The World Bank’s Worst-Case Wallowing
As President Zoellick is increasingly vocal about urging joint international public and private sector anti-crisis action near the end of his term, the World Bank rendered a grim global economic reading advising developing countries to “prepare for the worst.” Their 2012 GDP growth forecast was clipped to 5.5 percent from the previous 6 percent as all regions “feel the blow” from Eurozone and industrial world debt and banking stress. Fiscal space is far narrower than in 2008-09, with 40 percent of the group running deficits of at least 4 percent of GDP. Monetary policy easing could help where viable but 30 emerging economies have immediate external financing needs above 10 percent of output. Corporate issuance in particular could be compromised as bond spreads widen, and lower commodity prices could damage both company and sovereign balance sheets. The report recommends contingency planning for these shocks alongside the potential fallout from cross-border financial sector deleveraging. Wholesale interbank sources could disappear and bubbles could puncture in locations where credit expansion has been rapid in the post-Lehman period. Current account positions could deteriorate sharply both from reduced trade and remittances as 2011 overall private capital inflows were off 10 percent to just over $1 trillion. This year in the separate categories bonds and loans and FDI are all expected to drop while portfolio equity allocation at $60 billion will remain just half the 2010 level. In the last six months major emerging market currencies have lost more than 10 percent against the dollar, reversing a secular appreciation trend. Raw material values outside oil, especially metals and food have weakened over the past year, generating lower inflation. Energy is subject to higher geopolitical disruption with Arab spring-aggravated tensions worsening in the Middle East. These scenarios could be more severe with a plausible credit freeze in large Euro-area economies, and vulnerability is uniformly greater than during the last episode, according to the outlook.
Fifteen developing nations have public debt-GDP ratios above 75 percent and external financing requirements come to almost $1.5 trillion. The sum has been roughly constant since 2008 with exceptions like India where foreign borrowing has jumped 40 percent as a fraction of output. For Turkey and others also with large current account gaps the situation could be “acute,” while Central and Eastern European bank units dependent on Western parents face commercial and regulatory network retrenchment. Austria’s recent supervisory edict to limit engagement is a “worrying development” as the original Vienna Initiative presence pledge no longer holds, the Bank notes. New IMF and industry surveys show trade finance conditions are again degenerating under market and oversight pressures, and could impede rollover of $1 trillion in short-term debt under a 5-year long rolling crisis.
