Hans Timmer
Hans Timmer, Director of Development Prospects at the World Bank, has noted that developing countries must focus on productivity-enhancing reforms and infrastructure investment instead of reacting to day-to-day changes in the international environment.
Commenting on the newly-released report of the World Bank titled Global Economic Prospects (GEP), Mr Timmer added that developing countries should prepare for a long period of volatility in the global economy by re-emphasizing medium-term development strategies while preparing for tougher times.
He said a resurgence of tensions in high-income Europe had eroded the gains made during the first four months of this year, which saw a rebound in economic activity in both developing and advanced countries and an easing of risk aversion among investors.
Since May 1, this year, increased market jitters have spread. Developing and high-income country stock markets have lost some seven percent, giving up two-thirds of the gains generated over the preceding four months.
According to the report, most industrial commodity prices are down, with crude and copper prices down by 19 and 14 percent respectively, while currencies in developing countries have lost value against the US dollar, as international capital fled to safe-haven assets, such as German and U.S. government bonds.
So far, conditions in most developing countries have not deteriorated as much as in the fourth quarter of 2011.
Outside of Europe and Central Asia and the Middle-East and North Africa, developing country credit default swap (CDS) rates, a key indicator of market sentiment, remain well below their maximums from the fall of 2011, it said, adding global capital market and investor sentiments are likely to remain volatile over the medium term making economic policy setting difficult.
Increased uncertainty will add to pre-existing headwinds from budget cutting, banking-sector deleveraging and developing country capacity constraints.
As a result, the World Bank projects that developing country growth will slow to a relatively weak 5.3 percent in 2012 before strengthening somewhat to 5.9 percent in 2013 and 6.0 percent in 2014.
Growth in high-income countries will also be weak, 1.4, 1.9 and 2.3 percent for 2012, 2013 and 2014 respectively with GDP in the Euro Area declining 0.3 percent in 2012. Overall, global GDP is projected to rise 2.5, 3.0 and 3.3 percent for the same period.
This baseline scenario remains the most likely outcome. However, should the situation in Europe deteriorate sharply, no developing region would be spared.
Developing Europe and Central Asia is especially vulnerable because of its close trade and financial ties with high-income Europe, but the world’s poorest countries will also feel the fall out, especially countries that are heavily reliant on remittances, tourism or commodity exports or that have high-levels of short-term debt.
Where possible, developing countries need to move to reduce vulnerabilities by lowering short-term debt levels, cutting budget deficits and returning to a more neutral monetary policy stance.
“Doing so will provide them with more leeway to loosen policy should global conditions take a sharp turn for the worse,” said Andrew Burns, Manager of Global Macroeconomics and lead author of the report.
Higher commodity prices and improved macroeconomic and political stability in recent years has supported increased private investment flows to sub-Saharan Africa, with promising prospects in the medium term.
As domestic demand remains robust, regional growth is expected to strengthen by five percent in 2012, 5.3 percent in 2013 and 5.2 percent in 2014.
By Samuel Boadi
