Jun 2015 Financial News

World Bank in new report: Developing countries face higher borrowing costs

Jun 18, 2015

Developing countries face a series of tough challenges in 2015, including the looming prospect of higher borrowing costs as they adapt to a new era of low prices for oil and other key commodities. This has resulted in a fourth consecutive year of disappointing economic growth this year, according to a World Bank report issued last week.

The World Bank Group’s latest Global Economic Prospects (GEP) report, predicted that developing countries are now projected to grow by 4.4 per cent this year, with a likely rise to 5.2 per cent in 2016, and 5.4 per cent in 2017.

“Developing countries were an engine of global growth following the financial crisis, but now they face a more difficult economic environment,” said World Bank Group president Jim Yong Kim.

“We’ll do all we can to help low- and middle-income countries become more resilient so they can manage this transition as securely as possible. We believe countries that invest in people’s education and health, improve the business environment, and create jobs through upgrades in infrastructure will emerge much stronger in the years ahead. These kinds of investments will help hundreds of millions of people lift themselves out of poverty.”

With an expected liftoff in US interest rates, borrowing will become more expensive for emerging and developing economies over the coming months.

This process is expected to unfold relatively smoothly since the US economic recovery is continuing and interest rates remain low in other major global economies.

However, there are considerable risks around this expectation, the report argues. Just as the initial announcement of US policy normalisation caused turmoil in financial markets in 2013—now referred to as the “taper tantrum”—the US Federal Reserve’s first interest rate increase, or liftoff, since the global financial crisis could ignite market volatility and reduce capital flows to emerging markets by up to 1.8 percentage points of GDP, the report says.

Coinciding with the expected rise in US interest rates, positive credit ratings for emerging markets are fading, especially in oil exporting countries, risks of financial market volatility are increasing, and capital flows are declining. An excessive appreciation of the US dollar could curtail the recovery in the world’s largest economy, with adverse sideeffects for US trading partners around the world.

“Slowly but surely the ground beneath the global economy is shifting. China has avoided the potholes skillfully for now and is easing to a growth rate of 7.1 per cent; Brazil, with its corruption scandal making news, has been less lucky, dipping into negative growth. With an expected growth of 7.5 per cent this year, India is, for the first time, leading the World Bank’s growth chart of major economies.

“The main shadow over this moving landscape is of the eventual US liftoff,” said Kaushik Basu, World Bank chief economist and senior vice president. “This could dampen capital flows and raise borrowing costs. This GEP provides a comprehensive analysis of what the liftoff may mean for the developing world.”

This would especially hurt emerging markets with greater vulnerabilities and weakening growth prospects. For commodity-exporting emerging markets that are already struggling to adjust to persistently low commodity prices, or for countries experiencing policy uncertainty, a slowdown in capital flows would add to their policy challenges.

“Unless emerging markets have taken the prudent policy steps to be fiscally and externally resilient, they may face significant challenges dealing with the turbulence and other fallout that could be associated with a Fed tightening,” said Ayhan Kose, the World Bank’s director of development prospects.

Lower prices for oil and other strategic commodities have intensified the slowdown in developing countries, many of which depend heavily on commodity exports. While commodity importers are benefiting from lower inflation, fiscal spending pressures, and import costs, low oil prices have so far been slow to spur more economic activity because many countries face persistent shortages of electricity, transport, irrigation, and other key infrastructure services; political uncertainty; and severe flooding and drought caused by adverse climate.

Growth in Brazil, held back by weak confidence and higher inflation, is expected to contract by 1.3 per cent in 2015, a 2.3 percentage point swing from January, while Russia’s economy, hit by oil price declines and sanctions, is forecast to contract by 2.7 per cent.

Mexico’s GDP is projected to advance by a more moderate 2.6 per cent, as a soft patch in US activity and falling oil prices weigh on growth. In China, the carefully managed slowdown continues, with growth likely to moderate to a still robust 7.1 per cent this year.

In India, which is an oil importer, reforms have buoyed confidence and falling oil prices have reduced vulnerabilities, paving the way for the economy to grow by a robust 7.5 per cent rate in 2015.

A special analysis in the report finds that low-income countries, many of which depend on commodity exports and investment, are vulnerable in the current environment.

“After four years of disappointing performance, growth in developing countries is still struggling to gain momentum,” said Franziska Ohnsorge, lead author of the report.

Source:
Business Guardian, BG7
Thursday June 18, 2015