The World Bank’s Diminished Prospect Diatribe

The World Bank shaved its developing region growth forecast to 5 percent in the mid-year global economic prospects publication with East Asia and Sub-Sahara Africa at the high end while citing bank distress, output gaps and commodity reversals as major constraints elsewhere. Monetary tightening may be needed against incipient credit bubbles and current account deficits, and faster rebalancing is urgent for China’s “unsustainable” fixed investment. Structural reforms in regulation, enforcement, education and health must be “prioritized” especially with agricultural, metals and energy export slides and potential quantitative easing pullback. The additional liquidity from low industrial country interest rates has generated only 4 percent of GDP in net capital inflows in comparison with the pre-crisis 7 percent. With unwinding debt-service costs and defaults will rise and growth could decline half a point. In recent months cross-border bank lending to emerging Europe and MENA has recovered as private funding heads toward $1.2 trillion this year. Outward south-south allocation will also be steady at $375 billion with trade up 15 percent in Q1. Official development assistance in turn fell 4 percent in 2012 especially from peripheral Europe sources as the 0.3 percent of national income share remains less than half the Paris Club goal. Remittances outside Europe have increased for a $400 billion total in 2012, outpacing all capital inflow categories except FDI, as strong Latin America numbers from the US were undermined in Spain. In Brazil, India, Russia and South Africa recent growth has lagged the boom due to outstanding supply-side obstacles. In Asia the yen’s initial sharp depreciation upset currencies but few neighbors compete directly with their goods and their manufacturing chains tied to Japanese exporters could ultimately benefit. A near-term 100 basis point spike in advanced economy yields could lead to almost double that elevation for emerging markets according to historic data. In thirty five low and middle income nations gross government debt is above 50 percent of GDP and twenty have private external exposure over 30 percent. In China, Malaysia and Thailand domestic corporate and household debt ratios approach or exceed 100 percent and represent “great risk” the Bank warns.

Jamaica and Pakistan are in the most vulnerable official group as the former just resurrected a suspended IMF credit and the latter pursues the same course. Jamaican foreign bonds have thus far escaped restructuring despite a wave of Caribbean sovereign haircuts and Pakistan’s returned President Sharif intends to borrow further in advance of Fund talks to settle state electric company arrears aggravating shortages. Power curbs are also an overriding issue for South Africa as Eskom is shunned by domestic and foreign lenders, and mining production is already stifled by strikes and hefty union wage demands. In the immediate 2008 crisis phase rolling blackouts compounded output losses with Q1 GDP growth performance under 1 percent the worst since as commodity and currency prospects decline.