The World Bank’s Aid and Trade Finance Funk
The World Bank’s June Global Economic Prospects publication urged developing countries to brace for a “sharp turn for the worse” as it pared the baseline growth scenario with all regions except Sub-Sahara Africa lagging 2011 on a 5 percent-plus aggregate prediction. It urged budget deficit control and neutral monetary policy to reduce vulnerability to a “long period of tougher times” globally including in aid and trade credit flows. Net overseas development assistance dropped to $135 billion last year for the first time in a decade according to the OECD, especially from non-Scandinavian Europe. The 0.7 percent of GDP target remains distant for the majority of members and the poorest recipients have seen share diverted to post-rebellion North Africa. European commercial banks at the same time have cut export funding 20 percent on an annual basis through the first quarter, and smaller and low-income economy-domiciled firms have been spurned the most with higher risk ratings under Basel III standards. South Asia has experienced a severe squeeze while East and Central Asia have held relatively firm. The World Bank’s IFC arm has reactivated its post-2008 facility and recently added a program to back commodity trading in response to the cross-border retreat in short-term debt due to continue for “years to come.” The total capital inflow forecast for developing and emerging markets is equally sober with a one-fifth gross fall to $185 billion through May. Bonds have represented $100 billion as the only “boom” category with a record $7 billion individual issue by Brazil’s Petrobras, while bank lending and equity offering were both off one-third. FDI, with re-invested earnings taking 30 percent of the total, will sustain the 15 percent recent setback through year-end as private allocation in sum stays under $800 billion versus 2011’s near $1 trillion.
An immediate contagion risk comes from Greek-owned lenders with Europe and CIS ties where the Vienna Initiative goodwill threatens to be swamped by balance sheet weakness and supervisory gaps between the home and host countries. In the medium-term emerging market borrowers should prepare for scarcer capital at steeper rates which could lead to 5 percent output shrinkage. NPLs which could routinely be understated as in the cases of China and Vietnam will likely spike and may already be triple the reported ratio applying international practice. Chinese state banks have unknown local government debt exposures which could soon become defaults. Ratings agencies have downgraded institutions across a geographic range for both parent and subsidiary problems, including in Chile, Argentina, Russia and Bulgaria. Many sectors are extremely concentrated where the top five competitors handle over half of assets, with Peru and South Africa heading the power curve at 90 percent.
