but these benefits have not All three countries benefited from their rising sales been shared by developing countries in Europe & to countries outside high-income Europe. In fact, Central Asia (figure ECA.2). In contrast, the USD many countries in the region have managed to value of their export contracted at a 0.4 percent diversify their export destinations in recent years, (3m/3m saar) annualized rate in the three-months which should benefit the export performance of ending in March, with weak foreign sales in Russia the region in coming months (see box ECA.2). and Latvia the main explanation. A 11.3 percent annualized decline in the value of Russian exports mainly reflected weaker commodities sales, Improved access to international debt particularly natural gas, which were hit by a slump markets… in the European market where Russian natural gas is facing newfound competition. Global financial markets have been significantly calmer since July 2012, including during the first For several other countries, the USD value of four months of 2013 (see the Finance Annex for exports did surge, by an annualized 14.5 percent in details). Market risk perceptions have remained the case of Romania and 9.4 percent in the case of relatively stable, despite continued economic Lithuania. The growth in Romania's exports weakness in the Euro Area, political gridlock in reflected steady improvement in the share of the Italy that has stalled reforms, and the Cyprus crisis car parts industry and transport equipment in total that culminated in the imposition of capital foreign sales. Lithuania’s exports were supported controls—a first in the Euro Area. by robust oil exports—the country's biggest traded commodity, while exports in manufacturing also In this improved environment, gross cross- picked up due to improved competitiveness border capital flows (international bond following a large devaluation. issuance, cross-border syndicated bank loans and equity issuance) to the Europe and Similarly, Turkey’s exports bounced back in March Central Asia region strengthened in the by 4.8 percent annualized rate after declining second half of 2012 and into 2013, with sharply earlier in the year. The earlier sharp inflows in during the first four months of contraction was because of a decline in gold 2013 reaching $88.5 billion, more than double exports (and prices) with no sale to Iran in January their year earlier levels of $37.4 billion (figure and weakening exports to Europe—mainly to ECA.3). While equity issuance remained Germany, UK and Italy. That said gold exports to subdued, both bank lending and bond issuance Fig ECA.2 Export from the region slowed exports Fig ECA.3 Improved access to international debt markets Value growth (3m/3m saar) 80 $ Billions 30 60 25 ECA exports 40 20 Bank lending Equity issuance 20 Developing country imports Bond issuance 15 0 10 High-income country imports -20 High-income Europe imports 5 -40 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 0 Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13 Source: World Bank; Datastream; Haver. Source: World Bank; Dealogic. 137 GLOBAL ECONOMIC PROSPECTS | June 2013 Europe and Central Asia Annex Box ECA.2 Increased diversification of exports Trade has been a central mechanism through which the high-income country debt crisis has affected developing countries in the Europe and Central Asia region. High -income European countries are particularly important export destinations for Ro- mania, Lithuania and Latvia, with Albania, Macedonia FYR, and Bulgaria having close trade ties with some of the hardest -hit high-spread Euro Area economies. Several countries in the region have managed to diversify their export destinations in recent years. As discussed in the main text, South-South trade has grown rapidly since 2000, although Europe and Central Asia region exports to other developing regions has grown at 16 percent per annum on average slightly less rapidly than the 19 percent for all developing countries. As a result, the share of exports to other developing -countries in total exports of the region rose to 39.8 percent in 2011 from 31 percent in 2000 (box figure). Today China is the second largest export destination for Russia after the European Union. Turkey has successfully diversi- fied its export markets over the last two years, exporting more to Middle Eastern economies including Iran, Iraq and the Unit- ed Arab Emirates, with Iraq share in Turkey’s exports having increased to 9 percent so far in 2013 from 2 percent in 2004. Similarly, according to estimates in 2013, Romanian exports to other developing countries including to Mexico (mostly tires, carpets, steel products, optical instruments, accessories), Brazil (cars and car parts, rolling stock, oil equipment) and Turkey has been growing rapidly. Romania’s exports to Russia increased at a 42.8 percent annualized pace and to Ukraine by more than 10 percent in the first two months of the year. Similarly, both Latvia and Lithuania have been increasing is exports to Russia and other CIS economies. Turkey continues to be a major destination for exports from the South Caucus region as is China for countries in Central Asia. Box figure ECA 1.1 Share of exports (%) 30 1996 2003 2011 25 20 15 10 5 0 Within ECA Other developing countries Source: World Bank; Comtrade. rebounded. Despite these improvements, inflows into Bond flows to the region were also robust. Several the region remain low relative to pre-crisis flows. sovereigns and corporates successfully tapped international bond markets taking advantage of Syndicated bank lending to the region, at $37 strong appetite for higher-yield developing-country billion, showed the sharpest improvement, debt, encouraged by low yields in high-income increasing three folds from its level a year- countries because of quantitative easing. For ago. Even excluding the mega loans to the example, despite the downgrading of Ukraine’s Russian company Rosnefte Gaz for their sovereign credit rating by Moody’s and S&P in large acquisition in 2012, bank lending to the December 2012, the government and several region was still more than twice as high as in companies issued $5.7 billion of combined during the first four months of 2012. The international bonds. Regular regional emitters rebound in syndicated bank lending reflected included Russia ($26 billion), Turkey ($8.7 billion), a global phenomenon as the acute phase of Kazakhstan ($3.5 billion) and Romania ($1.5 Euro Area deleveraging appears to have billion), while infrequent issuers such as Azerbaijan passed 2 . The moderation in its pace has been ($1 billion), and Serbia ($1.5 billion) also took easing lending conditions in the region (see advantage of conditions. Improved access to the discussion later). international bond markets is particularly important 138 GLOBAL ECONOMIC PROSPECTS | June 2013 Europe and Central Asia Annex for countries with large external financing needs investment flows from high-income European (current account deficit and amortization of debt). economies— traditionally the region’s main source This year, this includes Ukraine with financing of FDI. In a process somewhat akin to the earlier needs totaling 42.6 percent of GDP, Bulgaria (39.5 episode of banking-sector deleveraging, percent of GDP), Turkey (30.8 percent of GDP) multinationals from Greece, and the Netherlands and Romania (27.1 percent of GDP). repatriated substantial sums from their foreign holdings, including investments in the region. In …with portfolio investments coming addition, in contrast to other years, reinvested earnings were limited due to weak profitability and with their challenges intercompany loans slowed down sharply. Several countries in the region also received large Serbia experienced the sharpest (86 percent) portfolio investment flows (foreign investment in decline in FDI inflows, followed by Macedonia, local stock markets and local currency debt FYR (71 percent), Moldova (43 percent), Lithuania securities). During the first three months of this (32 percent) and Turkey (22 percent). In contrast, year, flows to local bond markets were particularly FDI increased in oil-exporting economies strong in Turkey ($7.3 billion), Romania ($4.7 Azerbaijan (18.5 percent) and remained high at its billion), and Serbia ($1.9 billion) putting upward 2011 level in Kazakhstan. pressure on their currencies. As these flows tend to be volatile, managing the fluctuations can be quite Limited high frequency data suggest a mixed challenging, and to the extent that countries rely on picture so far in 2013. While FDI inflows to Russia these flows to finance current account deficits they surged in the first quarter because of a special constitute a source of vulnerability. acquisition deal (for $15 billion) and methodological changes, flows to other countries After the sharp decline in 2012, FDI have been weak.3 Nevertheless, FDI inflows are projected to rebound in the second half of the year inflows to Europe and Central Asia for other economies as well. Several countries are expected to rebound this year including Romania, and Serbia might accelerate privatization efforts this year. With the sharp increase in FDI to Russia, FDI inflows to the Foreign direct investment (FDI) inflows to Europe region are forecast to increase by 20 percent— & Central Asia region totaled only $109 billion in reaching $132 billion in 2013. In 2014, FDI flows 2012, a 9 percent decline compared with 2011 to the region is expected to slow down mainly on (figure ECA.4). The sharp fall in FDI mostly the account of Russia following an adjustment for reflects a 25 percent contraction in direct the 2013 mega deal. Excluding Russia, FDI flows are expected to rebound by 6 percent in the region in 2014. The recovery in FDI, may be particularly Fig ECA.4 FDI inflows are estimated to have risen important for countries such as Georgia and in 2013Q1 Albania, where FDI accounts more than 30 percent Quarterly inflows ($ billions) 35 of gross domestic capital formation. 30 With strong bond flows, rebounds in bank lending 25 and FDI flows, net private capital flows (debt flows net of disbursements and equity flows net of 20 disinvestments) to the Europe and Central Asia 15 region are forecast to rebound to $255 billion (6.5 percent of the region’s GDP) in 2013 from an 10 estimated $208 billion (5.7 percent) in 2012 (table ECA.1). Going forward, assuming there is no 5 major set-back in financial markets confidence, net 0 capital flows to the region are expected to 2010 2011 2012 2013 strengthen along with global growth to reach $279 Source: World Bank; Haver. billion in 2015—around 5.9 percent of region’s 139 GLOBAL ECONOMIC PROSPECTS | June 2013 Europe and Central Asia Annex GDP. By 2015, all flows are expected to increase, developing Europe and Central Asia. Remittance with bond issuance expected to level off slightly as flows to the region are estimated to have fallen by bank-lending picks up the pace, with the latter 3.9 percent in US dollar terms to about $40 billion supported by increased South-South flows. (1.1 percent of GDP) in 2012 (table ECA.1). The fall partly reflects the Euro depreciation against the Supply-side credit constraints in the dollar as remittances declined by a smaller 2 percent in Euro terms. Remittances flows declined region have eased along with in most countries in the region in USD terms improved global financial conditions (Migration and Development Brief 20). The exceptions were Tajikistan, Kyrgyz Republic, Moldova and Armenia, where flows increased by As discussed in the January edition of GEP 2013, 28 percent, 14 percent, 10 percent and 8.5 percent, credit growth in the region was very weak during respectively as flows were supported by strong the second half of 2012. Real domestic credit growth in Russia and high oil prices (Migration and growth has been negative for Latvia and Lithuania Development Brief 17). since early 2009, and sharply declined in Albania, Bulgaria, Macedonia FYR, and Romania. The The weakness of the flows in the rest of the region intense deleveraging by European banks over the mainly reflects that the preponderance of their last two years has contributed to the tight credit migrants are in Western Europe, where economic conditions and weak credit growth, especially in growth has been weak and unemployment rising. countries with strong European bank presence Remittances to Romania have gyrated in recent (BIS December 2012). The recent pick up in years. They surged after accession into the EU in international bank flows to the region, likely signals 2004 but dropped significantly after the crisis in the end to the most intense phase of Euro Area 2008, partly due to increasing numbers of migrants deleveraging. While expected to continue, the returning home. Still, migrants are showing slower pace of deleveraging should ease the supply resilience in the face of these dampening effects, side constraints when demand for loans picks up and are nearly sustaining remittances in euro terms. with the economic activity. As economic conditions improve in the European Recent data show a modest increase in real credit in Union, officially recorded remittances to the region Bulgaria (0.5 percent year-over-year in February) are expected to keep up with the region’s nominal and Macedonia (2.2 percent) after contacting in GDP growth in 2013-2015, reaching $52 billion 2012, and less rapid declines in Latvia and (1.1 percent of GDP) in 2015. Despite the Lithuania. The rebound has been more robust for projected slowdown in Russia (see the discussion Turkey, where after slowing due to domestic later), still high oil price should continue to support monetary policy tightening, real credit growth rose remittance outflows. 7.8 percent in the 12 months ending February. A large part of the increase was funded by foreign loans, with Turkish banks aggressively seeking Output gaps and unemployment wholesale financing abroad. Although the credit growth (nominal annualized growth of 20 percent) represent persistent problems in is much higher than its central bank’s official target many countries with limited policy at 15 percent, the central bank has not yet acted to restrain it as inflation pressures have subsided. space Remittances flows to Europe and Since the 2008/09 and European crises, several countries in the region—particularly developing Central Asia are also expected to Europe, had to deal with declining exports, bounce back this year European bank deleveraging, and high levels of external debt. As growth rates sharply declined, unemployment soared to record levels, as banks Remittances are an importance source of foreign deleveraged and households and firms cut into currency and income for several countries in spending in an effort to repair damaged balance 140 GLOBAL ECONOMIC PROSPECTS | June 2013 Europe and Central Asia Annex Table ECA.1 Net capital and workers’ remittances flows to Europe and Central Asia* 2008 2009 2010 2011 2012e 2013f 2014f 2015f Capital Inflows (official+private) 288.0 98.5 180.9 200.1 206.2 253.9 255.0 277.6 Private inflows, net 276.0 62.9 157.3 194.6 207.9 255.2 257.2 278.8 Equity inflows, net 153.8 96.7 87.2 108.6 113.3 139.0 130.7 143.0 Net FDI inflows 169.0 90.4 88.0 118.7 108.8 132.8 121.3 131.3 Net portfolio equity inflows -15.3 6.4 -0.8 -10.1 4.5 6.2 9.4 11.7 Private creditors, net 122.2 -33.9 70.1 86.0 94.6 116.2 126.5 135.8 Bonds -18.0 2.9 21.3 13.6 34.4 46.4 38.2 30.4 Banks 151.6 -14.3 -5.8 33.2 26.7 37.2 49.4 59.7 Short-term debt flows -16.9 -34.9 45.9 24.5 23.1 25.2 29.7 40.0 Other private 5.5 12.4 8.8 14.7 10.4 7.4 9.2 5.7 Official inflows, net 12.0 35.6 23.5 5.5 -1.7 -1.3 -2.2 -1.2 World Bank 0.7 3.0 3.5 2.4 -0.1 IMF 7.0 20.5 9.4 -1.0 -5.0 Other official 4.3 12.1 10.7 4.1 3.4 Memo item: Migrant remittance inflows 37.0 38.0 39.0 40.0 43.0 47.0 52.0 Central and Eastern Europe & Turkey 19.8 18.9 16.1 16.7 Commonwealth of Independent States 17.2 19.1 22.9 23.3 Source: The World Bank Note: e = estimate, f = forecast. *The regional FDI numb ers have b een revised historically since some countries including Russia have started to report their b alance of payment data under BMP6 methodology. sheets. Fiscal conditions deteriorated throughout sector balance sheets have constrained the scope of the region, with severe consequences in a few monetary policies to stimulate growth. countries where public debt levels had risen during the boom years. On the contrary, Russia, Turkey and Kazakhstan remain among the exceptions in the region as their The good news is that growth rate for many of the output gaps are relatively small (or positive). Russia hardest-hit countries have recovered to levels close to their underlying potential output. Unfortunately, Fig ECA.5 Developing Europe grows at potential rate but growth so far has not been strong enough to make output gap remains significant inroads into existing unemployment and 12 Annual growth of potential and actual GDP (%), spare capacity in many countries (figure ECA.5). Output Gap % of GDP Several countries including Romania, Ukraine and 10 Output Gap Bulgaria have still large economy-wide output gaps 8 GDP growth (3 to 4 percent of their GDP). Several economies 6 continue to suffer from high levels of 4 unemployment. The unemployment rate is still in 2 Potential Output growth excess of 10 percent in Albania, Bulgaria, Latvia 0 and Lithuania. More than 20 percent of the labor -2 force remain unemployed in Serbia, Kosovo, and -4 Macedonia FYR. Arguably, these economies have -6 been caught in a high unemployment equilibrium. In the short run, policy options have been limited. -8 Many of these economies are already constrained -10 2000 2002 2004 2006 2008 2010 2012 by high fiscal deficits. Inflationary pressures of last year’s bad crop and necessity of restoring banking- Source: World Bank; Datastream; Haver. 141 GLOBAL ECONOMIC PROSPECTS | June 2013 Europe and Central Asia Annex has been growing at or above its potential growth importer) or any local food prices as it did last year, rate indicated by its tight labor market and high inflation is expected to rise beyond the central capacity utilization. Similarly, Turkey’s current bank’s target of around 5 percent. Inflation in acceleration in growth has been generating Romania remained at 5.7 percent year over year in inflationary pressures, and increasing current February (5.8 percent in January) driven mainly by account deficits. For these economies, efforts to foods and services (due to regulatory tariff hikes), increase growth through monetary and fiscal but is expected to go down toward the central stimulus risk being ineffective while adding to debt bank’s target rate in the second half of the year. or inflationary pressures without any sustained Inflationary pressures have eased slightly in progress in terms of increased output. Belarus, but inflation remains in double-digits. Inflationary pressures have recently In contrast, consumer prices fell in Azerbaijan and Georgia towards the end of 2012 due to weak moderated in most economies domestic demand; decline in food prices; and due to the earlier nominal appreciation of Georgian lari Inflation has moderated in most economies due to against currencies of its main trading partners. declines in food prices following last summer’s While inflation has picked up in Azerbaijan, poor crop, and the passing through of earlier Georgia's deflation continued in April, the sixth administrative tariff and tax increases (figure month in a row with falling prices, with prices ECA.6).4.Further inflation declines are expected down by 1.7 percent due to the weak economic among countries that suffered the biggest food price activity. shocks. That said inflation remains at high levels in several …allowed central banks cut their middle-income countries. In Russia, inflation policy rates although down was 7.2 percent year-over-year in April, well above the central bank’s target of 5-6 Against the backdrop of easing inflation, spare percent. However, inflation is expected to decline capacity, high unemployment and moderate to within this range as the adverse base effect from growth, several central banks in the region last year’s drought disappears and a better crop including Albania, Azerbaijan, Belarus, and Georgia could even cause food prices to decline. In Turkey, have cut their policy rates (figure ECA.7). Turkey’s despite the recent easing, pressures are likely to central bank has been narrowing its interest rate build in the later part of the year due to robust corridor since last year and recently cut its main domestic demand and supply-side capacity policy rate in April. The rate was cut despite a small constraints. In the absence of any significant relief output gap, the acceleration in credit growth, and from global commodity prices (Turkey is an energy persistent inflation in part to support growth and Fig ECA.6 The regional inflation momentum has Fig ECA.7 Several countries cut their policy rates subsided in recent months* 9 Rate at end of period 12 Rate of inflation (%) 8 10 CPI (3m/3m saar) 7 8 CPI (y-o-y) 6 6 5 4 4 2 Jan '10 Jul '10 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 0 Georgia (monetary policy) Russia (refinancing) Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 Kazakhstan (refinancing) Turkey (1-wk repo) Romania (monetary policy) *Excluding Belarus Source: World Bank; Datastream; Haver. Source: World Bank; Haver. 142 GLOBAL ECONOMIC PROSPECTS | June 2013 Europe and Central Asia Annex discourage the inflow of portfolio investment (see from 2012 is generally low in many economies the discussion earlier). in the region, it is negative for Ukraine and Georgia, and weak for Turkey and Bulgaria. In contrast, the Russian central bank has kept its On the plus side, agricultural production is main policy rates unchanged since December 2012 expected to be better this year in several countries. despite weakening growth. Similarly, the monetary The summer and winter droughts in 2012 cut the policy in Ukraine remains restricted by its de-facto growth rates significantly and generated inflationary currency peg to the dollar. Maintaining the peg pressures in several countries. Countries including might be increasingly challenging with economic Albania, Georgia, Kazakhstan, Romania, Russia, contraction. Serbia, and Ukraine will benefit from a higher contribution of agriculture this year. Outlook: A rebound with Growth in developing Central and Eastern Europe is expected increase only slightly to 1.9 percent in 2013 from 1.5 percent as most of the factors that increasing differentiation weighed down the growth last year continue to hinder the economic growth this year, but less among countries intensively in some countries (see the table ECA.2 for the list of countries; table ECA.3 for individual country forecast). Monetary policy remains accommodative in most countries, while the pace of fiscal consolidation has eased in Romania, Latvia Despite the improved global and Lithuania, reducing the drag on overall environment, growth in the region is growth6. However, major fiscal adjustments are still needed in several others, including Serbia and expected to rebound only slightly in Montenegro. In addition, although there are signs 2013 of improvement, economic growth in high-income Europe still remains weak and is expected to pick up only gradually toward the end of the year. Thus Although the global environment has become although developing European economies will less volatile and growth appears to be benefit from a gradual improvement in high- strengthening, GDP growth in Europe and income countries and are therefore expected to see Central Asia is projected to rise only a firming in quarterly growth rates, this will have gradually in 2013 to 2.8 percent from 2.7 only a modest impact on whole-year growth in percent in 2012 (table ECA.2). Growth 2013. As a result, growth is expected slightly should firm further to 3.8 percent in 2014 increase in almost all Central and Eastern and 4.2 percent in 2015 as the fiscal and financial restructuring that has been a drag on Fig ECA.8 Growth was weak in 2012Q4 growth within the region and in the Euro Area loses intensity. Several domestic factors GDP growth (q-o-q, saar) including fiscal and monetary policies and 4 structural issues will generate differentiation 3 2012Q1 2012Q2 2012Q3 2012Q4 in economic performance among countries. 2 The apparently anemic acceleration in 2013 1 mainly reflects the weakness of growth at the end of 2012. The quarterly profile of growth 0 during 2013 is stronger than the annual growth rate -1 because growth in the final quarters of 2012 was -2 so weak (figure ECA.8). This low base effect reduces carryover 5 into 2013, resulting in -3 weak annual growth even if quarterly growth Georgia Lithuania Latvia Turkey Ukraine Bulgaria rates are relatively strong. While carry-over Source: World Bank; Datastream; Haver. 143 GLOBAL ECONOMIC PROSPECTS | June 2013 Europe and Central Asia Annex Table ECA.2 Europe and Central Asia forecast summary (annual percent change unless indicated otherwise) Est. Forecast 00-09a 2010 2011 2012 2013 2014 2015 GDP at market prices b 4.2 5.3 5.7 2.7 2.8 3.8 4.2 (Sub -region totals-- countries with full NIA + BOP data)c GDP at market prices c 4.1 5.4 5.7 2.8 2.8 3.8 4.1 GDP per capita (units in US$) 4.0 4.9 5.2 2.3 2.4 3.4 3.7 PPP GDP 4.3 5.1 5.4 2.8 2.7 3.8 4.1 Private consumption 5.9 4.7 6.9 4.3 4.9 4.5 4.9 Public consumption 2.3 -0.1 2.6 2.3 3.0 2.4 2.2 Fixed investment 6.5 13.6 9.0 2.2 3.0 6.8 6.5 Exports, GNFS d 5.2 7.5 4.7 3.9 2.8 4.6 5.5 Imports, GNFS d 7.0 17.3 15.0 4.7 5.5 6.2 6.6 Net exports, contribution to growth -0.3 -2.7 -3.4 -0.4 -1.0 -0.8 -0.7 Current account bal/GDP (%) 2.3 0.6 0.7 0.6 -0.3 -1.1 -1.7 GDP deflator (median, LCU) 9.2 10.0 8.4 3.9 5.1 5.1 5.3 Fiscal balance/GDP (%) -0.6 -3.0 0.9 -0.3 -1.1 -0.1 -0.7 Memo items: GDP Transition countries e 4.6 3.9 4.4 3.0 2.5 3.5 3.9 Central and Eastern Europe f 4.1 -0.4 3.1 1.5 1.9 2.5 3.1 Commonwealth of Independent States g 4.7 4.7 4.6 3.2 2.6 3.7 4.0 Russia 4.4 4.3 4.3 3.4 2.3 3.5 3.9 Turkey 3.0 9.2 8.8 2.2 3.6 4.5 4.7 Romania 4.2 -1.6 2.5 0.7 1.7 2.2 2.7 Source: World Bank. a. Growth rates over intervals are compound weighted averages; average growth contributions, ratios and deflators are calculated as simple averages of the annual weighted averages for the region. b. GDP at market prices and expenditure components are measured in constant 2005 U.S. dollars. c. Sub-region aggregate excludes Bosnia and Herzegovina, Kosovo, Montenegro, Serbia, Tajikistan and Turkmenistan. Data limitations prevent the forecasting of GDP components or Balance of Payments details for these countries. d. Exports and imports of goods and non-factor services (GNFS). e. Transition countries: CEE and CIS (f + g below). f. Central and Eastern Europe: Albania, Bosnia and Herzegovina, Bulgaria, Georgia, Kosovo, Lithuania, Macedonia, FYR, Montenegro, Romania, Serbia. g. Commonwealth of Independent States: Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyz Republic, Moldova, Russian Federation, Tajikistan, Turkmenistan, Ukraine, Uzbekistan. European countries. The only exceptions are Latvia rates and spare capacity. Prospects for the region and Lithuania where economic growth is expected critically depend on the progress in addressing to ease in Latvia after more than 5 percent growth external (large current account deficits) and over the last two years, and in Lithuania mainly due domestic (large fiscal deficit, unemployment, and to the base effect from 2012’s exceptionally good inflation) imbalances. Serbia has the widest twin harvest and projected weak growth in main trading deficits in the region. While spare capacity remains partners including Russia and Latvia. in the region, countries must focus on redressing structural weaknesses if they wish to return to the Going forward, growth in developing Europe is relatively robust growth rates of the pre-crisis expected to rise in the medium-term to 3.1 percent period. Areas of focus should include increasing by 2015 but will remain below their 2000-2009 labor market flexibility, strengthening the business average (table ECA.2). As discussed earlier, several environment and financial market efficiency. economies still suffer from high unemployment 144 GLOBAL ECONOMIC PROSPECTS | June 2013 Europe and Central Asia Annex After the sharper than expected slowdown in 2012, quarter growth. Government consumption is growth is likely to pick up in Turkey on rising expected to compensate for moderating private domestic demand, supported by robust domestic consumption and the economic slowdown in credit growth and relatively loose macroeconomic Russia. While expected to pick up by 2014 after a policies. Nevertheless, the growth in 2013 will be new oilfield becomes operational, medium-term constrained by the weak carryover from 2012. The growth in Kazakhstan will be held back by supply- growth rate is expected to rebound to 3.6 percent side constraints. from 2.2 percent in 2012. With the economy operating very close to its potential output growth, Growth in Ukraine is forecast to remain weak at 1.0 the rising domestic demand and declining tourism percent in 2013, up from 0.2 percent in 2012. The receipts will widen the current account deficit to increase will be supported by robust consumer 6.9 percent of GDP in 2013 from 6 percent in demand with increasing retail sales, while industry 2012. While access to external financing has been continues to contract and global steel prices remain comfortable so far 2013 with the recent upgrade weak. The overall outlook remains challenging, of its credit rating to investment grade, the heavy with a high fiscal deficit, persistent current account reliance on portfolio and short-term debt flows is deficit, high external debt, and the currencies de- an important vulnerability. Monetary policy is facto peg to the dollar and declining foreign expected to remain active in balancing external and reserves all sources of concern. Reforms that may domestic demand while growth picks up with the stem from ongoing discussions with the EU/IMF forecasted global recovery, reaching 4.7 percent by and Russia will be crucial factors determining the 2015. shape of growth going forward. Growth in Russia is expected to slow down to 2.3 Growth rates in Azerbaijan and Kyrgyzstan are percent in 2013 from 3.4 percent in 2012 after forecast to be higher in 2013 as high public continuously weakening over the last five quarters (on a year-over-year basis). In addition to investment spending boosts domestic demand and disappointing export growth, domestic demand has a recovery in Kyrgyzstan’s gold production. On the been weak—partly due to increasing prices and other hand, Armenia’s growth is expected to easing in oil prices, which has constrained incomes, moderate after the strong growth in 2012, as corporate profits and investment. At the same prudent fiscal and monetary policies permit the time, despite the increased capital flows, economy to avoid overheating. investment has not picked considerably. Similar to Turkey, Russia’s economy is operating close to its potential and faces high inflation, a tight labor market, and capacity constraints. But unlike Risks and Turkey, the Russian central bank has pursued a less accommodative stance keeping its main policy rates vulnerabilities unchanged. However, this stance might change if inflationary pressures start to ease in the second half of the year with adverse base effect disappearing. In addition, starting this year fiscal While risks are less pronounced, the region’s policy will be constrained by a newly accepted economic outlook is still subject to various challenges. budget rule. The rule implies that spending cannot exceed revenues more 1 percent of GDP, while Although the risk of a serious Euro Area crisis has revenues are calculated as a function of past long- diminished, outturns in developing Europe will term average oil price. Growth is expected to remain sensitive to the speed of the recovery in its pick up together with the global economy high-income neighbor. Both a significantly stronger only modestly to 3.9 percent by 2015 as the and weaker recovery in high-income Europe would pace of expansion will be held back by have significant knock on effects for the region, potential output growth. including through the financial channel. Growth in Kazakhstan is expected to remain stable The recent easing in commodity prices in response at 5 percent in 2013 following the weak first to growing supply and demand substitution 145 GLOBAL ECONOMIC PROSPECTS | June 2013 Europe and Central Asia Annex brought on by high prices, is a further source of flows and FDI (see World Bank, 2010 for an in uncertainty as to the pace of decline toward long- depth discussion of channels) term equilibrium prices. As discussed in the main text and the Commodity Annex, if prices ease more Aside from these global risks for the region’s quickly than the baseline, government revenues, economies, banking systems in several countries incomes and current account positions in exporting have been under pressure by sharp slowdown in countries could come under pressure, even as economic activity, weak credit demand and lower prices benefitted importing nations. increase cost of foreign funding have increased According to the simulations highlighted in table 5 pressures on profits. Non-performing loans (NPL) in the main text, a rapid decline in oil prices might remain higher than 10 percent in several countries reduce the growth rate by 0.8 percentage points, including Kazakhstan, Albania, Ukraine, and the current account balance by 2.3 percentage Serbia. The high levels of NPL in region’s banking points, and the fiscal balance by 1.8 percentage system may constrain credit growth going forward, points in 2014 from the baseline scenario for oil- which has already been weak. Nevertheless, there is exporters in the region. The impact will be positive some level of resilience in most banks in the region for oil-importers with increasing growth by 0.4 with their capital adequacy ratios in excess of 10 percentage points and improving both the current percent by the end of 2012. account and fiscal balance by 0.8 and 0.2 percentage points, respectively from the baseline scenario. The scenario for the metal price declines show smaller impact for the region. Several countries have accessed international capital markets this year as cost of bond financing fell. Nevertheless, a sharp drop in confidence in financial markets — due to unexpected developments in Euro Area debt resolution and US fiscal situation—can lead to a sudden reversal of global financial conditions and adversely affect significantly the countries with high external financing needs (current account deficits and amortization of external debt). In the longer term, developing country financial conditions may become more difficult as high- income countries step back from quantitative easing and base interest rates and spreads rise. The cost of capital in developing countries is likely to rise amid rising long-term yields in high-income countries. Initially this could expose vulnerabilities that have built up during periods of sustained low borrowing costs, intensifying financial market pressures in the region and even in a worst case scenario provoking local crises. Longer-term, higher borrowing costs would raise the cost of capital and cause firms and foreign investors to reduce investment levels with negative consequences for growth (see main text), capital 146 GLOBAL ECONOMIC PROSPECTS | June 2013 Europe and Central Asia Annex Table ECA.3 Europe and Central Asia Country forecasts Est. Fore ca st 00-09a 2010 2011 2012 2013 2014 2015 Alba nia GDP at market prices (% annual growth) b 4.9 3.5 3.0 1.6 1.8 2.0 3.0 Current account bal/GDP (%) -8.6 -11.4 -12.0 -10.7 -9.5 -8.3 -7.1 Arme nia GDP at market prices (% annual growth) b 7.7 2.2 4.7 7.2 5.0 5.0 5.0 Current account bal/GDP (%) -7.4 -14.8 -10.9 -10.6 -9.6 -9.4 -9.4 Aze rba ija n GDP at market prices (% annual growth) b 14.4 5.0 0.1 2.2 4.8 4.8 2.9 Current account bal/GDP (%) 2.9 28.4 26.5 21.7 13.6 11.9 9.4 Be la rus GDP at market prices (% annual growth) b 6.6 7.7 5.5 1.5 2.5 2.8 3.0 Current account bal/GDP (%) -4.6 -15.0 -8.5 -2.9 -4.7 -5.6 -6.1 Bulga ria GDP at market prices (% annual growth) b 4.0 0.4 1.8 0.8 1.2 2.1 3.0 Current account bal/GDP (%) -11.3 -1.5 0.1 -1.0 -1.6 -1.6 -2.5 Ge orgia GDP at market prices (% annual growth) b 5.6 6.3 7.2 6.1 4.0 6.3 6.0 Current account bal/GDP (%) -12.6 -10.2 -12.8 -11.5 -9.0 -7.8 -7.4 Ka za khsta n GDP at market prices (% annual growth) b 7.5 7.3 7.5 5.0 5.0 5.3 5.5 Current account bal/GDP (%) -2.0 0.9 6.5 3.8 3.2 3.2 3.1 Kosovo GDP at market prices (% annual growth) b 5.8 3.9 5.0 2.3 3.1 4.0 4.2 Current account bal/GDP (%) -18.2 -25.9 -26.2 -21.3 -21.0 -18.8 -16.0 Kyrgyz Re public GDP at market prices (% annual growth) b 4.8 -0.5 6.0 -0.9 7.4 7.5 5.3 Current account bal/GDP (%) -6.0 -6.4 -6.5 -15.3 -8.0 -6.0 -5.6 La tvia GDP at market prices (% annual growth) b 3.7 -0.3 5.5 5.6 3.6 4.1 3.7 Current account bal/GDP (%) -10.2 3.0 -2.1 -1.7 -2.8 -2.8 -3.6 Lithua nia GDP at market prices (% annual growth) b 4.2 1.3 5.9 3.7 3.0 3.5 4.2 Current account bal/GDP (%) -7.1 1.6 -1.8 -0.9 -1.4 -1.7 -2.0 Moldova GDP at market prices (% annual growth) b 4.4 7.1 6.8 -0.8 3.0 4.0 5.0 Current account bal/GDP (%) -8.4 -7.7 -11.3 -7.0 -7.4 -7.9 -8.9 Ma ce donia , FYR GDP at market prices (% annual growth) b 2.3 1.8 3.0 -0.3 1.4 2.5 3.5 Current account bal/GDP (%) -6.1 -2.2 -3.0 -3.9 -5.0 -5.5 -5.2 Monte ne gro GDP at market prices (2005 US$) b - 2.5 3.2 -0.5 0.8 1.8 2.0 Current account bal/GDP (%) -11.4 -22.9 -17.7 -17.9 -19.0 -18.3 -17.0 Roma nia GDP at market prices (% annual growth) b 4.2 -1.6 2.5 0.7 1.7 2.2 2.7 Current account bal/GDP (%) -7.6 -4.5 -4.6 -3.8 -3.7 -3.6 -3.6 Russia n Fe de ra tion GDP at market prices (% annual growth) b 4.4 4.3 4.3 3.4 2.3 3.5 3.9 Current account bal/GDP (%) 9.3 4.8 5.3 3.9 3.0 1.6 0.6 Se rbia GDP at market prices (% annual growth) b 3.6 1.0 1.6 -1.7 2.0 3.1 3.6 Current account bal/GDP (%) -9.7 -6.7 -9.2 -10.9 -9.9 -9.0 -8.8 Ta jikista n GDP at market prices (% annual growth) b 7.7 6.5 7.4 7.5 7.0 6.0 6.0 Current account bal/GDP (%) -4.8 -1.2 -4.7 -1.9 -2.2 -2.4 -2.5 Turke y GDP at market prices (% annual growth) b 3.0 9.2 8.8 2.2 3.6 4.5 4.7 Current account bal/GDP (%) -3.3 -6.4 -9.7 -6.0 -6.9 -7.1 -7.2 Ukra ine GDP at market prices (% annual growth) b 3.9 4.2 5.2 0.2 1.0 3.0 4.0 Current account bal/GDP (%) 2.2 -2.2 -5.5 -8.4 -7.4 -6.8 -6.2 Uzbe kista n GDP at market prices (% annual growth) b 6.1 8.5 8.3 8.2 7.4 7.1 6.7 Current account bal/GDP (%) 7.5 6.2 5.8 1.0 1.1 1.3 2.2 Source: W orld Bank. W orld Bank forecasts are frequently updated b ased on new information and changing (glob al) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if b asic assessments of countries’ prospects do not significantly differ at any given moment in time. Bosnia and Herzegovina, Turkmenistan are not forecast owing to data limitations. a. GDP growth rates over intervals are compound average; current account balance shares are simple averages over the period. b. GDP measured in constant 2005 U.S. dollars. 147 GLOBAL ECONOMIC PROSPECTS | June 2013 Europe and Central Asia Annex Notes 1. Turkey did not sell any gold to Iran in January as banks and dealers waited until early February for the implementation of U.S. sanctions that tightened control over precious metal sales. The trade has resumed in February as the United States has given Turkey a six-month waiver exempting it from sanctions on trade with Iran, which is now due to expire in July 2. By June 2012, three quarters of European banks had complied with the ECB’s capital ratio requirements. Moreover, according to the April ECB Bank Lending Survey, Euro Area banks are beginning to loosen credit standards. Euro Area banks have begun repaying ECB crisis loans and have already started to repay some of the loans well in advance (See Finance Annex). 3. The regional FDI numbers have been revised up historically since several countries including Russia have started to report their balance of payment data under BMP6 methodology. FDI flows to Russia surged in the first quarter of 2013 as the deal between Rosneft and BP around the TNK-BP sale that eventually resulted in the acquisition of 18.5 percent of Rosneft, worth almost $15 billon. Adjusted for this one-off deal, the FDI remained fairly stable during the first quarter of 2013. 4. The figure excludes Belarus because of its outlier status in terms of 2011 inflation, which reached 108.7 percent, after almost threefold devaluation of the national currency. 5. Carry over (or statistical overhang) is defined as the rate of growth that would be observed if quarterly GDP in year t remained unchanged from the level of the fourth quarter of the previous year. It therefore measures the contribution to annual growth in year t, of the quarterly expansion during the previous year (GEP 2012 June). 6. The EU required adjustment has been completed in Romania, Latvia and Lithuania to reach the 3 percent deficit target. 148 GLOBAL ECONOMIC PROSPECTS | June 2013 Latin America and the Caribbean Annex Annex GLOBAL ECONOMIC June PROSPECTS 2013 LATIN AMERICA and the CARIBBEAN REGION 149 GLOBAL ECONOMIC PROSPECTS | June 2013 Latin America and the Caribbean Annex Overview Risks and vulnerabilities: The severe downside risks to the global economy have eased significantly compared to last year, reflecting progress in Euro-area economies towards reducing fiscal and banking solvency After a sharp recovery from the global risks and an easing in fiscal-cliff related risks economic crisis in 2010, when regional output in the United States. However, little progress expanded by 6 percent, growth in the Latin has been made in setting the US fiscal policy America and the Caribbean decelerated on a sustainable path and by Japan to reduce markedly, to an estimated 3 percent by 2012. its large general government debt to Supply side constraints have become apparent sustainable levels, and these continue to in some of the larger economies, where represent sources of risk for the global output was near or above potential during the economy. recovery phase, and which contributed to relatively high inflation and deterioration of For the Latin America and the Caribbean the current account balances. Despite a sharp risks stem in part from the challenges of deceleration in growth, regional output is finding the optimal balance between only now in line with potential GDP. Cyclical macroeconomic policies to stimulate factors such as lower commodity prices and domestic demand in the short term and generally subdued global activity, in particular structural reforms to enable faster growth in high-income countries, have also weighed over the longer run. In addition ample global on growth. Private consumption remained liquidity and higher and more volatile capital relatively robust, while the contribution to flows are complicating the task of conducting growth from investment and exports monetary policy and could, if interest rates weakened considerably. are low, lead to rapid credit expansion and goods and asset price inflation. For Outlook for 2013-2015: The factors that commodity exporters, large fluctuations of have contributed to the deceleration in export prices represent a major risk to the growth in the post-recovery period will outlook. continue to weigh on economic activity over the short-to-medium term. Growth in the Over the longer term as external financial region is expected to accelerate only modestly conditions are likely to become tighter, to 3.3 percent in 2013, and to about 3.9 higher financing costs could result in reduced percent over the medium terms. Growth is investment spending and growth in the expected to firm somewhat from a very weak countries in the region and may also expose pace in Brazil and Argentina, while slowing unsustainable positions. If greater progress is down in most of the commodity exporters, made to implement a wide range of structural largely on account of weaker commodity reforms and address supply-side constraints prices. Growth in Venezuela is expected to to growth, economic expansion over the decelerate markedly as highly expansionary medium term could be more robust. policies are reversed. Meanwhile Paraguay will see one of the sharpest accelerations in growth this year, on account of normalization in agriculture output. Growth in Central America will benefit over the medium term from firmer growth in the United States and improvements in terms of trade. Growth in the Caribbean will be held back by large fiscal adjustments necessary to bring fiscal deficits to sustainable levels and help reduce public debt burdens. 151 GLOBAL ECONOMIC PROSPECTS | June 2013 Latin America and the Caribbean Annex Recent economic due to the impact of a severe drought, and slower growth in its major trading partners. Mexico developments continued to outperform the regional average for a second consecutive year, expanding close to 4 percent and contributing 1.1 percentage points to the regional growth, compared to a 0.3 percentage point contribution by Brazil and Chile. Mexico’s growth continued to be well balanced, with positive With growth decelerating to slightly contributions from all demand components. below potential, the positive output In Central America output expanded at a robust gap nearly closed in 2012… pace of close to 5 percent in 2012, the second consecutive year of above trend growth. Growth Growth in the Latin America and the Caribbean region accelerated in Costa Rica to above 5 percent decelerated an estimated 1.4 percentage points to 3 percent boosted by exports and private consumption and in 2012 (table LAC.1). In per capita terms growth has remained very robust in Panama, where exports fallen below 2 percent for the first time since the and investment have made significant contributions global crisis. The growth slowdown was partly due to to growth (in excess of 4 percentage points), bottlenecks that constrained growth in some of the larger supported by the Panama Canal expansion and economies in the region, partly because of softening in several other large investment projects. global activity mid-year due to Euro Area uncertainty, and partly because of a decline in non- Growth in the Caribbean continued to disappoint, oil commodity prices. Even with GDP growth decelerating to 3 percent in 2012 as growth below potential in 2012, the positive output gaps decelerated in the Dominican Republic and in that opened during the recovery from the 2009 Haiti, while Jamaica’s economy fell into recession. crisis still persist or have only now closed. GDP in In most other economies in the region growth fell Brazil expanded only 0.9 percent, despite accommodative below 1 percent, with the notable exception of monetary and fiscal policies, held back by increasingly Belize’s economy, which expanded more than 5 percent. apparent supply side bottlenecks. Despite slow growth, unemployment remains low and inflation high. World Bank estimates suggest that the slowdown Data from the first quarter of 2013 has only now opened up a negative output gap of suggests that growth is easing 0.8 percent of potential GDP. Although potential growth has slowed due to a decline in investment Growth had decelerated from 3.2 percent and slower growth in total factor productivity, at seasonally adjusted annualized (or saar) in the first 3.2 percent potential growth was still much higher quarter of 2012 to 1.6 percent by the third quarter, than actual GDP.1 before reaccelerating markedly in the last quarter to a 3.5 pace in line with potential growth, as growth In other South American commodity exporting in the largest economies in the region accelerated countries growth remained robust, including into the year’s end. On an annualized basis fourth Bolivia, Chile, Colombia, Peru, and Venezuela. In quarter GDP expanded 2.6 percent in Brazil, 4.5 these economies, growth in private consumption percent in Peru, 2.7 percent in Mexico, more than contributed half or more of the total GDP 7.0 percent in Chile and Colombia. Among the expansion supported by still high commodity countries that bucked the regional acceleration revenues. In Venezuela very expansionary policies trend in the final quarter of 2012 were Paraguay, contributed to a marked acceleration in growth to Peru, with GDP contracting in the former and 5.6 percent and a wide positive output gap with decelerating in the latter. With relatively strong growth respect to potential. Growth decelerated markedly only in in the second half of 2012 and/or the fourth quarter of Argentina to 1.9 percent from 8.9 percent, as exports 2012, Chile, Peru, Colombia have strong carryovers for underperformed and investment plunged, subtracting 0.01 2013, in excess of 1.3 percentage points, while Brazil’s and 1.2 percentage points from growth, respectively. carry over is relatively weak at 0.65 percentage points. For Paraguay is one of only a couple of countries in the region the carryover for 2013 growth is about 1 Latin America to have recorded a decline in GDP, percentage points. 152 GLOBAL ECONOMIC PROSPECTS | June 2013 Latin America and the Caribbean Annex Regional growth in the first quarter as decline comes even as world imports continued to approximated by industrial production softened, expand at a solid pace over this period (10 percent). with industrial production remaining relatively flat, The quarterly decline was particularly pronounced after a slight contraction in the fourth quarter in commodity exporters like Argentina, Brazil, (figure LAC.1). Slower domestic consumption in Chile, Colombia, and Peru. Export revenues also conjunction with weak external demand caused declined in manufactures exporters like Mexico economic activity to slow in many countries in the (10.7 percent saar). region. In Mexico GDP growth eased to a 1.8 percent seasonally adjusted annualized pace as Meanwhile imports expanded at slower pace of 8.4 domestic consumption and external demand percent annualized pace in the first quarter of 2013, showed signs of weakness. In addition government after a strong recovery in the fourth quarter (31.6 spending eased in line with past trends at the percent), pointing to a possible moderation in beginning of a new presidential administration. domestic demand and rapidly deteriorating trade Similarly in Brazil growth eased to a 2.2 percent balances. Imports continued to rise at a rapid pace annualized pace in the first quarter of 2013, as in Argentina, Brazil, and bounced back in exports contracted and both private and public Colombia, while import growth eased in Mexico in consumption showed signs of weakening and line with weaker exports. despite an acceleration in investment growth. Growth decelerated markedly in Chile in the first quarter, to 2.1 percent quarter-on-quarter Inflation remains contained annualized pace, down from 8 percent in the fourth quarter of 2012 on account of a slowdown in Inflation rates in the region have remained investment, consumption, and sluggish exports. relatively anchored for the most part, especially Meanwhile economic activity in Venezuela core inflation, although they have remained contracted 2.5 percent quarter-on-quarter (or 9.7 stubbornly high or even accelerated in countries percent annualized pace) as private consumption where economic output is at or near potential (e.g. slowed dramatically, while exports contracted, and Brazil, Uruguay). Currency devaluation has inventories tumbled. exacerbated local price pressures in Venezuela, while import restrictions and loose policies Similarly, export performance has weakened in the contribute to stubborn inflation in Argentina that first months of 2013, with export revenues continues to erode real incomes. Inflation declining close to 12 percent annualized rate in the decelerated in Chile, Colombia, and Peru on first quarter of 2013, after a robust performance in account of deceleration in food and energy the fourth quarter of 2012 (14.8 percent). The inflation, but in some cases also on account of moderation in domestic demand. Lower food and Fig LAC.1 Industrial production below trend levels energy inflation also contributed to the decline in since the second half of 2012 inflation in Central American economies, while Index, August 2008=100 inflation in some of the Caribbean economies was 120 low on account of weak domestic demand. 108 Monetary policy guided by both 96 domestic conditions as well as global liquidity 84 Conducting monetary policy during the post-crisis 72 period has been complicated by the very loose monetary policies pursued by several high-income 60 countries, most recently Japan. Jan '95 Jan '98 Jan '01 Jan '04 Jan '07 Jan '10 Jan '13 Industrial production Trend (HP filter) The benign inflation environment and very easy policy stances in high-income countries have Source: Datastream and the World Bank staff calculations 153 GLOBAL ECONOMIC PROSPECTS | June 2013 Latin America and the Caribbean Annex prompted some central banks in the region to cut Foreign currency earnings from remittances policy rates. The Bank of Colombia cut its policy increased slightly to an estimated $62 billion, still rate 200 basis points, as growth slowed since mid- below the 2008 peak of $64.5 billion. Remittances 2012, while Banxico, Mexico’s central bank cut the to Mexico (which accounts for 55 per cent of overnight rate 50 basis points in March 2013, the regional inflows) and Ecuador declined in absolute first cut since July 2009. In contrast Brazil’s central terms, while they rose relatively quickly in Brazil, bank raised the Selic rate a cumulative 75 basis Guatemala, El Salvador, and Peru. points to 8 percent embarking on what is expected to be a gradual normalization in its monetary policy Expressed as a share of recipient countries’ GDP (figure LAC.2). they remained flat at 5.3 percent of GDP2 in 2012. The weak performance reflected still weak labor Sluggish growth in some of the larger economies markets in the United States, and unemployment in h a s p r om p t ed m o r e a c c o m m o d a t i v e Spain (another major destination for regional macroeconomic policies despite becoming migrants) in excess of 25 percent of the labor force. increasingly apparent that supply potential is lower Indeed, the very high unemployment rate in Spain than during the recovery from the global crisis in and improved growth prospects in home countries these economies. forced many migrants to return home. Strong domestic demand in many countries in the region and in some cases small or positive Capital flows output gaps have resulted in a worsening in current account positions in 2012. For Very loose monetary policies pursued by several commodity exporters the decline in non-oil high-income countries, most recently Japan have commodity prices in 2012 has also played a contributed to ample global liquidity. With role, with this group of countries recording dramatic shifts in perceptions of risk in high- some of the largest deteriorations in current income countries there have been episodes of account positions. One notable exception is strong inflows and outflows of capital to Argentina, where compression in imports due developing countries, putting currencies under to tough import controls, made possible an pressure (figure LAC.3). While data for annual improvement in the current account balance. flows do not suggest that capital flows have been For the region as a whole the current account unusually high, several countries have taken deficit deteriorated 0.4 percentage points, unusual measures – including lowering interest with a median deterioration of 0.1 percentage rates to dissuade foreign capital inflows. points of GDP. Fig LAC.2 Monetary policy rates Fig LAC.3 Real effective exchange rates Percentage Points June 2008=100 14 120 12 100 10 80 8 60 6 40 4 2 20 0 0 Jan '08 Jan '10 Jan '12 Jan '04 Jan '06 Jan '08 Jan '10 Jan '12 Brazil Colombia Chile Mexico Peru Brazil Chile Colombia Mexico Peru Source: National central banks and Datastream Source: World Bank. 154 GLOBAL ECONOMIC PROSPECTS | June 2013 Latin America and the Caribbean Annex Table LAC.1 Net capital flows to Latin America USD, billions 2008 2009 2010 2011 2012e 2013f 2014f 2015f Capital Inflows 186.0 179.6 328.5 303.9 362.6 358.5 364.1 379.2 Private inflows, net 179.3 161.6 306.1 299.1 360.7 359.4 364.8 381.6 Equity Inflows, net 127.5 126.5 166.6 165.6 199.8 209.8 212.4 232.0 Net FDI inflows 137.2 84.9 125.3 158.3 175.6 192.2 191.0 206.4 Net portfolio equity inflows -9.7 41.6 41.3 7.4 24.2 17.6 21.4 25.6 Private creditors. Net 51.8 35.1 139.5 133.4 160.9 149.6 152.4 149.6 Bonds 8.9 45.9 72.9 85.2 112.0 89.3 83.1 79.6 Banks 40.8 -1.7 21.7 51.7 41.4 43.6 45.2 51.4 Short-term debt flows 2.6 -8.6 43.8 -3.0 7.3 15.2 23.4 16.5 Other private -0.5 -0.5 1.1 -0.4 0.2 1.5 0.7 2.1 Official inflows, net 6.7 18.0 22.5 4.8 1.9 -0.9 -0.7 -2.4 World Bank 2.4 6.6 8.3 -2.9 0.4 IMF 0.0 0.4 1.3 0.2 0.1 Other official 4.3 11.0 12.9 7.5 1.4 Source: The World Bank Note : e = estimate, f = forecast Net capital inflows rose 19.3 percent in 2012 Latin America and the Caribbean region. Net to about 6.5 percent of GDP, up from 5.5 bond flows increased by an estimated $26.8 percent of GDP in 2011, on stronger equity billion in 2012, while bank lending declined inflows. Net FDI flows increased by $10.3 billion. $17.3billion and net portfolio inflows were up $16.8 billion in 2012 (table LAC.1). Together Gross capital flows to countries in Latin the equity inflows accounted for more than America and the Caribbean region were 23 half of the increase in net capital flows to the percent higher year-on-year in the first five months of 2013 (see Finance Annex and Fig LAC.4 Gross capital flows to Latin America figure LAC.4). Equity placements jumped 154 and the Caribbean percent on account of strong issuance by million USD Brazilian firms, including a record developing 50000 country bond issuance of $11 billion by Petrobras. Meanwhile bank lending fell more 40000 than 30 percent year-on-year. 30000 Reflecting ample global liquidity and despite increased costs, frontier-market sovereigns in 20000 the region like Honduras ($500 million) were able to successfully issue bonds. Bolivia ($500 10000 million), Dominican Republic, El Salvador ($800 million), and Guatemala ($700 million) also came to the market last year to take 0 Jan '09 Jan '10 Jan '11 Jan '12 Jan '13 advantage of investors’ search for higher yields. Costa Rica has managed to issue a Equity issuance Bond issuance Bank loans $500-million 12-year bond and a $500-million 30-year bond while Panama issued a $750 Source: World Bank. 155 GLOBAL ECONOMIC PROSPECTS | June 2013 Latin America and the Caribbean Annex million 40-year bond. The long-term dated bonds issued at surprisingly low rates seem to indicate Economic outlook that investors’ are comfortable with longer-dated issuance. Many countries in the region are engaging in more active debt management to take advantage of investors’ willingness to buy longer-dated paper increasing the maturity of their debt, by pre-paying Growth is expected to firm gradually shorter-term debt. Furthermore the decline in cost of financing could help some countries in the A gradual firming in the global economy, and still region reduce the cost of debt servicing over the very easy external financing conditions will support short to medium term. a modest step-up in growth in the region to 3.3 Table LAC.2 Latin America and the Caribbean forecast summary (annual percent change unless indicated otherwise) Est. Forecast 00-09a 2010 2011 2012 2013 2014 2015 GDP at market prices b 2.6 5.9 4.4 3.0 3.3 3.9 3.8 c (Sub -region totals-- countries with full NIA + BOP data) GDP at market prices c 2.6 6.0 4.4 3.0 3.3 3.9 3.8 GDP per capita 1.4 4.8 3.2 1.8 2.2 2.8 2.7 PPP GDP 2.7 6.1 4.6 3.0 3.4 3.9 3.8 Private consumption 2.9 5.9 5.1 3.8 3.3 3.7 3.8 Public consumption 2.6 4.2 3.2 3.7 2.8 3.1 3.4 Fixed investment 3.6 10.5 8.9 2.9 5.4 5.9 5.1 Exports, GNFS d 2.8 11.7 6.4 2.6 4.5 5.4 5.8 Imports, GNFS d 3.7 22.0 10.4 3.9 5.3 5.6 6.1 Net exports, contribution to growth -0.2 -2.6 -1.3 -0.5 -0.5 -0.4 -0.4 Current account bal/GDP (%) -0.3 -1.3 -1.3 -1.7 -1.9 -2.1 -2.1 GDP deflator (median, LCU) 6.3 5.2 7.0 5.7 5.7 5.1 5.2 Fiscal balance/GDP (%) -2.4 -3.0 -2.4 -2.8 -2.2 -2.2 -2.4 Memo items: GDP LAC excluding Argentina 2.5 5.7 4.0 3.1 3.3 4.0 3.9 e Developing Central & North America 1.5 5.2 4.1 4.0 3.5 4.0 3.9 Caribbean f 3.4 4.7 3.8 3.0 2.2 3.3 3.9 Brazil 2.9 7.5 2.7 0.9 2.9 4.0 3.8 Mexico 1.2 5.3 3.9 3.9 3.3 3.9 3.8 Argentina 3.4 9.2 8.9 1.9 3.1 3.0 3.0 Source : World Bank. a. Growth rates over intervals are compound weighted averages; average growth contributions, ratios and deflators are calculated as simple averages of the annual weighted averages for the region. b. GDP at market prices and expenditure components are measured in constant 2005 U.S. dollars. c. Sub-region aggregate excludes Cuba and Grenada, for which data limitations prevent the forecasting of GDP components or Balance of Payments details. d. Exports and imports of goods and non-factor services (GNFS). e. Developing Central & North America: Costa Rica, Guatemala, Honduras, Mexico, Nicaragua, Panama, El Salvador. f. Caribbean: Antigua and Barbuda, Belize, Dominica, Dominican Republic, Haiti, Jamaica, St. Lucia, St. Vincent and the Grenadines, and Suriname. 156 GLOBAL ECONOMIC PROSPECTS | June 2013 Latin America and the Caribbean Annex percent (slightly down from our January 2013 robust domestic demand in conjunction with projection) from 3.0 percent in 2012 (table LAC.2). relatively soft external demand and lower Growth in selected resource exporting countries commodity prices will keep the current account will be weaker due to recent declines in commodity balance in deficit at close to 3 percent of GDP by prices. For commodity exporters, further declines 2015. Over the medium-to-long term efforts by the in commodity prices will both reduce government government to address the supply side constraints revenues and foreign exchange revenues, placing and reduce the custo Brasil are expected to lift pressure on currencies and government spending in potential output gradually. those countries such as Argentina and Venezuela, where deficits are already high. Growth in Argentina is also expected to accelerate to 3.1 percent in 2013, bolstered by a record The output gap for the region as a whole more or harvest expected this season and by moderately less closed in 2012, and with the expected uptick, stronger external demand from Brazil. However, GDP in 2013 is projected to expand at roughly the growth is expected to underperform over the same rate as potential so there should be no medium term remaining below potential growth, as significant exacerbation of overheating pressures distortions introduced by various policies aimed at (figure LAC.5 and 6). However, with growth holding back inflation cut into investment and total expected to accelerate even further in 2014 and factor productivity growth.3 Fiscal policy is expected 2015, partly due to relatively loose monetary and to tighten due to financing difficulties and softer fiscal policies, inflationary pressures are expected to commodity prices, which will further weaken growth. build and current account deficits to rise. Paraguay will have the fastest growing economy in Growth in Brazil is expected to accelerate to 2.9 the region in 2013, due to appropriately percent in 2013 and further to close to 4 percent accommodative monetary and fiscal policies and over the 2014-2015 period, bolstered by spending the normalization of agricultural output, following on infrastructure and supportive private last year’s drought. In contrast, Venezuela will see consumption. Monetary and fiscal policy are one of the most pronounced decelerations in projected to remain expansionary (the public sector growth in the region (more than 4 percentage primary surplus declined below 2 percent of GDP points to 1.4 percent) due to expected post-election in Q1 on a 12 months rolling basis). With the cuts to government spending, and weak real- economy arguably operating at potential, the income growth due to high inflation. Similarly acceleration in growth will keep inflation near the growth in Ecuador is expected to decelerate by upper limit of the targeted inflation range, while close to 1 percentage point to 3.8 percent. Fig LAC.5 Growth in Latin America and the Carib- Fig LAC.6 Output gaps to narrow in Latin America bean is expected to accelerate only and the Caribbean in 2013 marginally through 2015 4.5 Gap closing from below Overheating GDP growth, percent 8 3.5 Size of output Haiti gap (2012) Antigua and Barbuda 2.5 6 1.5 Mexico Jamaica Guyana St. Vincent and 4 Chile Grenadines 0.5 Guatemala El Salvador Honduras Suriname Bolivia Nicaragua Costa Rica Colombia Brazil Peru -0.5 St. Lucia Dominica Ecuador Uruguay 2 Belize Panama Venezuela Argentina -1.5 Dominican Rep. -2.5 0 2010 2012 2014 2016 -3.5 Latin America and the Caribbean The Caribbean South America Gap closing from above Crashing Developing Central and North -4.5 America -4.5 -3.5 -2.5 -1.5 -0.5 0.5 1.5 2.5 3.5 4.5 Speed of gap closure in 2013, percentage points Source: World Bank Note: 2009 data represents the average for the 2003-2007 period. Source: World Bank 157 GLOBAL ECONOMIC PROSPECTS | June 2013 Latin America and the Caribbean Annex In Mexico growth momentum will ease only Although some (IMF, 2013) argue that inflation marginally to 3.3 percent in 2013, before expectations have become more anchored -- reaccelerating to close to 4 percent over the 2014- inflation in the region remains and is projected to 2015 period. Recent labor and telecommunication remain at or above the higher end of the target reforms are expected to lift growth in by increasing range in several of the inflation targeting countries total factor productivity and by attracting more that are once again running against capacity investment to the country. Over the 2014-2015 constraints. In countries with high inflation and period the economic recovery in the United States, exchange rate pressures the scope for monetary and in particular firmer private demand, will also policy is very limited. support stronger Mexican export and remittances growth. Exchange rates are projected to appreciate only slightly in some of the financially integrated Growth in Central America is projected to ease economies in the region, given very easy monetary slightly to 4.3 percent as growth decelerates in policy in the major high-income economies and almost all the countries in the region, despite terms better fundamentals in the developing countries of trade gains, as commodity prices, and oil prices relative to high-income countries. There could also in particular are expected to decline. Costa Rica be an increase in volatility in exchange rates, as in remains one of the most competitive economies in the shorter term more volatile portfolio inflows are the region, reflected in the strong export likely to affect exchange rates in these economies, contribution to growth. Similarly export growth as policy makers will be only partially successful in will remain robust in Panama. sterilizing these inflows. Macro prudential measures and/or capital controls will prove once again The Central American countries, which were helpful in preserving healthy banking systems in among the most affected in the region by the the context of excessive global liquidity. 2008/2009 global economic crisis, will continue to struggle to bring down fiscal deficits and public Risks and debt. Over the 2014-2015 period a more upbeat U.S. economy should help support growth in the region, boosting external demand for goods and services as well as remittances. Vulnerabilities Growth in the Caribbean will ease slightly to 2.2 percent (table LAC.3), as growth in the Dominican Republic softens. Elsewhere growth is projected to remain restrained at around 1.5 percent due to very The global economic environment has stabilized high debt levels, and relatively soft remittances and significantly since July of last year, and the tourism revenues. Over the medium term large likelihood and likely magnitude of external risks fiscal adjustments will be necessary to cut fiscal have declined and become more balanced, with deficits to more sustainable levels and help reduce upside risks more pronounced than even six the public debt burden. These adjustments are months ago. likely to have negative consequences for growth in the short run. A larger-than-expected deceleration in China’s economic growth, and in particular in investment, Monetary policies in the inflation targeting above and beyond the soft landing envisaged in our countries are projected to gradually move to a base line would undercut growth in the region as more neutral stance. The pace of adjustment may external demand would be much softer with both be slower than it would have been in the absence price and quantity effects, in particular for South of very easy monetary conditions in high-income American commodity exporters. Similarly a steeper countries, (in particular in the United States and than envisaged fiscal tightening in the United States Japan) even if inflation rates remain close to the would have negative spillovers for the economies upper bound of the target range, as some of the in the region that have strong economic ties with countries in the region may be wary of attracting the United States. The reverse of these situations excessive capital flows and of appreciating currencies. represent the upside risks for the region. 158 GLOBAL ECONOMIC PROSPECTS | June 2013 Latin America and the Caribbean Annex Table LAC.3 Latin America and the Caribbean country forecasts Est. Forecast 00-09a 2010 2011 2012 2013 2014 2015 Argentina b GDP at market prices (% annual growth) 3.4 9.2 8.9 1.9 3.1 3.0 3.0 Current account bal/GDP (%) 2.7 0.6 -0.4 0.1 -0.2 -0.3 -0.3 Antigua and Barbuda b GDP at market prices (% annual growth) 3.4 -8.5 -3.0 1.6 1.9 2.9 3.1 Current account bal/GDP (%) -14.8 -14.8 -10.8 -12.1 -12.1 -12.9 -13.0 Belize b GDP at market prices (% annual growth) 5.0 2.7 2.0 5.3 2.6 3.0 3.1 Current account bal/GDP (%) -12.9 -2.8 -1.1 -2.6 -3.5 -3.8 -3.7 Bolivia b GDP at market prices (% annual growth) 3.4 4.1 5.2 5.2 4.7 4.3 4.1 Current account bal/GDP (%) 3.9 3.9 1.4 7.4 6.4 5.6 5.0 Brazil b GDP at market prices (% annual growth) 2.9 7.5 2.7 0.9 2.9 4.0 3.8 Current account bal/GDP (%) -0.7 -2.2 -2.1 -2.3 -2.7 -3.1 -3.3 Chile b GDP at market prices (% annual growth) 3.2 5.8 5.9 5.6 4.9 4.5 4.7 Current account bal/GDP (%) 0.8 1.5 -1.3 -3.4 -3.8 -3.8 -4.1 Colombia b GDP at market prices (% annual growth) 3.7 4.0 6.6 4.0 3.9 4.2 4.3 Current account bal/GDP (%) -1.4 -3.1 -2.9 -3.0 -3.4 -3.2 -2.9 Costa Rica b GDP at market prices (% annual growth) 3.8 5.0 4.4 5.1 4.0 4.1 4.2 Current account bal/GDP (%) -5.0 -3.6 -5.4 -5.2 -4.4 -4.0 -3.7 Dominica b GDP at market prices (% annual growth) 2.4 1.2 1.0 0.4 1.4 1.6 2.0 Current account bal/GDP (%) -18.2 -16.2 -12.9 -13.5 -12.4 -11.7 -11.1 Dominican Republic b GDP at market prices (% annual growth) 4.5 7.8 4.5 3.9 2.5 3.7 4.4 Current account bal/GDP (%) -2.6 -8.4 -7.9 -7.0 -5.5 -4.5 -3.7 Ecuador b GDP at market prices (% annual growth) 4.2 3.3 8.0 4.7 3.8 3.9 3.8 Current account bal/GDP (%) 1.0 -2.8 -0.2 -0.5 -1.3 -1.5 -1.7 El Salvador b GDP at market prices (% annual growth) 2.0 1.4 2.0 1.6 1.9 2.1 2.5 Current account bal/GDP (%) -3.8 -2.7 -4.7 -5.2 -5.3 -5.1 -4.8 Guatemala b GDP at market prices (% annual growth) 3.4 2.9 4.1 3.0 3.5 3.6 3.8 Current account bal/GDP (%) -4.8 -1.6 -3.3 -2.9 -2.9 -3.2 -3.4 Guyana b GDP at market prices (% annual growth) 2.1 3.6 5.2 3.9 4.7 4.5 4.3 Current account bal/GDP (%) -9.0 -7.2 -8.6 -14.1 -14.3 -15.0 -15.2 Honduras b GDP at market prices (% annual growth) 3.8 3.7 3.7 3.3 3.5 3.3 3.2 Current account bal/GDP (%) -6.7 -5.4 -8.5 -9.5 -11.2 -8.5 -8.4 Haiti b GDP at market prices (% annual growth) 0.6 -5.4 5.6 2.8 3.4 4.2 3.9 Current account bal/GDP (%) -6.8 -9.5 -3.7 -4.0 -3.7 -4.0 -4.3 159 GLOBAL ECONOMIC PROSPECTS | June 2013 Latin America and the Caribbean Annex Est. Forecast 00-09a 2010 2011 2012 2013 2014 2015 Jamaica GDP at market prices (% annual growth) b 1.0 -1.5 1.3 -0.8 0.5 1.5 1.7 Current account bal/GDP (%) -10.2 -6.7 -13.5 -11.7 -11.1 -9.1 -6.7 Mexico GDP at market prices (% annual growth) b 1.2 5.3 3.9 3.9 3.3 3.9 3.8 Current account bal/GDP (%) -1.5 -0.2 -0.8 -0.8 -0.9 -1.1 -1.2 Nicaragua GDP at market prices (% annual growth) b 2.8 3.6 5.5 5.2 4.2 4.2 4.4 Current account bal/GDP (%) -17.3 -10.0 -13.2 -12.8 -13.6 -13.2 -12.3 Panama GDP at market prices (% annual growth) b 5.6 7.5 10.6 10.0 7.5 7.0 6.5 Current account bal/GDP (%) -4.8 -9.9 -10.5 -9.2 -9.5 -9.2 -8.8 Peru GDP at market prices (% annual growth) b 4.8 8.8 6.9 6.3 6.0 5.9 5.8 Current account bal/GDP (%) -0.7 -2.5 -1.9 -3.6 -2.9 -3.4 -3.6 Paraguay GDP at market prices (% annual growth) b c 2.3 15.0 4.0 -2.1 10.2 1.7 3.1 Current account bal/GDP (%) 0.1 -3.7 -1.3 -2.6 -1.4 -2.2 -2.8 St. Lucia GDP at market prices (% annual growth) b 2.1 3.2 0.6 -0.2 1.2 1.7 2.0 Current account bal/GDP (%) -19.6 -17.1 -19.0 -18.1 -15.7 -13.5 -11.6 St. Vincent and the Grenadines GDP at market prices (% annual growth) b 2.8 1.0 1.5 3.1 1.9 2.5 3.0 Current account bal/GDP (%) -18.8 -30.6 -28.7 -27.8 -26.7 -25.9 -25.0 Suriname GDP at market prices (% annual growth) b 4.4 4.1 4.7 4.5 4.5 4.5 5.0 Current account bal/GDP (%) 9.8 6.5 5.6 6.2 5.2 3.8 2.1 Uruguay GDP at market prices (% annual growth) b 2.1 8.9 6.5 3.9 3.8 4.1 4.3 Current account bal/GDP (%) -1.3 -1.9 -2.8 -5.3 -4.2 -4.5 -4.1 Venezuela, RB GDP at market prices (% annual growth) b 3.3 -1.5 4.2 5.5 1.4 2.4 2.2 Current account bal/GDP (%) 10.0 2.9 7.9 3.0 4.1 4.0 3.8 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. Cuba, Grenada, St. Kitts and Nevis, are not forecast owing to data limitations. a. GDP growth rates over intervals are compound average; current account balance shares are simple averages over the period. b. GDP measured in constant 2005 U.S. dollars. c. GDP excluding binational corporations. 160 GLOBAL ECONOMIC PROSPECTS | June 2013 Latin America and the Caribbean Annex Increasingly risks are domestic in nature, and stem A further risk stemming from the current in part from the challenges of getting the correct environment of easy external financing conditions balance between macroeconomic policies to and increased search for yield by international stimulate demand in the short-term and structural investors is that countries and private agents in the reforms to spur faster growth over the longer run. region may take on too much debt or have large currency or maturity mismatches. Real credit For those larger economies in the region where growth has expanded rapidly in several countries in growth has slowed in the post-crisis period despite the region, including in Brazil, Mexico, and Peru, prolonged efforts at demand stimulus, the evidence while several Caribbean countries are already seems to be accumulating that policies to boost burdened by very high debt levels. domestic demand will not lead to higher growth if not accompanied by growth-enhancing policies Over the longer term external financial conditions that deal with supply side inefficiencies. Failure or are likely to become tighter as high-income delays in implementing such reforms could hold countries unwind their long-term positions and as growth hostage over the medium term. base rates and spreads start to rise. Higher financing costs will likely reduce investment Ample global liquidity and higher capital flows has spending and growth in developing countries and complicated the task of conducting monetary may also expose unsustainable positions made policy and there is a risk that relatively low interest possible by very easy external financing. Asset rates in some of the financially integrated prices that have grown rapidly in the current economies might fuel rapid credit growth and environment may reverse course precipitously, contribute to inflation pressures. In some cases stressing banking systems in the region. temporary and transparent capital controls may be warranted to help manage capital flows and prevent build up of vulnerabilities in financial systems. In so far as the overall international environment is less volatile countries may wish to give greater weight to the domestic inflationary pressures that these policies may be generating. 161 GLOBAL ECONOMIC PROSPECTS | June 2013 Latin America and the Caribbean Annex Notes 1. Potential output is estimated by the World Bank, based on a production function methodology, using an estimate of total factor product growth based on the average TFP growth between 1995 and 2005, and an estimate of the capital stock constructed using investment data, the perpetual inventory method and assumed depreciation rate of 7 per cent, and the working-age population as the labor input (consistent with a constant labor force participation and natural unemployment rates). See Nehru and Dhareshwar (1993) for an earlier attempt at using a similar meth- odology. 2. Weighted average of remittances as a share of recipient country’s GDP. 3. Price controls in Argentina have helped contain inflation. References De la Torre, Augusto, Eduardo Levy Yeyati, Samuel Pienknagura. 2013. “Latin America and the Caribbean as Tail- winds Recede: In Search of Higher Growth.” LAC Semiannual Report, World Bank, Washington, DC.. International Monetary Fund. 2013a. “World Economic Outlook: Hopes, Realities, Risks.” World Economic and Financial Surveys. Washington, DC: IMF. Nehru, Vikram and Ashok Dhareshwar. 1993. “A New Database on Physical Capital Stock: Source Methodology and Results”. Revista de Analisis Economico, Vol 8. No 1., pp. 37 -69. June World Bank. 2013. “Migration and Development Brief 20”. 2013 April. 162 GLOBAL ECONOMIC PROSPECTS | June 2013 Middle East and North Africa Annex Annex GLOBAL ECONOMIC June PROSPECTS 2013 MIDDLE EAST and NORTH AFRICA REGION 163 GLOBAL ECONOMIC PROSPECTS | June 2013 Middle East and North Africa Annex Overview help lift growth towards potential in Morocco and Tunisia. Jordan’s and Lebanon’s GDP growth is expected to remain subdued in 2013 reflecting spillovers from Syria. More than two years after the Arab Spring began, Risks and vulnerabilities: Political economic activity remains weighed down by uncertainty, polarization and elevated political tensions and continued civil strife conflict. Prolonged political crises and in the region. Regional growth accelerated to 3.5 conflicts—elections are upcoming in several percent in 2012 from minus 2.2 percent in 2011 economies and conflicts are gaining intensity in reflecting mainly a rebound in Libya’s crude oil Iraq and Syria—pose risks to near term recovery, production to pre-war levels that doubled real and to long term potential growth rates by GDP and a weak growth recovery in Egypt (to 2.2 depressing investment and increasing the likelihood percent in FY2012 from 1.8 percent in FY2011). that urgent structural reforms are delayed. More Iran, the region’s largest economy, slipped into generally the long term structural challenges facing recession, with GDP falling by an estimated 1.9 the region – which are a source of current volatility percent due to international sanctions and lower oil – remain the same as before the Arab Spring. A output while Algeria’s growth remained subdued at failure of political consensus needed to tackle these 2.5 percent, supported by expansionary fiscal structural weaknesses will mean that they will likely policy. Domestic demand and exports in Syria contribute to low growth rates even when calm collapsed last year as the civil war intensified, with returns to the region. spillovers affecting activity in Jordan and Lebanon. Drought in Morocco reduced growth to 2.7 We a k e n i n g m a c r o e c o n o m i c percent from 5.0 percent in 2011. fundamentals and rising fiscal sustainability risks. Rising fiscal outlays to Outlook for 2013-15: Regional prospects fund difficult-to-reform food and fuel subsidies are depend critically on the evolution of domestic and generating serious fiscal and current account cross-border political tensions. Aggregate regional imbalances among oil importers – a situation growth is forecast to slow to 2.5 percent in 2013 exacerbated by rising borrowing costs and mainly due to weakness in the region’s three largest exchange rate depreciation, although the recent economies, before recovering to 4.2 percent in moderation in global food prices could provide 2015 as tensions ebb and the Euro Area, the some respite in the near term. region’s main trading partner, recovers. Euro Area and US recovery. Protracted Within the region, Egypt’s GDP growth is forecast weakness in the Euro zone would hurt economies to slow to 1.6 percent in FY2013 on elevated with close trade, investment and financial ties to it. political tensions and worsening macroeconomic Any increase in global risk aversion would also imbalances, before recovering to about 4.8 percent reduce already depressed capital inflows into the in FY2015 as political tensions recede and reforms region. On the upside, better-than-expected are undertaken, although there remain considerable economic outcomes in the US and Euro Area downside risks to this forecast. GDP in Iran is should support growth, particularly in forecast to contract for the second straight year by economies where political tensions are 1.1 percent due to sanctions and soaring inflation relatively muted. before recovering to about 1.9 percent in 2015. Growth in Algeria is expected to rise modestly to Commodity price and geo-political 2.8 percent due in part to temporary disruptions to developments: Oil exporters in the region oil production, before firming to about 3.5 percent could be very vulnerable if the projected gradual in 2015. Elsewhere, growth in Iraq and Libya is decline in commodity prices occurs more sharply expected to remain relatively buoyant driven by than in the baseline. While benefitting importers, it their mineral sectors, although rising violence poses would cut into incomes, government revenues and a risk to near term stability in Iraq. Meanwhile foreign currency earnings of oil exporters – forcing rising farm output in Morocco and strengthening potentially significant adjustments. external demand over the medium term should 165 GLOBAL ECONOMIC PROSPECTS | June 2013 Middle East and North Africa Annex Recent Developments spending. However, private consumption in both Jordan and Lebanon benefited from added demand associated with a rising influx of Syrian refugees. Although Morocco has remained relatively free from political and social tensions, drought hurt Aggregate regional growth picked up in 2012 in the agricultural output, while weak demand among developing Middle-East & North Africa region to Euro zone trading partners hit manufacturing and 3.5 percent in 2012, mainly reflecting a recovery tourism, with growth slowing to just 2.7 percent from a 2.2 percent contraction in 2011 due to from 5.0 percent in 2011 and the lowest since 2000. social and political unrest in Egypt, and armed conflict in Libya. Political (domestic and Among oil exporters, growth experiences have international) tensions continue to weigh on been mixed. Thanks to a post-conflict recovery in economic activity and investment across the region. oil production, Libya’s GDP expanded by 105 International sanctions are contributing to rising percent in 2012. Growth in Algeria was subdued at inflation and negative growth in Iran, while about 2.5 percent in 2012, supported mainly by spillovers from the intensifying civil conflict in rising government spending financed by relatively Syria, including the disruption of land trading buoyant global energy prices. Post-war increases in routes, have cut into economic activity in Lebanon crude oil production helped sustain an 8.4 percent and Jordan with the latter also affected by energy increase in Iraqi GDP. Output in Iran, however, shortfalls in Egypt. At the same time, weak shrank an estimated 1.9 percent and inflation economic conditions in European trading partners reached over 40 percent this year due to have acted as a drag on non-oil exports and international sanctions and currency depreciations. tourism receipts. Growth is showing signs of recovering in Yemen, but remains fragile with GDP barely expanding 0.1 Among oil importers, growth remained subdued percent in 2012 after contracting 10.5 percent in during 2012 reflecting spillovers from conflict 2011. Although fraught with uncertainty, within the region and weak external demand from indications are that Syria’s conflict has caused Euro Area trading partners. The main exception to GDP to shrink by nearly a third – reflecting a this trend was Tunisia, where GDP growth collapse in both domestic demand and exports. accelerated to 3.6 percent in 2012 from just below 2 percent in 2011, supported by a recovery in tourism and increased domestic demand following Nascent economic recoveries among an earlier relaxation of fiscal policy. Egypt’s oil importers have suffered repeated economy grew by just 2.2 percent in 2012 in fiscal year terms, a modest recovery from the 1.8 percent setbacks over the past year outturn in 2011, supported by higher government spending and record remittance inflows. In Periodic eruptions of political and social tensions calendar terms, the rebound was more substantial – or renewed weakness in the Euro Area have 4.6 percent versus 0.5 percent in 2011 – but repeatedly set back nascent recoveries among reflected a recovery from a low base. developing oil importing economies in the Middle- East & North Africa region, with growth turning Elsewhere, Lebanon’s GDP growth is estimated to increasingly volatile in Egypt and Tunisia. For have remained flat at 1.5 percent in 2012 as instance, since 2011 Egypt has experienced three elevated domestic political uncertainty and separate episodes of a sharp deceleration or spillovers from the conflict in Syria undermined contraction in activity as political and social tourism and scarce public resources came under tensions erupted, punctuating rebounds in activity. pressure from growing numbers of refugees In Tunisia, a recovery in early 2012 led by tourism (estimated at 1 million plus in a total population of and service sector growth was interrupted by social about 4.3 million). At an estimated 2.8 percent, unrest in the second quarter and lower demand in Jordan’s growth was only slightly better than the the Euro Area, the country’s main trading partner. 2.6 percent outturn in 2011, as slower manufacturing growth reflecting a domestic energy Recent high frequency data up till March show a crisis offset higher public and private sector recovery in industrial output in Egypt from last 166 GLOBAL ECONOMIC PROSPECTS | June 2013 Middle East and North Africa Annex producers due to rising domestic uncertainty, and Fig MENA.1 A recovery in industrial output at the increasing reliance by Egypt on exports of crude oil to end of 2012 lost momentum in Tuni- cover imports and debts, leaving less for refineries to sia and Morocco in Q1 process for domestic use. Egypt’s natural gas exports to % 3m/3m saar % 3m/3m saar Jordan have suffered, at first because of sabotage 80 15 that targeted the Arab Gas Pipeline in 2011, then 60 Egypt, Arab Rep. (LHS) 10 by a temporary suspension of exports last October 40 in an effort to cover a spike in domestic energy 5 demand; and most recently in January this year 20 because of rising social unrest in Egypt. 0 0 -20 -5 Export momentum weakened among some oil importers in the first quarter Oil importers ex Egypt (RHS) -40 -10 -60 -80 -15 Recent seasonally adjusted export earnings data Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 from Q1 (figure MENA.2) indicate that exports are Source: World Bank; Datastream. stabilizing in Egypt and Lebanon after rebounding at the end of last year, but contracting sharply once years trough, led by manufacturing and construction, again in Morocco in Q1. Jordan meanwhile has although PMI surveys up till May indicate weak been hurt by the closure of land trading routes business conditions. Among other oil importers, through Syria: exports to other countries in the momentum has held up in Jordan, but weakened in region – some 50 percent of total exports in 2012 MoroccoOil and Tunisia importers (figure MENA.1). ex Egypt (RHS) (figure MENA.3) – fell by an annualized 21.7 percent seasonally adjusted pace in the three Egypt, Arab Rep. Egypt and by extension Jordan, which has relied on months through February. Tunisia’s exports cheap natural gas imports from the former to produce remained buoyant in Q1 helped by a recovery in electricity, have faced severe energy shortfalls over the past agricultural, textile and some manufacturing exports. year. In both countries – and indeed elsewhere in the region – energy demand has soared in recent years partly due to large subsidies in place. Energy Production in developing MENA oil shortages in Egypt, which is the second largest exporters continues to contract natural gas producer in North Africa after Algeria, reflect a longer term decline in supply, more Industrial output in the MENA region resumed its conservative drilling plans by some major downward trend in the second half of last year as Fig MENA.2 The recovery in exports among oil Fig MENA.3 Jordan, which trades heavily with oth- importers has lost momentum in Mo- er MENA economies, has been hurt by rocco and Jordan the closure of land trading routes 3-month moving average, 2011=100, LCU, sa through Syria 140 Tunisia Exports by destination (% of total, 2012) 100 130 90 Egypt, Arab Rep. 80 70 120 60 50 110 40 Morocco 30 20 100 10 0 Jordan Syria Jordan Iran Lebanon Iraq Egypt Algeria Morocco Tunisia 90 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 Other Developing China MENA Other Adv USA EMU Source: World Bank; Datastream. Source: World Bank; IMF Direction of Trade Statistics. 167 Jordan Morocco Egypt, Arab Rep. Tunisia Jordan EGYIDX3M Morocco Tunisia GLOBAL ECONOMIC PROSPECTS | June 2013 Middle East and North Africa Annex the boost from Libya faded. Aggregate regional start of this year reflecting disputes between production volumes fell by 27.2 percent annualized Baghdad and the semi- autonomous region of in Q4 last year, led by sharp drops of close to 16 Kurdistan that led to a halt in exports from the percent in both Iran and Algeria. Kirkuk Ceyhan pipeline and weather-related disruptions in southern Iraq. Libya’s production More recently, aggregate regional production has also fallen in recent months—most recently by volumes excluding Libya (figure MENA.4) picked 60,000 bpd in March — with reports up in Q1. However this reflected a stabilization in suggesting that an ageing infrastructure is in output in Iran following sharp declines over the affecting output. past year due to crippling US and EU sanctions that had led to oil production falling to 2.63 mbd in Activity in Syria has collapsed as the conflict September - the lowest in 23 years according to has intensified, and it is likely that the economy the International Energy Agency (IEA). As per contracted by nearly a third during 2012, possibly latest IEA estimates, Iran’s production was about even more. As of December 2012 industrial 2.65mbd in May, with the country likely to cut production volumes were half their level at end- output going ahead as exports to Asian buyers 2011. Although difficult to gauge the true extent of dwindle due to a tightening of international economic damage from the conflict, mirror sanctions. Japan for example bought only 8000bd statistics from trading partners indicate that exports of Iranian oil in April, down 97 percent from April and imports fell by an unprecedented 85 and 79 2012. Prior to the sanctions, Iran used to produce percent respectively in 2012. about 3.5mbd and export about 2.5mbd of oil. There have been production setbacks in other Current plans by developing oil countries too, notably Algeria in the aftermath of exporters to significantly raise the militant attacks in mid-January on the Amenas gas plants which account for about 10 percent of investment may prove optimistic the country’s total gas output. Along with a slow recovery from these attacks, heightened security Given stagnating or declining production levels and after the attacks also hurt crude oil production sharply increasing domestic demand, oil exporters which temporarily fell to 1.14 million bpd in March will need to invest heavily in infrastructure, from 1.16 mbd in February according to the IEA, exploration and production to raise production although levels have since recovered. levels. However private capital and FDI inflows may fail to materialize because of security risks, Iraq surpassed Iran as the second largest oil poor legal environments for investment and producer in OPEC at the end of 2012. However political uncertainty, and, in the case of Iran, crude oil production and exports fell slightly at international sanctions. In Iraq, government estimates count on capital Fig MENA.4 Oil exporters ouput contracted for most of expenditures of $30 billion per year in energy 2011 and 2012, led by declines in Iran, and infrastructure to meet its production targets. But recently Algeria progress on this front is likely to be slow due to %3mma, saar 10 Jan 2011=100 150 payment disputes with the Kurdish Regional Libya (RHS) 140 Government, and delays in the passage of a law 5 130 120 that would govern the development of Iraq's oil 110 and gas wealth (the law was first announced in 0 100 90 2008, but has yet to be passed). Algeria is also -5 80 70 planning to invest significantly in hydrocarbon 60 exploration, notably in shale gas, and in refineries. -10 However raising private investment may prove 50 40 Oil importers ex Libya (LHS) -15 30 20 challenging given political uncertainty generated by 10 upcoming presidential elections in spring 2014 and -20 Jan '09 Jul '09 Jan '10 Jul '10 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 0 earlier reversals in investor-friendly provisions in investment laws that may deter investors. Source: World Bank. Algeria Libya Oil exporters ex Libya Libya (RHS) 168 Libya Oil exporters ex Libya Libya (RHS) Iraq MOX_LBY_IRN3MM Libya, RHS IRN3MM Libya Oil Exporters ex Libya Middle East and North Africa Oil exporters MOX_LBY3MM Libya (RHS) GLOBAL ECONOMIC PROSPECTS | June 2013 Middle East and North Africa Annex Inflation pressures built up in 2012, since the start of the year, inflation touched 40.7 percent (y/y) in March. and persist However inflation pressures remain subdued The latest CPI data show that price pressures in several economies, including Morocco and have remained strong, with annual inflation Iraq, helped by generous food and fuel rising close to or over 7 percent (y/y) in subsidies. Inflation in Yemen fell into single- Egypt, Tunisia and Jordan and, to over 10 digits in 2012 to about 7 percent (but has percent (y/y) in Lebanon in the first few since accelerated), from a peak of 24.6 months of 2013 (figure MENA.5). In part percent in October 2011, as improving this reflects partial fuel and energy tariff security eased supply bottlenecks after the reforms in some economies (Jordan, Tunisia, formation of transition government in early Egypt) to contain soaring fiscal burdens from 2012. Inflation in Algeria decelerated to 3.1 subsidies. In Jordan and Egypt, shortfalls in percent in April on slower growth in (mostly energy provision slowed production in other imported) food prices. sectors and contributed to inflation pressures, with the latter also affected by a 13 percent depreciation of the currency since December. Tourism-related revenues and jobs Growing inflation pressures in Egypt also improved slightly in 2012, likely reflect the negative impact of prolonged political and social tensions on Tourism inflows, a key source of foreign absorptive capacity and potential output in exchange and jobs (figure MENA.6) in the the face of continued sharp increase in region, are recovering. According to the government expenditures (up 30 percent y/y United Nations World Tourism Organization in the first half of FY 2013). (UNWTO), aggregate tourist arrivals in North African economies rose 8.7 percent to 18.5 Similar supply side constraints, combined million in 2012, only slightly below the peak with sanctions and a sharp fall in the value of of 18.8 million visitors in 2010. In Tunisia, the Iranian Rial have contributed to rising tourism revenues in 2012 reached $2.1 inflation in Iran, which (per official billion, up 30 percent from the previous year, estimates) touched 38.5 percent in December. supporting a strong recovery in the service The market value of the Iranian currency sector. In Egypt, tourism revenues stabilized dropped to 37,000 Rial per US Dollar in at around $10bn during 2012, although well October from 25,000 in September compared below the $12.5 billion earned in 2010. As a to an official exchange rate of about 12,000 result, the sector, which employs roughly one Rial. With the currency dropping further in every eight Egyptian workers (directly and Fig MENA.5 Inflation remains persistently high in Fig MENA.6 A significant share of the workforce is many economies employed by the tourism industry % y/y % y/y 45 45 1000's % 3,500 30 40 40 3,000 Indirect Employment (LHS) 25 35 Latest Inflation Inflation Peak 2012 35 Direct Employment (LHS) 30 30 2,500 % of total employment 20 25 25 2,000 15 20 20 1,500 15 15 10 1,000 10 10 500 5 5 5 0 0 0 0 IRQ MAR ALG JOR TUN EGY LBN YEM IRN LBY IRN YMN ALG SYR EGY TUN MOR JOR LBN Source: World Bank; Datastream. Source: World Bank; UNWTO; World Travel and Tourism Council. 169 GLOBAL ECONOMIC PROSPECTS | June 2013 Middle East and North Africa Annex Fig MENA.7 A modest recovery in tourism during Fig MENA.8 Unemployment rates have declined 2012 has yet to reverse sharp job modestly in some countries, but losses in the sector during 2011 generally remain high Unemployment rate, % 2009 20 200 Change in Employment in Tourism Sector 20 2011- peak 18 latest 100 10 16 0 14 0 12 -100 10 -200 -10 8 Indirect Employment, 2010-12 (change, 1000's) -300 -20 6 Direct employment, 2010-12 (change, 1000's) -400 4 Change in direct employment, 2012 (% y/y, RHS) -30 2 -500 na na 0 -40 -600 Egypt Iran Morocco Tunisia Jordan Yemen* Iraq -700 -50 Source: World Bank. * range for Yemen WorldSYR Source: EGY TUN Bank; YMN World UNWTO; LBN Travel JOR MOR LBY ALG and Tourism IRN Council. indirectly), only shed 14,000 jobs per industry percent in 2011 to 16.7 percent in 2012 helped by a estimates, versus half a million or so tourism recovery in tourism. Growing tourism inflows have related losses during 2011 (figure MENA.7). also supported a decline in official unemployment rates in Jordan, Morocco and Iran. The number of tourists to the Middle East economies (including high-income economies Nonetheless, unemployment remains extremely in the region) fell at a slightly slower pace in high (figure MENA.8), particularly among the 2012 (-4.9 percent vs -6.7 percent in 2011) to youth and in urban areas. In oil exporting 52.6 million. Jordan, which reported a 15.3 economies, strong growth in capital-intensive percent increase in earnings in 2012, Morocco hydrocarbon sectors has boosted overall growth, and Iran have benefited from instability in but failed to generate many jobs. For instance, in neighboring countries, attracting visitors Iraq, the oil sector accounts for only 1 percent of from the GCC economies and Central and total employment versus a contribution to GDP of South Asia that otherwise would have headed about two-thirds. In addition, large commodity to traditional tourist hotspots such as Egypt export inflows contribute to Dutch Disease and Lebanon. pressures, undermining the development of non-oil sectors that could potentially provide jobs. More Recent data however suggest that tourism generally, job creation across the region is being related gains in Tunisia and Egypt are likely held back by a difficult business climate (figure to have been lost in the wake of recent social MENA.9), and further hampered by political and unrest. Revenues from tourism fell 7.5 economic uncertainty among oil importing percent from a year earlier in Q1 in Tunisia, economies. hit by security concerns after a political assassination in February, although the unrest has since eased. Reports from Egypt indicate Remittance inflows rose during 2012 sharp drops in hotel occupancy. With remittance inflows estimated at $49 billion in Unemployment rates have eased 2012, the Middle East and North Africa region experienced the fastest expansion of remittances in slightly, but remain high the world, growing by 14.3 percent in 2012 compared with 2011 (World Bank, 2013). Egypt High levels of unemployment, one of the catalysts received a record US$19 billion (8 percent of for the Arab Spring uprisings, have shown modest GDP), up from $14.3 billion in 2011, making it the signs of improvement in some economies. In sixth largest receiver of official remittances in the Tunisia, the official jobless rate fell from 18.9 world. Although Egypt has a large stock of highly 170 GLOBAL ECONOMIC PROSPECTS | June 2013 Middle East and North Africa Annex Fig MENA .9 …In part reflecting a difficult busi- Fig MENA.10 Fiscal balances have deteriorated in ness climate made worse by political the region as have debt levels uncertainty and social unrest Fiscal Bal (% of GDP 2011, RHS) 160 25 180 Fiscal Bal (% of GDP 2012, RHS) Ranking in Doing Business Indicators, 2012 140 Public Debt (% of GDP, 2012) 20 160 140 15 120 120 10 100 100 5 80 80 60 0 60 40 -5 20 40 -10 0 20 Morocco Tunisia Middle East & NA Jordan Djibouti Latin Am. & Car. Egypt Yemen West Bank &Gaza Syria Algeria Iraq East Asia & Pac Lebanon Iran Sub-Saharan Af. -15 Europe & C. Asia 0 -20 Egypt Yemen Iraq Libya Jordan Morocco Iran Lebanon Tunisia Algeria Source: World Bank. Source: World Bank; Datastream; IMF. skilled expatriates in the US, the UK and other Rising fiscal deficits and public sector debt have OECD countries, about two-thirds of its migrants added to growing fiscal sustainability concerns, are working in oil rich countries within the MENA notably in Lebanon and Egypt where spending region, which benefitted from relatively buoyant oil pressures exacerbated by rising borrowing costs prices last year. Inflows were up by 10 percent in have pushed interest expenditures to about 40 Tunisia and 6 percent in Jordan but remained percent and 25 percent of total revenues broadly stable at about US$7.4 billion in Lebanon. respectively in these economies. To finance its revenue shortfalls Egypt has relied heavily on Public finances have deteriorated borrowing from the domestic banking sector, and grant aid from the Gulf economies. Rising public- sharply raising fiscal sustainability sector borrowing is crowding out private sector concerns borrowing and increasing the exposure of the banking sector to sovereign risk. Meanwhile, delays in tax reforms have delayed the approval of a Broad structural public finance reforms are needed US$4.8billion loan from the IMF, and in turn, in developing MENA economies, to ensure fiscal assistance from other multilateral and bilateral sustainability, and to limit vulnerability to adverse partners despite indications that the fiscal deficit economic shocks. Public expenditures as a share of will reach over 12 percent of GDP in FY2013. GDP tend to be large, and dominated by relatively Among oil exporters, fiscal surpluses have rigid wages and entrenched subsidies, with a shrunk as revenues, despite strong growth, narrow revenue base heavily dependent on have failed to keep pace with surging public revenues from a few key sectors. expenditures. Deteriorating public finances during 2012 (figure A number of economies are attempting fiscal MENA.10) in the region reflected a number of consolidation in order to manage funding pressures factors. These include: slippage in revenues due to and risks, with a focus on fuel and food subsidies underlying economic weakness; rising costs of given their significantly large share of total imported but heavily subsidized food and fuel spending. Jordan liberalized fuel prices last year as commodities; and expansionary fiscal policies part of an IMF $2billion loan program, and a to shore up flagging economies and to gradual reform of electricity tariffs is planned this contain social discontent. Government summer to curb contingent liabilities associated outlays were up 15 percent and 11 percent with rising indebtedness of the state owned (y/y) in Algeria and Morocco during 2012 electricity company (which has been forced to sell and by 30 percent (y/y) in the first half of the power at below cost). Tunisia raised fuel prices by current fiscal year in Egypt. nearly 7 percent in March, the second hike in six 171 GLOBAL ECONOMIC PROSPECTS | June 2013 Middle East and North Africa Annex month, despite strong domestic opposition as led by a sharp drop in merchandise exports and inflation has increased. Algeria’s 2013 budget plans surging imports. support fiscal consolidation of about 2 percent of GDP in the overall balance led by a decline in Trade deficits have shown signs of modest public sector wage expenditures, but worryingly improvement entering 2013 in Jordan, Lebanon, also predicated on continued buoyancy in Egypt and Tunisia. Foreign exchange reserves have commodity prices and strong external demand also been partly bolstered in recent months which may not materialize. Lebanon, which posted reflecting external support from the IMF (Jordan), a modest primary deficit of 0.4 percent in 2012, its support from other regional economies (Jordan, first in several years, on rising public sector wage Morocco and Tunisia), a rebound in foreign direct costs and weak revenue growth, is planning 3 investment in Tunisia (up 85 percent during 2012) percent worth of GDP expenditure cuts during and short term private capital inflows in Lebanon. 2013. That said, excepting Lebanon, reserves are down by roughly a quarter in Tunisia, Jordan and However, fiscal reforms have slowed in Morocco, Morocco compared to January 2011, amounting to and Iran. Following a small hike in fuel prices in only slightly higher than the critical 3 month June and a cut in the subsidy of imported wheat import cover threshold in Tunisia and Jordan. last year, Morocco has shifted consolidation efforts towards cuts in public investment spending (of In Egypt, reserves are down by two-thirds from about 2 percent of GDP for 2013) despite a January 2011 (figure MENA.11), amounting to less subsidy bill estimated at 6 percent of the GDP. than 2 months of import cover and the currency Although subsidy reforms have been proposed has fallen some 12 percent since late December. they remain highly politically contentious. Iran’s Dwindling reserves have forced the central bank to parliament has blocked the second phase of fuel hold weekly foreign exchange auctions since subsidy reforms, with budget proposals for 2013 December, and to raise its benchmark rate to 10.25 projecting about a one-third increase in overall percent (up 75bp) in March to support the spending over 2012 levels. Recently Egypt has currency and combat inflation. Reflecting Egypt’s taken some tentative steps towards liberalizing fuel precarious fiscal and external position, CDS and energy subsidies and tax reforms are also in the spreads have widened substantially to close to 700 works as the fiscal situation has deteriorated, but basis points and the country has received reforms remain difficult given lack of political substantial financing assistance from Qatar and consensus and elevated social tensions. Libya. External vulnerability has increased Current account positions among oil importers improved last year, but are likely to face pressures among oil importers this year reflecting lower oil prices, and growing Rising current account deficits and balance of Fig MENA.11 Foreign exchange reserves have fall- payments pressures combined with managed or en sharply in some oil importing fixed exchange rates have resulted in external economies financing difficulties, falling foreign exchange Jan 2011=100 120 reserves (figure MENA.11), and repeated sovereign Lebanon credit rating downgrades in several oil importing 100 Tunisia economies in the region. Higher current account 80 deficits reflected an increasing cost of food imports compounded by weak European demand for 60 Jordan Morocco North African exporters, reaching over 16 percent of GDP in Jordan and Lebanon (despite 40 remittances estimated at 18 percent of GDP in the 20 Egypt, Arab Rep. latter), and 9.6 percent in Morocco and 8.1 percent in Tunisia. Egypt posted a 3.1 percent of GDP 0 2011 2011 2012 2012 2013 deficit, with the trade deficit rising to 10.4 percent Source: World Bank, Datastream. 172 GLOBAL ECONOMIC PROSPECTS | June 2013 Middle East and North Africa Annex import needs as they invest in production and refining capacities. Libya’s current account Outlook position has improved, buoyed by recovery in crude oil production and continued elevated international prices, but current account positions have deteriorated in Syria and Iran, with the latter The outlook for the region as a whole remains facing difficulty in securing buyers for its oil in Asia dominated by domestic political developments, as international sanctions have tightened. with added risks from external demand, commodity price and geo-political developments. Financial flows to the region Output for the region as a whole is projected to rise by 2.5 percent in 2013 (table MENA.2), and recovered slightly in 2012 but remain gradually firm to 3.5 percent and 4.2 percent in much lower than in 2010 2014 and 2015, buoyed on the one hand by stronger demand in the Euro Area and an assumed easing of regional political tensions, but held back Capital flows to the developing MENA on the other hand by declining oil prices and an region recovered modestly in 2012 to an assumed tightening of macroeconomic policies that estimated $17.5 billion after almost halving to begins to alleviate growing fiscal and inflation $15.8 billion in 2011. The improvement tensions. reflected an increase in net FDI flows (up 22 percent) to Egypt, Morocco and Tunisia, In Egypt, the near term outlook remains although overall levels remain well below pre- difficult reflecting weak investor and Arab Spring inflows (table MENA.1). consumer confidence on account of Morocco and Lebanon have also successfully upcoming elections in the fall, widening fiscal issued sovereign debt over the last year worth and current account imbalances and delays in $1.5billion (in December) and $1.1 billion (in negotiating an IMF program. Egypt is April, 20 percent of which was bought by expected to import natural gas for the first overseas investors) respectively. Other time in decades which will further add to sovereigns including Jordan and Egypt are external financing pressures. Official considering debuting sukuk bonds later this estimates project a bumper wheat harvest this year in international capital markets to year in Egypt, which could reduce food finance fiscal deficits. imports, but these are regarded as too Table MENA.1 Net Capital Flows to Middle East and North Africa 173 GLOBAL ECONOMIC PROSPECTS | June 2013 Middle East and North Africa Annex optimistic by some observers. Absent any signs of recovery in Q1, but a slow pace of major fiscal or balance of payments crisis, recovery in Euro zone, its main trading partner, growth is expected to slow to 1.6 percent in should temper gains in external demand and the current fiscal year from 2.2 percent last tourism inflows in 2013. Accordingly, growth is year. Conditional upon a subsiding in political expected to rise to about 3.8 percent, only slightly tensions and reforms being undertaken, higher than 3.6 percent in 2012, and to gradually growth should firm to about 3.0 percent next pick up further to about 5 percent in 2015 as year and to about 4.8 percent in 2015, the external and internal environment although this forecast remains subject to improves. substantial downside risks (table MENA.3). Growth in Jordan is forecast to pick up somewhat Growth is expected to pick up slowly in Tunisia. to 3.3 percent in 2013 (from 2.8 percent), as Although civil unrest experienced in February has confidence in the economy improves due to receded, there remain tensions between reforms taken as part of the IMF program, and also conservative and secular forces. Exports showed reflecting the boost to sentiment and activity from Table MENA.2 Middle East and North Africa forecast summary (annual percent change unless indicated otherwise) Est. Forecast 00-09a 2010 2011 2012 2013 2014 2015 b GDP at market prices 3.9 4.6 -2.2 3.5 2.5 3.5 4.2 (Sub -region totals-- countries with full NIA + BOP data) c c GDP at market prices 4.3 4.9 1.2 -0.3 1.2 2.6 3.5 GDP per capita (units in US$) 2.8 3.3 -0.4 -1.8 -0.3 1.1 2.1 PPP GDP d 4.3 5.2 1.0 -0.4 0.9 2.4 3.4 Private consumption 4.1 4.2 2.8 0.7 2.2 3.0 3.9 Public consumption 3.7 3.6 3.8 2.9 3.5 3.1 3.2 Fixed investment 6.9 3.0 2.7 -0.6 1.3 2.5 3.3 Exports, GNFS e 4.3 5.5 -3.5 -8.1 0.9 3.5 5.0 Imports, GNFS e 7.5 4.8 0.2 0.6 4.8 6.2 5.4 Net exports, contribution to growth -0.6 0.2 -1.3 -3.0 -1.4 -1.2 -0.5 Current account bal/GDP (%) 5.2 1.6 1.5 -1.9 -3.3 -3.4 -3.1 GDP deflator (median, LCU) 5.9 8.4 6.4 4.2 4.2 3.7 3.3 Fiscal balance/GDP (%) -0.5 -2.4 -3.7 -6.5 -6.4 -5.3 -4.7 Memo items: GDP MENA Geographic Region f 4.1 4.8 3.6 2.5 2.6 3.2 3.8 Selected GCC Countries g 3.8 4.6 6.1 5.3 3.8 3.8 4.0 Developing Oil Exporters 3.6 4.5 -4.4 3.5 2.1 3.1 3.8 Developing Oil Importers 4.5 4.8 1.6 3.5 3.1 4.1 4.7 Egypt 4.4 6.0 0.5 4.6 2.3 3.9 4.9 Fiscal Year Basis 4.3 5.3 1.8 2.2 1.6 3.0 4.8 Iran 4.6 5.9 1.7 -1.9 -1.1 0.7 1.9 Algeria 3.4 3.3 2.4 2.5 2.8 3.2 3.5 Source : World Bank. a. Growth rates over intervals are compound weighted averages; average growth contributions, ratios and deflators are calculated as simple averages of the annual weighted averages for the region. b. GDP at market prices and expenditure components are measured in constant 2005 U.S. dollars. c. Sub-region aggregate excludes Iraq and Libya, for which data limitations prevent the forecasting of GDP components or Balance of Payments details. d. GDP measured at PPP exchange rates. e. Exports and imports of goods and non-factor services (GNFS). f. Geographic region includes high-income countries: Bahrain, Kuwait, Oman, United Arab Emirates and Saudi Arabia. g. Selected GCC Countries: Bahrain, Kuwait, United Arab Emirates, Oman and Saudi Arabia. 174 GLOBAL ECONOMIC PROSPECTS | June 2013 Middle East and North Africa Annex Table MENA.3 Middle East and North Africa forecast summary Est. Forecast 00-09a 2010 2011 2012 2013 2014 2015 Algeria GDP at market prices (% annual growth) b 3.4 3.3 2.4 2.5 2.8 3.2 3.5 Current account bal/GDP (%) 22.3 7.3 10.5 7.7 5.4 4.5 3.9 Egypt, Arab Rep. GDP at market prices (% annual growth) b 4.4 6.0 0.5 4.6 2.3 3.9 4.9 Fiscal Year Basis 4.3 5.3 1.8 2.2 1.6 3.0 4.8 Current account bal/GDP (%) 1.1 -2.0 -2.3 -3.1 -3.5 -2.8 -2.1 Iran, Islamic Rep. GDP at market prices (% annual growth) b 4.6 5.9 1.7 -1.9 -1.1 0.7 1.9 Current account bal/GDP (%) 6.4 7.1 5.9 -0.1 -2.5 -3.3 -3.0 Iraq GDP at market prices (% annual growth) b -1.0 0.8 8.5 8.4 9.0 8.0 8.0 Current account bal/GDP (%) 3.0 12.5 7.0 3.8 3.0 4.0 Jordan GDP at market prices (% annual growth) b 6.1 2.3 2.6 2.8 3.3 3.4 4.5 Current account bal/GDP (%) -4.4 -7.1 -12.0 -17.3 -15.4 -14.2 -12.7 Lebanon GDP at market prices (% annual growth) b 4.4 7.0 1.5 1.5 2.0 2.3 4.0 Current account bal/GDP (%) -16.8 -20.4 -12.5 -13.8 -14.7 -13.6 -13.2 Libya GDP at market prices (% annual growth) b 3.8 3.5 -53.9 104.5 15.0 10.0 8.0 Current account bal/GDP (%) 19.5 9.1 35.8 24.0 18.0 9.0 Morocco GDP at market prices (% annual growth) b 4.6 3.7 5.0 2.7 4.5 4.8 4.7 Current account bal/GDP (%) 0.2 -4.5 -7.9 -9.5 -9.7 -8.8 -8.0 Syrian Arab Republic GDP at market prices (% annual growth) b,c 4.6 3.2 -3.2 -30.0 -10.0 -2.0 3.0 Current account bal/GDP (%) 2.7 -0.6 -1.7 -8.2 -8.8 -7.5 -6.7 Tunisia GDP at market prices (% annual growth) b 4.1 3.0 -1.8 3.6 3.8 4.8 5.1 Current account bal/GDP (%) -2.7 -4.8 -7.4 -8.1 -8.4 -7.4 -6.4 Yemen, Rep. GDP at market prices (% annual growth) b 3.5 7.7 -10.5 0.1 4.3 4.5 4.6 Current account bal/GDP (%) 1.2 -3.7 -4.0 -1.4 -2.3 -2.8 -2.1 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. Djibouti, West Bank and Gaza are not forecast owing to data limitations. a. GDP growth rates over intervals are compound average; current account balance shares are simple averages over the period. b. GDP measured in constant 2005 U.S. dollars. c. The estimate for GDP decline in Syria in 2012 is subject to significant uncertainty. 175 GLOBAL ECONOMIC PROSPECTS | June 2013 Middle East and North Africa Annex the signing of an $18bn deal with Iraq to build an up, including inflows from GCC economies oil pipeline from southern Iraq to Aqaba. The into construction and tourism sectors which pipeline which is expected to be completed by 2017 have been diverted elsewhere into the region. should help spur FDI and domestic activity and For the region, equity inflows are also help lift growth to over 4 percent by 2015. expected to recover but should remain However there remain downside risks from the modest compared to the pick up in bond conflict in Syria. Morocco’s economy should inflows. benefit from the recovery in agricultural sector output, which should lift growth to about 4.5 percent in 2013 from 2.7 percent in 2012 and to remain buoyant at just under 5 percent in the Risks and Challenges medium term supported by the recovery in the Euro Area. Aggregate growth among oil exporters should slow in the near term reflecting a stabilization of The main risks and challenges facing the region are production to a more sustainable pace in Libya, domestic. While a weaker outturn in the Euro recession in Iran and production and export Area would certainly impact the region, its likely setbacks in Algeria and Iraq. Algeria’s growth is influence pales compared with the potential impact expected to pick up modestly to about 2.8 percent of increased social and political tensions, or in 2013 (from 2.5 percent) in 2013 and gradually compared with the likely impact of a failure to firm thereafter. Iran’s economy is expected to address growing macroeconomic imbalances, remain weak until some sort of resolution with including fiscal deficits bloated to unsustainable Western governments over its nuclear issues can be levels by fuel and food subsidies that amount to reached. Until then domestic investment and over a fifth of government revenues in several private consumption should remain subdued with economies (figure MENA.12) and rising debt levels that growth projected at about 1.9 percent in 2015, well threaten long-term fiscal sustainability, and for oil below its average growth of 4.5 percent between exporters the potential impact of a more pronounced 2000 and 2009. than projected decline in commodity prices. Although a tentative agreement on oil payments Political tensions and security risks between the Iraqi government and the Kurdish remain elevated and there are growing signs semi-autonomous region was reached in early May, of domestic political polarization in several longer term plans to raise Iraq's oil output to about economies. Elections are due in a number of 3.3 million bpd (from nearly 3 million bpd countries this year or early next year, making currently) may prove challenging given the recent for a challenging reform environment at a time of history of tensions between the two and also given domestic unrest and persistently high levels of the scale of infrastructure investment needed to realize the higher output. Accordingly medium term growth is projected to remain at close to last Fig MENA .12 Subsidy reforms are crucially needed to improve fiscal sustainability year’s outturns of about 8.5 percent. Near term risks have increased, however, given the % of total revenues 60 % of total GDP 14 escalation in conflict in recent months. 12 50 Capital inflows are expected to recover gradually in 40 Natural Gas Subsidy (LHS) Electricity Subsidy ( LHS) 10 the region, rising to about US$30 billion in 2015, Petroleum Subsidy (LHS) Total Fuel subsides as % of GDP, RHS 8 led mainly by growing FDI inflows as political 30 6 tensions ease and reflecting infrastructure 20 investment opportunities in both oil importing and 4 exporting economies, including Algeria, Iraq and 10 2 Jordan. Private capital flows to Egypt are likely to 0 0 remain weak in the near term due to continued DJI MAR MRT TUN IRQ LBN JOR LBY YMN ALG EGY IRN uncertainty there. However inflows should pick Source: World Bank, IMF (2013). 176 GLOBAL ECONOMIC PROSPECTS | June 2013 Middle East and North Africa Annex unemployment. Already heightened tensions in Commodity price and demand/ Iraq and Lebanon could be further worsened by supply risks: The economies of oil exporters spillovers from Syria, with potentially destabilizing are particularly vulnerable to a shift in the price of effects for these economies. oil. As discussed in the main text, global supply has responded to the higher prices of the past 10 years, Over the longer term, the structural challenges and as a result large gaps have been generated facing the region—and which are currently a between hydrocarbons in North America and the source of ongoing social and political tensions— rest of the world. As existing bottlenecks remain much the same as before the onset of the increasingly allow this new supply (and that coming Arab Spring. Consequently, unless progress is made from Sub-Saharan Africa and elsewhere) to reach on building political and social consensus needed global markets, prices could decline much more to undertake the necessary structural reforms, then quickly than in the baseline. In such an instance it is very likely that the developing Middle East and government revenues and current account balances North Africa region will continue to lag other would come under pressure. developing regions and that growth rates will remain relatively low even when calm is eventually Simulations discussed in the main text show the restored to the region. effects of a fall in real oil prices to $80 per barrel by mid-2014. They suggest that developing oil Much of the region faces very real exporters in the Middle East and North Africa challenges on the fiscal front, due in region (along with exporters in sub-Saharan Africa) part to increased social spending to assuage would be hardest hit by such a decline, with GDP tensions that have arisen in the context of the Arab declining by 1.4 percent relative to the baseline, Spring, but also because of high fuel and food government balances deteriorating by as much as prices that have sharply increased the cost of 2.1 percent of GDP and current account balances subsidy programs (figure MENA.12). Dealing with by 3.5 percent in 2014. For countries, like Algeria this would be difficult enough at the best of times, or Iran, where fiscal balances are already under but is particularly challenging in the current slow pressure this could force sharp adjustments in growth and socially volatile period. Still, with such demand, policy and exchange rates. Conversely, oil expenditures at some 6 percent of GDP in many importers with stressed fiscal and balance of countries, inaction does not appear to be an option. payments positions would benefit from such a Experience from other countries suggests that decline, with GDP 0.5 percent higher relative to explicitly combining a reduction in subsidies with a the baseline on average, and current accounts and reinforcement of targeted assistance of the very fiscal balances improving by 0.5 and 0.2 percent of poor can make such a reform more politically GDP respectively in 2014. acceptable and minimize the negative poverty effects – while still reducing fiscal deficits. In the current environment, regional oil exporters will no longer be able to rely on high and rising Inaction risks a fiscal crisis, where markets prices, but will increasingly need to rely on refuse to finance additional deficits forcing a increased output. This in turn necessitates reforms much sharper, less acceptable and more that would allow them to invest heavily in damaging cut in government spending. This is infrastructure, and exploration to raise current particularly the case for economies running production levels which have stagnated or been low on foreign exchange reserves, with steadily declining in recent years. However, private slowing of domestic reform efforts further capital and FDI inflows may fail to materialize undermining fiscal solvency and investor because of security risks, poor legal environments confidence, both domestic and overseas. In for investment and political uncertainty to varying Egypt, a delay or halt in future aid degrees in Algeria, Iraq, Libya and Yemen and disbursements could spiral into serious international sanctions in the case of Iran. balance of payments difficulties given its already low level of reserves and undermine Economic developments in the confidence in the banking sector which has Eurozone: The Eurozone (and to a lesser high levels of exposure to sovereign debt. extent the US) account for the bulk of the region’s manufacturing, service and hydrocarbon exports. 177 GLOBAL ECONOMIC PROSPECTS | June 2013 Middle East and North Africa Annex Any setback to the ongoing recovery there could undermine exports and tourism in oil importing economies and export and fiscal revenues in Algeria and Iraq. Heightened risk aversion could also reduce already depressed capital inflows into the region and dent confidence, particularly in countries with large macroeconomic imbalances, high levels of debt and severely depleted fiscal and reserve buffers. On the upside, a faster than expected recovery in the Euro Area could provide positive tailwinds to these economies, reducing balance of payment and exchange rate pressures. 178 GLOBAL ECONOMIC PROSPECTS | June 2013 Middle East and North Africa Annex References World Bank. 2013. “Migration and Development Brief 20”, April 2013. IMF. 2013. “Energy Subsidy Reform: Lessons and Implications”, January 2013. http://www.imf.org/external/np/pp/eng/2013/012813.pdf 179 GLOBAL ECONOMIC PROSPECTS | June 2013 South Asia Annex Annex GLOBAL ECONOMIC June PROSPECTS 2013 SOUTH ASIA REGION 181 GLOBAL ECONOMIC PROSPECTS | June 2013 South Asia Annex Overview Outlook for 2013-15 Economic activity in South Asia is projected to strengthen during the course of 2013, buoyed by a gradual strengthening of external demand; a less South Asia’s regional GDP growth slipped to 4.8 volatile external environment; lower crude oil percent in 2012, following a robust recovery in the prices; reduced fiscal pressures due to lower fuel years after the 2008 global financial crisis. A prices and lower subsidies; an improved crop weakening global economy, coupled with domestic (following last year’s weak monsoons); and difficulties (including policy uncertainties, structural continued remittance inflows. However, even as capacity constraints, and a poor harvest) quarterly GDP accelerates, the sharp deceleration contributed to weaker regional growth in 2012. The of growth in 2012 implies that whole year growth bulk of this regional slowdown reflects a continued in 2013 will be a relatively weak 5.2 percent. deceleration in India (to 5 percent in the 2012 fiscal Looking further ahead, the stronger underlying year ending in March 2013), but growth also momentum in 2013, coupled with firming external slowed in other regional economies. Sri Lanka’s demand and improvement in investment spending growth slowed sharply, by nearly 2 percentage (assuming policy and fiscal reforms are sustained), points in 2012. Bangladesh, Pakistan, and Nepal are should help to accelerate the region’s growth to 6.0 expected to experience less marked slowdowns in percent in 2014 and then 6.4 percent in 2015. their respective 2012-13 fiscal years, although Growth in India is projected to rise to 5.7 percent actual growth rates in Pakistan and Nepal are much in the 2013 fiscal year, and accelerate to 6.5 percent lower than in other countries in the region. In and 6.7 percent in FY2014 and FY2015. contrast, Afghanistan experienced double digit growth in 2012. Risks and vulnerabilities The regional trade balance deteriorated in 2012 due to weakening exports and rising demand for crude Risks to the outlook for the region are broadly oil and other imports. India’s current account balanced. deficit widened sharply, but robust remittance inflows bolstered current account positions in External risks are diminishing but remain Nepal, Bangladesh, and Pakistan. External risks from the Euro Area and of fiscal sustainability in the United States have diminished. More recently, activity in South Asia has picked up But the region’s vulnerability to a deterioration in from its mid-2012 slump, with industrial output financial flows has picked up due to rising current rising at different paces in India, Pakistan and account deficits, notably in India. A more rapid Bangladesh in the second half of 2012 and in the than expected decline in commodity prices would first quarter of 2013 - while in Sri Lanka industrial help outturns by reducing current account and production stabilized in the fourth quarter of 2012. fiscal deficits, and by easing inflationary pressures South Asia’s exports (and imports) are also increasing, in and boosting domestic incomes. line with strengthening global trade and output. Domestic challenges are gaining prominence Inflation has moderated in several countries, Domestic issues, including continued progress in helped in part by the easing of international fiscal consolidation; the quality of this year’s rice commodity prices. But in general, consumer price crop; and success in reversing the earlier increase in inflation in the region remains higher than the inflationary expectations will contribute to average for the group of middle-income developing determining the pace of recovery going forward. countries, and inflation expectations are still very Perhaps most importantly, will be continued high in India. In addition, some countries have progress in implementing reforms that relieve stepped up the reform agenda, seeking to contain supply-side constraints, such as reducing energy fiscal deficits (including reduction of subsidies, by supply bottlenecks, labor market reforms, raising end-user fuel and electricity prices), and in improving the business climate, and investing in the case of India, opening the economy further to education, health and infrastructure. international investment. 183 GLOBAL ECONOMIC PROSPECTS | June 2013 South Asia Annex Recent economic A worsening external environment amid intensification of Euro Area debt tensions in mid- developments 2012 caused a severe weakening of exports across the region. Regional exports fell by 4 percent (y/y) in US dollar terms in 2012 (-4.1 percent y/y excluding India), after two consecutive years of more than 30 percent increases. The Euro Area economy, South Asia’s largest export market, GDP in South Asia decelerated sharply during 2012, contracted by 0.5 percent in 2012, and although extending a slowing trend following the rapid recovery policy actions in high income countries stabilized from the financial crisis in 2008. Regional growth financial markets, global trade only began firming slowed from 10 percent in 2010 to 7.3 percent in in the fourth quarter. South Asia’s US dollar 2011, and further to 4.8 percent in 2012 (figure SAR.1). imports continued to rise in 2012, but at a much slower pace (4 percent y/y) compared with a 32 The slowdown in 2012 mainly reflects a continuing percent increase the previous year. steep deceleration in India, which represents about four-fifth of the region’s GDP, to 5.0 percent in In consequence, trade balances as a share of GDP the 2012 fiscal year (April 2012-March 2013) from either deteriorated or trade deficits remained high 6.2 percent in FY2011 and 9.3 percent in FY2010. in the region (figure SAR.2). India’s worsening But growth also slowed in other regional trade deficit was reflected in a sharp widening of its economies. Growth in Sri Lanka slowed sharply, by current account deficit, which reached 6.7 percent almost 2 percentage points in 2012. Fiscal year of GDP in the fourth quarter of 2012. Sri Lanka’s growth in Bangladesh, Pakistan, and Nepal is current account deficit had widened even more estimated to have slowed less markedly in their earlier (to 7.8 percent of GDP in 2011) together respective 2012-13 fiscal years, although actual with an overheating economy. Policy tightening growth rates in Pakistan and Nepal are much lower measures curbed import demand, but weak exports than in other countries in the region. Afghanistan meant that Sri Lanka’s trade deficit remained high, was unique among the larger economies in the and its current account deficit declined only region, recording double digit growth in 2012. modestly to 6.6 percent of GDP in 2012. In Bangladesh, although exports declined in 2012 in Fig SAR.1 A sharp slowdown in post-financial crisis line with the regional trend, imports fell even GDP growth in South Asia, led by India faster—in part due to a 10 percent depreciation of the taka relative to the US dollar, compared with South Asia Pakistan the previous year—causing its trade deficit to India Bangladesh GDP growth Nepal Sri Lanka narrow during the 2012 calendar year. Together 10 9 Fig SAR.2 Trade deficits as share of GDP have 8 widened in India, Pakistan and Sri Lanka 7 Trade balance/GDP (Percent) 6 5 0 4 -2 3 -4 2 -6 1 0 -8 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013f -10 Note: Fiscal years for Bangladesh, Nepal and Pakistan span almost -12 equally across two calendar years, with data for FY2011 -12 shown in -14 India 2012 in the chart. For India, where the fiscal year runs from April to Pakistan -16 March, data for FY2012-13 is shown in 2012. GDP growth rates are Bangladesh shown in factor cost terms for India and Pakistan, and in market price -18 Sri Lanka terms for other countries. South Asia’s GDP growth rate for calendar -20 2005 2006 2007 2008 2009 2010 2011 2012 years are based on country-level averages of fiscal year GDP growth rates (see Table.SAR.2). Source: World Bank; Datastream. Source: World Bank; Datastream, Haver. 184 GLOBAL ECONOMIC PROSPECTS | June 2013 South Asia Annex with increased remittances, this resulted in an improved current account position. Despite Fig SAR.3 New investment project announcements in India declined and resources tied up in growing trade deficits in Pakistan and Nepal in the stalled projects rose sharply since 2011 2012 calendar year, their current account positions Investment projects in India were bolstered by robust migrant remittances (2-quarter moving average, billions of constant 2006 rupees) inflows (see box SAR.1), and also by official 6,000 New investment projects announced 1200 transfers in the case of Pakistan. Stalled projects [Right] 5,000 1000 Below-average monsoon rains and a poor regional 4,000 800 harvest in 2012 (agriculture constitutes about a fifth of South Asia’s GDP and over half of employment) also 3,000 600 contributed to weaker growth across the region. In 2,000 400 addition, structural capacity constraints and domestic policy uncertainties, as well as security concerns and social 1,000 200 unrest in some countries, played a significant role in the 0 0 slowing of regional GDP growth. Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Source: Center for Monitoring Indian Economy. India’s GDP measured in factor-cost terms grew at a decade-low 5.0 percent in FY2012 (figure SAR.1). GDP growth in Bangladesh and Sri Lanka has been The aforementioned weakening of external around 6 percent or higher in recent years (figure demand and below-average monsoons exacerbated SAR.1). Bangladesh’s exports have benefited in a domestic slowdown that was already underway, as part from preferential access to European Union building capacity constraints and bottlenecks kept and US markets, while domestic demand and its growth in check despite sustained fiscal stimulus. current account position were partly cushioned by This stimulus had helped the economy recover remittances (see Box SAR.1). However, weakening quickly after the financial crisis in 2008, and was external demand, domestic supply constraints gradually withdrawn in subsequent years. (including unreliable electricity provision), and Uncertainty about the reform agenda, along with social unrest resulted in growth slowing to 6.2 monetary policy tightening in 2010 and 2011 in percent in FY2011-12 from 6.7 percent the response to rising inflationary pressures, led to a previous fiscal year, with a further slowdown sharp slowing of investment growth and an expected for FY2012-13. Bangladesh’s relatively increase in stalled projects (figure SAR.3). Weaker fast growth during 2010-12, together with investment activity added to existing supply-side international commodity price increases and constraints and negatively impacted overall growth.1 expansionary macroeconomic policies, resulted in Figure SAR.2 Trade balances in India, Bangladesh inflationary Figure SAR.3 pressures. Subsequent Industrial production macroeconomic is picking up, al- and Sri GDP in Pakistan sharply Lanka deteriorated growth and Nepalin 2012 hasas exports remained beit at different paces in South tightening and intensified domestic constraints, Asian countries slowed Source: World Bank. well below the regional average in recent years. combined with disruptions caused by political unrest, Source: World Bank. Industrial production, 3m/3m seasonally-adjusted annualized rate (Percent) Pakistan, South Asia’s second-largest economy, Trade balance/GDP (%) contributed to the projected slowdown in FY2012-13. appears to have settled into a relatively low-growth 50 path 0 of about 3-4 percent in recent years mainly Sri Lanka’s economy enjoyed a post-conflict 40 due to unfavorable domestic factors, including -2 rebound, growing at 8 or more percent in both security -4 uncertainties, unreliable delivery of natural 2010 and 2011. Growth has since slowed to a more 30 -6 and electricity to firms, and weak investment gas sustainable 6.4 percent in 2012, in response to 20 rates. -8 In Nepal, political uncertainties in recent policy efforts to reduce overheating (amid rising years, -10 and an adverse investment climate, played a domestic supply constraints), a drought, and weaker 10 role -12 in its relatively poor economic performance. global 0 demand for Sri Lanka’s exports. Nepal’s GDP growth had risen to 4.9 percent in -14 India the 2011-12 fiscalPakistan year (ending in mid-July 2012) on Afghanistan’s robust 11.8 -10 India percent GDP growth in -16 Pakistan the back ofBangladesha good harvest. However, a poor 2012, the highest in the -20 region, was mainly due to Bangladesh harvest -18 in 2012, high inflation, weakening external Sri Lanka Sri Lanka and continued strong an exceptionally good harvest Developing excl. South Asia demand, -20 2005 and 2006 slowing 2007 growth 2008 2009 in 2010 India 2011 (its largest 2012 foreign aid inflows. In -30 addition, mining activity Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 trade partner) weighed negatively on economic also picked up. However, governance issues and an activity in Nepal during the 2012-13 fiscal year. uncertain security situation present persistent challenges 185 GLOBAL ECONOMIC PROSPECTS | June 2013 South Asia Annex Box SAR.1 Box SAR.1 Migrant remittances shielded current account positions in several South Asian countries Remittances to the South Asia region are estimated to have increased by 12.3 percent in 2012 (the second -highest growth among developing regions) to reach $109 billion. This follows growth averaging 14 percent in the previous two years. India is the largest recipient among developing countries ($69 billion), while Bangladesh, and Pakistan ($14 billion each) are among the top ten developing-country recipients of remittances. Remittance flows to Bangladesh and Pakistan have been particularly robust in US dollar terms, although Nepal and Sri Lanka recorded the largest increases as a share of GDP in 2012 (Box figure SAR.1a), helped in part by strong income growth in the Gulf Cooperation Council (GCC) countries. A steady increase in US dollar remittance inflows in recent years has helped to offset trade deficits in Nepal, Bangladesh and Pakistan, and to a small- er extent in Sri Lanka and India (Box figure SAR.1b). Box figure SAR.1a Remittances Remittanceshave haverisen as risen a share as a share Box Box figure figure SAR.1b Remittances SAR.1b Remittance inflows mostly offset of GDP in South Asian countries of GDP in South Asian countries trade deficits in Nepal, Bangladesh trade deficits inand Pakistan Nepal, Bangla- Remittances as a share of GDP desh and Pakistan 0.25 Percent of GDP Nepal Remittances as a share of GDP Percent of GDP 30 0.25 30 Nepal 0.2 20 20 0.2 0.15 10 10 Sri Lanka 0.15 Bangladesh 0 0.1 0 Sri Lanka Bangladesh -10 Pakistan 0.1 0.05 -10 Trade balance -20 Remittances Pakistan India balance balance/GDP Trade account Current 0.05 0 -20 Remittances 2000 2002 2004 2006 2008 2010 2012 -30 India India Current balance accountBangladesh Pakistan Sri Lanka Nepal 0 -30 2000 2002 2004 2006 2008 2010 2012 India Pakistan Bangladesh Sri Lanka Nepal Source: World Bank, Migration and Development Brief 20. for the economy. Bhutan’s economy grew strongly in recent years mainly due to hydropower generation and Regional industrial production growth electricity sales to India—these revenues together with picked up in late 2012 and early budgetary grants allowed it to finance a current account deficit exceeding a fifth of GDP. High credit growth 2013, but business sentiment and supply constraints resulted in an overheated weakened in India economy and inflation rates rising to over 10 percent (in line with cost of imports from India). Industrial activity has begun picking up from a mid But policy tightening in 2012 moderated credit growth, -2012 slump at different paces across South Asian while delays in new projects coming on-stream caused countries. India dominates the regional trend, with GDP growth to slow to an estimated 7.6 percent in the industrial production expanding at a 4.1 percent 2012-13 fiscal year from 9 percent in FY2011-12. annualized pace during the three months ending in March (3m/3m, saar) (figure SAR.4). Available data The Maldives, however, experienced political show industrial production rose even more uncertainty, double-digit fiscal deficits (the highest decidedly in Pakistan and Bangladesh—at a 22.6 in the region - see below), current account deficit percent annualized pace during the three months of over a quarter of GDP, falling reserves (well ending in March 2013 (3m/3m, saar) in Pakistan below the critical 3 months of imports), and a and at a 21.3 percent annualized pace in the three halving of GDP growth to 3.4 percent in 2012. months ending in January in Bangladesh. Tourism, a mainstay of the economy, was also Industrial production momentum in Sri adversely affected by slower growth in high income Lanka stabilized by the end of 2012 after countries, and was only partly compensated for by registering steep declines during the second an increase in Asian tourist arrivals. half of the year (figure SAR.4). 186 GLOBAL ECONOMIC PROSPECTS | June 2013 South Asia Annex Fig SAR.4 Industrial production growth momen- Fig SAR.5 Momentum of export volume growth is tum has picked up at different paces in rising across South Asia South Asian countries Industrial production, 3m/3m seasonally-adjusted annualized rate (Percent) Export volumes, 3m/3m seasonally-adjusted annualized rate (Percent) 80 50 60 40 40 30 20 20 0 10 -20 0 -40 -10 India -60 Pakistan Jul '11 Jan '12 Jul '12 Jan '13 -20 Bangladesh Sri Lanka Developing excl. South Asia India Bangladesh Developing excl. South Asia -30 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Pakistan Sri Lanka Source: World Bank. Source: World Bank. Business sentiment in India, however, weakened volume growth weakened in Q1 2013, in part as markedly between March and May, with the natural gas and electricity shortages cut into Purchasing Managers’ Index for manufacturing activity. The pace of decline, however, appears to recording its lowest reading in four years in May - have slowed in March and April. Available data although still slightly above the 50 mark, indicating suggest that the pace of earlier decline in Sri expansion. This in part reflects still difficult Lanka’s exports slowed in the second half of 2012 domestic and external demand conditions (despite and momentum of export volume growth recent strengthening) and persistent electricity improved in recent months (figure SAR.5), shortages. In contrast, the services sector index although on a year-on-year basis, exports in US picked up in May on stronger demand, with dollar terms were still 2.8 percent lower in March increased optimism about the future among compared to the same month in 2012. services firms. Inflation in South Asia shows signs of South Asian exports have also moderating, but price pressures remain started to recover from their 2012 slump Regional consumer price inflation accelerated in the three months to February partly due to a surge in food prices and upward adjustments to regulated South Asia’s exports have also started to recover fuel prices. However, inflation shows signs of from their mid-2012 slump. Regional export moderating, helped in part by easing of volume growth picked up to a 12 percent international commodity prices. India’s benchmark annualized pace in the fourth quarter of 2012 from wholesale price index (WPI) inflation fell to a 3- 6.5 percent (annualized) in the third quarter, and year low of 4.9 percent (y/y) in April 2013— further to a robust 15.7 percent annualized pace in although consumer price index (CPI) inflation and the three months to April (3m/3m, saar) (figure core inflation (CPI excluding food and energy) SAR.5). While India dominates the regional trend, were both above 8 percent (y/y) in April. In Sri Bangladesh’s export volume growth accelerated as Lanka, inflation moderated to 6.4 percent (y/y) in a result of strengthening demand for its garment April, its lowest in almost a year, but rose to 7.3 exports (although recent factory accidents could percent in May. moderate the pace of increase going forward). Year-on-year inflation rates can however be In Pakistan, following a relatively strong pickup in influenced by base effects. Quarterly inflation the second half of 2012, the momentum of export provides a better measure of recent movements 187 GLOBAL ECONOMIC PROSPECTS | June 2013 South Asia Annex Fig SAR.6 Inflation momentum is moderating Fig SAR.7 Inflation expectations in India are still across South Asia, but still strong in very high India and Bangladesh Inflation, 3m/3m seasonally adjusted annualized rate (Percent) Mean inflation rates in India for given survey quarter (Percent) 20 16 14 15 12 10 10 5 8 6 Current perceived 0 1-year Ahead 4 Actual Linear (Current perceived) 2 Linear (1-year Ahead) -5 Jul '11 Jan '12 Jul '12 Jan '13 Linear (Actual) 0 India Pakistan Bangladesh Sri Lanka Nepal Q4-2006 Q1-2008 Q2-2009 Q3-2010 Q4-2011 Q1-2013 Source: World Bank. Source: World Bank; RBI. (figure SAR.6). According to this measure, the Private capital flows to South Asia momentum of CPI inflation remains strong in Bangladesh and India—although moderating have picked up since mid-2012 slightly in Bangladesh—suggesting that price pressures continue to remain high in these Private capital flows to South Asia have increased countries. However, inflation has moderated robustly since mid-2012 (figure SAR.8). Overall, markedly in Pakistan. Inflation momentum had net private capital inflows to the South Asia region been weakening earlier in Sri Lanka, but increase in rose from $73 billion in 2011 to $87 billion in 2012 regulated electricity prices caused inflation to rise in (table SAR.1). May. Following reform efforts in India since September The generally high CPI inflation rates in South 2012, private capital flows to India grew robustly Asian countries compared with the average for led by portfolio equity inflows and bank lending. middle-income developing countries reflect supply- The increase in private inflows since mid-2012 was side production constraints, entrenched inflationary also a consequence of abundant global liquidity expectations, and the persistence of food inflation. that resulted from financial market stabilization and Households’ inflation expectations in India remain accommodative monetary policies in high income stubbornly high, partly because of a steady upward trend in inflation over the past 7 years (figure Fig SAR.8 Gross capital flows to South Asia re- SAR.7). Food inflation has remained persistently bounded in the second half of 2012 high in the region, partly reflecting agricultural US$ millions 5000 production constraints and logistics bottlenecks. Bank lending Despite the moderation in overall consumer price 4000 Bond issuance Equity issuance inflation, food inflation in India was over 10 percent (y/y) in April, and in Bangladesh and Sri 3000 Lanka was 8.4 percent and 7.9 percent, respectively, in May. In Pakistan, despite a moderation in headline inflation to 5.1 percent (y/ 2000 y) in May, food inflation was a higher 6.5 percent. Moreover, core inflation (CPI excluding food and 1000 energy) in Pakistan remains above 8 percent, in part because of escalating costs due to energy 0 bottlenecks and security concerns. Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13 Source: World Bank; Datastream. 188 GLOBAL ECONOMIC PROSPECTS | June 2013 South Asia Annex TableSAR.1 Table SAR.1 Net capital flows to South Asia 2008 2009 2010 2011 2012e 2013f 2014f 2015f Capital Inflows 64.7 89.8 100.4 78.3 89.5 92.4 100.5 110.1 Private inflows, net 55.9 78.9 90.7 72.5 86.9 90.6 99.3 109.5 Equity Inflows, net 35.0 63.4 60.3 30.9 47.8 52.8 57.2 67.5 Net FDI inflows 50.8 39.3 30.4 35.7 27.7 36.7 40.0 48.2 Net portfolio equity inflows -15.8 24.1 29.9 -4.8 20.1 16.1 17.2 19.3 Private creditors. Net 20.8 15.5 30.4 41.6 39.1 37.8 42.1 42.0 Bonds 1.7 1.9 10.1 0.7 2.8 4.3 2.5 3.4 Banks 11.2 10.9 8.6 18.4 17.4 15.4 17.8 19.2 Short-term debt flows 8.0 2.7 11.8 22.5 19.1 18.2 21.7 19.3 Other private 0.0 -0.1 0.0 0.0 -0.2 -0.1 0.1 0.1 Official inflows, net 8.8 11.0 9.6 5.8 2.6 1.8 1.2 0.6 World Bank 1.4 2.4 3.3 2.0 0.9 .. .. .. IMF 3.2 3.6 2.0 0.0 -0.2 .. .. .. Other official 4.2 4.9 4.4 3.7 1.9 .. .. .. Source: World Bank. countries. Foreign direct investment (FDI) received by India, however, declined by 22 percent (y/y) Medium-Term Outlook during the 2012 calendar year. As part of reform efforts (and given the need to finance a larger current account deficit), India undertook several measures to boost private capital inflows. These Following a steep deceleration in South Asia’s included raising limits on FDI in retail, GDP growth to 4.8 percent in 2012, regional broadcasting and aviation sectors; reducing growth is projected to improve during 2013-15 withholding taxes on interest earnings on foreign (Table SAR.2). This recovery in regional growth investment in domestic bonds; faster clearances for will be helped by gradual improvements in both large investment projects (including those with external and domestic conditions. foreign participation); and in general, efforts to clarify tax and other regulations relevant for foreign A stabilization of the global economic environment investors. Gross capital inflows, however, and a gradual recovery in global demand will moderated in recent months, in part due to growth provide something of a tailwind for South Asia’s concerns and further deterioration of India’s GDP growth. However, output in the Euro Area current account position in the fourth quarter of economy, South Asia’s largest export market, is 2012. forecast to contract for the second year in a row in 2013, and growth will remain subdued in 2014 and In Sri Lanka, private debt inflows have risen as the 2015 (see GEP June 2013 main text). Economic government successfully issued several sovereign activity in the United States, however, is more bonds in international markets. By contrast, in robust and projected to strengthen further. Much Pakistan, foreign investment inflows have been on of the additional external demand for South Asia is a declining trend in recent years due to domestic projected to come from other developing countries, which uncertainties, an adverse investment climate, and have become increasingly important destinations of energy shortages. This decline, together with South Asian exports. South Asia’s exports to developing repayment of official debt to the IMF, have added countries, including within the region, have risen from 19 to pressures on Pakistan’s balance of payments percent of overall exports in 2000 to 35 percent in position, with international reserves falling below 2 2011 (14 percent and 26 percent for South Asia months of imports. excluding India—see figure SAR.9). 189 GLOBAL ECONOMIC PROSPECTS | June 2013 South Asia Annex An expected normal agricultural season and projected to accelerate to 6.0 percent in 2014 increase in rural disposable incomes, together with and 6.4 in 2015, as a result of strengthening lower crude oil prices and moderation in inflation, external demand and with gradual success in and continued remittance inflows (in countries alleviating some of the domestic structural where they are important relative to GDP), will constraints that have held back growth. support an improvement in activity in the South Asia region from mid-2013 onwards. Regional growth will be driven mainly by a projected pickup in India, whose GDP in factor Although quarterly GDP is expected to pick cost terms is projected to grow 5.7 percent in the up over the course of 2013, the sharp 2013 fiscal year (ending in March 2014), and then deceleration of growth in the previous year accelerate to 6.5 percent and 6.7 percent in FY2014 implies that whole year growth for the South and FY2015, respectively. Exports and private Asia region in 2013 will be a relatively weak investment, which slowed sharply in 2012, are 5.2 percent. In the subsequent two years, projected to strengthen during 2013-15 and South Asia’s regional GDP growth is provide a boost to growth. However, how robust Table SAR.2 South Asia regional forecasts (annual percent change unless indicated otherwise) Est. Forecast 00-09a 2010 2011 2012 2013 2014 2015 b,f GDP at market prices - 10.0 7.3 4.8 5.2 6.0 6.4 GDP per capita (units in US$) 4.4 8.5 5.8 3.3 3.8 4.6 5.0 PPP GDP d 5.9 10.1 7.3 4.7 5.2 6.1 6.4 Private consumption 5.4 7.4 7.3 6.6 5.7 6.0 6.2 Public consumption 5.7 9.9 7.6 6.5 5.7 5.9 6.0 Fixed investment 8.9 16.6 5.9 2.7 4.2 6.0 6.8 Exports, GNFS e 11.5 14.5 15.9 1.4 5.6 8.6 9.8 Imports, GNFS e 9.6 16.0 17.0 7.3 6.2 7.3 8.4 Net exports, contribution to growth -0.3 -1.3 -1.4 -2.0 -0.7 -0.4 -0.5 Current account bal/GDP (%) -0.6 -2.6 -3.1 -4.5 -3.5 -3.1 -2.8 GDP deflator (median, LCU) 6.5 9.2 8.0 6.1 7.2 6.9 6.7 Fiscal balance/GDP (%) -7.5 -8.4 -7.6 -7.0 -7.1 -6.9 -6.8 Memo items: GDP at market prices f South Asia excluding India 4.6 4.9 5.2 4.9 4.7 4.9 5.0 India at factor cost 7.6 9.3 6.2 5.0 5.7 6.5 6.7 Pakistan at factor cost 4.9 3.1 3.0 3.7 3.4 3.5 3.7 Bangladesh 5.2 6.1 6.7 6.2 5.8 6.1 6.3 Source: World Bank. a. Growth rates over intervals are compound weighted averages; average growth contributions, ratios and deflators are calculated as simple averages of the annual weighted averages for the region. b. GDP at market prices and expenditure components are measured in constant 2005 U.S. dollars. c. GDP figures presented in calendar years (CY) terms for Bangladesh, Bhutan, Nepal, India and Pakistan are calculated taking the average growth over the two fiscal year periods to provide an approximation of CY activity. d. GDP measured at PPP exchange rates. e. Exports and imports of goods and non-factor services (GNFS). f. National income and product account data refer to fiscal years (FY) for the South Asian countries, while aggregates are presented in calendar year (CY) terms. The fiscal year runs from July 1 through June 30 in Bangladesh, Bhutan, and Pakistan, from July 16 through July 15 in Nepal, and April 1 through March 31 in India. Due to reporting practices, Bangladesh, Bhutan, Nepal, and Pakistan report FY2010/11 data in CY2011, while India reports FY2010/11 in CY2010. 190 GLOBAL ECONOMIC PROSPECTS | June 2013 South Asia Annex Fig SAR.9 South Asia’s exports benefited from stronger developing -country growth, with exports to developing countries outpacing overall exports during 2000-2011 Share of Indian exports (Percent) Share of South Asia excluding India exports (Percent) 100 100 80 80 60 60 40 40 20 20 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Other high income USA Other high income USA EU27 Within South Asia EU27 Within South Asia Other developing regions East Asia and Pacific Other developing regions East Asia and Pacific China China Note: Export shares calculated using trade partner data on imports from South Asian countries. Source: World Bank; UN COMTRADE. that recovery will be, will depend on the pace of pressures have risen with reserves falling below 2 policy and fiscal reforms, and remains subject to months of imports, notwithstanding robust significant uncertainty and downside risks. Some remittance inflows. Policy actions to address the upside risks to the outlook include a faster than underlying adverse structural factors are critical to projected pickup in global demand and a larger raising Pakistan’s longer-term growth potential. than expected decline in commodity prices (see Risks and Vulnerabilities section below). Bangladesh’s growth slowed to an estimated 5.8 percent in the 2012-13 fiscal year ending in June. GDP growth in Pakistan is projected to only slowly But growth is projected to pick up modestly to 6.1 accelerate from an estimated 3.4 percent in FY2012 percent in FY2013-14 and 6.3 percent in FY2014- -13 to 3.7 percent in FY2014-15, with output 15, as external demand strengthens gradually, and being held back by a wide range of structural agricultural output returns to more normal levels. problems, including: weak investment (down a Several domestic weaknesses, including third since 2008 when expressed as a percent of infrastructure gaps (electricity, roads) and social GDP—see figure SAR.10), security uncertainties, unrest are expected to hold back a firmer recovery. unreliable energy inputs, and monetization of large fiscal deficits, among others. Balance of payments In Sri Lanka, growth is expected to pick up to 6.5 percent in 2013 and 6.7 percent in 2014, aided by normal agricultural harvests, strengthening demand Fig SAR.10 Fig SAR.10 A sharp decline in investment -to-GDP for exports, robust capital inflows, increase in ratio in Pakistan infrastructure and other investments, and a revival Fixed investment as pecent of GDP of tourism (Table SAR.3). The relatively modest 40 pickup in growth represents a return to underlying Pakistan India potential growth rates after rapid demand-fueled 35 Bangladesh Nepal growth in 2010-11 opened up positive output gaps Sri Lanka 30 and resulted in inflation and current account pressures. 25 20 Some domestic uncertainties in Nepal appear to be easing and the political situation normalizing after 15 formation of an interim government in March. This political normalization, expected timely 10 monsoon rains, and continued increase in 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 remittances should be favorable for economic Source: World Bank; Datastream; Haver. activity in 2013 and beyond. However, private 191 GLOBAL ECONOMIC PROSPECTS | June 2013 South Asia Annex Table SAR.3 South Asia country forecasts Est. Forecast 00-09a 2010 2011 2012 2013 2014 2015 Calendar year basis b Afghanistan c GDP at market prices (% annual growth) - 8.4 7.0 11.8 3.1 4.9 6.3 Current account bal/GDP (%) -0.3 2.8 2.2 3.9 1.6 0.5 -0.3 Bangladesh c GDP at market prices (% annual growth) 5.2 6.4 6.5 6.0 6.0 6.2 6.3 Current account bal/GDP (%) 0.6 1.8 0.2 1.3 1.1 1.0 0.9 Bhutan c GDP at market prices (% annual growth) 7.7 9.6 9.5 8.3 7.9 8.4 8.6 Current account bal/GDP (%) -0.1 -19.1 -25.5 -20.7 -20.9 -19.2 -18.4 India GDP at factor cost (% annual growth) c 7.4 9.1 7.0 5.3 5.5 6.3 6.6 Current account bal/GDP (%) -0.5 -3.2 -3.5 -5.4 -4.2 -3.7 -3.3 Maldives c GDP at market prices (% annual growth) 6.3 7.1 7.0 3.4 3.7 3.9 4.0 Current account bal/GDP (%) -1.1 -9.2 -21.4 -26.5 -28.0 -26.0 -25.0 Nepal c GDP at market prices (% annual growth) 3.4 4.1 4.2 4.3 3.8 3.9 4.1 Current account bal/GDP (%) -0.9 -2.5 0.2 0.1 -0.1 -0.3 -0.5 Pakistan GDP at factor cost (% annual growth) c 4.9 3.1 3.4 3.5 3.4 3.6 3.7 Current account bal/GDP (%) -1.4 -0.7 -1.0 -0.9 -0.4 -0.3 -0.3 Sri Lanka c GDP at market prices (% annual growth) 4.4 8.0 8.2 6.4 6.5 6.7 6.5 Current account bal/GDP (%) -3.7 -2.2 -7.8 -6.6 -5.9 -5.4 -4.8 Fiscal year basis b Bangladesh GDP at market prices (% annual growth) c 5.2 6.1 6.7 6.2 5.8 6.1 6.3 Bhutan GDP at market prices (% annual growth) c 7.7 9.3 10.0 9.0 7.6 8.1 8.6 India GDP at factor cost (% annual growth) c 7.6 9.3 6.2 5.0 5.7 6.5 6.7 Nepal GDP at market prices (% annual growth) c 3.4 4.8 3.4 4.9 3.7 3.8 4.1 Pakistan GDP at factor cost (% annual growth) c 4.9 3.1 3.0 3.7 3.4 3.5 3.7 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. a. GDP growth rates over intervals are compound average; current account balance shares are simple averages over the period. b. National income and product account data refer to fiscal years (FY) for the South Asian countries with the exception of Sri Lanka, which reports in calendar year (CY). The fiscal year runs from July 1 through June 30 in Bangladesh, Bhutan, and Pakistan, from July 16 through July 15 in Nepal, and April 1 through March 31 in India. Due to reporting practices, Bangladesh, Bhutan, Nepal, and Pakistan report FY2010/11 data in CY2011, while India reports FY2010/11 in CY2010. GDP figures presented in calendar years (CY) terms for Bangladesh, Bhutan, Nepal, India and Pakistan are calculated taking the average growth over the two fiscal year periods to provide an approximation of CY activity. c. GDP measured in constant 2005 U.S. dollars. 192 GLOBAL ECONOMIC PROSPECTS | June 2013 South Asia Annex sector industrial activity is likely to continue to growth. In Maldives, in addition to deteriorating remain lackluster. Overall, following an estimated macroeconomic fundamentals discussed earlier, the 3.7 percent GDP growth in FY2012-13, Nepal’s country faces severe challenges in diversifying its growth is projected to remain broadly stable at 3.8 economy beyond tourism. The economic outlook percent in FY2013-14 and improve modestly to 4.1 remains clouded by political uncertainty leading up percent in FY2014-15. To do better, the elections in 2013/14 and by limited success in government will need to make energy provision controlling fiscal outcomes. more reliable, invest further in the skills and quality of Nepal’s workforce, enhance the predictability An easing in global fuel prices (Brent crude oil and transparency of the regulatory and tax regimes, prices fell 15 percent between mid-February and while also strengthening the overall business early-June - see figure SAR.11), together with environment. expected normal monsoon rains, will help to curb price pressures. Modestly lower crude prices in Afghanistan’s economy remains dependent on 2013 and 2014 will also provide some relief to agricultural performance and external aid. current account and fiscal positions. Lower crude Moderate rainfall is projected to reduce growth to oil prices will help regional governments in around 3 percent in 2013. The withdrawal of narrowing existing gaps between international coalition forces, which have been a major source of prices and domestic administered prices, and lower demand, is likely to create challenges for sustaining the subsidy burden and reduce overall fiscal growth. To assist in this transition, donors have pressures. pledged significant aid in the coming years. Although the security situation remains difficult, But inflation pressures will still remain in the services and natural resource extraction are starting region. Ongoing and planned increases in to contribute to economic activity. Growth will administered fuel and electricity prices will add to also be helped by continued rebuilding of headline price pressures in the near term, but as infrastructure and essential services, foreign long as the higher inflation does not get ingrained assistance, and foreign investment in natural into expectations, this should not result in a resource sectors. Afghanistan’s GDP growth is permanent increase in inflation. More importantly, forecast to accelerate to about 6 percent by 2015. supply side constraints in agricultural, energy and other sectors will continue to exert upward price In Bhutan, hydropower projects coming on steam pressures. in coming years are likely to keep overall GDP growth high at about 8-9 percent annually in 2013- Risks and 15. But lack of economic diversification poses challenges to generating employment and inclusive Fig SAR.11 Sharp crude oil price declines have often vulnerabilities corrected in the past, but on average, prices are forecast to be 2.5 percent lower in 2013 than in 2012 USD per barrel 130 Global uncertainties have receded since mid-2012 120 and both the severity and likelihood of downside Brent risks from high income countries has diminished 110 (see June 2013 GEP main text). Domestic policy and weather risks have now gained in importance for the South Asia region. 100 Dubai A key risk to the gradual acceleration in growth 90 envisaged in the baseline scenario, is the success with which planned and announced reform policies 80 Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13 are actually implemented during 2013-15. Based on Source: World Bank; Datastream. backward looking indicators, growth could well be 193 GLOBAL ECONOMIC PROSPECTS | June 2013 South Asia Annex between 0.3 and 0.5 percentage points slower than Revival of business sentiment remains a key in the baseline. element for South Asia’s regional growth. As discussed earlier, business sentiment in the Political obstacles to passing and implementing manufacturing sector in India weakened to a four- reform legislation pose downside risks to the year low in May (although the services sector index outlook. Reforms to the process of land acquisition picked up). If business sentiment were to remain for industrial projects and labor market reforms weak in coming months, this could adversely could prove contentious. In countries either exiting impact investment and growth. (Pakistan) or entering electoral cycles (Bangladesh, India, Nepal), spending pressures associated with An upside risk to South Asia’s growth outlook elections could boost fiscal expenditure, adding to includes a significant decline in commodity prices inflationary pressures and both internal and compared to the baseline. If crude oil prices were external imbalances. Risks in the post-election to fall to an average level of $80 per barrel by mid- period include the possibility that past reforms are 2014 due to additional supplies coming on stream reversed or implementation delayed. in international markets, South Asia’s GDP would be 0.9 percent higher than in the baseline by 2014, Weaker than expected monsoon rains present current account deficit would be 1.4 percent of another downside risk for South Asia. A second GDP lower, and fiscal deficit 0.7 percent of GDP poor monsoon in a row would adversely affect lower (see table 5 in June 2013 GEP main text). rural incomes and employment, contribute to Other upside risks include a more rapid resolution persistence of food inflation (and in turn, overall of structural constraints to growth than envisaged inflation) and could reduce overall GDP growth. in the baseline, and faster than projected global by 0.5 percentage points or more. Moreover, growth during the forecast period. weaker rural income growth would put greater demands on public spending (through automatic stabilizers and social welfare programs), Despite recent efforts at fiscal which could make it difficult to achieve fiscal targets. consolidation, relaxation of monetary A weakening of reserve coverage of imports in policies and still large fiscal deficits Pakistan and the Maldives to below 2 months of pose risks imports suggests that their balance of payments positions could come under stress from Central banks in South Asia cut interest rates unanticipated shocks. However, the reserve sharply during the global financial crisis of position of Bangladesh has improved in the most 2008/09, but rates were appropriately raised recent period, from robust remittance inflows and subsequently as inflationary pressures rose (figure a recent improvement in trade. Sri Lanka’s reserves SAR.12). With the slowing of growth in 2012 and have also risen in line with an increase in private the recent moderation in year-on-year inflation, capital inflows. monetary policy in the region shifted toward a more accommodative stance. Policy rates in A greater dependence on foreign investment Pakistan were cut by 250 basis points in the second inflows to finance India’s significantly larger half of 2012, while Bangladesh, India and Sri Lanka current account deficit compared to the past has cut policy rates in the first half of 2013. Sri Lanka’s increased its vulnerability to a sudden reversal of central bank cut its policy rate by 25 basis points in investor sentiment. Several factors could result in a late 2012 and again by 50 basis points in May after slowing or reversal of investment inflows—an inflation moderated in the previous two months. unanticipated monetary tightening in some high The Reserve Bank of India reduced its key policy income countries; resurgence of debt tensions; interest rate by a cumulative 75 basis points escalation of geopolitical conflict; and even between January and May of 2013 as its benchmark disenchantment with the pace or nature of wholesale price inflation declined, notwithstanding domestic reforms. Moreover, the sharply relaxed high CPI inflation. monetary policy in Japan could result in strong and disruptive private capital flows. Although inflation rates have moderated across several countries in the region, consumer price 194 GLOBAL ECONOMIC PROSPECTS | June 2013 South Asia Annex inflation still remains high compared to the average recent consolidation, India’s general government for middle-income developing countries. India’s deficit (including state government fiscal deficits) is steep growth deceleration mostly closed a large more than 7 percent of GDP. Pakistan’s general positive output gap that had opened up in the post- government deficit is estimated to have risen financial crisis period. And notwithstanding either sharply in recent years to above 7 percent of GDP slower or weak growth in 2012, several other South (figure SAR.13). Maldives’ fiscal deficit is Asian countries also appear to be operating either significantly higher than the regional average, and close to or above full capacity. Given lags in rose further in 2012. monetary policy transmission, an easing of monetary policies (together with still large fiscal Several South Asian countries undertook fiscal deficits) could add to strengthening activity already reforms during the last year, particularly to their underway in the countries operating at full capacity, subsidy regimes. Fuel and food subsidies typically resulting in additional inflationary and current account for the bulk of subsidies, with subsidies in account pressures, without much payoff in India and Sri Lanka at more than 2 percent of additional GDP growth. GDP, and over 3.5 percent of GDP in Bangladesh. Reforms to subsidy regimes have involved The high fiscal deficits in the region also pose risks introducing more frequent adjustments to to the outlook, despite recent efforts at administered fuel and electricity prices, and consolidation (see below). Large government measures to improve targeting of government borrowing programs can result in crowding out of benefits to the poorest beneficiaries. For instance, private investment, and importantly, reduce administered diesel prices in India are being raised available policy buffers to counter external or at close to monthly frequency to gradually narrow domestic shocks. Moreover, when underlying the gap between international and domestic prices, inflationary pressures are already high, the while quotas have been imposed on subsidized additional spending can further exacerbate provision of liquefied petroleum gas (LPG) for inflation. domestic use. Sri Lanka raised electricity prices in April 2013 in order to curb the (quasi-fiscal) losses General government deficits exceeded 6 percent of of the state electricity company. India has also GDP on average in 2012 in the region (figure undertaken an ambitious direct cash transfer SAR.12). India’s central government's fiscal deficit program (based on Aadhar digital unique fell to 4.9 percent of GDP in the 2012 fiscal year, national identification numbers, already below the 5.2 percent initially estimated, and down provided to nearly 400 million Indians) in from 5.8 percent in FY2011.2 The government has order to better target government benefits pledged to further reduce it to 4.8 percent in and services, and to reduce leakages from the FY2013 and 4.2 percent in FY2014. Despite the public distribution system. Fig SAR.12 South Asian central banks (with exception Fig SAR.13 Fiscal deficits remain higher than pre- of Nepal) cut policy interest rates financial crisis levels in general in following a mid-2012 slump in activity South Asia and moderation of inflation General government deficit (Percent of GDP) Policy interest rate (Percent) 25 16 2007 14 20 2009 2011 12 2012 15 2013f 10 8 10 6 5 4 Bangladesh India Nepal 2 0 Pakistan Maldives India Pakistan Sri Lanka Bangladesh Nepal Afghanistan Sri Lanka 0 Jan-08 Sep-08 May-09 Jan-10 Sep-10 May-11 Jan-12 Sep-12 May-13 Note: Only deficits shown in chart. f = forecasts for 2013. Source: World Bank; Datastream. Source: IMF (2013a and 2013b). 195 GLOBAL ECONOMIC PROSPECTS | June 2013 South Asia Annex Development Goals by 2015 – halving extreme Fig SAR.14 Tax revenues are in general a smaller poverty, reducing maternal mortality, and providing share of GDP than the average for middle- and low-income countries access to safe water), South Asia will still be home to almost 400 million of the developing world’s Tax revenue (Percent of GDP) 20 970 million poor in 2015, according to the World 18 Bank’s Global Monitoring Report (see also Chen 16 and Ravallion (2012) and Ravallion (2013)). 14 12 The sharp economic slowdown experienced in the 10 post-financial crisis period exposed structural 8 vulnerabilities and has made the task of reviving 6 growth in a sustainable manner even more urgent. 4 But with India’s positive output gap mostly closed 2 after its steep growth deceleration, and given 0 India Nepal Bangladesh Sri Lanka Pakistan Afghanistan Middle Low income income countries capacity constraints in most South Asian countries, countries policymakers need to remain vigilant against relying Source: World Bank; IMF. on short-term demand stimulus in order to avoid overheating (inflation and current account) pressures. South Asian countries should continue Despite progress made in recent months, there are to rebuild their fiscal buffers to be able to deal with still challenges to moving towards market-based future crises. pricing of fuel and electricity tariffs in the region. Regulated fuel and electricity prices are often Deepening supply-side reforms is critical to insufficient for energy producers to fully recover improving the efficiency of investment and raising costs. These not only add to quasi-fiscal losses of the longer-term growth potential of the region. public sector firms, but can also deter private These include eliminating bottlenecks in project investment in the critical energy sector. implementation and easing energy input constraints for firms, as well as labor market reforms, clarity in Mobilizing sufficient tax revenues to fund social tax and business regulations for both foreign and development and infrastructure investment remains domestic investors, and improving the overall a major challenge for the region. Tax revenues as a business climate. Raising the quality of human share of GDP are in general lower in South Asian capital through appropriate investments in countries when compared with the average for education and health can boost productivity in middle and low income developing countries South Asian countries over the longer term. (figure SAR.14). For sustained deficit reduction, Investment in infrastructure will help the formal expenditure restraint and better targeting of private sector by reducing transportation and subsidies has to be combined with revenue logistics costs, and also the poor in gaining access mobilization (including measures to simplify the to markets and opportunities. tax code, broaden the tax base, and improve compliance), so that necessary expenditure on education, health, and infrastructure do not suffer and impair future growth. Conclusions The South Asia region faces a number of longer- term economic challenges. Despite impressive gains in development outcomes in recent years (the region is on track to achieve three Millennium 196 GLOBAL ECONOMIC PROSPECTS | June 2013 South Asia Annex Notes 1 See GOI (2013), Rajan (2013), and Subbarao (2013) for some of the reasons behind India’s growth slowdown and the macroeconomic and structural challenges that the country faces in reviving growth. 2 The World Bank’s estimates of India’s central government fiscal deficit are slightly higher at 6.0 percent in FY2011 and 5.1 percent in FY2012. The difference is mostly accounted for by receipts from disinvestment in public sector enterprises. World Bank estimates excludes these (and any other one time receipts) from the government's revenue. References Chen, Shaohua, and Martin Ravallion. 2012. “More Relatively-Poor People in a Less Absolutely-Poor World.” Policy Research Working Paper 6114, World Bank: Washington, DC. GOI (Government of India). 2013. “Review of the Indian Economy 2012/13.” Report of the Economic Advisory Council to the Prime Minister of India, April. (http://eac.gov.in) IMF (International Monetary Fund). 2013a. Fiscal Monitor, April. Washington DC. _____. 2013b. World Economic Outlook, April. Washington DC. Rajan, Raghuram. 2013. “Why India Slowed.” Project Syndicate, April 30. Ravallion, Martin. 2013. “How Long Will It Take to Lift One Billion People Out of Poverty?” Policy Research Working Paper 6325, World Bank: Washington, DC. Subbarao, Duvvuri. 2013. “India’s Macroeconomic Challenges: Some Reserve Bank Perspectives.” 5 th I.G. Patel Lecture, London School of Economics, March 13. World Bank. 2013a. Global Monitoring Report 2013: Rural -Urban Dynamics and the Millennium Development Goals . South Asia Regional Brief. World Bank. 2013b. South Asia Economic Focus: Regaining Momentum. April 2013. 197 GLOBAL ECONOMIC PROSPECTS | June 2013 Sub-Saharan Africa Annex Annex GLOBAL ECONOMIC June PROSPECTS 2013 SUB- SAHARAN AFRICA REGION 199 GLOBAL ECONOMIC PROSPECTS | June 2013 Sub-Saharan Africa Annex Overview (South Africa) sharp fiscal adjustments (Swaziland) and those impacted by severe adverse weather conditions . Medium-Term Outlook. Going forward, Strong domestic demand allowed Sub Saharan the robust domestic demand factors that have African economies to continue their robust growth underpinned Sub-Saharan Africa’s growth trajectory in 2012, despite subdued global demand performance in recent years and the projected conditions. On aggregate the region grew at 4.4 per strengthening of global demand are expected to cent in 2012 (this includes South Sudan whose support the region’s medium term growth GDP recorded a double digit contraction).1 trajectory. Regional GDP is projected to pick up to Excluding South Africa, the region’s largest 4.9 percent in 2013, 5.2 percent in 2014, and 5.4 economy, the rest of the region grew 5.4 percent, percent in 2015. Excluding, the region’s largest with close to a third of economies growing faster economy, South Africa, GDP growth for the rest than 6 percent (figure SSA.1). of the region is expected to increase by 6.2 percent in 2013 and 2014, and further strengthen to 6.4 Much of this growth was supported by investments percent in 2015. Net private capital inflows are in both the resource and non-resource sectors. Net projected to reach $77.5 billion in 2015 from $48.3 foreign direct investment inflows to the region are billion in 2012. Household spending will be expected to reach about $40 billion in 2013, up supported by rising incomes, increased remittance from $32.1 billion in 2012. Still high commodity flows, and a stable macroeconomic environment. prices (even if easing) is supporting investments in Although the gradual strengthening of the global the natural resource sectors in several economies in economy and increased capacity in mineral exports the region. But the growth dynamism has not come will support export growth over the medium term, only from the resource sector as investments (both the net exports contribution to growth is expected domestic and foreign) have also flowed to the non- to be modest or even negative, on account of resource sector, in particular the service sub-sectors strong import demand (especially capital such as finance and banking, telecommunication, equipment). transportation and retail trade. Indeed, in several economies growth in the non-resource sector was Risks to growth prospects. Nonetheless, stronger than the resource sector. there exist downside risks that could derail the projected robust growth outlook. While external Better weather conditions and associated improved risks to the outlook from the Euro Area crisis, or harvests, decelerating inflation, relaxation of earlier fiscal sustainability in the United States and Japan interest rate hikes and increased remittance inflows have diminished, new domestic and external risks ($33 billion in 2013, up from $32 billion in 2012) and challenges have gained in prominence. Notable broadly supported the resilience in household among these is the possibility that the recent easing spending, albeit with differences across countries in in international commodity prices intensifies. Our the region. Fiscal policy for most economies in the simulations suggest that, while a 25 percent decline region remains expansive with several governments in oil prices will be beneficial to the oil importers in rightly emphasizing the need to address the region, oil exporters would experience a cut in infrastructural weaknesses. Debt levels also remain growth by some 1.4 percentage points, with similar low. However, compared to 2008 levels, fiscal impacts for metal exporters in the event of a sharp buffers in the region are yet to be restored, and in a decline in industrial metal prices. Domestic risks number of countries the expansionary fiscal policy include the possibility of overheating in economies may actually be hitting against capacity constraints. operating close to capacity; adverse weather shocks; and political unrest. On the upside growth While the overall growth story for the region has could be stronger if high-income countries recover been robust, not all countries are enjoying this more quickly than envisaged or if ongoing robust growth. Indeed, growth in 2012 was weaker infrastructural investments improve competitiveness in countries that encountered conflict or political and help unlock new sources of growth. instability (e.g. South Sudan, Central Africa Republic, Mali, Guinea Bissau), major labor unrests 201 GLOBAL ECONOMIC PROSPECTS | June 2013 Sub-Saharan Africa Annex Fig SSA.1 Fastest Growing Economies in Sub Fig SSA.2 Capital equipment imports picked up in Saharan Africa (2012) Q4 following weakness in Q3 100 Sierra Leone 18.2% Niger 80 Cote D'Ivoire Ghana 60 Burkina Faso China Rwanda 40 All imports Capital equipment Mozambique Eritrea 20 Ethiopia Angola 0 Tanzania Zambia Dem. Rep. of Congo -20 Nigeria India -40 Russia Brazil -60 0 2 4 6 8 10 12 14 16 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Source: World Bank. Source: World Bank; ITC. Recent Developments fourth quarter of 2012, although this follows a sharp slump (-38.2%) in Q3 2012, when global economic activity was weaker (figure SSA.2). 2 Fourth quarter capital goods imports were particularly strong in Angola, Cote D’Ivoire, Investment flows continue to Ethiopia, Ghana, Nigeria, Tanzania and underpin growth in Sub Saharan Zambia - all economies where real GDP grew Africa. Gross fixed capital formation in Sub by an estimated 6.5 per cent or more in 2012. Saharan Africa has steadily increased from about 16.4 per cent of GDP in 2000 to about 20.4 per High commodity prices have cent in 2011. The pick up in investment has not supported investment flows to only contributed to growth directly, but it has also minerals sector. With the region’s vast helped boost potential output in the region by potential of unexplored mineral and hydrocarbon raising the amount of capital with which reserves and still high commodity prices labor has to work, albeit concentrated in (notwithstanding recent declines) foreign direct specific sectors. investment continues to flow to the natural resource sectors across the breadth and length of Data for 2012, suggest that this capital deepening the region’s economies (see table SSA.1). Net process has continued. Imports of capital foreign direct investment inflows to the region equipment, used as a proxy for domestic reached an estimated $33.4 billion in 2012, and are investment activity, have expanded at a robust projected to rise a further 21% in 2013 (table SSA. 2) 33.6% annualized pace in value terms during the The non-minerals sector has also Table SSA.1 Selected major ongoing explorations in the natural resource sector in Sub Saharan African economies S ub- re gio n O il a nd G a s M e t a l a nd M ine ra l Ghana, Co te d’ Ivo ire, Sierra Leo ne, We s t A f ric a Sierra Leo ne (iro n o re), Guinea (iro n o re) Liberia, Chad E a s t A f ric a Tanzania, Uganda, Kenya Eritrea (go ld), Ethio pia (go ld) Tanzania (go ld, uranium) M o zambique (co al, iro n o re), Zambia (co pper), B o tswana (co pper), S o ut he rn A f ric a A ngo la M adagascar (nickel), M alawi (uranium) Gabo n (manganese), Camero o n (iro n o re), Demo cratic Republic o f C e nt ra l A f ric a Camero o n Co ngo (co pper, co balt, go ld) Source: Africa Mining 202 GLOBAL ECONOMIC PROSPECTS | June 2013 Sub-Saharan Africa Annex Table SSA.2 Net capital flows to Sub-Saharan Africa ($ billions) 2008 2009 2010 2011 2012e 2013f 2014f 2015f Capital Inflows 43.4 47.0 61.1 66.9 58.8 67.5 73.8 82.6 Private inflows, net 38.4 37.1 47.8 55.4 48.3 58.0 66.5 77.5 Equity Inflows, net 33.4 43.2 42.7 46.8 41.4 49.5 57.5 65.4 Net FDI inflows 39.1 32.5 26.7 38.5 32.1 39.8 46.2 52.0 Net portfolio equity inflows -5.7 10.7 16.0 8.4 9.3 9.7 11.3 13.4 Private creditors. Net 5.0 -6.2 5.1 8.6 6.9 8.5 9.0 12.1 Bonds -1.6 2.0 1.4 6.0 6.8 8.4 6.4 7.1 Banks 2.3 0.5 0.5 3.1 0.9 1.2 1.8 2.9 Short-term debt flows 4.4 -9.5 2.8 -0.5 -0.9 -1.2 0.6 1.2 Other private -0.1 0.8 0.5 -0.05 0.1 0.1 0.2 0.9 Official inflows, net 5.0 9.9 13.3 11.4 10.5 9.5 7.3 5.1 World Bank 1.9 3.1 4.0 3.2 3.3 IMF 0.7 2.2 1.2 1.4 1.3 Other official 2.4 4.6 8.2 6.8 5.9 Source: The World Bank Note : e = estimate, f = forecast benefitted from increased investment grew 14.4 per cent in 2012 (higher than the flows, thereby supporting the developing country average of 8.1%). Indeed, dynamic growth of that sector. in the region services sector growth well Although the natural resources sector is the exceeds that of resource sector growth, even pre-eminent destination for foreign direct in long-standing resource rich economies (see investment inflows, increasingly non-minerals box SSA.1). sectors, notably the services sector, is attracting the interest of foreign investors. The mining sector tends to require higher capital Sectoral breakdown of cross- border merger’s outlays and specialized technology than other and acquisition for the Africa region shows sectors and therefore attracts a higher percentage that over the 2010-2011 period the services and of foreign investors. Domestic capital, on the other manufacturing sectors attracted an average of 53.4 hand, plays a more significant role in service-sector per cent and 33.5 per cent respectively of all M&A growth. Thus, despite the increasing contribution purchases in the region.3 The primary sector of foreign direct investment flows to capital accounted for only 13.2%. Similarly, the services deepening in the region, FDI accounts for about and manufacturing sector attracted some 33.6 per only a fifth of the regions gross fixed capital cent and 41.2 per cent of all green field FDI into formation (19.6 percent in 2010). Domestic credit Africa. growth figures attest to the rising importance of domestic intermediation. Year-over-year real Rising disposable incomes, an increasing credit grew 23.4 percent in Botswana work force, and the fact that many economies (February 2013); 31.4 percent in Ghana are growing from a low base have spurred on (September 2012); 16.6 percent in Kenya investments in telecommunications, retail and (January 2013); 12.9% in Uganda (February banking. For instance, the International 2013); 8.1 percent in Nigeria (March 2013); Telecommunications Union estimates that and 9.7 percent in South Africa (April 2013). mobile subscriptions in Sub-Saharan Africa But not all economies are benefitting 203 GLOBAL ECONOMIC PROSPECTS | June 2013 Sub-Saharan Africa Annex Box SSA.1 Growth in the non-resource sector in several Sub Saharan African countries, including resource rich ones, was higher than that of the resource sector in 2012. In Botswana, where GDP expanded by 3.7 per cent in 2012, mining output contracted 8.1 per cent, whereas non -mining GDP growth was positive, with notable contributions from construction (14.4), financial and business services (9.7 per cent) and transport and communications (9.1 per cent). Ghana, one of the new oil exporting economies in the region, grew at an estimated 7.9 percent in 2012, with the mining and quarrying sector (including crude oil) growing at 5.0 percent, whereas the services sector grew at 10.2 per cent. The fastest growing sectors were the information and communication sector (23.4 per cent), financial and insurance activities (23.0 per cent), real estate and other professional services (13.1 percent) and hotel and restaurants (13.0 percent). In Kenya, where economic activity picked up to 4.7 per cent in Q3 2012, mining and quarrying picked up by 1.8 per cent, with much of the pick-up coming from a 6.9% expansion in the agriculture sector, a 6.8 percent increase in financial inter- mediation, a 13.7 percent increase in electricity and water output and a 5.2 percent rise in transport and communication services. In Nigeria Q1 2013 GDP growth was 6.7 per cent with crude petroleum and natural gas contracting at 0.5 percent, while non-oil growth was at 7.9 percent. The lead growth sectors were telecommunications (24.5 percent), hotel and restaurants (13.6 percent) construction (15.7 percent) and real estate (13.6 per cent). In Rwanda, where GDP grew by 8.7 percent in Q4 2012, the agriculture sector grew by 3 percent and contributed 1.1 per- centage points to the overall GDP growth; the industrial sector grew by 11 percent and contributed 1.7 percentage points to the GDP growth; and the services sector increased by 12 percent and contributed 5.4 percentage points to the GDP growth. In South Africa, where GDP increased by 1.9 per cent in Q1 2013 the mining and quarrying industry, finance and real estate and business services each contributed 0.7 percentage points (ppt). The growth in mining followed two quarters of negative growth. Wholesale, retail & motor trade, and transport, storage & communication each contributed 0.2 percentage points to GDP growth. In Tanzania, where output expanded by an estimated 6.8 percent in 2012, the mining and quarrying sector expanded by 1.2 per cent in the first three quarters of the year, whereas there was double digit expansion in the real estate (10.1 per- cent), transport and communications (16.5 percent) and wholesale and retail sectors (16.1 percent). from the investment flows. While GDP in the post-crisis period — about one strong on average, investment growth (both percentage point higher than in 2008. Revenues, foreign and domestic) has been weaker in however, have not kept pace, and as a result, several other countries. Political instability is overall fiscal balances have deteriorated by about hurting investment, thereby curtailing 2.6 percent of GDP since 2008. economic growth in Central African Republic, Guinea Bissau, Madagascar, and For the region as a whole, fiscal policy appears to Mali. Madagascar’s crisis for instance, is have eased in 2012, with cyclically adjusted estimated to have cost it some $6.3 billion in balances having deteriorated by about 0.3 lost growth over the 2009-2012 period, percentage points overall, with the largest according to World Bank estimates. This deterioration occurring among oil exporters (figure contrasts with post-conflict economies such SSA.3). Nevertheless, average structural (cyclically as Cote D’Ivoire and Comoros which are adjusted) deficits remain low. Moreover, although witnessing increased investment flows and a the region’s government gross debt to GDP ratio is rebound in economic activity. rising it remains relatively low at 33.4 percent of GDP in 2012 (versus 29% of GDP in 2008). Fiscal deficits deteriorated in 2012 Nonetheless, there remain significant differences and fiscal policy is generally among countries in the region, hence while debt expansive in the region. In general, profiles remain sustainable for most countries in government expenditures in Sub Saharan Africa the region, it is a rising concern for a few have been growing at par with GDP since 2009, economies. and have stayed steady at about 30 per cent of Most government spending plans for countries in 204 GLOBAL ECONOMIC PROSPECTS | June 2013 Sub-Saharan Africa Annex Fig SSA.3 Fiscal deficits deteriorated in 2012 Fig SSA.4 A number of Sub Saharan African countries (Structural budget balances as share of GDP, %) are operating with an output gap above 0.30 1 percent of GDP 0.20 Output gap 4 0.10 3 0.00 BDI 2 -0.10 GHA 1 -0.20 0 -10 -5 0 5 10 15 -0.30 -1 Inflation (3m/3m, saar) -0.40 -2 2011 2012 -0.50 -3 -0.60 -4 Sub Saharan Africa Oil Importers Oil exporters -5 Source: World Bank. Source: World Bank. the region (e.g. Uganda, Ethiopia, Zambia, Niger, or even positive (implying demand in excess of Namibia, Tanzania, South Africa, Ghana, Nigeria) supply, figure SSA.4). For these countries, an expansion are rightly targeting infrastructure spending of fiscal policy could be counterproductive as it could (particularly power generation, transportation induce macro instability, with negative impacts on routes and port facilities), which remains a critical the investment environment and growth. binding constraint to improving the competitiveness of economies in the region. The challenge will be for policymakers to ensure Increasingly such infrastructure projects are being that the hard earned gains of the past 15 years in financed from new funding sources including from terms of macroeconomic and fiscal stability are some large developing countries (in particular preserved, while at the same time continuing to lay China but also India, Brazil and Russia) and from the foundation for long-term growth by investing international capital markets. in areas of structural weakness, including infrastructure, education and health. A number of Indeed, over the past several years countries in the countries show signs of overheating, including region have taken advantage of low interest rates rising inflationary pressures, increased current and investor interest in the high-income world to account deficits, suggesting that aggregate demand tap international bond markets, sometimes for the was pushing up against capacity constraints. For first time. For example Rwanda raised $400 million these economies, some tightening of policy may be in April 2013 in it’s maiden Eurobond issuance.4 needed. In many countries, where overall tax rates And, other Sub Saharan African sovereigns are low and structural deficiencies high this might (Angola, Kenya, Ghana, Nigeria, Tanzania) have be most efficiently achieved by raising revenues, plans to borrow from international capital markets while maintaining growth enhancing investments in in coming months. A Bloomberg report estimates education, health and infrastructure. that excluding South Africa, sub Saharan African sovereigns will issue some $7 billion in Consumer spending has in general international debt in 2013 – the highest level since been supportive of growth, though 2007. differences exist among countries. Consumer spending accounts for some 60% of Large positive output gaps in a GDP in Sub Saharan Africa, and a major number of economies suggest contributor to overall demand growth. With real further expansionary fiscal policy per capita incomes increasing by 2.3 per cent per could actually be counterproductive. annum over the past decade, rising household Nonetheless, with demand in many Sub Saharan incomes have supported consumer demand in the African countries closing in on their supply region and contributed to its resilient and robust potential, output gaps (an estimate of the growth in recent years. difference between demand and supply) are small More recent developments point to much 205 GLOBAL ECONOMIC PROSPECTS | June 2013 Sub-Saharan Africa Annex heterogeneity in the strength of consumer demand impacted the various commodity across countries in the region. Where quarterly exporter types in the region national accounts data exist, sectors with strong differently. Among oil exporters, export participation of consumers grew strong in Nigeria volumes for 2012 were some 3.2% higher (9.6 per cent in retail sector in Q3 2012), Tanzania than in 2011, mostly due to an increase in (16.1 per cent retail sector growth in first three exports from Angola, as export volumes in quarters of 2012) and in Ghana (real estate sector Nigeria and Sudan contracted. Reflecting the expanded at 13.1 per cent in 2012). However where coming on stream of past investments in growth was weaker whole sale and retail sales existing and new mines in several countries in growth decelerated in South Africa to 1.9 per cent the region, including Sierra Leone, in Q1 2013 (from 3.2 per cent in Q1 2012) and in Mozambique, Niger, and Zambia, export Kenya due to a credit squeeze at the time, the volumes from the predominantly metal wholesale and retail sector expanded by 4.9 per exporters in the region expanded by 5.2%, cent in Q3 from 5.6 per cent the previous quarter). notwithstanding subdued demand in the Affected by ongoing fiscal consolidation, in global economy and a 15% decline in the Botswana, household consumption grew at a below World Bank metal prices index. Export trend rate of 2.7 per cent in 2012. However, for the volumes of agricultural exporters expanded vast majority of countries in the region this data the most in the region (12.8%), due to weak does not exist. Nonetheless, indirect measures base effects, improved rains in East Africa point to steady outturns in private consumption, compared to a year earlier, and the lower including: favorable weather conditions and cyclical sensitivity of agricultural decelerating inflation. In general weather commodities to global business cycles. conditions were particularly more favorable in the West African (Burkina Faso, Benin, Chad, Gambia, However, in line with developments in the and Togo) and East African sub-regions (Kenya, global economy, exports from Sub Saharan Uganda) relative to a year earlier, thus supporting Africa have been volatile, in particular agricultural household incomes there. Nonetheless, industrial metals and oil exporters, which are flooding in selected parts of Nigeria and more sensitive to global business cycles. Mozambique impacted agricultural household Indeed, in the Q3 2012, as global imports incomes there. Although there was an up-tick in plunged, so did export volumes in the region, February, inflation for the region (on a GDP- in particular that of the region’s metal ( -43 weighted basis) fell to 6.9 per cent in February percent, 3m/3m saar) and oil (-36.8 percent, 2013 from 9.4 per cent (y/y) in January 2012 3m/3m saar) exporters (figure SSA.6). (figure SSA.5). Further, remittance inflows to the However, along with the recovery in global region increased by $1 billion to $31 billion in 2012 import demand by the Q4 2012 Sub Saharan and are projected increase to $33 billion in 2013. African export volumes rebounded, with the Recent global developments expansion in exports being sustained through Fig SSA.5 Inflation has decelerated in recent months Fig SSA.6 Growth in Sub Saharan African export- ers by predominant export group 12.0 (inflation, y/y) 100 (volumes, seasonally adjusted and annualized 3m/3m growth) 11.0 80 10.0 60 9.0 40 8.0 20 7.0 0 6.0 -20 5.0 Oil Importers Oil Exporters Sub Saharan Africa -40 All Agriculture Metal Oil 4.0 -60 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Source: World Bank; International Financial Statistics; IMF. Source: World Bank. 206 GLOBAL ECONOMIC PROSPECTS | June 2013 Sub-Saharan Africa Annex Fig SSA.7 Fig SSA.7 Growth in tourist arrivals in SSA has Medium Term Growth Prospects been above average in recent years, albeit from a low base Percent 12.0 10.0 8.0 6.0 Medium term GDP growth prospects for Sub 4.0 Saharan Africa remain strong, with robust 2.0 investment, resilient consumer demand, public 0.0 investment in infrastructure and increased exports -2.0 World High-income expected to continue to underpin the region’s growth performance, albeit with variations across -4.0 Developing Sub Saharan Africa countries. Regional GDP is projected to expand by -6.0 2009 2010 2011 2012 5.2 percent per year on average during 2013 Source: UN World Tourism Organization. through 2015, 4.9, 5.2, and 5.4 percent for 2013, 2014 and 2015 respectively (table SSA.3). Q1 2013. Indeed, for the first two months of Excluding, the region’s largest economy, South 2013, export volumes are up 8.8 percent Africa, GDP growth for the rest of the region will compared with the same period a year ago. be stronger at 6.2 percent in 2013 and 2014 and further strengthening to 6.4 percent in 2015. This Trends in services trade, particularly tourism, strong growth will not be uniform, with countries facing are an increasingly important driver of political instability and serious labor unrests expected to growth in several Sub Saharan African significantly underperform. (see table SSA.4 for detailed countries (including traditional destinations country forecasts). such as Cape-Verde, Kenya, Mauritius, Seychelles and newer destinations such as Domestic demand will be the major Rwanda). Data from the UN World Tourism driver of growth. Investments to the natural Organization shows that the growth in tourist resources sector in the region will continue to arrivals to the region picked up by some 5 remain an important growth driver, with FDI in percent (y/y) in 2012, compared with a global the natural resource sector increasingly being average of 3.8 percent (figure SSA.7). Sub buttressed by investment in other sectors, Saharan African countries that recorded particularly, rapidly growing, and underserved, strong growth in tourist arrivals included domestic market especially in those economies with South Africa, Sierra Leone, Madagascar and a rising middle-class, relatively larger populations and Cape Verde. political stability (Nigeria, Kenya, Ghana, Tanzania etc). The growth of tourist arrivals to destinations Overall foreign direct investment flows to the in the region notwithstanding the economic region are projected to increase to $53.6 billion by weakness in Europe is encouraging and 2015, from $33.4 billion in 2012. However not all reflects a diversification of source countries. economies in the region will benefit from rising For instance, in Mauritius, arrivals from investment inflows. Lingering political uncertainty Europe in 2012 (largest source market) fell by (Madagascar, Central African Republic, Guinea, 2.6 percent, but arrivals from China rose 38.0 Guinea Bissau), persistent labor unrests (South percent, and those from Russia by 58.9 Africa) and macroeconomic instability will sour the percent. Further arrivals were up from investment climate in a number of countries. elsewhere in Africa (13.2 percent), Australia (13.5 percent), Canada (18 percent) and South Domestic demand (both domestic investment and America (55.3 percent). Other countries fared consumption) is expected to continue to benefit less well, for instance the conflict in Mali led from the low interest rate and inflation to a sharp decline in tourist arrivals there. environment, while household incomes should benefit from an expected increase in remittance 207 GLOBAL ECONOMIC PROSPECTS | June 2013 Sub-Saharan Africa Annex Table SSA.3 Sub-Saharan Africa forecast summary (annual percent change unless indicated otherwise) Est. Forecast 00-09a 2010 2011 2012 2013 2014 2015 b GDP at market prices 4.3 5.0 4.7 4.4 4.9 5.2 5.4 (Sub -region totals-- countries with full NIA + BOP data) c GDP at market prices c 4.3 5.0 4.7 4.4 4.9 5.2 5.4 GDP per capita (units in US$) 2.0 2.5 2.1 1.8 2.4 2.7 2.8 PPP GDP c 4.6 5.3 4.9 3.8 5.7 5.5 5.7 Private consumption 4.9 8.3 5.1 5.0 4.3 5.0 5.6 Public consumption 5.3 5.2 4.9 9.3 3.6 2.4 4.5 Fixed investment 8.9 -1.3 12.1 8.2 7.0 7.6 5.9 Exports, GNFS d 4.4 7.1 8.2 1.3 6.6 7.9 7.6 Imports, GNFS d 5.0 8.7 11.3 6.4 6.4 7.1 7.1 Net exports, contribution to growth -0.5 -0.7 -1.3 -2.1 -0.2 -0.1 -0.1 Current account bal/GDP (%) 0.0 -2.5 -1.7 -3.8 -4.3 -4.2 -4.2 GDP deflator (median, LCU) 6.7 7.3 9.2 5.0 5.9 5.4 5.3 Fiscal balance/GDP (%) -0.5 -3.7 -1.6 -2.7 -2.9 -2.7 -2.4 Memo items: GDP SSA excluding South Africa 5.0 6.2 5.5 5.4 6.2 6.2 6.4 Oil exporters e 5.6 6.2 5.2 5.3 6.4 6.3 6.5 CFA countries f 3.8 4.5 2.8 4.9 5.9 5.5 5.4 South Africa 3.2 2.9 3.1 2.5 2.5 3.2 3.3 Nigeria 5.6 8.0 7.4 6.5 6.7 6.7 7.0 Angola 10.7 3.4 3.4 8.1 7.2 7.5 7.8 Source : World Bank. a. Growth rates over intervals are compound weighted averages; average growth contributions, ratios and deflators are calculated as simple averages of the annual weighted averages for the region. b. GDP at market prices and expenditure components are measured in constant 2005 U.S. dollars. c. Sub-region aggregate excludes Liberia, Chad, Somalia and São Tomé and Principe. Data limitations prevent the forecasting of GDP components or Balance of Payments details for these countries. d. Exports and imports of goods and non-factor services (GNFS). e. Oil Exporters: Angola, Cote d Ivoire, Cameroon, Congo, Rep., Gabon, Nigeria, Sudan, Chad, Congo, Dem. Rep. f. CFA Countries: Benin, Burkina Faso, Central African Republic, Cote d Ivoire, Cameroon, Congo, Rep., Gabon, Equatorial Guinea, Mali, Niger, Senegal, Chad, Togo. flows from $31 billion in 2012 to $39 billion in Cameroon - oil, Sierra Leone – iron –ore etc.). 2015. Improving global conditions also bodes well for tourism to the particular benefit of the region’s Though exports are expected to rise main tourist markets (Gambia, Mauritius, Kenya, over the forecast horizon, the Tanzania, South Africa, Seychelles etc). contribution to growth from net exports will be marginal, on account Despite the strong projected export growth, the of strong import demand. Exports from contribution of net exports (exports less imports) Sub Saharan Africa, are expected to strengthen to growth is expected to be modest or even over the forecast horizon. The pickup is a result of negative, due to strong demand for foreign capital strengthening global demand, particularly from the goods to meet infrastructure and other investment Euro Area (it’s largest trading partner), and a needs, as well as consumer durables and imported structural re-orientation of trade toward faster oil. growing regions, notably Asia, and rising intra- regional trade. Export volumes in the extractive Overall, the regional current account deficit is industries sector are expected to rise due to projected to increase to about 2.8 percent of significant investments in productive capacity in regional GDP in 2014 from 2.4 percent in 2012 recent years that are expected ( Burkina Faso - before improving to 2.5 percent in 2015, and net gold, Mozambique - coal, Niger - uranium, exports are expected to be a modest drag. 208 GLOBAL ECONOMIC PROSPECTS | June 2013 Sub-Saharan Africa Annex However, for some oil exporters (Angola, Congo), New or more prominent risks include net exports will continue to make a positive overheating in some countries in the region, a more contribution to growth. rapid easing in commodity prices than outlined in the baseline. Notwithstanding the robust growth outlook, significant development End of commodity price supercycle. challenges remain. Though Sub Saharan The significant decline in global metals prices, in Africa has made progress in alleviating poverty response to increased supply and substation on the (poverty levels in the region are forecast to fall to demand side, raises the specter of an even more 42.3 per cent of the population by 2015 from 56.5 pronounced easing of prices over the projection per cent in 1990), it still remains the only period as market expectations about future demand developing region not on track to attain the and supply adjust.5 Commodity prices are cyclical millennium development goal of halving extreme by nature (Global Economic Prospects, World poverty by 2015 (Global Monitoring Report, World Bank, 2009, pg 55), and while specifying the timing Bank 2013). of turning points is extremely difficult, it would be imprudent to assume that current high prices will Part of the reason is because, most of the remain indefinitely or that only a smooth investment activity has created value in capital adjustment to long-term prices as in the baseline is intensive sectors with limited backward linkages the only likely outturn. (e.g. mining), while labor intensive sectors have not been able to attract sufficient capital A more rapid adjustment which would see crude- investment to increase productivity and oil prices decline to their estimated long-term employment. Hence the relatively limited flow of equilibrium level of 80 (2012 dollars) within a two investment to existing labor-intensive sectors such year horizon and a 25 per cent decline in metal as the agriculture sector and or low-skilled prices would have significant consequences for Sub manufacturing sectors serves as a limitation to Saharan African commodity exporters, most of translating the robust growth the region is whom have undoubtedly benefitted from the benefitting from to rapid job creation. This is all recent high commodity price levels. the more important given that the region has the youngest and fastest growing working age population. In the oil price decline simulation, Sub Saharan African would be the hardest hit of developing regions, with oil exporters in the region Risks experiencing a deterioration of their current account balances by 4.5 per cent of GDP and fiscal balances by 2.9 percent of GDP by 2014 and real GDP growth would also be cut by some 1.4 percentage points compared to the baseline Risks to the forecast are more balanced than in the recent past, and are increasingly local rather than Fig SSA.8 Impact on Selected Sub Saharan African external in nature. Countries of an oil price shock External risks (cumulative percentage point decline in GDP growth relative to baseline projections) Rwanda Fragile global economy. External risks to Mauritius the outlook (Euro Area, fiscal sustainability in the Ethiopia United States and Japan) are familiar, but the Kenya likelihood of them materializing has diminished as Ghana has the likely severity of the impacts. Moreover, Nigeria upside risks — potentially stemming from a firmer Sudan than projected recovery in the United States, a Angola reversal or easing of the currently pervasive -6.0 -4.0 -2.0 0.0 2.0 4.0 pessimism in Europe — are more pronounced. Source: World Bank. 209 GLOBAL ECONOMIC PROSPECTS | June 2013 Sub-Saharan Africa Annex raising domestic debt could be expensive (i.e. if SSA.9 FigSSA.7 Fig Impact of metal price shock on selected inflation goes up on account of weaker currencies Sub Saharan Africa countries and higher costs of imports) and with the (cumulative percentage point decline in GDP growth relative to unlikelihood of increased aid inflows given fiscal baseline projections) Gambia challenges in high-income countries, governments Kenya Cape verde in the region with limited fiscal space could be Mauritius Malawi forced to cut spending in a procyclical fashion, Seychelles Senegal thereby reducing short-term growth prospects. Lesotho Swaziland Namibia Botswana Domestic risks Uganda Mozambique Mauritania South Africa Mali Ghana -6.0 -5.0 -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 Source: World Bank. With the steady strengthening of the global forecasts. Similarly, under the metal price scenario, economy expected over the forecast horizon, the where metal prices gradually decline by a risks to Sub Saharan Africa’s growth being derailed cumulative 20% by June 2014, GDP growth for are increasingly shifting from global to domestic the regions metal exporters deteriorates by 0.7 sources. percentage points in 2014 and an additional 0.5 percentage points in 2015. Nonetheless there will Macroinstability. As noted in the recent be differentiated effects across countries in the development section, with rising inflation rates and region as non-exporters of these commodities in deteriorating current account balances in a number the region could stand to benefit from positive of countries in the region, fiscal and monetary terms of trade (especially the oil importers, when stimulus measures may fuel inflationary pressures, the price of oil declines, see figures SSA.8 and SSA.9). and add to debt levels without adding to output. The resulting macroinstability will inevitably be For those economies that would be adversely deleterious to long-term growth prospects. impacted from the negative terms of trade impacts, the weaker commodity prices could lead to rapid Nonetheless, a prudent line needs to be drawn depreciation of currencies, higher inflation outturns between fiscal austerity (which, under certain and weaker growth in less diversified economies circumstances could also prove to be with weaker domestic policy and external buffers. counterproductive) and governments carrying out With the appropriate policy space and the needed investments (education, health and diversification of economies a sharp adjustment infrastructure) that lay the foundation for medium needn’t occur. Indeed, as observed in the 2009 to long-term sustainable growth. To sustain a period when commodity prices plunged, real GDP robust durable growth trajectory over the medium growth in sub Saharan Africa (excluding South to long term, economies operating close to capacity Africa) expanded at a healthy 4.1 per cent, with the (as characterized by high and rising inflation and more economically diversified economies being hit twin deficits) would benefit from building their less harder. external and domestic policy buffers. However unlike in 2008 when fiscal balances in the This is all the more important given the possibility region were in a relatively stronger position, fiscal of exogenous shocks to government revenues from buffers for several countries in the region have yet possible declines in commodity prices or even aid to be fully rebuilt, thus limiting the ability of cuts (for more fragile economies in the region). governments in the region to respond in a Although of a different nature, the sharp fiscal countercyclical way were a sharp decline in consolidation in Swaziland (due to lower SACU commodity prices to lead to weakening of private revenue transfers) contributed to the contraction in demand (investment and consumption). Indeed, that economy in 2012 (-1.5 per cent) and serves as under this scenario, access to international capital a reminder of the importance of building policy markets would likely become more restricted, and buffers and diversifying economies. 210 GLOBAL ECONOMIC PROSPECTS | June 2013 Sub-Saharan Africa Annex Other downside risks include weather-related and Nonetheless, isolated examples of this kind of political risks. With the agricultural sector being development exist. For instance, in 2012, Huajian the largest employer in most economies in the Group, a Chinese foot wear manufacturer set up region, even if not the largest contributor to GDP, shop in Ethiopia producing shoes for exports and and with most of the sector remaining rain with plans to foster a new global shoe making hub, dependent, output and incomes in the sector with an investment plan of $2 billion over the next remain vulnerable to drought, floods and other decade. Further, in February 2013, Toyota forms of inclement weather. Poor harvests also announced that it would start assembling trucks threaten macroeconomic stability as food accounts and buses in Kenya. These examples appear to be for over 40% of the consumer price index basket the exception rather than the norm. For these for many economies in the region. Thus far examples to become more widespread and a weather long-term projections suggest a “normal” regional source of growth, significant additional crop year in 2013, but weather conditions are more efforts are needed to reduce existing impediments of an unknown in the outer years of the forecast. to investment in light manufacturing including: improving weak or absent infrastructure (especially While significant progress has been made on power and transportation), unburdening political stability over the past decade, there still cumbersome regulations that contribute to a high remain elements of fragility in a few countries in transactions cost environment, and eliminating the region that could compromise investment and trade barriers, in particular those stifling intra- growth, if not contained. These include the conflict regional integration. in Mali as well as terrorist activity in certain parts of Nigeria; political paralysis in Madagascar; and political uncertainty in Guinea- Bissau. These and potentially new conflicts could hinder investment flows and derail growth prospects in these countries and their neighbors. Entering manufacturing global value chains. On the upside, however, the rising wage costs in China is providing opportunities for other developing countries (e.g. Vietnam) to become more competitive in the global light manufacturing production chains. Sub Saharan Africa may also have an opportunity to increase its involvement in these chains. Doing so would contribute to structural transformation, helping create higher productivity jobs, improving incomes and reducing poverty. Hindered by ongoing high cost of doing business relative to other developing countries, we do not include this possibility in our medium-term projections. 211 GLOBAL ECONOMIC PROSPECTS | June 2013 Sub-Saharan Africa Annex Table SSA.4 Sub-Saharan Africa Country forecasts Est. Forecast 00-09a 2010 2011 2012 2013 2014 2015 Angola b GDP at market prices (% annual growth) 10.7 3.4 3.4 8.1 7.2 7.5 7.8 Current account bal/GDP (%) 3.9 9.3 11.2 6.7 5.1 4.9 2.4 Benin b GDP at market prices (% annual growth) 3.7 3.0 3.1 4.0 4.2 4.1 4.3 Current account bal/GDP (%) -8.4 -9.4 -9.2 -9.4 -9.7 -8.8 -7.9 Botswana b GDP at market prices (% annual growth) 3.4 7.0 8.1 6.1 5.0 5.1 5.2 Current account bal/GDP (%) 8.3 0.3 8.6 4.8 4.9 3.8 3.9 Burkina Faso b GDP at market prices (% annual growth) 5.2 7.9 4.2 9.0 7.0 7.0 7.0 Current account bal/GDP (%) -13.1 -7.4 -8.2 -8.6 -6.3 -4.2 -2.0 Burundi b GDP at market prices (% annual growth) 2.9 3.8 4.2 4.1 4.3 4.6 4.9 Current account bal/GDP (%) -17.8 -15.9 -14.2 -16.0 -15.4 -14.5 -13.5 Cape Verde b GDP at market prices (% annual growth) 5.5 5.2 5.0 4.3 4.0 5.0 5.4 Current account bal/GDP (%) -11.3 -13.0 -15.2 -14.2 -11.5 -9.6 -10.6 Cameroon b GDP at market prices (% annual growth) 3.0 2.9 4.2 4.7 4.8 5.0 5.1 Current account bal/GDP (%) -2.4 -3.8 -3.6 -3.6 -3.1 -3.4 -3.5 Central African Republic b GDP at market prices (% annual growth) 0.7 3.0 3.3 3.8 3.0 3.5 3.7 Current account bal/GDP (%) -8.6 -10.5 -7.8 -6.8 -6.4 -4.7 -4.1 Comoros b GDP at market prices (% annual growth) 1.8 2.1 2.2 2.5 3.5 4.0 4.0 Current account bal/GDP (%) -11.8 -27.9 -16.7 -6.9 -7.5 -7.4 -6.8 Congo, Dem. Rep. b GDP at market prices (% annual growth) 4.2 7.2 6.9 6.6 8.2 6.4 7.5 Current account bal/GDP (%) 0.6 -16.6 -4.7 -2.9 -3.6 0.6 36.1 Congo, Rep. b GDP at market prices (% annual growth) 3.8 8.8 3.4 4.9 5.6 5.4 5.0 Current account bal/GDP (%) -2.0 -28.0 0.5 2.5 2.1 1.3 0.9 Cote d Ivoire b GDP at market prices (% annual growth) 0.8 2.4 -4.7 9.8 8.0 8.0 8.1 Current account bal/GDP (%) 1.9 2.0 -5.6 -3.3 -3.0 -2.9 -3.4 Equatorial Guinea b GDP at market prices (% annual growth) 17.0 -0.5 7.8 -2.1 6.6 3.6 3.4 Current account bal/GDP (%) 13.5 -22.0 6.9 2.4 9.1 9.9 14.1 Eritrea b GDP at market prices (% annual growth) 1.8 2.2 8.7 7.5 6.0 3.5 3.0 Current account bal/GDP (%) -21.5 -5.5 -0.6 -0.6 0.8 2.5 4.2 Ethiopia b GDP at market prices (% annual growth) 7.4 9.9 7.3 8.5 7.0 6.9 7.4 Current account bal/GDP (%) -5.8 -4.0 0.5 -5.9 -7.5 -6.5 -6.2 212 GLOBAL ECONOMIC PROSPECTS | June 2013 Sub-Saharan Africa Annex Est. Forecast a 00-09 2010 2011 2012 2013 2014 2015 Gabon b GDP at market prices (% annual growth) 1.6 6.6 7.0 6.1 5.5 5.1 4.8 Current account bal/GDP (%) 14.8 4.2 8.3 12.2 3.3 2.3 1.3 Gambia, The b GDP at market prices (% annual growth) 3.2 6.5 -4.3 -3.9 10.7 5.5 5.3 Current account bal/GDP (%) -3.6 2.2 -1.9 -16.7 -18.4 -14.0 -12.1 Ghana b GDP at market prices (% annual growth) 5.0 8.0 14.4 8.1 7.8 7.4 7.3 Current account bal/GDP (%) -6.5 -8.2 -8.5 -12.3 -13.0 -9.8 -6.6 Guinea b GDP at market prices (% annual growth) 2.4 1.9 3.9 3.9 4.5 5.2 5.3 Current account bal/GDP (%) -7.2 -7.0 -19.5 -37.6 -28.9 -40.9 -41.5 Guinea-Bissau b GDP at market prices (% annual growth) 0.9 3.5 5.3 -1.5 5.0 4.6 5.1 Current account bal/GDP (%) -9.0 -12.0 -6.2 -6.0 -7.1 -6.2 -6.0 Kenya b GDP at market prices (% annual growth) 3.6 5.6 4.3 4.6 5.7 5.9 5.5 Current account bal/GDP (%) -2.4 -7.5 -10.0 -11.3 -10.0 -10.2 -9.8 Lesotho b GDP at market prices (% annual growth) 3.2 5.6 5.8 4.0 5.2 5.3 5.0 Current account bal/GDP (%) 2.9 -20.2 -21.4 -23.0 -6.8 -5.8 -4.6 Madagascar b GDP at market prices (% annual growth) 2.5 1.6 1.0 2.7 4.1 4.8 5.4 Current account bal/GDP (%) -12.4 -10.7 -6.3 -7.3 -5.0 -4.3 -3.5 Malawi b GDP at market prices (% annual growth) 3.8 6.5 4.3 1.9 4.4 4.8 5.5 Current account bal/GDP (%) -10.8 -17.3 -13.0 -13.1 -11.7 -11.2 -10.4 Mali b GDP at market prices (% annual growth) 5.1 5.8 2.7 -1.2 4.8 5.9 6.0 Current account bal/GDP (%) -8.1 -12.6 -6.2 -4.4 -5.4 -7.6 -8.7 Mauritania b GDP at market prices (% annual growth) 4.5 5.2 3.9 6.4 5.2 4.9 4.8 Current account bal/GDP (%) -10.9 2.3 -6.5 -12.2 -9.3 -5.9 -7.0 Mauritius b GDP at market prices (% annual growth) 3.4 4.1 3.8 3.2 3.4 4.0 4.2 Current account bal/GDP (%) -2.7 -10.4 -12.6 -10.6 -10.9 -10.4 -9.6 Mozambique b GDP at market prices (% annual growth) 7.1 6.8 7.3 7.4 7.0 8.5 8.5 Current account bal/GDP (%) -14.0 -17.2 -24.3 -36.9 -39.8 -41.1 -41.5 Namibia b GDP at market prices (% annual growth) 4.0 6.0 4.9 5.0 4.3 4.4 4.9 Current account bal/GDP (%) 3.5 -1.6 -2.5 -0.5 -4.7 -4.7 -4.1 Niger b GDP at market prices (% annual growth) 3.7 8.0 2.3 11.2 6.2 6.1 5.0 Current account bal/GDP (%) -9.7 -21.0 -18.9 -25.3 -23.5 -20.7 -21.1 Nigeria b GDP at market prices (% annual growth) 5.6 8.0 7.4 6.5 6.7 6.7 7.0 Current account bal/GDP (%) 14.4 1.5 5.8 3.5 2.0 1.6 1.4 Rwanda b GDP at market prices (% annual growth) 7.2 7.2 8.3 8.0 7.0 7.5 7.2 Current account bal/GDP (%) -6.0 -7.5 -7.4 -11.4 -8.5 -8.4 -8.7 213 GLOBAL ECONOMIC PROSPECTS | June 2013 Sub-Saharan Africa Annex Est. Forecast a 00-09 2010 2011 2012 2013 2014 2015 Senegal b GDP at market prices (% annual growth) 3.6 4.1 2.6 3.7 4.0 4.6 4.7 Current account bal/GDP (%) -8.0 -4.7 -7.6 -9.3 -8.0 -7.1 -7.4 Seychelles b GDP at market prices (% annual growth) 1.5 6.7 5.0 2.7 3.5 3.9 4.2 Current account bal/GDP (%) -14.1 -19.7 -22.4 -22.8 -22.9 -21.1 -19.2 Sierra Leone b GDP at market prices (% annual growth) 9.0 4.9 6.0 18.2 17.1 14.1 12.1 Current account bal/GDP (%) -14.1 -34.2 -57.3 -20.2 -8.6 -8.4 -5.9 South Africa b GDP at market prices (% annual growth) 3.2 2.9 3.1 2.5 2.5 3.2 3.3 Current account bal/GDP (%) -3.0 -2.8 -3.4 -6.2 -6.6 -6.7 -6.4 South Sudan b GDP at market prices (% annual growth) 4.1 3.9 5.0 -20.0 24.0 7.0 8.0 Current account bal/GDP (%) 11.8 30.1 17.4 -4.7 4.3 7.6 11.2 Sudan b GDP at market prices (% annual growth) 6.4 5.1 4.7 -1.0 1.0 3.0 2.5 Current account bal/GDP (%) -5.9 -0.5 -1.0 -7.8 -8.6 -7.9 -8.4 Swaziland b GDP at market prices (% annual growth) 2.1 2.0 1.3 -1.5 0.8 0.1 0.5 Current account bal/GDP (%) -2.6 -10.5 -8.5 -2.1 6.5 3.3 1.0 Tanzania b GDP at market prices (% annual growth) 6.2 7.0 6.4 6.7 7.0 7.1 7.4 Current account bal/GDP (%) -9.1 -12.8 -19.7 -19.6 -19.8 -19.9 -20.1 Togo b GDP at market prices (% annual growth) 1.8 4.0 4.9 5.6 5.5 5.1 5.0 Current account bal/GDP (%) -9.2 -6.3 -4.6 -8.0 -10.2 -8.1 -6.7 Uganda GDP at market prices (% annual growth) b 6.8 5.9 6.7 3.4 4.8 6.2 7.0 Current account bal/GDP (%) -5.2 -10.8 -12.4 -12.0 -12.4 -13.3 -13.7 Zambia GDP at market prices (% annual growth) b 4.8 7.6 6.8 7.3 7.0 7.2 6.8 Current account bal/GDP (%) -10.9 5.7 0.3 0.9 1.0 0.6 0.5 Zimbabwe GDP at market prices (% annual growth) b -5.9 9.6 9.4 4.4 2.5 3.5 3.7 Current account bal/GDP (%) -12.2 -23.0 -39.7 -29.9 -24.8 -19.0 -15.8 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 . Liberia, Somalia, Sao Tome and Principe are not forecast owing to data limitations. a. GDP growth rates over intervals are compound average; current account balance shares are simple averages over the period. b. GDP measured in constant 2005 U.S. dollars. 214 GLOBAL ECONOMIC PROSPECTS | June 2013 Sub-Saharan Africa Annex Notes: 1. South Sudan’s contraction in GDP was due to the stoppage of oil exports arising from its dispute with Sudan. Previous editions of the Global Economic Prospects did not include South Sudan. Excluding South Sudan, GDP growth in 2012 was 4.6 percent, and excluding South Africa as well as South Sudan, GDP growth was 5.8 percent for the rest of the region. 2. The measure of capital equipment used is the aggregation of machinery and transport equipment imports . 3. This includes North Africa hence distorts the picture. FDI flows to North Africa are about a-third of the total to the Africa region. 4. The bond was over subscribed some seven times, in part reflecting the loose monetary policy in high-income countries in search of higher yielding securities. 5. Following a pattern where the supply responds to a lag in current prices since it takes time for investments to come on stream. 215 Global Economic Prospects 1818 H Street, NW Washington, DC 20433 USA E-mail: globaloutlook@worldbank.org Website: www.worldbank.org/globaloutlook