35
Andrew Burns World Bank January 2012 Global Economic Prospects Uncertainties and Vulnerabilities 1
Andrew Burns World Bank
January 2012
Global EconomicProspects
Uncertainties and Vulnerabilities
1
Global environment has become much more precarious
• Turmoil since August has affected financial conditions in developing countries and economic activity worldwide
• Slow growth in large‐middle‐income countries and high‐income Europe makes recovery fragile
• Developing countries to grow in 2012 by 5.4 %, high‐income countries by 1.4% (vs June forecast of 6.2 and 2.7%)
• Baseline assumes no serious deterioration of conditions, should this materialize impacts for developing countries could be much worse
• Developing countries are vulnerable because of:– Reduced fiscal space– Maturing short‐term and long‐term debt– Potential deleveraging by banks in high‐income world– Weaker export demand and remittances flows– Commodity prices
2
Limited market relief for high‐spread European and high‐spread developing countries
5-yr sovereign credit-default swap rates, basis points, Jan 2011-Jan 2012
3Source: World Bank, Global Economic Prospects, 2012A.
0
200
400
600
800
1000
1200
1400������� �����
�������� �����
����� < 200 ����� > 200
Contagion effects have diminished only somewhat5-�� ��������� ������-������� ���� �����, ����� ������, ��� 2011-��� 2012
4Source: World Bank, Global Economic Prospects, 2012A.
0
50
100
150
200
250������� ������
�� �����
����� < 200
80,0
130,0
180,0
230,0
280,0
330,0
January‐yy July‐yy January‐yy July‐yy January‐yy
ASIAN Developing
LAC Developing (exc. Argentina and Venezuela)
ECA Developing
Source: World Bank, Global Economic Prospects, 2012A
����� �� ������ ������� ���� (���), ������ ����� �����
5
Largest increase in the risk premia was in Eastern European and Central Asia
Borrowing costs are falling for Italy and Spain following solid bond auctions
���������� ���� ������, �������
6
3,50.0
4,0.0
4,50.0
5,0.0
5,50.0
6,0.0
6,50.0
7,0.0
7,50.0
8,0.0
10‐year yields5‐year yields
Italy Spain
Source: World Bank, Global Economic Prospects, 2012A.
������ �� 5-���� ��������� ������-������� ����, ����� ������ (�� �� ���. 6��, 2012)*
0
150
300
450Ukraine
Argentina
Croatia
Romania
Bulgaria
Lithuania
Turkey
Kazakhstan
Russia
South Africa
Indo
nesia
China
Malaysia
Thailand
Chile
Philipp
ines
Brazil
Colombia
Mexico
Peru
Vene
zuela
Greece
Portugal
Italy
Spain
France
Germany
Japan
USA
Ireland
5,929
* ������ ����� ��� ��������� �� ����.
���������� ��������� ����-������ ���������
Contagion has increased sovereign credit default swap rates worldwide
Sources: Bloomberg and World Bank DEC Prospects Group7
European banking‐sector counterparty‐risk concerns persist despite pledge to recapitalize
0
50
100
150
200
250
300
350
400
Jan‐yy Jul‐yy Jan‐yy Jul‐yy Jan‐yy Jul‐yy Jan‐yy Jul‐yy Jan‐yy
Indications of rising concerns about counter‐party risk in European banking system
Interbank overnight spreads, basis points
United States (LIBOR‐OIS spread)
Europe (EURIBOR‐EONIA spread)
Sources: Datastream and World Bank DEC Prospects Group8
(Latest reading, 93)
Market jitters translated into large‐scale reduction in capital flows to developing countries in 2011H2
• Since July 31, 2011– Developing equity markets are off 8.5%– High‐income markets off 4.2% – Total decline, c. $6.5 trillion (9.5% of global GDP)
• Emerging‐market equity mutual funds posted net outflows of about $48 billion in 2011, versus a $97 billion inflow in 2010.
• Gross capital flows to developing countries down 50% and 45% in the second half from the like periods of 2009 and 2010, respectively
9
70,0
80,0
90,0
100,0
110,0
120,0
January‐yy July‐yy January‐yy
MSCI LAC index
MSCI EM Eastern Europe
MSCI EM Asia Index
Source: World Bank DEC Prospects Group and Bloomberg
���� ������ ����� (��� 2011=100)
10
Steepest stock market declines were in Eastern European and Central Asia
,0
5,0
10,0
15,0
20,0
25,0
30,0
Jan‐yy Jun‐yy Nov‐yy Apr‐yy Sep‐yy Feb‐yy Jul‐yy Dec‐yy
Bond issuance Equity placement
Syndicated bank loan
Gross capital flows to developing countries down 50 percent in second half of 2011
3-����� ������ ������� ($ �������)
11Source: World Bank, Global Economic Prospects, 2012A.
Capital flows to developing countries down 50 percent from 2010 levels
12
0
10
20
30
40
50
60
70
80
East Asia &Pacific
Europe &Central Asia
Latin America &Caribbean
Middle-East &North Africa
South Asia Sub-SaharanAfrica
2010-Q1 2010-Q22010-Q3 2010-Q42011-Q1 2011-Q22011-Q3 2011-Q4
$ billion
Source: World Bank.
Biggest drops (y/y)
Increases (y/y)
Real economy has slowed and recovery looks fragile
• Diverging trends: Strength in US and Japan; policy induced slowdown in large MIC; Europe entering recession; modest growth elsewhere
• Global trade has sharply weakened; driven by falling European imports
• Slow growth in Europe and several middle‐income countries could be self‐reinforcing
13
���������� �������� ����� (���), ������
14
46
48
50
52
54
56
58
60
2010M01 2010M04 2010M07 2010M10 2011M01 2011M04 2011M07 2011M10
Global
Other high‐income
European Union
Developing
50‐line
Business outlook improving but weak
Source: World Bank, Global Economic Prospects, 2012A.
���������� ������ ������, 3�/3� ����
Domestically rooted slow growth in large developing countries and European downturn create challenging environment
15
‐40
‐30
‐20
‐10
0
10
20
30
40
2011M01 2011M03 2011M05 2011M07 2011M09 2011M11
Japan
China
Brazil, India,Russia, Turkey
Other develo(also excluding
Euro Area
Other high‐income
Source: World Bank, Global Economic Prospects, 2012A.
,0
2,0
4,0
6,0
8,0
10,0
12,0
14,0
Romania Ukraine Russia Latvia Lithuania Turkey Bulgaria Serbia
2011 Q1
2011 Q2
2011 Q3
Stronger Flat Slower
Source: World Bank, Global Economic Prospects, 2012A
��� ������ (�-�-�, �������)
16
Mixed economic performance in the third quarter
‐60,0‐50,0‐40,0‐30,0‐20,0‐10,0
,010,020,030,040,050,0
2009M01 2009M10 2010M07 2011M04
Europe Central AsiaTurkeyRussiaRomaniaBulgaria
Source: World Bank DEC Prospects Group
���������� ���������� ������ ������ (3�/3� ����. �������)
17
Industrial production growth in ECA had a rebound in October
Import volumes appear to have declined sharply in August
Contribution to growth of global import volumes, 3m/3m saar
18
‐20
‐15
‐10
‐5
0
5
10
15
20
25
30
35
2010M01 2010M04 2010M07 2010M10 2011M01 2011M04 2011M07 2011M10
China Rest of DevelopingJapan European UnionUSA Rest of High‐IncomeWorld
Source: World Bank, Global Economic Prospects, 2012A.
Developing countries at risk from a deterioration of conditions in high‐income countries
• Baseline shows significant markdown since June, assuming limited confidence effects outside Europe
• Much more serious consequences could be envisaged, if financial-sector solvency is affected or a market-induced credit event occurs.
• Downside scenarios necessarily speculative, but potentially as significant as 2008/09
19
Growth forecasts have been downgraded further since September
‐6
‐4
‐2
0
2
4
6
8
10
2005 2006 2007 2008 2009 2010 2011 2012 2013
June 2011 baseline
CurrentUpper‐bound baseline
DevelopingHigh‐incomeWorld
Projected growth
20Source: World Bank, Global Economic Prospects, 2012A.
Growth forecasts have been downgraded further since September
‐8
‐6
‐4
‐2
0
2
4
6
8
10
2005 2006 2007 2008 2009 2010 2011 2012 2013
High‐income Developing
Europe & Central Asia Poland
Projected growth
21Source: World Bank, Global Economic Prospects, 2012A.
Combination of weak middle‐income growth and fiscal crisis in Europe pose downside risks
‐6
‐4
‐2
0
2
4
6
8
10
2005 2006 2007 2008 2009 2010 2011 2012 2013
Scenario 1Revisedbaseline
DevelopingHigh‐incomeWorld
Scenario 2
Projected and Simulated GDP growth
22Source: World Bank, Global Economic Prospects, 2012A.
A deterioration in conditions could have serious consequences for developing countries
‐8
‐6
‐4
‐2
0
2
4
6
8
10
High‐income East Asia &Pacific
Europe &Central Asia
LatinAmerica &Caribbean
Middle‐East& NorthAfrica
South Asia Sub‐SaharanAfrica
Baseline Scenario 1 Scenario 2
23
GDP growth, 2012 various scenarios
Notes: Baseline assumes muddling through; scenario 1 assumes an additional freezing out from capital markets of two small Euro Area economies equal to around 3‐4 percent of Euro Area GDP; Scenario 2 assumes crisis spreads to 1‐2 larger European countries whosetotal weight equals around 30 percent of Euro Area GDP.
Source: World Bank, Global Economic Prospects, 2012A.
Developing countries are more vulnerable to a renewed crisis than in 2008
• Policy response constrained by reduced fiscal space• Countries with large amounts of ST and maturing LT debt should seek to refinance early to limit effects of a potential freezing of capital markets.
• Countries should stress‐test their banking systems, especially if credit has grown rapidly in recent years or they are heavily reliant on wholesale financing.
• Commodity exporters could be hurt by collapse in commodity prices
• Remittance dependent countries may also be vulnerable
24
38% of developing countries had a government deficit greater than 4% of GDP in 2011 (18% in 2007)
0
5
10
15
20
25
30
35
40
‐15 ‐10 ‐8 ‐6 ‐4 ‐2 0 2 4 More
20072011
25
Percent of developing countries
Government balance (% of GDP)
Source: World Bank, Global Economic Prospects, 2012A.
High levels of external short‐ or maturing long‐term debt place countries at risk
0.0 0.5 1.0 1.5 2.0
BulgariaLatvia
LebanonLithuaniaRomania
KazakhstanJamaicaUkraine
ChileMalaysiaAlbaniaTurkey
El SalvadorGeorgia
Macedonia, FYRBelarus
PeruVietnam
IndiaGuatemalaUruguayMoldovaNicaraguaParaguay
Philippines
Short‐term debt (includes trade finance)
Long‐term debt coming due in 2012
Short‐term and maturing long‐ term external debt in 2012 (% of GDP)
Source: World Bank calculations using Debt Reporting System and BIS.26
-16,0 -12,0 -8,0 -4,0 ,0
������
����� ������
�����
������
������
��������
�����
���������
��������
Capital outflows caused currencydepreciations in many countries
������� ������ �� ������� ��������� �������� ���� (���-
Source: World Bank, Global Economic Prospects, 2012A.
,0
10,0
20,0
30,0
40,0
50,0
60,0
70,0
80,0
90,0
100,0
EuropeEM, MNA
Asia EM LatinAmerica
Turkey Poland Hungary Brazil Mexico
Greece, Ireland, and Portugal
Italy
Spain
Rest of Euro Area
Source: World Bank DEC Prospects Group and JPMorgan
������� ������ �� ��������/ ������� ������� ������, % �� ���
28
Deleveraging effects could be strongest among countries with close ties to Euro area banks
Strong banking linkages to high‐income European countries
0 20 40 60 80
Azerbaijan
Belarus
Ukraine
Georgia
Kazakhstan
Jordan
Armenia
Moldova
Turkey
Albania
Lithuania
Bulgaria
Romania
Latvia
European Banks’ Foreign Claims (2011 Q2, percent of GDP)
Source: World Bank calculations using BIS.29
-10,0-8,0-6,0-4,0-2,0,0 2,04,06,08,010,012,014,016,018,020,022,024,026,028,0
������ ���� & ����� ����������� ����
���� ���� & ������������� & ������� ��������� ��. & ���������
���-������� ���������� ���� & �������
����� ��. & ��������������� & ������� ����
������ ���� & ����� ���������-������� ������
�����������������������������������������
����������������
��������������� ������
����������
�����������
���������� �������������� �� �����
��� ���������
��� ���������
2011 ���� 2010, ������ ���. ����� �������, %-����� �� ���
Falling commodity prices can have large income effects
Source: World Bank, Global Economic Prospects, 2012A.
A drop in commodity prices could yield binding cuts in government revenues
Change in fiscal balance (% of GDP)
Fiscal impact of a drop in commodity prices similar to that observed in 2008/09.
31
World ‐0.1
High income countries 0.4
Developing countries ‐1.0
Oil exporting ‐4.3
Oil importing 0.4
East Asia and Pacific 0.7
Europe and Central Asia ‐2.9
Latin America and Caribbean ‐2.4
Middle East and North Africa ‐4.8
South Asia 0.3
Sub‐Saharan Africa ‐4.0
Source: World Bank, Global Economic Prospects, 2012A.
Remittances could fall by more than 6 percent in a severe crisis scenario
‐0.5 ‐0.5 ‐0.4 ‐0.4 ‐0.3 ‐0.3 ‐0.2 ‐0.2 ‐0.1 ‐0.1 0.0
ArmeniaNepal
Gambia, TheSamoa
El SalvadorLesothoMoldovaNicaragua
Kyrgyz RepublicTajikistan
Severe Crisis Moderate Crisis
‐1.0 ‐0.8 ‐0.6 ‐0.4 ‐0.2 0.0
South AsiaMiddle‐East and North Africa
Sub‐Saharan AfricaLatin America and Caribbean
East Asia and PacificEurope and Central Asia
Percent change in remittances (from baseline)
Change in remittances (from baseline), % of GDP
Source: World Bank, Global Economic Prospects, 2012A.
Developing countries should prepare for the possibility of a serious downturn
• Engage in contingency planning and prioritize spending programs in case financing freezes up
• Stress‐test domestic banking sector• Avoid trade disputes and allow commodity prices to decline with weaker activity
• Longer‐term need to identify new drivers for growth
Concluding remarks
• The global recovery is at a difficult juncture with significant downside risks.
• Slow growth in large middle‐income countries and financial turmoil in Europe are generating headwinds.
• A sharp deterioration in conditions could imply a cycle as large as the 2008/09 crisis – potentially longer lasting because of reduced policy space.
• Developing countries activity will be vulnerable to varying degrees to:– A further decline in international capital flows;
– Reduced exports; falling commodity prices or remittance levels;
– A reduction in international aid
34
Andrew Burns World Bank
January 2012
Global EconomicProspects
Uncertainties and Vulnerabilities
35
http://globaloutlook.worldbank.org (GEP interactive web‐site)http://prospects.worldbank.org (high‐frequency data)http://blogs.worldbank.org/prospects/ (daily commentary)
