The World Bank’s Nervous Capital Bouts

In its first developing country prospects publication for the year the World Bank cited improvement in financial market “nerves” with risk price decline although translation to the real economy remains “modest.” CDS spreads are down on average 115 basis points the past six months with high-yielding Romania, Ukraine and Venezuela shrinking the most and the benchmark EMBI has come in 175 basis points since January 2012. Almost thirty sovereign ratings were upgraded and stock markets advanced double digits. Syndicated lending hit a post-crisis record of near $65 billion in the last quarter as “acute” European and foreign bank deleveraging may be over, particularly in heavily reliant Emerging Europe. FDI numbers were mixed with drops in India, Russia and South Africa offset by Latin America gains as the overall private capital inflow total last year was just shy of $1 trillion for a 10 percent annual slide while outflows in contrast jumped 15 percent. Monetary easing both in industrial and emerging economies contributed to the result and 2013 should see a return to $1.1 trillion despite a falloff in bond activity. Developing world GDP growth should rise marginally to 5.5 percent, on better industrial output with the exception of the MENA region from domestic and external demand. China-dominated East Asia will again lead at 7.5 percent, with Sub-Sahara Africa ex-South Africa second at 6 percent. Global trade expansion halved in 2012 to an estimated 3 percent but Southern hemisphere import and export figures averaged 5 percent. Agricultural, energy and metal commodities values should stay stable but low maize and wheat supplies may create shocks.

A downside Euro-zone scenario would hurt remittances and tourism, and US “fiscal policy uncertainty” could dent emerging market budget and current account balances. A fall in Chinese fixed investment to 35 percent is needed for sustainability and GDP growth in Asian neighbors Thailand and Vietnam would then be shaved half a point. The subsequent drag on raw material prices would harm oil and mining exporters in the Persian Gulf and Latin America. The developing country agenda should again focus on supply-side structural reforms, particularly with high unemployment in several regions. Half the universe runs fiscal deficits of at least 3 percent of GDP, but 80 percent have inflation under 6 percent. In external accounts twenty nations have less than minimal three months’ import cover, and in addition to trade weakness reserves dropped in India and Indonesia due to currency intervention. Productivity gains through liberalization, institutional strengthening, labor and infrastructure upgrades would bring “potentially large” benefits, the report comments. BRIC quasi-sovereign issuers continue to be over-represented in bonds, and equity ipo volume was lackluster last year. Africa followed by Europe has been most exposed to trade finance cutbacks, and prime name borrowing preference will be reinforced by Basel III guidelines. The overseas development assistance outlook is also “gloomy,” below the agreed UN target of 0.7 percent of GDP, as richer nation providers encounter taxpayer anxiety.