Beruflich Dokumente
Kultur Dokumente
Flagship Report
JUNE 2015
Global
Economic
Prospects
The Global Economy
in Transition
Global
Economic
Prospects
A World Bank Group
Flagship Report
June 2015
Global
Economic
Prospects
The Global Economy
in Transition
2015 International Bank for Reconstruction and Development / The World Bank
1818 H Street NW, Washington, DC 20433
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AttributionPlease cite the work as follows: World Bank Group. 2015. Global Economic Prospects, June 2015: The Global
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ISBN (paper): 978-1-4648-0483-0
ISBN (electronic): 978-1-4648-0485-4
DOI: 10.1596/978-1-4648-0483-0
ISSN: 1014-8906
Cover design: Bill Pragluski (Critical Stages)
The cutoff date for the data used in this report was May 20, 2015.
Contents
Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii
Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv
Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xvii
Boxes
1.1 Negative Interest Rates in Europe: A Glance at
Their Causes and Implications. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
1.2 Low Oil Prices in Perspective. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
1.3 Recent Developments in Emerging and Developing
Country Labor Markets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Special Feature 1 Hoping for the Best, Preparing for the Worst: Risks around U.S. Rate Liftoff
and Policy Options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
How Have Growth Prospects and Policies in Advanced Countries Changed
since the Taper Tantrum? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
What Are the Major Risks around the Liftoff? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
What Are Possible Implications of the Liftoff for Emerging Markets? . . . . . . . . . . . 70
What Are the Major Lessons for Emerging Markets from the Taper Tantrum? . . . . . 72
How Have Growth Prospects and Vulnerabilities in Emerging Markets
Changed since the Taper Tantrum? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
What Policy Options Are Available to Prepare for Risks around Liftoff? . . . . . . . . . . 76
Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Boxes
SF1.1 Econometric Analysis of U.S. Yields and Spillovers. . . . . . . . . . . . . . . . . . . . 79
v
vi Contents G L O B A L E C ONO M I C P R OS P E C TS | J U NE 2 0 1 5
Special Feature 2 After the Commodities Boom: What Next for Low-Income Countries?. . . . . . . . . 91
A. Implications of the Recent Decline in Commodity Prices for Commodity
Exporting, Low-Income Countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
B. Recent Developments and Near-Term Outlook in Low-Income Countries. . . . . 102
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
Boxes
2.1 Linkages between China and Sub-Saharan Africa. . . . . . . . . . . . . . . . . . . . . 163
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
Figures
1.1 Global activity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.2 Global trends and policy challenges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.3 United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.4 United Kingdom. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.5 Euro Area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.6 Japan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1.7 China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.8 Implications of the European Central Banks quantitative easing for
global financial conditions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
B1.1.1 Negative interest rates in Europe: Context. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
B1.1.2 Negative interest rates in Europe: Some consequences. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
1.9 Implications of the European Central Banks quantitative easing for developing countries. . . . 20
1.10 Implications of launch of monetary tightening in the United States. . . . . . . . . . . . . . . . . . . . . 21
1.11 Developing countries capital flows and borrowing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
1.12 Oil markets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
B1.2.2 Global growth and inflation around oil price declines. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
B1.2.3 Financial market developments around oil price declines. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
B1.2.4 The new oil map . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
1.13 Oil price volatility and non-oil commodity prices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
1.14 Global trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
1.15 Developing and emerging-market growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
1.16 Terms of trade effect on GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
1.17 Developing country currencies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
1.18 Exchange rates and competitiveness in major emerging economies . . . . . . . . . . . . . . . . . . . . . 37
1.19 Inflation in developing countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
1.20 Private debt in developing countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
1.21 Risk of a rough awakening. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
1.22 Emerging market credit ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
1.23 Risk of excessive U.S. dollar appreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
1.24 Risk of stagnation and deflation in the Euro Area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
1.25 Risk of a hard landing in China. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
1.26 Monetary policy in developing countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
1.27 Fiscal pressures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
1.28 Income convergence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
1.29 Structural reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
B1.3.1 Global unemployment rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
B1.3.2 Unemployment rate in developing and advanced economies. . . . . . . . . . . . . . . . . . . . . . . . . . 50
viii Contents G L O B A L E C ONO M I C P R OS P E C TS | J U NE 2 0 1 5
Tables
1.1 The global outlook in summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
SF1.1 Studies on the effects of sudden stops . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
SF1.2 Studies on the implications of the taper tantrum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
SF2.1 Low-income country growth forecasts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
2.1 East Asia and Pacific forecast summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
2.2 East Asia and Pacific country forecasts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
2.3 Europe and Central Asia forecast summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
2.4 Europe and Central Asia country forecasts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
2.5 Latin America and the Caribbean forecast summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
2.6 Latin America and the Caribbean country forecasts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
2.7 Middle East and North Africa forecast summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
2.8 Middle East and North Africa economy forecasts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148
2.9 South Asia forecast summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156
2.10 South Asia country forecasts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156
2.11 Sub-Saharan Africa forecast summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
2.12 Sub-Saharan Africa country forecasts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170
A.1 GDP growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177
Foreword
Changes, which in the long-run steady-state, may adjust to the combination of these two shocks.
be good for the global economy, can cause strain Although resilient thus far, low-income countries
and even a slowdown in the short run brought about could weaken over the medium term as investment
by the challenges of transition. This is the message in the resource sector slows. The benefits from low
that underlies much of the June issue of the World oil prices to growth in oil importers have thus far
Bank Groups Global Economic Prospects. been slow to materialize, but some oil importers
In addition to charting, as usual, our detailed out- have seen their vulnerabilities decline as inflation
look for the global economy and for each of the has slowed and fiscal or current account deficits
worlds developing regions, this report goes on to have narrowed, boosting their growth potential.
analyze two big challenges, associated with two The global economy is expected to grow 2.8 percent
transitions, currently confronting policy makers the in 2015, slightly less than forecast in January, before
world over and especially in emerging economies strengthening moderately to 3.2 percent in 2016
and low-income countries: the impact of the loom- 17. Developing country growth, buffeted by falling
ing monetary tightening cycle in the United States, commodity prices, the stronger dollar, and tightening
and the repercussions of low commodity prices. financial conditions, has been revised downward to
Global growth has yet again disappointed, especially 4.4 percent in 2015 but is expected to pick up
but not surprisingly in oil exporters and some large momentum and reach 5.3 percent in 201617.
developing countries. The reason for our short-term Risks to the outlook remain tilted to the downside,
forecast being somewhat downbeat is the expected as new challenges have emerged even as preexisting
strain of the transitions, even though the trends ones have become more balanced. In particular,
bode well for the medium and long terms. tighter global financial conditions could combine
Under the baseline scenario, the first U.S. monetary with deteriorating growth prospects, especially in
policy rate increase since the global financial crisis commodity-exporting countries, to raise the possi-
will dampen capital flows to developing countries bility of greater financial stress. The strengthening
modestly and gradually and is not expected to cause dollar could also slow the U.S. economy more than
any major turbulence. This is not to deny that the expected earlier, leading to some global strain.
first rate increase will likely cause an increase in global In the current environment, there will be a premium
borrowing cost, and will be accompanied by greater on structural reforms in developing countries to
investor discrimination between countries based on ensure a smooth adjustment to low commodity
their vulnerabilities and structural strengths. prices and gradually tightening financial conditions.
Commodity-exporting developing countries may be Ambitious reform agendas will signal to investors
vulnerable to shifting investor sentiment since that authorities are serious about promoting long-
sharply lower oil prices from a year ago have already term growth prospects. Lower commodity prices
begun to reduce activity in most of them. Under a underscore the importance of diversification in
stress scenario, some countries might struggle to commodity-dependent economies.
Kaushik Basu
Chief Economist and Senior Vice President
The World Bank
xiii
Acknowledgments
This World Bank Group Flagship Report is a product of the Prospects Group in the Development
Economics Vice Presidency. The project was managed by Ayhan Kose and Franziska Ohnsorge,
under the general guidance of Kaushik Basu.
Several people contributed substantively to the report. Chaudhury, Guang Zhe Chen, Marcel Chistruga, Ajai
Chapter 1 (Global Outlook) was prepared by a team led by Chopra, Karl Kendrick Tiu Chua, Punam Chuhan-Pole,
Franziska Ohnsorge and Marc Stocker and included Kevin Clinton, Tito Cordella, Somneuk Davading, Simon
Tehmina Khan and Dana Vorisek. Box 1.1 (Negative Davies, Agim Demukaj, Shantayanan Devarajan, Alain W.
Rates) was prepared by Carlos Arteta and Marc Stocker D'Hoore, Tatiana Didier, Viet Dinh, Makhtar Diop, Ndi-
with contributions from Eung Ju Kim and Bryce Quillin. ame Diop, Doerte Doemeland, Bakyt Dubashov, Olga
Box 1.2 (Oil Markets) was prepared by John Baffes and Emelyanova, Marianne Fay, Erik Feyen, Cornelius Fleis-
Marc Stocker. Box 1.3 (Labor Markets) was prepared by chhaker, Frederico Gil Sander, Indermit S. Gill, Marcelo
Bryce Quillin. The Special Feature 1 was prepared by team Giugale, Chorching Goh, Anastasia Golovach, Gloria M.
led by Carlos Arteta, Ayhan Kose, Franziska Ohnsorge, Grandolini, Poonam Gupta, Gohar Gyulumyah, Kiryl
and Marc Stocker and included Derek Chen, Raju Haiduk, Birgit Hansl, Zahid Hasnain, Marco Hernandez,
Huidrom, Ergys Islamaj, Eung Ju Kim and Tianli Zhao. Yumeka Hirano, Sandra Hlivnjak, Bert Hofman, Vivian Y.
Research assistance was provided by Jiayi Zhang and Trang N. Hon, Elena Ianchovichina, Stella Illieva, Ivailo Izvorski,
Nguyen. The Special Feature 2 was prepared by Tehmina Evans Jadotte, Saroj Kumar Jha, Markus Kitzmuller, Fritzi
Khan (Section A) and Gerard Kambou (Section B). Chap- Koehler-Geib, Christos Kostopoulos, Auguste Tano
ter 2 (Regional Outlooks) was coordinated by Franziska Kouame, Ahmed Kouchouk, Aurelien Kruse, Jean Pierre
Ohnsorge. The authors were Ekaterine Vashakmadze (East Lacombe, Melanie Laloum, Daniel Lederman, Taehyun
Asia and Pacific), Allen Dennis and Ekaterine Vashak- Lee, Tenzin Lhaden, Joseph Louie C. Limkin, John Lit-
madze with contributions from Jungjin Lee (Europe and wack, Julio Ricardo Loayza, Rohan Longmore, Mark R.
Central Asia), Derek Chen (Latin America and the Carib- Lundell, Sodeth Ly, Dorsati Madani, Sanja Madzarevic-Su-
bean), Damir Cosic (Middle East and North Africa), jster, William F. Maloney, Paul Mariano, Miguel Eduardo
Tehmina Khan (South Asia), and Gerard Kambou (Sub- Martin, Khalid El Massanoui, Ernesto May, Elitza Mileva,
Saharan Africa). Ajai Chopra, Kevin Clinton, and David Saiyed Shabih Ali Mohib, Lilli Mottaghi, Maria Bru Munoz,
Robinson provided consultancy support. Editorial review Zafer Mustafaoglu, Evgenij Najdov, Gaurav Nayyar, Anto-
was provided by Mark Felsenthal and Graeme Littler. nio Nucifora, Rei Odawara, Samuel K.E. Otoo, Lucy Pan,
John Baffes, Damir Cosic, and Shane Streifel provided inputs John Panzer, Catalin Pauna, Samuel Jaime Pienknagura,
on commodity markets, and Eung Ju Kim and Marc Stocker Miria A. Pigato, Ruslan Piontkivsky, Catriona Mary Purf-
on financial markets. Modeling and data work were produced ield, Rong Qian, Mahwish Qureshi, Mohammad Zia M.
by Thi Thanh Thanh Bui, Xinghao Gong, Jungjin Lee, Trang Qureshi, Martin Rama, Luc Razafimandimby, Elliot Joseph
Thi Thuy Nguyen, Kiwako Sakamoto, and Jiayi Zhang. Riordan, David Robinson, David Rosenblatt, Michele Ruta,
Pablo Saavedra, Seynabou Sakho, Ilyas Sarsenov, Cristina
The online publication was produced by a team including Savescu, Philip Schellekens, Sergio Schmukler, Lazar Ses-
Graeme Littler, Praveen Penmetsa, Katherine Rollins, with tovic, Smriti Seth, Sudhir Shetty, Saurabh Shome, Peter
technical support from Marjorie Patricia Bennington, Siegenthaler, Alex Sienaert, Karlis Smits, Nikola Spatafora,
Ugendran Machakkalai and Gayathri Natrajan. Shane Streifel, Ashley Taylor, Mark Roland Thomas, Theo
Indira Chand, Merrell Tuck-Primdahl, and Phil Hay David Thomas, Hans Timmer, Augusto de la Torre, Sergei
managed media relations and the dissemination. Maria Ulatov, Ekaterina Ushakova, Robert Utz, Rogier J. E. Van
Hazel Macadangdang, Keisha Lynn McGee, Katherine Den Brink, Ralph Van Doorn, Sona Varma, Aristomene Va-
Rollins, and Ann-Marie Wildman produced the hard roudakis, Julio Velasco, Mathew Verghis, Gallina Andron-
copy publication, in collaboration with Aziz Gkdemir ova Vincelette, Adrien Vogt-Schillb, Dana Vorisek, Ekat-
and Patricia Katayama. erina Vostroknutova, Kei-Mu Yi, Ayberk Yilmaz, Hakan
Yilmazkuday, Puri Shen Yoong, Albert Zeufack, Luan Zhao,
Several reviewers offered extensive advice and comments.
May Thet Zin, and Johannes Zutt. Regional projections and
These included: Enrique Aldaz-Carroll, Marina Bakanova,
write-ups were produced in coordination with country
Kevin Barnes, Kaushik Basu, Hans Anand Beck, Kirida
teams, country directors, and the offices of the regional chief
Bhaopichitr, Gregor Binkert, Genevieve Boyreau, Cesar
economists.
Calderon, Jose Lopez Calix, Vandana Chandra, Shubham
xv
Abbreviations
ASEAN Association of Southeast Asian Nations
bbl barrel
CPI Consumer Price Index
EAP East Asia and Pacific
ECA Europe and Central Asia
ECB European Central Bank
EITI Extractive Industries Transparency Initiative
EM emerging market
EMBI Emerging Markets Bond Index
FDI foreign direct investment
FOMC Federal Open Market Committee
FRB Federal Reserve Board
FY fiscal year
GCC Gulf Cooperation Council
GDP gross domestic product
CDS credit default swap
GEP Global Economic Prospects
GST Goods and Service Tax
IMF International Monetary Fund
LAC Latin America and the Caribbean
LIC low-income country
MENA Middle East and North Africa
NPL nonperforming loan
OECD Organisation for Economic Co-operation and Development
OPEC Organization of the Petroleum Exporting Countries
RHS right-hand side (in figures)
SAR South Asia
SSA Sub-Saharan Africa
VAR vector auto regression
VAT value added tax
WDI World Development Indicators
WEO World Economic Outlook
xvii
CHAPTER 1
GLOBAL OUTLOOK
The Global Economy in Transition
G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5 chapter 1 3
Global growth hit a soft patch at the start of the Shrinking current account surpluses among oil-
year, but remains broadly on track to reach about exporting countries have narrowed global current
2.8 percent in 2015, somewhat below earlier fore- account imbalances. In contrast, commodity-
casts, with a modest pickup in 201617 (Table importing countries have benefited from declining
1). However, important shifts are emerging. The vulnerabilities, as current account and fiscal bal-
recovery in high-income countries is expected to ances have strengthened and inflation has fallen.
gather momentum, while a broad-based slowdown Offset by country-specific headwinds, low oil prices
appears to be underway in developing countries have not yet been fully reflected in stronger activity
this year (Figure 1.1). Looking forward, global ac- in oil-importing countries. Compared with 2014,
tivity should be supported by continued low com- growth in developing countries is expected to slow
modity prices and generally still-benign financing to 4.4 percent in 2015, 0.4 percentage point less
conditions, notwithstanding the expected modest than anticipated in January, before rising to 5.3 per-
tightening in U.S. monetary policy. Among major cent in 201617. Growth prospects for low-income
economies, growth in the Euro Area and Japan is countries (LICs) remain robust, above 6 percent
picking up, and the United States should continue in 201517. Among several commodity exporters,
to expand at a robust pace despite recent setbacks, the negative impact of low commodity prices is ex-
while the slowdown in China is proceeding as an- pected to be offset by strong public investment.
ticipated in January. High-income countries are ex- In a second transition, developing countries will
pected to grow by 2 percent in 2015 and 2.3 percent be at heightened risk of depreciation amid a grad-
in 201617. ual tightening of financial conditions, albeit from
Developing countries are facing two transitions, as very accommodative levels, and moderating capital
they adjust to prospects of low commodity prices flows. The announcement of quantitative easing
over the medium-term and tighter financial condi- by the European Central Bank (ECB) in January,
tions ahead. Oil prices appear to have found some continued monetary easing in Japan, and the pros-
support, upon evidence of a sharp decrease in un- pect of an interest rate increase in the United States
conventional oil production capacity in the United have been associated with a broad-based apprecia-
States, but are likely to remain low. Other commod- tion of the U.S. dollar and some financial market
ity prices continue to be soft, on weak demand as volatility (Figure 1.2). Currency depreciations have
well as ample supplies. As a result, in commodity- been largest in developing countries with deterio-
exporting countries, especially those with limited rating growth prospectsmost notably commod-
reserve and fiscal buffers, activity has slowed more ity exportersand elevated external vulnerabilities.
than anticipated, currencies have weakened, and Currency depreciations against the U.S. dollar have
domestic and external vulnerabilities have grown. raised concerns about U.S. dollar exposures in sov-
4 chapter 1 G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5
ereign and corporate balance sheets in some coun- FIGURE 1.1 Global activity
tries, especially those with rapid post-crisis credit The global economy is growing somewhat more slowly than expected, with disap-
growth. Since trade exposures tend to be diversified, pointments in developing countries, especially in oil exporters and Brazil. Forecasts
depreciations have been considerably more modest, have been revised upwards in the Euro Area and India, but downwards in the United
States, Brazil and oil-exporting countries. As a result, growth in the BRICS is increas-
if not negligible, in trade-weighted terms for most ingly diverging.
developing countries and may not deliver significant
A. Growth forecasts B. H
igh-income countries: Contribution to
competitiveness gains. With the gradual tightening global growth
in U.S. monetary policy likely to start later in 2015, Percent World
Percent
capital flows are expected to ease and overall finan- 10 High-income countries 100
Developing countries 90
cial conditions for developing countries to tighten 8 80
70
modestly. 6
60 50 percent threshold
4
50
The transitions to lower commodity prices and 2 40
weaker currencies are having diverging inflation- 0 30
20
-2
ary consequences. In oil-importing countries and 10
-4
oil-exporting countries with fixed exchange rates, 2007 2009 2011 2013 2015 2017
0
1980s 1990s 2000-08 2011-14 2015-17
headline inflation has generally slowed on falling
C. C
ontribution to developing D. Emerging and developing
energy and transport prices, although core inflation countries growth revisions countries: Growth
has remained broadly stable (Figure 1.2). This dis- Percent Percent
inflationary effect will be transitory as commodity 0.4 Oil exporters Oil importers 10 2013 2014 2015 2016
India Brazil 8
prices settle around lower equilibrium levels. It will 0.2 Developing countries 6
Developing
China
Brazil
India
Federation
Mexico
South Africa
countries
Russian
-0.6
inflation is already very low, especially where this 2015 2016
would heighten the risk of deflation. In contrast, in
many oil-exporting countries with flexible exchange E. M
anufacturing PMI: High-income F. M
anufacturing PMI: Emerging and
countries developing countries
rates, the pass-through of exchange rate deprecia- Index, +50: Expansion Index, +50: Expansion
tion has lifted inflation. 58 58
FIGURE 1.2 Global trends and policy challenges up. The beneficial effects of lower commodity prices
Diverging monetary policy in major high-income countries has contributed to a broad-
on activity may yet materialize more strongly than
based dollar appreciation. Oil prices appear to have found a floor as unconventional currently expected. However, new risks have arisen.
supplies have begun to adjust, but are expected to remain low and have helped reduce
inflation pressures and current acount imbalances. Depreciations and low commodity
The likelihood of disruptive exchange rate adjust-
prices present monetary and fiscal policy challenges. ments in developing countries may have increased,
as market expectations have continued to differ
A. U
.S. dollar and euro: Broad trade- B. Oil prices and U.S. rig counts
weighted currency indices
from those of U.S. Federal Reserve policy makers.
US$ per barrel Count
In addition, U.S. growth may turn out to be more
Index, Jan 2, 2013 = 100
120
U.S.$ Euro 120 1,800 fragile than anticipated and slower than expected as
115 100 1,600
a result of the broad-based dollar appreciation.
110 1,400
80
105 1,200
60
Recent Developments and
100 Brent 1,000
WTI
95 40 U.S. oil rig count (RHS) 800
90 20 600
Outlook in Major Economies
Jan-13
Sep-13
Sep-14
May-13
Jan-14
May-14
Jan-15
May-15
Jan-14
May-14
Jul-14
Sep-14
Jan-15
May-15
Mar-14
Nov-14
Mar-15
Divergences across major economies will narrow in
C. Inflation, median D. Global imbalances 2015-16 as growth plateaus in the United States and
Year-on-year, percent Percent of world GDP strengthens in the Euro Area and Japan. Lower oil
8 High-income countries
7 Developing countries 6
prices will support consumer spending and hold infla-
6
5 tion at record lows in the short term, but these effects
5
4 4 will wane by 2016. Activity in China will continue
3
2
3 to decelerate modestly in line with expectations, with
1 2 the slowdown buffered by scaled-up monetary and fis-
0 1 cal accommodation.
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Jan-10
May-10
Jan-11
May-11
Jan-12
May-12
Jan-13
May-13
Jan-14
May-14
Jan-15
0
1983 1991 1999 2007 2015 High-income countries are expected to grow at
2.0 percent in 2015 (compared with 1.8 percent
E. M
onetary policy decisions, F. G
eneral government debt and in 2014) and 2.3 percent, on average, in 201617.
developing countries primary balance, developing
countries
The expected growth pickup reflects the recovery
Number of policy rate changes Percent of GDP Percent of GDP
in the Euro Area, continued robust activity in the
40
35
Hikes Cuts 100 Government debt Government primary 12
United States, and increased traction from Japans
balance (RHS)
30 80 8 monetary, fiscal, and structural policy efforts.
25
60
20 4 In the United States, activity stalled at the start of
15 40
10 20
0 the year, partly as a result of another cold winter,
5
0 -4
disruptions to port activity, sharp cutbacks in capital
0
expenditures in the oil and gas industry and residual
2007
2014
2007
2014
2007
2014
2007
2014
Oil Ex. Oil Im. Oil Ex. Oil Im. Oil Ex. Oil Im.
14-Q3 14-Q4 15-Q1 Oil Ex. Oil Im. Oil Ex. Oil Im.
calendar effects. These factors are expected to dissi-
pate, resulting in a rebound in activity later in 2015,
Sources: World Bank; Bloomberg; Baker Hughes; International Monetary Fund. but a strong U.S. dollar will continue to weigh on
A. The latest observation is June 05, 2015.
B. The latest observation is May 22, 2015. exports. For example, the almost 15 percent dollar
C. The latest observation is March 2015. Data for 55 high-income countries (data for 45 available in March 2015)
and 120 developing countries (data for 89 available in March 2015).
appreciation in trade-weighted terms between mid-
D. Defined as the sum of absolute current account positions for 120 countries as a percent of global GDP. 2014 and March 2015 has been estimated to reduce
E. Oil Ex. stands for oil-exporting countries; Oil Im. stands for oil-importing countries.
F. Bar illustrates interquartile range. Dot shows median
growth by as much as percentage point this year
(Laforte and Roberts 2014). Driven predominantly
by private consumption, growth should strengthen
exporting countries account for a significant pro- modestly to 2.7 percent in 2015 and further to 2.8
portion of the poor population and their livelihoods percent in 2016, before slowing towards potential
may come under pressure as growth slows. growth in 2017 (Figure 1.3). The unemployment
Global risks to growth remain tilted to the down- rate is expected to fall to 5.2 percent by end-2015,
side. Deflation risks in the Euro Area remain but below the level at the start of the previous monetary
have receded as inflation expectations have picked tightening cycle in 2004 and close to estimates of
G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5 chapter 1 7
its structural level. The labor force participation rate FIGURE 1.3 United States
is predicted to remain broadly unchanged at cur-
As a result of sustained job creation, the unemployment rate is approaching structural
rent low levels, as a return of discouraged workers levels and inflation is expected to move closer to the Federal Reserves target in
is offset by the ongoing retirement of the sizeable 2016. This, together with broadly neutral fiscal policy and healing household balance
sheets, should support above-potential growth in 2015-16.
baby-boomer cohort. Sharply lower oil prices are
supporting household purchasing power (especially A. Growth B. Inflation
in lower-income households). While household sav- Percent Percent
4 4
ing rates initially increased, real income gains from GDP growth
Potential growth
Inflation
Inflation target
lower energy bills are expected to continue lifting 3 3
2002
2004
2006
2008
2010
2012
2014
2016
1985 1991 1997 2003 2009 2015
headline inflation temporarily below zero in the first
quarter of 2015. Core inflation is projected to stay
below the Feds 2 percent target until the end of the E. Government debt and deficit F. Household and corporate debt
year, but gradually increase towards it during 2016. Percent of GDP Debt Percent of GDP Percent of GDP
Household Debt
110 0
The current account deficit is expected to widen 100
Deficit (RHS)
-2
110
Corporate Debt
100
modestly as the real dollar appreciation increasingly 90 -4
90
-6
encourages imports and discourages exports. 80
-8 80
70
-10 70
The recovery in the United Kingdom remains on 60 -12
60
track despite mixed data in the first quarter, including 50 -14
50
40 -16
indications of weak construction and manufacturing
Jan-09
Jun-09
Feb-11
Oct-12
Aug-13
Jan-14
Nov-09
Apr-10
Sep-10
Jul-11
Dec-11
May-12
Mar-13
Jun-14
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
will continue to bolster consumer spending. Growth A. The Congressional Budget Office estimates and projects potential output growth by adjusting observed inputs
(labor force and total factor productivity) for the influence of the business cycle. The inputs cyclical components
should, however, gradually slow towards its potential are estimated by means of an analysis of the relationship between each input and the unemployment gap (that
is, the gap between the actual unemployment rate and CBOs estimate of the underlying long-term rate of
rate by 2017, as spare capacity is absorbed. Headline unemployment).
B. Inflation is the annual average change in the consumption deflator.
inflation turned negative in the first quarter of 2015, C. Distance to target is equal to (-*)2+(-*)2] where is inflation, * is the target rate of inflation in
due to falling energy prices, and will likely stay below percentage points, is the unemployment rate and * is the long-run average rate of unemployment
(Bullard 2014).
1 percent until end-2015. As these temporary effects D. The latest observation is 2015Q1.
FIGURE 1.4 United Kingdom on effects on the Euro Area as a whole. However,
In the United Kingdom, strengthening activitynotwithstanding stabilizing housing
the risk remains that a further deterioration affects
pricesand shrinking bank balance sheets are allowing a reduction in net government broader Euro Area confidence.
debt. Substantial slack, together with low oil prices, is expected to reduce inflation
temporarily. A mix of supply and demand shocks in the after-
A. Growth B. Inflation
math of the crisis left lasting damage to output
Percent Percent and employment across the Euro Area. Addi-
4
GDP growth
Potential growth
4 Inflation
Inflation target
tional easing by the ECB in 201415, includ-
3
ing the launch in March 2015 of a quantitative
3
easing program, brought long-term interest rates
2 2
to record lows in both core and periphery coun-
1 1 tries (Box 1.1), even as concerns about Greeces
financial strains intensified. It also contributed
0 0
2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 to a 10 percent depreciation of the euro in trade-
weighted terms since mid-2014, which should
C. Public debt and bank liabilities D. Household debt and house prices
Percent of GDP Percent of GDP
support activity and gradually lift headline and
Index, 2010 = 100
160
100 120 core inflation from currently very low levels. In-
140
120 90
100 flation was negative in the first quarter of 2015,
100 80 but should rise gradually from mid-year onwards
80 80
Household debt
60
as the impact of declining oil prices wanes. The
60 40
40 70 House Prices (RHS) Euro Area current account surplus should reach a
20
20 Net Public Debt
Excluding public sector banks 60 0
record 3.5 percent of GDP in 2015. It is driven by
0
a depreciated exchange rate, lower oil prices, weak
2000
2002
2004
2006
2008
2010
2012
2014
1998
2000
2002
2004
2006
2008
2010
2012
2014
slowed to 15.2 percent in 2014, down from 19.4 FIGURE 1.5Euro Area
percent in 2013, but is still the leading driver of A modest recovery is underway. Euro Area economies have diverged since the global
aggregate demand. Despite reportedly stagnat- financial crisis, with demand shocks in the core economies correlating more closely
with each other, but not with those in the periphery. Import compression and improv-
ing employment in industries with overcapacity ing competitiveness have turned current account deficits into surpluses; the aggre-
(e.g., various metals processing and mining in- gate Euro Area surplus is widening. Substantial slack, together with low oil prices,
dustries and cement), the labor market appears should keep inflation to near-zero in 2015. High government debt remains a burden.
ing. Tightening regulations on trust lending are Pre-crisis Post-crisis Pre-crisis Post-crisis -12
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
being accompanied by efforts to limit local gov- Periphery Economics Core Economics
2008
2009
2010
2011
2012
2013
2014
2000
2002
2004
2006
2008
2010
2012
2014
around 2 percent of GDP by 2017 as growth
picks up in high-income countries. Narrowing
interest rate differentials with the United States, Source: World Bank; Bank for International Settlements; Dealogic; Organisation for Economic Co-Operation
and Development; European Central Bank; Central Bank Rates.
fading expectations for further renminbi appre- B. Inflation is defined as the annual average change in consumption deflator.
ciation, and slowing domestic growth, have led to C. Values are the correlation of each countrys demand shocks with the Euro Area average. Demand and
supply shocks are identified as in Blanchard and Quah (1989) with country-specific vector autoregression
increased private capital outflows, and a slowing models of unemployment rates and growth. Demand shocks are assumed to have short-term impacts,
supply shocks long-term impacts.
of official reserve accumulation. D. The latest observation is 2014 Q4.
-8
volatility in European and U.S. long-term interest
75
65
150
-10
rates. On balance, in light of the sizeable impact of
55 100 -12 U.S. monetary policy decisions on global financial
markets, global borrowing costs are expected to rise
2000
2002
2004
2006
2008
2010
2012
2014
2000
2002
2004
2006
2008
2010
2012
2014
40
towards U.S. assets, particularly to long-term
6.5 30
debt securities (Figure 1.9). This reallocation, be-
20
sides supporting the U.S. dollar, has appeared to 6 2
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
2013 2014 2015 2016 2017
help keep U.S. Treasury bond yields low.1
Liquidity channel (reducing liquidity pre- C. Job openings and growth D. Employment in overcapacity sectors
mia and facilitating lending by liquidity- Millions Percent Employment levels, millions
Job openings 25 Ferrous Metal Smelting & Pressing
constrained banks). This channel has been par- 8
Job seekers
14 Chemical Materials & Products
GDP growth (RHS) Non Metallic Mineral Products
ticularly impaired in the Euro Area. Despite am- 7 12
20
Coal Mining & Dressing
6
ple central bank liquidity since the crisis, bank 5
10 15
8
credit has been held back by the need to rebuild 4
6
10
Jul-14
Sep-14
Mar-14
May-14
Nov-14
Jan-15
Mar-15
0 80
14 percent above end-2014 levels (Figure 1.9).
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Exchange rate channel (reducing the exchange
value of the euro and improving the cost com- Source: World Bank; Haver Analytics.
A. Annual averages.
petitiveness of the Euro Area). Since ECB Presi- C. The last observation is 2015 Q1.
dent Draghis speech at Jackson Hole in August F. The last observation is April 2015.
FIGURE 1.8 Implications of the European Central Banks rowers outside of the United States, comprising both
quantitative easing for global financial conditions bond and bank lending flows, grew at double digit
Euro Area activity only returned to pre-crisis levels in 2014, but is expected to receive
rates, whereas credit to the U.S. private sector remained
a boost from the European Central Banks quantitative easing. This easing has helped subdued. A similar effect is expected from the ECBs
reduce bond yields (although they spiked in May), contributed to euro depreciation and
capital outflows, especially into U.S. assets. However, currency and bond market volatility
quantitative easing, although weakening fundamen-
has increased. tals among emerging markets and greater competition
A. Real GDP levels B. Economic surprise indices for the
from U.S. issuers could dampen positive spillovers.
United States and the Euro Area
The ECBs quantitative easing could shift the com-
Index=100 in 2007Q1 Index, positive value = Better than consensus estimate
position of capital flows to developing countries.
115 150
Economic Surprise (Euro Area
1.7 A significant share of global portfolio flows to de-
United States
Euro Area
100 minus U.S.)
US$ per Euro (RHS)
1.6
1.5
veloping countries tends to originate in the United
110 50
0
1.4 States, while European banks provide the bulk of
105
-50
1.3
1.2
cross-border bank lending flows. A policy rate in-
100
-100 1.1 crease by the U.S. Federal Reserve will further tilt
-150 1.0
capital flows to developing countries from bond and
Aug-14
Sep-14
Jun-14
Jul-14
Oct-14
Nov-14
Dec-14
Jan-15
95
2007 08 09 10 11 12 13 14 15
equity markets into bank lending. This tendency
will be reinforced by the gradual healing of Euro-
pean banks balance sheets, notwithstanding regula-
C. Central bank balance sheets D. Net asset purchases after the
announcement of quantitative
tory tightening since 2008. Regions that have been
Percent of GDP
particularly reliant on bond and equity inflows (East
Index = 100 in January 2010
400 50 Announced Asia and Pacific, Latin America) could face a slow-
350 Euro Area
United States
40 Realized down in capital inflows, while capital inflows may be
300
250 Japan 30 more resilient to regions that receive predominantly
200 20 bank lending-based inflows (Central Asia, Eastern
150
100
10 Europe, Middle East and North Africa, see below).
0
50
Euro Area United States Japan (Apr 13
0 (Mar 15 - Sept (Nov-09 - Oct - Apr 16)
2010 11 12 13 14 15 16 16) 14) Implications of the launch of the U.S. monetary
tightening cycle for developing countries
E. 10-year government bond yields F. Volatility In the second half of 2015, the U.S. Federal Reserve
Percent Index U.S. equities is expected to raise interest rates for the first time
German U.K. Japan U.S.
3.6
3.2
FX (USD/Euro)
U.S. Treasuries (RHS)
since the 2008 financial crisis. This is likely to initi-
27 8
2.8
2.4
24 ate a gradual tightening cycle from currently record-
21 7
2
1.6
18 low interest rates. Rate increases will coincide with
15 6
1.2 12 improved growth prospects for the United States,
0.8 9 5
0.4 6 which would dampen the impact of rising financ-
0 3 4
ing costs on developing country trading partners
Jan-13
Sep-13
Sep-14
May-13
Jan-14
May-14
Jan-15
May-15
Jan-14
Jul-14
Sep-14
Mar-14
May-14
Nov-14
Jan-15
Mar-15
May-15
BOX 1.1 Negative Interest Rates in Europe: A Glance at Their Causes and Implications
A number of major central banks in Europe have set key countries at a time when global financial markets are
policy rates at negative levels in order to further encourage not in crisis is unprecedented.
lending by making it costly for banks to hold excess reserves This box briefly explores the causes and implications of
at their central banks. Amid negative policy rates, nomi- negative interest rates and yields in Europe. It aims to
nal yields on some bonds of highly-rated European govern- shed light on the following questions:
ments have also dropped below zero. Explanations for the
Why are some European policy interest rates
phenomenon of negative yields include very low inflation,
negative?
further flight to safety toward fixed income assets in
Europes core, andperhaps the main proximate cause What are the implications of negative policy rates
the increased scarcity of highly-rated sovereign bonds eli- for sovereign bond yields?
gible for the European Central Bank's asset purchase pro- What are the implications of negative rates and
gram. Negative rates may help boost exports by encouraging yields for activity and financial stability?
currency depreciation and may support lending and do-
What are the implications for developing
mestic demand by further easing credit conditions. At the
countries?
same time, they could also have some adverse consequences
for financial stability through an erosion of bank profit- Why are some European policy interest rates
ability, through funding problems for some non-bank fi- negative?
nancial institutions, and through excessive risk-taking by In June 2014, the ECB pushed the policy interest rate
investors seeking a higher rate of return. Potential implica- applied on its deposit facility below zero, with an ad-
tions for developing countries include a search for yield sup- ditional cut in September 2014. (Figure B1.1.1). In
porting capital inflows, which could help offset the impact February 2015, the Riksbank also cut its deposit rate
of an approaching liftoff in U.S. policy interest rates. below zero. The main motivation for these decisions
As an additional measure to stabilize inflation expecta- was to further ease the already accommodative mone-
tions and stave off the risk of deflation, a number of tary policy stance to fight the growing threat of defla-
major central banks in Europeincluding the Euro- tion amid downward pressures to inflation expecta-
tions in the second half of last year and into early 2015
pean Central Bank (ECB), the Danish National Bank
(Figure B1.1.1).3 The SNB and DNB have also taken
(DNB), the Swedish Riksbank, and the Swiss National
similar actions at different points in the past, albeit for
Bank (SNB)have pushed key short-term policy rates
slightly different reasons. The DNB, which maintains
into negative territory. 1 Amid these movements, yields
its currency within a narrow fluctuation band around
on some sovereign bonds at relatively short maturities
the euro, was actually the first central bank in Europe
in several European countriesincluding Austria,
to set its deposit rate below zeroin July 2012, in re-
Denmark, Germany, the Netherlands, and Switzer-
sponse to rising capital inflows amid heightened finan-
landhave also fallen below zero. Negative interest
cial stress in the Euro Area. It pushed the rate down
rates have been an extremely rare phenomenon: even again to negative territory in September 2014, follow-
during the Great Depression, U.S. short-term rates ing the ECB. The SNB set its deposit rate below zero
were never negative, and during the height of the re- in December 2014 amid currency appreciation pres-
cent global financial crisis in 2008 some U.S. Treasury sures, and pushed it further down in January 2015
bill yields only very briefly fell below zero.2 That they when it abandoned the Swiss francs cap against the
have simultaneously appeared in several European euro.
This box was prepared by Carlos Arteta and Marc Stocker, with contri- The implementation of these negative policy interest
butions from Eung Ju Kim and Bryce Quillin. rates have a common element. Commercial banks nor-
1The discussion of setting policy rates below zero is not recent. For in-
stance, Mankiw (2009) argued that the U.S. Federal Reserve should have 3In the ECBs case, an ongoing contraction of its balance sheet in 2013
considered this possibility during the Great Recession and 2014 had weakened the overall transmission of low policy rates to
2Based on closing levels, U.S. 1-month and 3-month T-bill rates fell broader financing conditions. The ECB reacted with an extended program
below zero between early December and mid-December of 2008. of asset purchases, as well as a negative deposit rate (ECB, 2015).
14 chapter 1 G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5
0.2 1.0
0.5
-0.2
0.0
-0.6
-0.5
-1.0 -1.0
Jul-14
Jan-14
Mar-14
May-14
Nov-14
Sep-14
Jan-15
Mar-15
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
C. Two year government bond yields D. Euro Area bank lending
Percent Euro, billions, 3-month rolling sum
0.2 150
0.0
100
-0.2
-0.4 50
-0.6 Germany
Austria 0
-0.8 Netherland
Denmark
-1.0 Switzerland -50
-1.2
-100
Oct-14
Nov-14
Nov-14
Dec-14
Dec-14
Jan-15
Jan-15
Jan-15
Mar-15
Mar-15
Apr-15
Apr-15
Feb-15
Feb-15
May-15
May-15
Jan-10
Nov-10
Jul-12
Mar-14
Sep-11
May-13
Jan-15
mally hold deposits at their central bank as settlement more uncertain environment since the global financial
balances for clearing payments, or to meet legal mini- crisis, and with money market interest rates at very low
mum reserve requirements. Central banks normally levels, some banks have chosen to hold higher balances
pay interesta deposit rateon commercial banks at central banks. That is, some of them have been hold-
excess reserves (i.e. reserves above the minimum level). ing excess reserves because of heightened risk aversion,
During normal times, banks usually minimize hold- and because the opportunity costs of hoarding re-
ings in such excess reserves, because central bank de- servesin terms of profitable lending opportunities
posit rates are below typical money market rates. In the have been quite low, given the low returns on assets
and the sluggishness of economic activity.4
4In addition, unconventional monetary policies and the expansion
of central bank balance sheets have significantly increased the amount of The four aforementioned central banks are now charg-
banks' excess reserves. ing (instead of paying) commercial banks for their ex-
G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5 chapter 1 15
cess reserves. Negative deposit rates should provide rently set at 20 basis points. This lower yield limit is
some encouragement to banks to buy alternative assets, to ensure that purchases are implemented broadly
and hence to put upward pressure on prices of such across eligible bonds, and to curb speculation on future
assets and further downward pressure on yields and declines in bond yields. Such speculation would en-
borrowing costs. This would be transmitted through courage holders, including banks, to hoard bonds.
the economy by a general easing of credit conditions. While the ECB deposit rate might establish a lower
However, as is discussed below, negative policy rates bound for bond yields, rising demand and limited sup-
have distinct implications for sovereign bond yields ply of highly-rated sovereign bonds could bring their
and, crucially, for financial stability. yields well below that rate. In addition, since bonds can
What are the implications of negative policy rates be used as collateral in repurchase agreements, they
for sovereign bond yields? have additional value which could keep them attractive
with materially negative yields.
Policy rates provide the benchmark for short-term bor-
rowing costs throughout the economy. This includes The prospects of growing imbalances between the lim-
shorter-dated bonds. Thus, negative policy rates in the ited supply of eligible bonds and rising demand under
Euro Area, Denmark, and Switzerland have been ac- the ECB quantitative easing program have pushed
companied by negative market rates on government down yields in core Euro Area countries and, indi-
bonds, particularly at the shorter end of the yield curve. rectly, in other European countries. Overall, the net
For example, the 2-year bond yields on highly-rated issuance of medium- and long-term securities by all
European countries such as Austria, Denmark, Ger- Euro Area debt management offices in 2015 is expected
many, the Netherlands, and Switzerland have been to be around 200 billion, against total asset purchases
negative during the first half of 2015, though they have of 600 billion by the ECB (Cur 2015). In some
generally ticked up amid recent bond market volatility countries, including Germany, net issuance is expected
(Figure B1.1.1.C). Besides the role of negative policy to be marginal or even negative, creating a mismatch
rates, there are several potential explanations for the between effective supply and the intended scale of
emergence of negative yields, particularly those beyond ECBs purchases.
the short-end of the yield curve. These include very low Investors initially held on to core-European bonds on
inflation, the persistence of the international savings expectation of further capital gains, which in itself
glut, and further flight to safety toward low-risk helped push yields to record low levels in April. A re-
fixed income assets. In consequence, sovereign bonds
versal in market sentiment in May led to an upward
of certain countries in Europe that are deemed risk-free
adjustment in yields. However, scarcity considerations
have been in heavy demand.
will likely continue to drive core-European bond mar-
That said, a key reason for negative sovereign yields in kets, potentially intensifying if the share of eligible sov-
core European countries appears to be technicala re- ereign bonds trading with negative yields approach the
sult of demand pressures stemming from the ECBs lower limit for eligibility. This should keep yields at
Extended Asset Purchase Program, which is in turn a exceptionally low levels, and perhaps below zero for a
consequence of the design of the program. Purchases while longer.
announced by the ECB, which will amount to 60 bil-
Investors may hold instruments with negative returns
lion per month until at least September 2016 (for a
for various reasons, such as for speculative and arbi-
total of 1.1 trillion), will mainly be of sovereign
trage reasons, institutional and regulatory require-
bonds, following a defined allocation, and strict eligi-
bility criteria. These criteria prohibit purchases beyond ments, or simply for lack of alternative assets.
25 percent of the outstanding amount of individual Speculative and arbitrage reasons. Investors may
securities, 33 percent of any given issuer's debt, and of be expecting increased demand for bondsfor ex-
bonds with yields below the ECBs deposit rate, cur- ample, due to the announcement by the ECB of
16 chapter 1 G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5
A. Euro-dollar exchange rate and government bond B. Net interest margin for Euro Area banks
yields
Percent US$ per Euro 4-week moving average, basis points
0.4 1.4 8
0.2 1.3 6
0.0 1.2 4
-0.2 1.1 2
German 2-year yield
-0.4 1.0 0
Euro exchange rate (RHS)
-0.6 0.9 -2
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
C. Benchmark government bond yields for Germany and D. Foreign portfolio flows into emerging-market bond funds
emerging markets
7 1.4
6
0.8
5
0.2
4
EM sovereign bond yield
3 German 10-year government bond yield -0.4
2
-1.0
1
0 -1.6
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
Source: Bloomberg, Emerging Portfolio Fund Research, JPMorgan Chase, and World Bank.
B. Net interest margin is proxied by the difference in borrowing and lending rate of banks without compensating for the fact that the amount of earning assets and borrowed funds may be different.
gains on the sale of their government bonds to long-term liabilities, such as pensions or life insur-
central banks and, in doing so, bolster their capital ance policies, offered at fixed nominal rates (Han-
position and, therefore, their capacity to extend noun 2015). In particular, various European life
loans (Cur 2015). insurance companies that have guaranteed payouts
Pressures on non-bank financial institutions. exceeding the yields on local 10-year government
Under negative interest rates, some non-bank fi- bonds are likely to face significant pressures (IMF
nancial institutionsespecially pension and life 2015a). Insurance companies or pension funds
insurance companiesmay struggle to meet their might be constrained to hold government bonds by
18 chapter 1 G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5
prudential requirements, hence contributing to the cia 2010; DellAriccia, Laeven, and Suarez 2013).
demand glut and downward pressure on yields. Greater risk-taking could contribute to the forma-
Anomalies in the valuation of returns and pay- tion of asset bubbles, particularly in higher-
ments streams. As interest rates approach zero, dividend paying stocks which may already have ex-
the calculation of present values of streams of cash cessive valuations.
flows becomes increasingly sensitive to the dis- Potential need to redesign the functioning of fi-
count rate.7 Indeed, the present value of any nancial transactions. The issuance of interest bear-
stream can be made arbitrarily large by choosing a ing securities at negative yields may face design
low enough discount rate. This becomes a conten- problems (Garbade and McAndrews 2015). Con-
tious issue in the negotiation of fair value in legal tractual language surrounding the operation of
settlements. As discount rates of zero or less have money and capital markets may not envision the
no economic meaning, a prolonged period of nega- possibility of negative rates; thus, the latter may
tive interest rates would create large ambiguities for create both legal and operational challenges. More
the valuation of assets and liabilities. generally, if negative rates were to prevail for long,
Effects on money market funds. Money market they may entail the need to redesign debt securi-
funds make conservative investments in cash- ties, certain operations of financial institutions, the
equivalent assets, such as highly-rated short-term recalculation of payment of interest among finan-
corporate or government debt, to provide investors cial agents, and other operational innovations,
liquidity and capital preservation by paying a mod- whose costs may offset the benefits of negative
est return. While these funds aim to avoid reduc- rates (McAndrews 2015).
tions in net asset values, this objective would not be One key question is how deep negative rates must be
attainable if rates in the market were negative for a for these kinds of distortions to become quantitatively
substantial period.8 Disruptive reactions by disap- important. According to some observers, in an econ-
pointed investors would best be avoided by clear omy like the United States, market rates (not to be
understanding of the nature of these funds. That confused with deposit rates on excess reserves) staying
said, the Danish experience suggests that money below 50 basis points on a sustained basis might
market funds can pass through the negative rates spawn various financial innovations to circumvent
without massive disruptions in the market (Huttl negative rates (Garbade and McAndrews 2012). Such
2014). adaptations would, in themselves impose an eventual
Excessive risk-taking. Bank and non-bank inves- floor, albeit somewhere below zero, on the extent to
tors may be encouraged by negative rates to take which rates could fall (Svensson 2015). However, these
excessive risk in their search for positive yield kinds of innovations, which uses valuable scarce re-
(Hannoun 2015). This is consistent with various sources, may impose a net loss in terms of economy-
studies that find a negative relation between short- wide social value.
term interest rates and bank risk-taking (e.g. If they were to emerge, such financial innovations
Altunbas, Gambacorta, and Marqus-Ibez could include new services, such as the creation of new
2010; De Nicol, DellAriccia, Laeven, and Valen- institutions to handle and store cash on behalf of oth-
ers. It could also include new behavioral responses,
such as making excessive tax payments to the govern-
ment and earn a zero return until a refund is received
7One way to describe the problem for pension and life insurance plans
from the government, thus avoiding negative rates
is to say that the steep drop in discount rates implies a steep rise in the pres- (McAndrews 2015). At the extreme, if central banks
ent value of their liabilities. pushed rates too far into negative territory, there is a
8Money market funds may face adverse consequences even at zero, non-
risk that large sectors of the economy could become
negative rates (Di Maggio and Kacperczyk. 2015).
G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5 chapter 1 19
cash-based. Under these circumstances, there could bond yield (Figure B1.1.2.C). Despite recent vola-
even be discussions about the feasibility of a tax on tility, which has slightly narrowed this differential,
money, a topic that has long been subject to debate in German 10-year yields are generally following the
academic circles as a way to overcome the zero bound same contour as (currently negative) short-term
on interest rates (Buiter and Panigirtzoglou 2003, yields. Amid interest rate differentials, foreign in-
Ilgmann and Menner, 2011).9 flows into emerging market bond funds have re-
The bottom line of all these factors is that, while the mained steady since the beginning of the year (Fig-
benefits of negative rates are broadly similar to those of ure B1.1.2.D)
very low but positive rates, they posit unique risks for Increased search for yield and carry trade. Negative Eu-
financial stability. ropean rates and yields could shift investor demand
What are the implications of negative rates for to higher-yielding emerging market debt and provide
developing countries? additional funding opportunities for developing
countries in European markets. With negative nomi-
Current negative European policy rates highlight the nal interest rates in Europe, there will also be incen-
asynchronous monetary policy stances in Europe and tives for increased carry trade, particularly to some
the United States. This could have implications for higher-yielding developing-country currencies.
real activity and the financial sector in developing
countries. Moderated effect of eventual U.S. liftoff on develop-
ing-country capital flows. Outflows from European
Real effects. The overall effect on developing-country sovereign to U.S. Treasury markets would have
exports via exchange rate movements is likely to be likely helped contain long-term yields in the
modest. The reduction in European rates has contrib- United States, in the face of the approaching lift-
uted to euro depreciation against the dollar. However, off in U.S. policy rates, thus providing support to
since developing-country currencies have also been de- continued capital flows to developing countries.
clining against the dollar, the impact of negative rates
on nominal and real effective exchange rates across de-
Shifts in developing-country sources of funding.
veloping countries may be contained.10 As a result, the Negative rates may be contributing to a gradual
direct impact of negative rates on developing countries shift in the source of funding for some developing
exports may be limited as a whole, albeit with large countries, from U.S. dollar- to euro-denominated
country variations depending on specific trade expo- debt instruments, and from bond to cross-border
sures and currency developments. bank lending flows, which mainly originate from
European lenders.
Financial effects. Negative interest rates in Europe
may accelerate portfolio outflows from Europe, and In sum, negative European interest rates may provide
support continued favorable financing conditions for ongoing support to capital flows to developing coun-
developing countries. tries and help reduce pressures from a gradual normal-
ization of U.S. monetary policy (Special Feature 1).
Widened interest rate differentials. The interest rate However, over the medium term, unsustainably low
differential between developing-country and Eu- interest rates may render some countries more vulner-
ropean bond yields widened since the second half able to the eventual unwinding of exceptional stimulus
of 2014, as suggested by the gap between the JP measures in Europe and to a reversal of capital flows.
Morgan EMBIG Index and the German 10-year
9There have even been discussions about the costs and benefits of phas-
ing out paper currency as one way to eliminate the zero bound in interest
rates (Rogoff 2014).
10Chapter 1 discusses this issue at greater length.
20 chapter 1 G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5
FIGURE 1.9 Implications of the European Central Banks While there is a risk that a lift-off in U.S. policy rates
quantitative easing for developing countries could lead to a sudden steepening of the U.S. yield
curve with disruptive consequences for developing
The ECBs announcement of quantitative easing (QE) was followed by falling sover-
eign bond yields, rising equity markets, and appreciation against the euro in emerging countries (reminiscent of the Taper Tantrum in
markets. Similar to the cross-border credit expansion triggered by QE in the United May/June 2013, Special Feature 1), the baseline as-
States, ECB QE is expected to increase portfolio flows and, especially, bank lending to
developing countries. sumption remains that of a very gradual increase in
U.S. long-term rates and a flatter yield curve, as ob-
A. Impact of the U.S. announcement B. Impact of the European Central served during some previous tightening cycles and
of quantitative easing on Banks announcement on developing
emerging-market assets country financial markets as expected by financial markets now. This should
Percent change Emerging Asia Percent change Emerging Asia
result in only modestly tighter global financial con-
Central Europe and Middle East
3 Emerging Europe
Emerging Latin America Emerging Latin America ditions for developing countries later in 2015 and
2 Emerging Market
Emerging Markets 4 in 2016.
1 2
0 0 As financing costs gradually rise, investors are likely
-1 -2 to increasingly differentiate among country pros-
-2 -4 pects and vulnerabilities. Both during the finan-
-3
Exchange
Rates
Stock Government Exchange
Markets bond yields Rates
Stock Government
Markets bond yields
-6
Exchange Equity Bond Exchange Equity Bond cial market turmoil of May/June 2013 (the taper
Rate Returns Yields Rate Yields
QE2 Annoucement Taper Tantrum
OMT SMP tantrum following the U.S. Feds announcement
of tapering large-scale asset purchases), and during
C. P
ortfolio investment from the
D. BIS-reporting banks cross-border
the broad-based U.S. dollar appreciation since mid-
Euro Area and the United States,
2013
claims, Q3 2014 2014, exchange rates depreciated sharply against
US$, billions US$, billions the U.S. dollar in the more vulnerable developing
1600 3,000
Euro Area banks
economies and in those with deteriorating growth
1400
2,500
1200
Euro Area U.S. U.S. banks prospects, in particular commodity exporters. Risks
2,000
1000
800 1,500
would be particularly sizable in developing countries
600 1,000 with high external and government debt; large cur-
400
200
500 rent account and fiscal deficits; heavy foreign cur-
0
All Latin Emerging Emerging Others
0
All Emerging Latin Emerging Others rency borrowing and high debt service payments;
develeoping Europe America Asia
developing America
and
Asia Europe
and
Caribbean
elevated inflation; low reserve coverage; and poor
Caribbean
growth prospects.
E. U
.S. dollar credit growth to non- F. Euro credit growth to non-E.U.
U.S. residents and U.S. residents residents and E.U. residents
Capital flows to developing countries
Percent Non-US Residents Percent
EU Residents Non-EU Residents
Portfolio flows to developing countries remained
30 US Residents
25
30 subdued in 2015, but low bond yields, and ample
25
20 20 liquidity continued to encourage investor interest
15
15
10 in bond issuance, particularly in China and other
10 5
0
East Asian countries. On the whole, sovereign bond
5
0
-5 yields in emerging markets remained low despite
-10
-5 -15 headwinds from expectations of U.S. policy tight-
ening, currency depreciations and increased volatil-
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
result, private external debt has risen since 2011, FIGURE 1.10 Implications of launch of monetary
whereas sovereign external debt has generally re- tightening in the United States
mained moderate as sovereigns shifted towards Past episodes of first rate increases in a U.S. monetary policy tightening cycle were
domestic borrowing. However, several developing often accompanied by a flattening U.S. yield curve, and currency depreciations and/
country sovereigns have issued heavily in interna- or monetary policy rate increases in emerging markets. The close correlation with
emerging market borrowing costs suggests that lift-off in 2015 may increase global
tional bond markets. In some countries, this has financing costs, especially for vulnerable countries.
helped reduce their debt service payments. Other
countries, however, may experience record-high A. U
.S. term spreads around B. N
umber of policy changes around
previous U.S. tightening cycles past episodes of U.S. rate hikes
spikes in payments over the next decade (Ghana,
Basis points; deviations from t = 0 Number of policy changes around
Jordan, Kenya, Nigeria, Zambia). 60 1994 Q1 1999 Q2 2004 Q2 2013 Q2
Feb.1994, June 1999, June 2004, and May 2013
20
40 Hikes
-20
countries, as prospects of increasingly divergent -40
-60 10
monetary policies between the United States and -80
-100
other major central banks increase the potential -120
-140
5
-160
for further appreciation of the U.S. dollar. This has -180 0
Nov-93
Dec-93
Feb-94
Jul-99
Aug-99
Sep-99
Jul-04
Feb-13
May-13
Jul-13
Aug-13
Jan-94
Mar-94
Apr-94
May-94
Mar-99
Apr-99
May-99
Jun-99
Mar-04
Apr-04
May-04
Aug-04
Sep-04
Jun-04
Mar-13
Apr-13
Jun-13
-4 -3 -2 -1 0 1 2 3 4
encouraged a shift towards euro-denominated cor- quarters
to moderate marginally, to 5.1 percent of GDP in 2015 Percent, deviations from t = 0 Correlation coefficient
Feb-94 Jun-99 Jun-04 May-13 0.5
from 5.4 percent in 2014 (Table 1.1). At the same time, 2 Non-European EM
European EM
a gradual shift is expected from bond financing to bank 0 0.3
tal flows will continue to be constrained by concerns Currency depreciation against the US$, percent
From end-April 2013 to end-Jan. 2014
Currency depreciation against US$, percent
From June 2014 to May 2015
0 0
tion, and increased competition for funding as high- -2
Regression line; R-square = 0.61
-10
income country issuance rises. Furthermore, natural -4
-20
resource-based foreign direct investment is expected -6
-30
to decline as a result of weak commodity prices and -8
-40
declining growth prospects among commodity- -10
3 4 5 6 7 8 9 10 11 12 13 -50
2012 FRB Vulnerability Index
exporting countries. 3 4 5 6 7 8 9 10 11
2014 FRB Vulnerability Index
12 13
Low and volatile commodity prices Sources: Bloomberg; U.S. Federal Reserve Board; Haver Analytics; World Bank.
A. Term spread denotes the difference between 10-year U.S. Treasury and 6-month T-bill yields, shown four
quarters before until four quarters after the launch of each U.S. tightening cycle (t= 0).
Oil prices have begun to find some support after the B. Values are for emerging and frontier markets as defined in World Bank (2015a).
C. Median of nominal effective exchange rate of BRICS and MINT countries, three months before until three
sharp decline in the second half of 2014, but are ex- months after the beginning (t=0) of U.S. monetary policy hikes. The Russian Federation is excluded from the
sample of the 1994 episode.
pected to remain well below their 2013 levels during D. U.S. term spread is defined by the difference between the 10-year Treasury rate and the 3-month T-bill rate.
the next decade. Second-round effects of low oil prices Emerging market bond spread is JP Morgan's EMBIG yield spread.
E. F. For the FRB vulnerability index, higher numbers = more vulnerable. Blue dots indicate net oil exporters.
on other commodities, together with robust supplies
and soft demand, are expected to keep prices low for
most other commodities in the medium-term. 2015. A substantial capacity adjustment in the U.S.
Oil prices have stabilized following the steep drop shale oil industry (Figure 1.12) has raised prices
more than 50 percentto a six-year low in January somewhat from the January lows. The rig count
22 chapter 1 G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5
FIGURE 1.11 Developing countries capital flows and a measure of future U.S. crude oil suppliesmore
borrowing costs than halved between October 2014 and April 2015,
Sovereign bond yields have mostly remained low, but corporate bond yields have
and major oil companies have announced sharp cut-
risen sharply and portfolio flows have remained subdued. Post-crisis bond inflows backs in investment plans. Thus far, however, U.S.
have raised corporate foreign currency debt, which is predominantly denominated
in U.S. dollar. Some sovereigns that haved recently accessed international capital
shale oil production has remained robust, albeit
markets are likely to see sharp debt payment spikes. Euro-denominated bond issu- growing more slowly. It is expected to peak in later
ances have picked-up since the start of quantitative easing in the Euro Area. As bank 2015. In the short-run, continued weak demand,
balance sheets heal, regions that are more dependent on bank flows than bond flows
may benefit. U.S. dollar appreciation, ample and rising global
inventories, and unexpectedly solid production in
A. Emerging-market bond yields B. F
oreign portfolio inflows to EM conflict-torn Republic of Yemen, Iraq, and Libya,
assets
Percent 4-week moving average, US$, millions
keep oil prices below their elevated 2013 levels (IEA
6.8
Sovereign (external)
Corporate (external)
4,000 Equity 2015). A recently negotiated international agree-
Sovereign (local) 3,000
6.3
2,000
Bonds
ment with the Islamic Republic of Iran could raise
5.8
5.3
1,000 supply further.3 Oil prices are expected to average
0
4.8 -1,000 about $58 per barrel in 2015 and remain below $70
4.3 -2,000 per barrel until 2018.
3.8 -3,000
3.3
-4,000
-5,000
The decline in oil prices since mid-2014 partly re-
Jan-13
Apr-13
Jul-13
Jan-14
Apr-14
Jul-14
Jan-15
Apr-15
Oct-13
Oct-14
Apr-11
Sep-11
Jun-10
Feb-12
Jul-12
Jan-15
Nov-10
Dec-12
May-13
Oct-13
Mar-14
0
LAC EAP ECA SAS SST MNA DEV
Bank 2015b). Absent significant demand pressures,
this flexibility may limit room for oil price increases
above $80 per barrel in the medium- to long-term.
E. Emerging-market private and F. Emerging and frontier market As a result, oil prices are expected to return to their
sovereign external debt peak annual debt service 2013 levels only in the next decade (by 2025).
payments
Percent of GDP Private external debt Average debt service as share of revenues, percent As oil prices have found some support and begun to
90
19 Sovereign external debt 80 Peak 2000-10
Peak, 2015-25
recover, their volatility has risen (Figure 1.13). Both
70
15
60 the realized and implied volatilities of oil prices have
50
40 increased more than three-fold since the thirty days
11
30
20 prior to OPECs November 27 decision to abandon
7
10
0
the earlier price target. The level of oil price volatil-
Kenya
Mozambique
Tanzania
Bulgaria
Senegal
Rwanda
Angola
Armenia
Ethiopia
Ghana
Jordan
Nigeria
Vietnam
Honduras
Ivory Coast
Bolivia
Ecuador
Paraguay
Mongolia
Venezuela
Gabon
3
1997 99 01 03 05 07 09 11 13 3Iran and the five permanent United Nations Security Council
ity remains well below spikes in 1985/86, 1990/91, FIGURE 1.12 Oil markets
and 2008/09. However, if sustained or amplified, it Unconventional oil supplies (Mexican and North Sea Oil in the 1990s, and shale oil,
could induce uncertainty that deters investment and biofuels and Canadian sands in the 2000s) have increased global supplies. On signs
of sharp investment cuts in the shale industry in 2015, oil prices appear to have found
reduces employment growth, by generating costly a floor. Longer-term prospects of ample supply from unconventional, non-OPEC oil
resource reallocations to and from energy-intensive production suggest that prices will likely remain low, constrained by the marginal cost
activities (Guo and Kliesen 2005; Federer 1997). of unconventional sources.
Weak global demand (including from China), U.S. A. Commodity price indices B. U.S. oil production and rig count
dollar appreciation, and low oil prices have put Nominal index, 2010=100 Million barrels per day Count
180 Agriculture 11 1,800
pressure on non-oil commodity prices, in particular 160
Energy Oil production
Rig count (RHS) 1,500
Metals and minerals
those for natural gas, fertilizers, and food. 140 9
1,200
120
Natural gas. The prices in most contracts for liq- 100
7 900
600
uefied natural gas deliveries to Asia are linked to 80 5
300
60
oil prices, though with a considerable lag. As a 40 3 0
result, liquefied natural gas prices have already
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
declined substantially (in Japan, by more than
15 percent since June 2014) and are expected
drop further. In Europe, a natural gas market C. OPEC and non-OPEC oil D. Oil production
production
is slowly emerging such that a smaller share of
Million barrels per day Non-OPEC production Million barrels per day
gas contracts is directly linked to oil prices. This 50 OPEC production Mexico and North Sea
Biofuel, U.S. shale, and Canadian sands
share, however, is sufficient to put downward 45 10
Others (RHS)
80
pressure on European natural gas prices.4 40 8 60
35 6
Fertilizer. Natural gas is a key input into fertilizer 30 4
40
1984
1990
1996
2002
2008
2014
2000
2002
2004
2006
2008
2010
2012
2014
Following the post-2005 drop in natural gas prices
in the United States (due to the shale gas boom),
many fertilizer companies began moving their
E. Changes in global oil production F. Marginal oil production cost, 2014
production plants to the United States.
Million barrels per day, growth since 2010Q4 US$ per barrel
Food commodities. Food production is 45 times 4 Iran
Libya
140
Thousands
120
more energy-intensive than manufacturing. En- Syria
2 Yemen 100
United States
ergy, and oil in particular, is used to fuel farm ma- 0
Net changes 80
2011Q1
2012Q1
2013Q1
2014Q1
2015Q1
Arctic
Biodiesel
Ethanol
Ethanol
Onshore
Sand
Offshore
Deep-water
Shale
Total
Deep-water
Total
Total
Total
Total
Onshore
Onshore
thus constitutes a significant proportion of the RUS Europe CAN BRA USA VEN NGA IRN DZA ARE IRQ SAU
modity prices since end-2014.5 E. Crude oil supply for OPEC and non-OPEC producers. OPEC = Organization of the Petroleum Exporting
Countries.
4Since a fully-functioning gas market has been developed in the Falling gas, fertilizer, and agricultural commodity
United States, U.S. natural gas prices have largely de-linked from prices may dampen or amplify some of the benefits
oil prices and are determined by domestic gas supply and demand of lower oil prices. For oil-importing countries that
conditions.
5The weak El Nio event currently underway is expected to last
depend heavily on exports of gas (Indonesia) or
through the summer (NOAA 2015). Its effect on global prices is likely to agricultural goods (e.g., cotton in Benin, Burkina
be limited, as most agricultural markets are well supplied. Faso, Mali, Tajikistan, and Uzbekistan; grains in
24 chapter 1 G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5
Argentina and Brazil), lower oil prices may support While the Euro Area continues to account for by far
energy-intensive production and consumption but the largest share of global imports, its contribution
export revenues will fall. Oil-importing countries has declined steadily as an export market destina-
that are also important food importers (Arab Re- tion, including in the second half of 2014. In 2015,
public of Egypt, Morocco) may benefit from both however, Euro Area import demand is expected to
lower oil prices and food prices to the extent that expand and support key trading partners in East-
they are passed through into local prices. The com- ern Europe, North Africa, and Asia. Imports by
bination of lower oil and food prices will further emerging markets, despite decelerating since 2011,
weaken prospects in oil-exporting countries that remain the most dynamic contributor to global ex-
also export foods (e.g., grain in Kazakhstan and the port growth at present.
Russian Federation). The recent oil price plunge reduces the cost of trans-
Metals and agricultural raw materials prices port, and hence should encourage global trade
among the most business cycle-sensitive commod- flows. Global trade has been estimated to rise by up
ity pricesfell 15 percent between mid-2014 and to two percent for every one percent decrease in the
April 2015. Since the factors that have driven all freight cost relative to the value of the shipment
commodity prices down since 2011 remain in place, (Behar and Venables 2010). Since fuel accounts for
non-oil commodity prices are expected to remain 40-63 percent of operating cost for a typical ship-
well below their 2011 peaks throughout the forecast ment (UNCTAD 2010), falling oil prices could sig-
horizon. nificantly bolster trade.
The price of oil is expected to remain low for a considerable tions for the future structure and functioning of oil
period of time and could become increasingly volatile. Past markets. This box addresses three questions:
episodes of sustained oil price declines were often followed What happened during past episodes of rapid oil
by relatively weak global economic recoveries, with mul- price declines?
tiple factors affecting final outcomes. The current episode
has been predominantly driven by supply factors, and How is the current episode different?
could lead to changes in the structure and functioning of What does the current episode mean for the future
global oil markets. structure of oil markets?
The oil price plunge since mid-2014 was caused by What happened during past episodes of rapid oil
changes in underlying supply and demand conditions, price declines?
amplified in the short term by a sharp appreciation of The drop in oil prices since June 2014 is the third larg-
the U.S. dollar, a shift in Organization of the Petro- est among six episodes of significant declines over the
leum Exporting Countries (OPEC) policy, and abating past three decades (Figure B1.2.1). Previous episodes
geopolitical risks. Although the supply capacity of rela- were preceded by a period of weakening global growth,
tively high-cost and flexible producers, such as the which contributed to the observed decline in price
shale oil industry in the United States, is already ad-
justing to this low-price environment, most of the un-
derlying factors point to persisting weakness in oil FIGURE B1.2.1 Major oil price declines since
prices over the medium term. 1984
The negative impact of sharply lower prices on export- The drop in oil prices in the second half of 2014 is one of six epi-
sodes of significant oil price declines over the past three decades.
ers has been immediate, and in some cases accentuated
by financial market pressures, while the positive impact Magnitude of significant oil price drops
for importers appears more diffuse and has not yet Percent
0
fully materialized. Evidence from past episodes shows
that sharply declining oil prices were generally fol-
-20
lowed by quite diverse global growth outcomes, point-
ing to other important forces either mitigating or rein-
-40
forcing the impact of declining oil prices on activity. As
the current decline in oil prices has been largely driven
-60
by supply factors and is expected to be persistent, the
net effect for the global economy should be positive
over the medium term. The distinction between supply -80
Jan-86 to Oct-90 to Oct-97 to May-01 to Jun-08 to Jul-14 to
and demand factors is of key importance, as the former Jul-86 Apr-91 Apr-98 Nov-01 Dec-08 Jan-15
has much more positive and lasting effects on activity. Sources: World Bank.
As a benchmark, a purely supply-driven and perma- Note: Nonconsecutive episodes in which the un-weighted average of West Texas Inter-
mediate, Dubai, and Brent oil prices dropped by more than 30 percent over a six-month
nent 45 percent drop in oil prices could be associated period.
198586. The 198586 oil price slump was the epi- 2001. The disruptions and uncertainty caused by the
sode most closely associated with changing supply con- September 11 terrorist attacks in the United States in-
ditions, as OPEC reverted to its production target of tensified a growth slowdown already underway as the
30 million barrels per day despite rising unconven- dotcom bubble deflated. Softening global activity
tional oil supply from the North Sea and Mexico. and rising uncertainty were the main triggers behind a
Prices dropped 60 percent from January to July 1986, sharp decline in oil prices around that period. How-
leading to a prolonged period of low real oil prices dur- ever, aggressive easing in monetary policy by the Fed-
ing the following two decades. Around that period, the eral Reserve and other major central banks propelled a
U.S. Federal Reserve embarked on a series of interest rapid rebound in activity and lower oil prices might
rate cuts to fend off slowing activity and declining in- have provided some further support.
flation. The lack of improvement in global activity, de-
spite these supportive conditions, was tightly con- 200809. A severe contraction in global demand sent
nected to a period of weak growth and significant debt all commodity prices tumbling during the Great Re-
problems in some large developing countries, slow cession of 200809. Wide-ranging central bank and
growth in Japan and many European countries, and, at government interventions, together with resilient
the end of 1987, the impact of a significant downward growth in major developing countries, gradually stabi-
correction in U.S. and global stock markets. lized global activity. However, the recovery remained
199091. The oil price decline of 199091 reversed an sluggish, constrained by financial sector restructuring,
earlier spike triggered by the first Gulf War, leaving a large asset price losses, and widespread deleveraging
limited trace on the global economy. Despite being ac- pressures in high-income countries. The combined
companied by monetary policy loosening, global growth impact of a rapid rebound in commodity prices and
failed to strengthen significantly. Instead, it slowed in declining interest rates supporting capital flows to de-
1992 before recovering modestly in 1993, as a recession veloping countries created particularly favorable con-
in Europe ran its course, the recovery in the United ditions for commodity-exporting developing countries
States remained hesitant, and Japan entered a period of in 201012.
prolonged stagnation. In advanced countries, a process How is the current episode different?
of debt reduction and balance sheet restructuring; ele-
vated long-term real interest rates; financial and ex- The footprint of sharply lower oil prices since mid-
change rate stress, especially in Europe; and weak confi- 2014 has become increasingly visible, but has not yet
dence hampered the global upturn. In contrast, growth translated into stronger global growth. Oil exporters
in many developing countries was resilient, with signifi- have faced increasing headwinds, diverging monetary
cant capital inflows helping commodity exporters offset policy across major reserve currencies has led to rising
negative terms-of-trade effects from weakening prices. exchange rate volatility, and China has continued to
1998. A sharp decline in oil prices was associated slow down. Global growth was subdued at the start of
mostly with weakening demand as a result of the 1997 2015, but is predicted to gain momentum, as the
Asian crisis. The continued expansion of OPEC pro- United States emerges from a soft growth patch at the
duction until mid-1998 might have played a role as start of 2015, the Euro Area continues to recover, and
well (Fattouh 2007). The global recovery remained oil-importing emerging economies gather strength.
tepid for most of 1998, partly as a result of financial Unlike during previous episodes of significant oil price
market stress in the United States and major emerging declines, the U.S. Federal Reserve is widely expected to
markets. The recovery gathered momentum only in start hiking policy rates before the end of the year,
19992000 when oil prices started recovering as well, while unconventional easing measures in the Euro
as growth in the United States, the Euro Area, and sev- Area and Japan maintain highly accommodative con-
eral large developing economies rebounded. ditions in other parts of the world.
G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5 chapter 1 27
Figure B1.2.2 Global growth and inflation around oil price declines
Past episodes of significant oil price declines were often preceded by global growth slowdowns and followed by relatively weak recoveries in
high-income and developing countries, mostly as a result of financial market stress. U.S. monetary policy eased around most of the past episodes.
2 8
0 6
-2 4
-4 2
-6 0
-8 -6 -4 -2 0 2 4 6 8 -8 -6 -4 -2 0 2 4 6 8
quarters quarters
4
2
3
0
2
-2 1
-4 0
-1
-6
-8 -6 -4 -2 0 2 4 6 8
-8 -6 -4 -2 0 2 4 6 8 quarters
quarters
10
6
8
4
6
2
4
0 2
-8 -6 -4 -2 0 2 4 6 8 -8 -6 -4 -2 0 2 4 6 8
quarters quarters
Sources: World Bank and Federal Reserve Bank of St. Louis.
Note: Shaded areas indicate the period of the sharp oil price drop.
A. Global growth computed on the basis of a weighted average (using 2010 US$ GDP weights) of countries for which quarterly national accounts data are available. Time 0 is the quar-
ter of the trough of a significant oil price decline episode (30 percent drop over a seven-month period, which is the shaded region); 8 corresponds to 8 quarters before the trough and 8
corresponds to 8 quarters after the trough.
B. Effective U.S. nominal federal funds rate.
D. Consumer price index (CPI) inflation aggregated across countries using consumption weights.
F. Median CPI inflation across developing countries.
28 chapter 1 G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5
Regarding the drivers of the recent crash in oil prices, a in November.1 Analysis by the International Monetary
comparison with previous episodes points to a predomi- Fund (IMF 2015b) points to weak demand playing a
nant role of supply factors, with important similarities more significant role in the initial phase of the decline
to the 198586 episode. Both episodes followed periods (July to mid-October 2014), while supply factors domi-
of high oil prices and a rapid expansion of non-OPEC nated in the subsequent period. Other studies, such as
oil suppliesAlaska, North Sea, and Mexico in the for- Hamilton (2014), Baumeister and Kilian (2015), and
mer, and U.S. shale oil, Canadian oil sands, and biofuels Badel and McGillicuddy (2015), point to varying effects
in the latter. And in both crashes OPEC changed its of weakening global growth on oil prices in 201415.2
policy objective, from price targeting to market share. Some of these empirical investigations focus on the co-
In contrast, other sharp declines were largely precipitated movement of oil prices with equity and other financial
by slowing global demand or, in the case of the 199091 and commodity prices. The current episode has been
crash, associated with the first Gulf War. The 200809 associated with relatively strong performance of U.S.
collapse exhibited some unique characteristics. Prices dur- and global equity markets, which has been interpreted
ing that period were highly correlated with equity and as evidence of a positive supply shock, reflecting expec-
exchange rates, while co-movements across most com- tations of more supportive conditions for activity
modity prices were twice as high compared with the his- ahead (Figure B1.2.3). Another important feature of
torical average (and other crashes), highlighting the pre- the recent period of sharply declining oil prices has
dominant role of deteriorating demand conditions. been the significant and broad-based appreciation of
The dominant role of supply factors behind the 2014 the U.S. dollar, in contrast with the 198586 episode.
15 drop bodes well for its eventual impact on global A strong dollar might have accentuated the decline in
activity. Estimates suggest that a purely supply-driven oil prices, contributing to lower demand in importing
decline of 45 percent in oil prices could be associated countries with depreciating currencies while encourag-
with a 0.70.8 percent increase in global GDP over the ing supply from producers.
medium term (Baffes et al. 2015). What does the current episode mean for the future
However, the ultimate impact on global activity re- structure of oil markets?
mains uncertain. First, with a confluence of cyclical Over the medium term, oil prices are projected to re-
and structural forces at work in the global economy, cover gradually from their current lows, but will re-
the expected gains for growth from the drop in oil main below recent peaks and could witness more vola-
prices could be lower than suggested by the standard tility. The pace of the recovery in prices will largely
model simulations. These mitigating factors include depend on the speed at which supply will adjust to cur-
current financial vulnerabilities, high indebtedness, rent market conditions. Given that OPEC, for now,
limited room for monetary policy in major economies appears to have relinquished its role as swing producer,
to be loosened further, elevated unemployment, and U.S. shale oil producers, with their relatively short pro-
slowing long-term growth prospects in major oil- duction cycles and low sunk costs, may see the greatest
importing economies. These factors may encourage
precautionary savings by households and corporations, 1Looking at high-frequency co-movements between oil and global eq-
particularly in countries still facing important crisis uity markets since mid-2014, Baffes et al. (2015) find that supply factors
were the dominant factor. Adverse demand shocks (that reduce oil and eq-
legacies and weak balance sheets. uity prices) peaked around end-2014, whereas favorable supply shocks kept
Second, the precise contributions of the supply and de- mounting until February 2015.
2Hamilton (2014) finds that two-fifths of the oil price decline in the
mand factors behind the recent oil price crash remain second half of 2014 reflected new indications of weakness in the global
uncertain and subject to debate. According to Baffes et economy, while Baumeister and Kilian (2015) report that shocks to the
al. (2015), supply shocks have accounted for roughly demand for oil inventories contributed to the recent oil price drop as well.
Badel and McGillicuddy (2015) argue that the decline in oil prices during
twice as much as demand shocks since mid-2014, par- the second half of 2014 was largely driven by negative oil-specific demand
ticularly after OPECs decision to forgo price targeting shocksin anticipation of expected abundant oil supply.
G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5 chapter 1 29
Index = 1 in 0 Index = 1 in 0
1986Q2 1991Q1 1998Q1
1.2 1986Q2 1991Q1 1998Q1 1.6
2001Q4 2008Q4 2014Q4
2001Q4 2008Q4 2014Q4
1.4
1.1
1.2
1.0
1.0
0.9 0.8
0.8 0.6
-8 -6 -4 -2 0 2 4 6 8 -8 -6 -4 -2 0 2 4 6 8
quarters quarters
adjustments in the short term, but could rapidly re- trade restrictions imposed by some of the agreements
store capacity as prices increase. This response could on global market conditions either encouraged the
contribute to more volatility in prices, around a lower emergence of competitor products (e.g., for tin) or the
equilibrium level. entry of new producers (e.g., for coffee).3 As a result, all
The increasing importance of unconventional oil pro- the agreements (except crude oil) eventually collapsed.
duction as an existing and prospective source of addi- A key difference between OPEC, the only surviving
tional oil (Figure B1.2.4) has led to intensive debates commodity organization seeking to actively manage
about the long-term role of OPEC as a cartel. markets, and the earlier commodity agreements is that
Looking back, efforts to manage world commodity OPEC does not have a legal clause on how to intervene
markets to achieve price objectives are not unique to when market conditions warrant. Therefore, OPEC
the oil market. Several commodity agreements, often can respond flexibly to changing circumstances.
negotiated among producing and consuming nations
to stabilize prices, were put in place after World War II,
3First negotiated in 1954, the International Tin Agreement (ITA) col-
including wheat, sugar, tin, coffee, and olive oil (Swer-
lapsed in 1985. Higher tin prices under the ITA encouraged new tin pro-
ling 1968). A renewed effort took place after the price ducers to enter the market and the development of a substitute product,
boom in the 1970s, with the agreements typically aluminum, which gained market share by capturing the growing demand
backed by the United Nations and extended to other from the beverage can producers. In 1962, coffee-producing countries ac-
counting for 90 percent of global coffee output and almost all developed
commodities, including cocoa and natural rubber coffee-consuming countries signed the International Coffee Agreement
(Gilbert 1996). These agreements had legal clauses re- (ICA) with the objective of stabilizing world coffee prices through manda-
garding the tools to manage the corresponding mar- tory export quotas. Elevated coffee prices encouraged the emergence of new
producers outside ICA, such as Vietnam, which by the early 2000s had
kets, which were export restrictions and inventory overtaken Colombia as the worlds second largest coffee producer after Bra-
management. But over the long term, the price and zil. The cartel was dismantled in 1989 (Baffes, Lewin, and Varangis 2005).
30 chapter 1 G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5
ing sector confidence softened in the first quarter of account for about one-third of developing country
2015 and industrial production growth slowed as GDP. Their slowdowns dampen activity in other
terms of trade deteriorated or domestic production countries with close trade, finance, and remittance
struggled with energy bottlenecks (Brazil, Nigeria, links. As a result, the downward revisions in the
South Africa). Policy uncertainty has weighed on forecast are concentrated in the regions with large
investment in some countries (Bangladesh, Turkey, commodity exporters (the eastern part of Europe
Nigeria). Elsewhere, fiscal restraint, tight monetary and Central Asia, Latin America and the Caribbean,
policy, or macroprudential measures are contribut- and Sub-Saharan Africa). Commodity-importing
ing to the slowdown in activity (East Asia). countries face other challenges. Turkey, South Af-
Growth forecasts have been revised downward for rica, and other countries that rely heavily on for-
2015 (Figure 1.15). Developing country growth is eign capital inflows could be negatively affected by
now expected to slow to 4.4 percent in 2015, before rising borrowing costs as the U.S. Federal Reserve
recovering somewhat by 2017, to 5.4 percent. raises policy rates. In addition, a structural growth
slowdown has been underway in many developing
Commodity-exporting countries, in particular, are countries as the growth in working age populations,
struggling to adjust to low commodity prices. They productivity, and investment has eased. Partly as a
G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5 chapter 1 31
result of reforms to raise productivity, South Asia, FIGURE 1.13 Oil price volatility and non-oil commodity
and East Asia and the Pacific should continue to prices
grow quite rapidly, although at a somewhat slower On average, commodity price declines since 2011 have reversed about one-third of
rate than in previous years (Chapter 2). price increases during the 2000s. Although oil prices appear to have found a floor,
their volatility has risen. Low oil prices also dampen non-oil commodity prices, espe-
East Asia and Pacific. Growth is expected to cially those of natural gas (with contracts typically tied to oil prices), and fertilizers and
ease to 6.7 percent in 2015 and to remain flat food (with oil-intensive production).
thereafter, reflecting a continued slowdown in A. Crude oil and volatility B. Oil price volatility over time
China that is only partly offset by a pickup in US$ per barrel Percent Percent OPEC abandons
8
the rest of the region. Indonesia and Malaysia 120 Brent price
Volatility (RHS)
4
7
price targeting 2008
financial crisis
face pressures from lower global prices of oil, 100 3 6 First Gulf War
5
gas, coal, palm oil, and rubber and softer ex- 80 2 4
ternal demand, particularly from China. Lower 3
2
60 1
energy prices will dampen oil and gas pro- 1
40 0
duction, but should support the large non-oil 0
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Jan-85
Jan-88
Jan-91
Jan-94
Jan-97
Jan-00
Jan-03
Jan-06
Jan-09
Jan-12
Jan-15
sectors in both economies. The effects of fis-
cal restraint (Malaysia, Vietnam), and tighter
macroprudential policies (China, Malaysia,
C. Crude oil and natural gas prices D. Commodity prices
Thailand), are expected to be largely offset by
US$ per barrel Index, 2010=100 Cumulative change in percent of 2001Q1, real 2010 US$
a gradual recovery of investment and manufac- 130 140
600
500
2011Q1-2015Q1
2001Q1-2011Q1
turing exports, in line with the global recovery. 120
110
130 400
300
Cumulative 2001-2015Q1
120 200
100 100
Europe and Central Asia. After slowing to 2.4 90 110 0
-100
80 100
percent in 2014, regional growth is expected to 70
90
-200
-300
60 -400
weaken further in 2015, to 1.8 percent, before 50
Crude oil
Natural gas (RHS) 80 -500
Palmoil
Lead
Tin
Copper
Rubber (Malaysia)
Cocoa
Soybean oil
Coffee (Arabica)
Soybean oil
RiceGold
Nickel
Zinc
Tobacco
Tea
Iron oil
Soybean
Crude oil
Natural gas
Wheat
Banana
Sugar
Cotton
Aluminum
Silver
Coal
Maize
picking up in 201617. In the eastern part of the 40 70
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
region (Central Asia, Eastern Europe, and South
Caucasus), growth slowed particularly sharply,
reflecting recessions in Russia and Ukraine, and
E. Share of energy in production, 2007 F. Oil price elasticities
downturns in oil-exporting economies (Azer-
Elasticity
baijan, Kazakhstan) partly cushioned by fiscal Percent
World
Manufacture Agriculture
Cotton
and reserve buffers. These regional headwinds High-income countries
Developing countries Palm oil
had significant negative spillovers to the re- Sub-Saharan Africa
United States Rice
gions many oil-importing economies through Canada
EU-12 Wheat
trade (Armenia, Belarus, Georgia, Moldova), China
Brazil
Soybeans
and remittances (Armenia, Georgia, Kyrgyz India
Turkey
Maize
Republic, Moldova, Tajikistan), which dropped
0 5 10 15 20 0 0.2 0.4 0.6
sharply from the fourth quarter of 2014. This
more than offset the benefits of low oil prices, Source: World Bank staff calculations based on the Global Trade Analysis Project database; World Bank; Baffes
and Etienne 2014.
caused depreciation and rising inflation, and A. Volatility is the standard deviation of the oil price changes and is presented as a 30-day trailing window.
compelled a number of central banks to raise B. Values are 30-day rolling standard deviation of daily oil price changes in percent.
F. Elasticity estimates are based on a reduced-form, seemingly-unrelated regression estimation using annual
interest rates since mid-2014 (Armenia, Geor- data for 1960-2013. According to Baffes and Etienne (2014), crude oil is the most important driver to food prices
among all sectoral and macroeconomic fundamentals. An average elasticity of 0.25 implies that the 200 percent
gia, Kyrgyz Republic, Moldova, Tajikistan). In increase in energy costs during the past decade could explain more than half of the food price increases.
FIGURE 1.14 Global trade the United States lifts activity in developing
Global trade growth continues to be modest, with a gradual shift towards U.S. import
North and Central America, along with the
demand. Trade-intensive capital equipment accounts for a sizeable share of U.S. Caribbean.
imports.
Middle East and North Africa. Growth is ex-
A. Global GDP and import growth B. H
igh-income countries pected to remain flat at 2.2 percent in 2015.
contribution to global imports
The expected growth rebound to 3.7 percent in
Percent Percent Percent
16
World import growth
World GDP growth (RHS)
8 100 2016-17 is predicated on improving external
12 6 90
80
demand, strengthening confidence that boosts
8 4
70 investments in some oil-importing countries
4 2 60
50
50% threshold (Arab Republic of Egypt, Jordan), and an as-
0 0
-4 -2
40
30
sumed gradual stabilization of security. The
-8 -4 20 plunge in oil prices is a particular challenge for
10
-12 -6 0 oil-exporting countries, most of which have se-
2000 2004 2008 2012 2016 1980s 1990s 2000-08 2011-14 2015-17
vere security challenges (Iraq, Libya, Republic
of Yemen) or have limited buffers (Iran, Iraq).
C. Source of world import demand D. M
erchandise imports by major For oil-importing countries, the potential posi-
economies and world, by product, tive effects of lower oil prices are partially offset
2013
by spillover effects from more fragile countries
Index = 100 in 2000
120 United States
World
in the region, including through lower remit-
Euro Area Japan
115 Emerging markets tances and security risks. Long standing struc-
110 China
105 United
tural constraints present a chronic obstacle to
100 States
faster growth in the region. Measures to ad-
95 EU27
90
dress these include policies to narrow the gap
0 50 100
85 Agricultural goods Food products
Percent between private and public employment, level
Textiles, clothing, footwear Minerals
80
2010 2012 2014
Fuels
Raw materials
Chemicals
Metals
the playing field between firms, and improving
Machinery and transport Other
education (World Bank 2015a).
South Asia. Growth is expected to firm to 7.1
Sources: World Bank; CPB Netherlands Bureau for Economic Policy Analysis; UN Comtrade database.
A. Grey area indicates forecasts.
percent in 2015 and 7.4 percent in 201617,
C. The figure shows the ratio of manufacturing imports to global manufacturing exports; the trend line (solid line) buoyed by a reinvigorated reform agenda in In-
is a fourth-order polynomial trend function.
dia and supported by strengthening demand in
high-income countries. The decline in global oil
macro- and microeconomic challenges, weak prices has benefited the region, improving fiscal
investor confidence, and low commodity prices. and current account balances, enabling subsidy
In Brazil, activity softened in the first quarter of reforms to proceed in India, and facilitating an
2015 as confidence fell further, mainly due to a easing of monetary policy (India, Pakistan, Sri
corruption scandal and increases in electricity Lanka). In India, gradual implementation of
prices following a drought, while infrastructure reforms has supported business and investor
bottlenecks and pro-cyclical policies continue confidence and encouraged capital inflows.
to weigh on growth. Sentiment has remained However, credit growth remains modest, re-
fragile and activity slowed in Mexico as a re- flecting weak bank balance sheets (mainly
sult of sharply lower oil prices, which could in public sector banks). This is holding back
reduce the short-term growth dividends from credit-financed investment.
energy sector reforms, a weak first quarter in Sub-Saharan Africa. Low oil prices have
the United States, and modest wage short-term considerably reduced growth in commodity-
growth. However, the economy is expected to exporting countries (Angola, Nigeria), where
strengthen for the remainder of 2015 on ris- softening oil sectors have also slowed activity
ing exports to the United States. For 201617, in non-oil sectors. Although South Africa is ex-
growth in the region is expected to pick up pected to be one of the main beneficiaries of
to 2.4 percent, on average, as South America low oil prices, energy shortages, weak investor
emerges from recession and robust growth in sentiment amid policy uncertainty, and by the
G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5 chapter 1 33
anticipated tightening of monetary and fiscal FIGURE 1.15 Developing and emerging-market growth
policies continue to hold back activity. Growth Developing country growth forecasts were revised downward again, as sharply lower
in the region is forecast to slow to 4.2 percent, a oil prices reduced activity in oil exporters, while the support to activity in oil-importers
appears slower to materialize. Growth in low-income countries continues to be robust
downward revision of 0.4 percentage point rela- as a result of strong public investment, good harvests, and, among oil-importing
tive to the January 2015 forecasts. This mainly countries, improving terms of trade.
reflects a reassessment of prospects in Nigeria A. Emerging markets: Growth B. Low-income countries: Growth
and Angola, following the sharp drop in oil forecasts for 2015 forecasts for 2015
prices, and in South Africa, because of ongoing Percent June 2013 Percent June 2013
June 2014
difficulties in electricity supply. For 201617, 10 June 2014
June 2015 8 June 2015
8 7
growth is expected to be only marginally higher 6 6
4 5
as these challenges partially offset higher trad- 2
4
3
ing partner growth and the continued expan- 0
-2
2
1
sion in the regions low-income countries. -4 0
Kenya
Rwanda
Uganda
Bangladesh
Comoros
United Rep.
LIC
Brazil
China
Indonesia
Federation
India
Malaysia
Mexico
Nigeria
Turkey
Tanzania,
South Africa
Russian
Growth in low-income countries, on average, is ex-
pected to remain robust in 2015 at 6.2 percent, be-
fore rising to 6.6 percent, on average, in 201617.
C. Low-income countries: D. Fraction of developing countries with
In the short-run, it should be supported by infra- Growth slower growth than 1990-2008 average
structure (Rwanda, Ethiopia) and mining (DRC, Percent Percent
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015-17
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
price decline (Special Feature 2). In several fragile
countries (Madagascar, Mali), growth should pick
up as investment rises on the back of increased polit- Source: World Bank.
ical stability. Political uncertainty in Bangladesh and C. The shaded area indicates the interquartile range. Red line indicates GDP-weighted average.
D. For each year, the fraction of developing countries in which growth is slower than its historical average for
the natural disaster in Nepal will dampen growth in 1990-2008. For 2015-17, the average of three years is shown.
trough in the commodity price cycle (Spatafora et al. ble or appreciated in trade-weighted terms. Oil-im-
2009), but real exchange rate depreciation and the porting emerging market currencies have typically
use of fiscal space could cushion this impact. depreciated in trade-weighted terms by less than 3
The biggest beneficiaries from the commodity price percent, or appreciated, since mid-2014. After tak-
slump are likely to be large energy-importing coun- ing into account inflation, most have appreciated in
tries in Asia and Eastern Europe, most notably China, real, trade-weighted terms. Competitiveness gains
India, and Turkey. The recent fall in oil prices is ex- have thus been modest, if any. However, countries
pected to support consumption by raising real in- heavily reliant on exports of services such as infor-
comes, easing inflation, and by improving current ac- mation technology and communications (India,
count balances and reducing external vulnerabilities. Turkey) could benefit even from modest competi-
Even where, as a result of subsidy reform, domestic tiveness gains since these services tend to respond
fuel prices do not decline in line with global energy more strongly to real depreciation than manufactur-
prices (Arab Republic of Egypt), fiscal and current ing (Eichengreen and Gupta 2013; Figure 1.18).
account deficits are expected to narrow. Sharp trade-weighted depreciations in some oil-
exporting countries (Colombia, Russia) and Brazil
Exchange rate depreciations: brought real effective exchange rates closer to their
competitiveness gains but some financial long-term averages. Commodity exporters with
stability risks manufacturing industries that are already well de-
veloped, diversified, and open to trade (Malaysia,
Divergent monetary policies among major econo- Mexico) could stand to benefit from important
mies and the prospect of higher interest rates in the competitiveness gains as a result of depreciations.6
United States, combined with sharply lower oil prices, In contrast, in Brazil, export competitiveness con-
have put pressures on emerging market currencies tinues to be held back by structural bottlenecks,
and caused volatility. For many developing countries, including weak infrastructure, limited openness
depreciation against the U.S. dollar since the start of to trade, and a small number of exporting firms
the year has been significantly more pronounced than (Canuto, Fleischhaker and Schellekens 2015).
during the taper tantrum in May/June 2013 (Figure
1.17). The depreciation was particularly severe in oil- Inflation: lower oil prices versus depreciation
exporters as their growth prospects dimmed and their
credit ratings were downgraded. Some countries with In many oil-importing developing countries, plung-
managed exchange rates have intervened in exchange ing oil prices have reduced inflation below inflation
markets to stem depreciation (Algeria, Ghana, Nige- targets, increasing the number of countries with low
ria until February 2014), and Morocco has changed or even negative inflation (Figure 1.19). The de-
the composition of the currency basket underlying its cline in inflation has been stronger where oil had a
currency peg away from the euro. larger weight in consumption baskets, where depre-
Exchange rate depreciationsin trade-weighted ciations were modest, and where fuel subsidies and
termsmay spur exports and help mitigate the other price regulations were limited. However, core
domestic impact of negative terms of trade shocks. inflation has remained high in several oil-importing
However, weakening currencies against the U.S.
dollar could also strain balance sheets with sizeable 6The less trade-weighted depreciations are passed through to do-
amounts of foreign currency debt and hinder invest- mestic prices, the more they will help competitiveness. However,
ment, after several years of rapid credit growth and emerging markets, and commodity-exporting countries especially, gen-
private debt build-up. For many countries, export erally experience a larger exchange rate pass-through to export prices
than advanced countries, possibly because of limited pricing power on
markets are considerably more diversified than the international markets (Campa and Goldberg 2005). The literature is
currency composition of their external liabilities. As not unanimous on the larger exchange rate pass-through in emerging
a result, the benefits of improved competitiveness markets (e.g., Ca-Zorzi, Hahn, and Sanchez 2007), perhaps because the
may be outweighed by the risks from balance sheet pass-through has fallen over time (Mihaljek and Klau 2008). However,
it appears more pronounced among commodity exporters like Indone-
strains associated with sharp depreciations. sia, South Africa, Mexico and lower in India, Russia, Turkey, Hungary,
or the Philippines (Bussire et al. 2014).
While most developing country currencies depreci-
ated against the U.S. dollar, many were broadly sta-
G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5 chapter 1 35
countries (Arab Republic of Egypt, Brazil, Indone- FIGURE 1.16 Terms of trade effect on GDP
sia, Nicaragua, South Africa, Tunisia, Turkey). Terms of trade deterioration, following a sharp reversal of earlier commodity
This disinflationary impact of lower oil prices should price gains, is causing slowdowns in commodity-exporting countries.
be transitory, fading during the second half of 2015 Change in trade balance, percent of GDP
-2
dissipating rapidly thereafter (Baffes et al. 2015).
-4
In some countries, lower oil prices have magnified -6
downward pressures on inflation from anemic de- -8
mand or overcapacity. This is especially the case in -10
Eastern Europe and parts of East Asia. For example,
India
China
Hungary
Pakistan
Venezuela, RB
Russian Federation
Philippines
Turkey
Zambia
Argentina
Romania
Mexico
Indonesia
Colombia
Peru
Nigeria
inflation has been near-zero or below-target since
well before the oil price plunge in Hungary and
Bulgaria. In China, persistent deflation in producer
prices suggests a build-up of overcapacity and loss Source: World Bank.
Note: Impact on trade balance (% of GDP) of terms of trade changes associated with commodity
of corporate pricing power, adding to balance sheet price movements.
FIGURE 1.17 Developing country currencies the same time as the approaching first rate increase
Sharp depreciations against the U.S. dollar in several developing countries raise bal-
by the U.S. Federal Reserve nears. Rising concerns
ance sheet risks. Depreciations were largest in oil exporters, the Euro Areas close about widespread emerging market credit rating
trading partners, and countries with external vulnerabilities. In some countries, they were
stemmed by reserve drawdowns or interest rate hikes. In trade-weighted terms, how-
downgrades or bouts of financial market volatility
ever, depreciations were modest, suggesting limited competitiveness gains. (such as during the taper tantrum in May/June
2013) would increase the risk of financial market
A. Major emerging-market currencies B. D
epreciation since mid-2014 and disruptions in developing countries with high vul-
deviation of the real effective
exchange rate from the long-term nerabilities or weak growth prospects.7
average
Although the U.S. Federal Reserve has adjusted its
Percent change
U.S. dollars per local currency unit, 2014
20
Reversal of
undervaluation CHN ECU Increased guidance to prepare markets for monetary policy
40 Nominal effective exchange rate, 2014 THA overvaluation
10
tightening, long-term interest rates in the United
NEER change, June 2014-
0 TUR CHL
MYS BGR NGA
ROM
-20 HUN
-40
-10 MEX
policy rate expectations of market participants and
-60
-20
Increased
undervaluation
COL BRA
those of members of the Federal Reserve Open
-80
-100
-30
RUS
Reversal of
overvaluation Market Committee exists over the medium-term,
-40
exceeding 100 basis points for 2017 (Figure 1.21).
RUS
COL
ROM
BRA
NGA
HUN
ZAF
IDN
IND
TUR
MEX
MYS
PHL
CHN
Russia
Zambia
Turkey
Pakistan
Philippines
Indonesia
Nigeria
Ghana
Jamaica
Kazakhstan
Lebanon
Cambodia
key) most affected by the turmoil of May/June 2013 could be less sus-
ing after 2012. Emerging market credit worthiness ceptible to turmoil in future episodes as their current account and fiscal
is eroding, especially in oil-exporting countries, at deficits and inflation rates have declined.
G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5 chapter 1 37
cause a general reappraisal of risk assets that spreads FIGURE 1.18Exchange rates and competitiveness in
to other emerging and frontier markets. Several large major emerging economies
emerging markets already struggle to maintain their Exchange rate pass-through into domestic prices and costs varies widely across
credit ratings. Credit rating downgrades are typically countries. It tends to be larger in developing countries with more concentrated export
structures, in particular natural resource exports. Exports of modern services in com-
anticipated in credit default swap (CDS) markets, munications and information technology appear to respond more strongly than in
which blunts the direct impact of the downgrade an- manufacturing.
nouncement (Hull, Predescu and White 2004; Nor-
den and Weber 2004). In some developing coun- A. Exchange rate pass-through to B. S
ize of manufacturing sector,
export prices 2013
tries, sovereign CDS spreads have already increased
Estimates Manufacturing, value added, percent of GDP
beyond those of similarly rated sovereigns (Brazil, 1.4 35
1.2 30
Kazakhstan, Turkey, South Africa; Figure 1.22). That 1.0 25
said, the risk remains that ratings downgrades trigger 0.8 20
0.6 15
a repricing, even if partially anticipated. 0.4 10
0.2 5
A reassessment of credit and liquidity risk may be 0.0 0
China
Malaysia
Indonesia
Federation
Brazil
Mexico
Turkey
India
South Africa
Nigeria
-0.2
accompanied by capital outflows, reserve losses,
Russian
Venezuela
Portugal
Brazil
Indonesia
Hungary
South Africa
Mexico
Thailand
Malaysia
China
Philippines
Turkey
sharp depreciations, and rising borrowing costs.
These could strain balance sheets of corporates and,
by raising nonperforming loans, those of banks.
Although banking systems in most oil-exporting
countries have been considered resilient to oil price C. Trade openness, 2014 D. R
eal exchange rate depreciation
changes in stress tests (Baffes et al. 2015), financial and export growth, by sector
strains could eventually emerge if low oil prices co- Sum of export and import as percent of GDP Export growth, in percentage points, associated
70 with a 10% real exchange rate depreciation
incide with tightening financial conditions, weak 60
50 2.5
growth, and currency depreciation. 40
30 2.0
20
10 1.5
0
Excessive U.S. dollar appreciation 1.0
China
Mexico
South Africa
India
Brazil
Russian Federation
Turkey
Indonesia
Nigeria
0.5
The recovery in the United States since mid-2014 0.0
has supported global growth, but has been accom- Merchandise Traditional
services
Modern
services
panied by a significant appreciation of the U.S. dol-
lar (Figure 1.23). To the extent that the broad-based
dollar appreciation reflects robust growth prospects
in the United States compared with its trading part- E. Export market concentration F. Export product concentration
ners, the dollar appreciation benefits trading part- among major emerging markets, among major emerging markets,
2013 2013
ners and helps reignite a robust global recovery.
Herfindahl-Hirschman market concentration index Herfindahl-Hirschman product concentration index
However, there is a risk that the dollar appreciation 0.7 0.20
0.6
is more than warranted by U.S. growth prospects, 0.5
0.15
India
Russia
Turkey
Brazil
India
Russia
Turkey
China
Indonesia
Mexico
China
Indonesia
Mexico
FIGURE 1.19 Inflation in developing countries economic prospects. In particular, it could reduce
Lower oil prices have reduced inflation in many oil-importing developing countries,
GDP in close trading partners in Latin America and
allowing their central banks to cut policy rates to support activity. However, currency the Caribbean by up to one percentage point. Else-
depreciations in oil-exporting countries have raised inflation and compelled central
banks to raise policy rates.
where, especially in economies that are less reliant on
exports to the United States, the impact would be
smaller but still negative. In addition to these trade
A. M
edian inflation in developing B. Inflation in selected commodity effects, sustained dollar appreciation could weaken
countries exporters
sovereign, corporate, and household balance sheets
Year-on-year, percent
16
Year-on-year, percent
Russia
Year-on-year, percent
Ecuador
with significant stocks of foreign-currency denomi-
20 80
14
Oil importers
Oil exporters
Nigeria
Venezuela (RHS)
Angola
nated debt.
12 15 60
10
8 10 40 Stagnation in the Euro Area or Japan
6
4
2
5 20
The risk of a prolonged period of stagnation and
0 0 0 deflation in the Euro Area appears to have receded
2011 2012 2013 2014 2015
2008
2009
2010
2011
2012
2013
2014
2015
Serbia
Romania
Afghanistan
Ethiopia
Burundi
Rwanda
Malawi
Hungary
Bulgaria
FYR Macedonia
Armenia
Vietnam
Thailand
China
Morocco
Jordan
Lebanon
Tunisia
India
Pakistan
Sri Lanka
-10
China
Malaysia
Mexico
Indonesia
South Africa
Turkey
Nigeria
Russia
India
Philippines
Indonesia
China
Turkey
South Africa
Russia
Brazil
Mexico
15
10
rely particularly heavily on the Euro Area as an
5 export market.
0
2000 03 06 09 12 15 Bank lending. Euro Area banks are more in-
ternationalized in their lending than Japanese
banks, despite sharp cuts after the global finan-
cial crisis (World Bank 2015a, Dailami and
Adams-Kane 2012). Should non-performing
loans increase in a low-growth environment
Source: World Bank; www.globalpetrolprices.com; Haver Analytics; Barclays.
and erode European banks capital cushions,
A. Hydrocarbon exporters (as proxy for oil exporters) are Algeria, Angola, Argentina, Azerbaijan, Cameroon, Cote
dIvoire, Colombia, Chad, Ecuador, Gabon, Indonesia, Iran, Iraq, Kazakhstan, Libya, Malaysia, Mexico, Nigeria, (despite improved capital buffers over the past
Papua New Guinea, South Africa, Sudan, Turkmenistan, Uzbekistan, Venezuela, Vietnam, and Yemen.
few years), they could become more reluctant
C. Indias inflation target is 4 percent by 2017. Latest indicates February 2015.
D. Latest indicates March 2015.
to fund lending abroad. In addition, changes
F. The latest observation is March 2015. Data for 120 developing countries (data for 89 available in March 2015). in Euro Area market sentiment could gener-
G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5 chapter 1 39
ate negative international financial market FIGURE 1.20 Private debt in developing countries
spillovers. Private debt rose rapidly in several developing countries over the past five years
until the recent slowdown. Similar past debt buildups were followed by sharp growth
A prolonged period of Euro Area stagnationper- slowdowns. Household debt is particularly high in parts of East Asia, South Africa,
haps triggered by spillovers from renewed economic and Poland; whereas corporate debt is particularly high in parts of Eastern Europe,
and financial stress in its peripherycould raise East Asia, and Brazil.
2006
2007
2008
2009
2010
2011
2012
2013
2014
2005
2006
2007
2008
2009
2010
2011
2013
signed to ensure financial stability would have to be
carefully monitored.8 A slowdown in the Euro Area C. Household debt D. Corporate debt
would affect countries in Eastern Europe and North Percent of GDP Percent of GDP
180
Africa most immediately and strongly, through tight 80
2007 160
2007
2013
2013 140
trade, remittance, and bank links. Financial markets 60 2014 120
2014
China
Hungary
Indonesia
India
Poland
Mexico
Thailand
Turkey
South Africa
China
Hungary
Indonesia
India
Poland
Mexico
Thailand
Turkey
South Africa
Oil price risks
Risks related to oil prices have become somewhat E. International bond issuances by F. G
rowth deceleration following
developing countries episodes of private debt buildups
more balanced since January, with predominantly
downside risks to oil prices themselves and some US$, billions, four-month moving average
20
Percent
0
Interquartile range Median
upside risks to their impact. Thus far, the benefits 18 China Brazil Others
-1
16
from lower oil prices for oil-importing countries have 14
-2
12
mainly been reflected in shrinking vulnerabilities 10 -3
such as lower inflation and improved external and 8
6 -4
fiscal accounts. Activity in many oil-importing coun- 4
2 -5
tries, in contrast, has disappointed. However, lower 0 -6
2009
2010
2011
2012
2013
2014
2015
could be reached and Iran could ramp up oil produc- B. Emerging countries (excluding China) are Argentina, Brazil, Colombia, Hungary, Indonesia, India, Malaysia,
Mexico, Nigeria, Philippines, South Africa, Thailand, Turkey, and Venezuela. Values are GDP-weighted averages.
tion and exports faster than expected. Either event C. For reasons of data availability, Q1 2008 data for South Africa instead of 2007 data.
would allow the release of additional oil supplies D. Brazils data represents private debt for lack of available data breakdown. For reasons of data availability, Q1
2008 data for South Africa is used, instead of 2007 data.
into global markets. This could depress oil prices F. The figure shows the range of growth decelerations in a sample of 16 developing countries after an increase in
credit to the private sector in excess of 15, 30, and 50 percentage points of GDP over the preceding five years.
further and would raise global activity. However, it
in Euro Area GDP and a 1 percent decline in global GDP, over five
would also add to financial, fiscal, and external pres-
years (IMF 2013b). In the highly open economies of Eastern Europe, sures in oil-exporting countries and could discour-
tight bank lending and trade links mean that a 1 percent decline in Euro age exploration and development of new capacity
Area real GDP could reduce real GDP by as much as 2.5 percent below
in developing countries. As activity and real income
baseline over two years (Fadejeva, Feldkircher, and Reininger 2014).
Through remittance and trade ties, such a slowdown could reduce activ- growth slows in oil-exporting countries, their labor
ity in North Africa by about 1 percent (IMF 2013c). markets and non-oil sectors may also soften. Espe-
40 chapter 1 G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5
FIGURE 1.21 Risk of a rough awakening cially in Gulf Cooperation Countries, this could be
The gap between U.S. policy interest rate expectations of financial markets over the
associated with lower remittance outflows and less
next few years and the views of the Federal Reserve Open Market Committee suggests demand for foreign construction services.
there may be a risk of an abrupt adjustment in the yield curve, and a reappraisal of credit
risk. This could lead to a sharp decline in capital flows to developing countries. Some Conversely, although tensions between Ukraine and
developing countries have more limited reserve buffers than others.
Russia may be easing, security risks are mounting
A. M
arket versus FOMC policy rate B. U
.S. term spreads around in the Middle East and North Africa (Chapter 2).
expectations monetary policy announcements Escalating violence in oil-exporting countries could
Percent
5 Market expectations FOMC-Max
Term spreads (basis point)
400 Oct. 2-
release
Jan. 22-
disrupt oil production and transport facilities, and
trigger abrupt spikes in oil prices. While many oil-
ECB
of
FOMC-Median FOMC-Low 360 TLTRO
ann.
of new
details
4 320
QE
1 120
Deeper-than-expected slowdown in China
Jan-13
Jul-13
Sep-13
Mar-13
May-13
Nov-13
Jan-14
Jul-14
Sep-14
Mar-14
May-14
Nov-14
Jan-15
May-15
Mar-15
0
2015 2016 2017 Longer Run
Turkey
India
Indonesia
Philippines
Mexico
-0.8
1 2 3 4 5 6 7 8 9 10 they could slide into financial distress. This could
Quarters
result in non-performing loans for financial inter-
mediaries and other investors. Weakening of lend-
E. M
edian bid-ask spread on F. Median bid-ask spread on emerging ing institutions capital bases could lead to a more
emerging government bonds: government bonds: local currency general tightening of credit.
foreign currency
Basis points Basis points In principle, the authorities have sufficient buffers
30 Median 3-month moving average 25 Median 3-month moving average
to recapitalize banks and corporates. General gov-
25
20
20
ernment debt is below 60 percent of GDP (includ-
15
15
ing contingent liabilities from local government
10 10
financing vehicles). Given capital and financial sec-
5
5
tor controls, there are few low-risk savings vehicles
0 0
beyond deposits in the predominantly state-owned
Jan-10
Sep-10
May-10
Jan-11
Sep-11
May-11
Jan-12
Sep-12
Sep-14
May-12
Jan-13
Sep-13
May-13
Jan-14
May-14
Jan-15
May-15
Jan-10
Sep-10
May-10
Jan-11
Sep-11
Sep-13
Sep-14
May-11
Jan-12
Sep-12
May-12
Jan-13
May-13
Jan-14
May-14
Jan-15
May-15
If confidence in Chinas growth prospects were to FIGURE 1.22Emerging market credit ratings
wane as high-income country growth strengthens, Credit ratings have begun to deteriorate, especially, for commodity exporters. The
private capital outflows could accelerate, despite downgrades have coincided with depreciating currencies and rising credit default
capital controls, triggering a tightening of domestic swap (CDS) spreads. In several countries, CDS spreads are now in line with those of
lower-rated countries.
financing conditions.
A. N
umber of sovereign credit rating B. Average sovereign credit ratings
actions, 201415
Policy Challenges Number of rating actions Average sovereign rating Index
50 in developing countries
45 BBB- 1000
Policy challenges in major economies 40 900
35 800
BB+ 700
30
Monetary policies are expected to remain highly ac- 25
20 BB
600
500
400
commodative, except in the United States where the 15
10 Net commodity exporters
300
BB- 200
first policy rate increase is currently projected to take 5
0
Net commodity importers
100
Commodity price, S&P (RHS) 0
place later in 2015. Fiscal consolidation is expected to Up Down Up Down Up Down Up Down B+
Jan-01
Jan-03
Jan-05
Jan-07
Jan-09
Jan-11
Jan-13
Jan-15
Latin Emerging E. Europe Emerging
ease across major economies, but several have yet to put America Asia and Africa markets total
first time since the 2008 financial crisis, provided 100 300
Jan-03
Jan-05
Jan-07
Jan-09
Jan-11
Jan-13
Jan-15
similarly rated
countries
0
amidst abundant liquidity and exceptionally low in- 0 AA+ AA AA- A+5 A A- BBB+ BBB 10
AAA 15
BBB- BB+ BB BB-22
Average credit rating of S&P and Fitch
ensure fiscal sustainability is needed, covering health C. The sovereign rating is calculated based on the simple average of long-tern foreign-currency credit ratings of
countries by Standard & Poors Rating Service.
care cost containment, tax reform, improved quality
of public spending, and adequate infrastructure in-
vestment. Although important health care reforms
were implemented in 201314 to help reduce costs fiscal policy support and growth-enhancing struc-
in government health care provision and increase tural reforms. In 2015, fiscal policy is expected to
risk pooling elsewhere, greater efficiency gains are be broadly neutral, although, under the Excessive
needed to ensure long-term sustainability. The tax Deficit Procedure, several countries (Cyprus,
system needs to be streamlined, the persistence of France, Greece, Ireland, Malta, Portugal, Slovenia,
long-term unemployment reduced, and the educa- Spain) need to proceed with their fiscal consolida-
tion system made more inclusive (OECD 2015a). tion plans. Activity in the European Union may
also be supported by a 315 billion (2.2 percent
Quantitative easing will support activity and re-
of GDP) investment program (the Juncker Plan)
duce deflation concerns in the Euro Area, but a
intended to stimulate growth and create jobs. The
lasting recovery needs to be secured by appropriate
initiative should help better leverage the EU budget
and European Investment Bank programs for greater
and non-financial corporates (Koo 2011). As banks faced mounting
private investment. However, long-term growth re-
impaired loans, lending to sound companies contractedpartly the mains weighed down by rigid and fragmented labor,
result of rolling over loans to weak companies (Caballero, Hoshi and product, and services markets, hampering produc-
Kashyap 2006). Investment and consumption growth declined sharply
tivity and innovation. Notwithstanding significant
and persistently.
42 chapter 1 G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5
FIGURE 1.23 Risk of excessive U.S. dollar appreciation consolidation and structural reform efforts are un-
Growth in the United States remains robust, but a further strengthening of the U.S. dollar
derway. The Bank of Japan continues to implement
could curtail the recovery. Spillovers from a U.S. slowdown would reduce activity else- its quantitative easing program as planned, and a
where (and especially in Latin America and the Caribbean). The U.S. current account
deficit is well below pre-crisis levels.
further expansion remains possible later in 2015
if inflation fails to pick up significantly. Financial
A. U.S. real GDP growth B. Size of U.S. economy, 2013/14 markets expect policy rates to remain at zero until
Percent U.S. GDP growth Percent of global end-2018. Japanese banks and some pension funds
8 40
Average 1992-2007
Average 1980-2014 35
continue to shift their portfolios away from hold-
6
30 ings of Japanese government bonds, whose yields re-
4 25
20
main low. A search for higher yields by financial in-
2
15 stitutions could lead to balance sheet vulnerabilities.
0
10
5
Government debt sustainability is under pressure
-2
0 from a fiscal deficit in excess of 7 percent of GDP
-4 GDP Imports Foreign claims Stock market
1980 1985 1990 1995 2000 2005 2010 2015 capitalization
in fiscal year 2014 and public debt at 234 percent of
GDP in 2015. The planned consolidation for fiscal
C. Impact of 10 percent U.S. dollar D. U.S. current account year 2015 and beyond will, however, be challenging
real effective appreciation in light of increasing outlays for social welfare and de-
Percent deviation from baseline Percent of GDP fense and delays in implementing the next consump-
2
0
End of first year End of second year
1 tion tax increase. Bolstered by an election victory in
0
-1
December 2014, the government has committed to
-2 speeding up its ambitious structural reform agenda.
-3
-0.5
-4
-5
With inflation contained, the monetary policy inter-
-6 est rate in the United Kingdom is expected to rise
-7
-1
only gradually from 2016, despite diminishing slack
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
local government revenue capacity including FIGURE 1.24 Risk of stagnation and deflation in the
through a property tax. The business tax is be- Euro Area
ing replaced with value-added taxation (e.g. in Given greater gross domestic product and imports, a prolonged stagnation in the Euro
railways since January 2014 and in telecommu- Area could have deeper global repercussions than Japans decade of slow growth did
nications since June 2014) and environmental in the 1990s and early 2000s. Eastern Europe and the Middle East and North Africa
would be particularly affected through trade, remittances, and bank exposures. Finan-
taxes have been increased. cial markets in Latin America and the Caribbean could come under pressure from Euro
Area deleveraging.
Financial sector reform. The deposit rate ceiling
was raised, deposit insurance was introduced A. Share of global GDP and imports B. Share of Euro Area in exports and
in May, and a Financial Consumer Protection remittances
Bureau was established. Some nontraditional Percent of global Percent of total Exports to the Euro Area
45 40
banking activity was reined in, for example e- Euro Area (2014)
Japan (1994) 35
Remittances from the Euro
Area
financing platforms. Margin requirements for 30
GIIPS (2014) 30
competition. Private companies will be allowed Percent of total FDI claims of Euro Percent
Cumulated effect on GDP growth at the end of second year
50 Area
entry. However, an independent competition Portfiolio claims of
Cumulated effect on GDP growth at the end of first year
Effect on GDP growth in the first quarter
Euro Area 0.0
authority aimed at ensuring well-functioning 40
Bank claims of Euro -0.2
Area banks
markets remains to be established. In addition, 30 -0.4
-0.6
higher fuel taxation and stricter enforcement of 20 -0.8
environmental rules have been implemented to 10
-1.0
-1.2
reduce pollution.
MENA
Turkey
ECA
Bulgaria
Romania
Jordan
Morocco
0
Administrative and other reforms. Administrative EAP ECA LAC MNA SAR SSA
contract enforcement. Pilots were initiated to C. Investment claims of Euro Area residents at end-2013 for foreign direct investment (FDI), at end-June 2014 for
portfolio investment claims, and end-September 2014 for cross-border bank loans.
convert land use rights into ownership shares; D. Results for the cumulated effect on GDP growth at the end of first and second years are statistically significant
at the 16th-84th percentile range based on 2000 draws for ECA, MENA, Turkey, Bulgaria, Romania, and Jordan.
to allow some municipal government bond is-
suance; to corporatize state-owned enterprises;
to operate a cap-and-trade trading system to Monetary policy challenges in developing
limit carbon emissions; and to further relax the countries
household registration system.
Much of the reform agenda, including a broad- Against the background of soft growth and the pros-
based reform of state-owned enterprises, remains to pect of rising global interest rates, falling oil prices have
be implemented. Issues that need to be addressed eased monetary policy constraints in oil-importing
include: implicit and explicit government guaran- countries but opened new policy dilemmas in oil-ex-
tees, non-binding budget constraints, low efficiency, porting countries.
and a lack of transparency and accountability Lower oil prices have eased constraints on mon-
(World Bank and Development Research Center of etary policy in oil-importing countries by slowing
the State Council 2014, OECD 2015b). inflation and reducing current account deficits. This
has allowed central banks in a number of inflation-
targeting or oil-importing countries to cut policy
rates to support slowing or weak activity in 2015
44 chapter 1 G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5
FIGURE 1.25 Risk of a hard landing in China Shifting fiscal pressures in developing
The risk remains of a hard landing, followed by a period of anemic growth, although it is
countries
low-probability. A hard landing could be triggered by financial distress in industries with
substantial excess capacity, including steel and coal. Many oil-exporting countries are tightening fiscal
A. Steel production B. Share of China in global coal policy, even as growth slows. Oil-importing countries,
production however, have the opportunity to reform energy subsi-
Index, 2005 = 100 Percent Percent of global
48
dies and taxes, and to build fiscal space.
270 China 70
250 Rest of the world 47
60
230 China in percent of global production (RHS) 46 For commodity-exporting countries with flexible
210 50 45
44
exchange rate regimes (Malaysia, Mexico, Peru,
190 40
170 43 Russia), the fiscal impact of declining commod-
150 30 42
130 20 41 ity prices has been somewhat cushioned by de-
110
90
10
40
39
preciating currencies (Figure 1.27), whereas it
70 0 38 has been more severe in commodity-exporting
2005 2008 2011 2014 2008 2009 2010 2011 2012 2013
countries (Ecuador, Iraq) with fixed exchange
Sources: BP Statistical Review of World Energy June 2014; National Bureau of Statistics of China; World Bank
rates. Nevertheless, many commodity-exporting
Commodity Price Data (The Pink Sheet). countries have had to tighten fiscal policy despite
slowing growth. This is particularly the case in
countries where fiscal deficits were already large
(Arab Republic of Egypt, India, Peru, Romania; Fig- before commodity price declines (Angola, Brazil,
ure 1.26). In India, the introduction of formal infla- Cameroon, Ghana, Mongolia, Venezuela, Zam-
tion targeting and increased central bank credibility bia), or debt levels were elevated (Ghana, Mongo-
have provided additional policy space. In Eastern lia), or rainy day savings or stabilization funds
Europe, lower oil prices have added to deflationary were of limited size (Mongolia, Nigeria). Con-
pressures central banks are struggling with as policy cerned about possible credit rating downgrades,
rates are at historic lows. Looking ahead, however, policymakers pursued consolidation budgets in
tighter global financing conditions and moderating several oil-exporting countries (Malaysia, Nige-
capital inflows may constrain room for monetary ria). However, despite recent downward revisions
policy maneuvering in emerging markets, especially in some oil-exporting countries, fiscal breakeven
those with a rapidly rising stock of external debt oil prices are estimated to remain at or over $90
(Turkey, South Africa). per barrel (Azerbaijan, Gabon, Kazakhstan, Nige-
In commodity-exporting countries, policy tradeoffs ria) or above $120 per barrel (Angola, Ecuador).
have been starkly different as central banks have had The loss in oil revenues for these countries strains
to balance the need to support growth with inflation government budgets and will generally need to
and balance sheet concerns resulting from deprecia- be offset by spending cuts. Unless widening fiscal
tion pressures. Tightening global financial conditions deficits can be reined in and reduce the burden on
over the medium term will intensify these dilemmas. tightening monetary policy, private investment
could be crowded out (Angola, Gabon, Mongo-
Sustained currency weaknessinteracting in some
lia, Nigeria, Republic of Congo).
cases with supply constraints (Ghana, Mongolia) or
spillovers from geopolitical risks (Central Asia and Among oil-importing countries, the drop in oil
South Caucasus)has increased inflation in oil-ex- prices could generate substantial fiscal savings,
porting countries and, for foreign currency borrow- particularly where fuel prices are subsidized. Not-
ers, financial stability risks. While non-concessional withstanding significant cuts in 2014 and 2015, es-
external debt, which is mostly foreign currency- pecially in East and South Asia, pre-tax subsidies,
denominated, is modest in most developing countries, which allow energy consumers to pay below-cost
it has risen considerably since 2011 in some com- prices, are high in several developing economies
modity-exporting countries (Indonesia, Mongolia). (IMF 2013a; Clements et al. 2014). Lower oil prices
To contain risks from depreciation pressures, central have helped some countries deregulate local fuel
banks have been compelled to raise policy rates procy- prices (Arab Republic of Egypt, India). In countries
clically (Belarus, Mongolia) or to intervene in foreign with unusually low energy taxes, lower oil prices
exchange markets (Mexico, Nigeria, Zambia). also make it easier for governments to raise these
G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5 chapter 1 45
taxes closer to international norms (Arab Republic FIGURE 1.26 Monetary policy in developing countries
of Egypt, India, Indonesia). This would help reverse Easing inflation has allowed several central banks in oil-importing countries to cut
some of the post-crisis spending increases made pos- rates. Currency depreciations and associated inflation pressures have compelled
sible by rapid revenue growth. central banks of commodity exporters to raise rates. In some countries, the exchange
rate risks inherent in high external debt with limited reserve coverage constrain mon-
In this way, the tailwinds of low oil prices provide etary policy room to support activity.
an opportunity for oil-importing countries to ei- A. Policy interest rate moves B. Selected countries, policy interest
rates
ther build fiscal space, which would allow an ef- Number of policy rate changes Percent
fective counter-cyclical response during the next 40
Hikes Cuts
25
35 20 2014 2015
slowdown, or to invest in critical infrastructure 30 15
or human capital (World Bank, 2015). A priority 25 10
20 5
for rebuilding fiscal space is particularly important 15 0
in countries that are vulnerable to shocks because 10
Brazil
Turkey
Ghana
Mongolia
Russian Fed.
Indonesia
Armenia
Colombia
Malaysia
Thailand
Mexico
Korea, Rep.
5
of high levels of government debt, particularly 0
where it has risen rapidly since 2010, such as the Oil Ex. Oil Im. Oil Ex. Oil Im. Oil Ex. Oil Im.
14-Q3 14-Q4 15-Q1
10 percentage point of GDP increases in the Arab
Republic of Egypt, Cabo Verde, Eritrea, Jordan, C. R
atio of reserves to non-concessional external debt and
Lebanon, Pakistan, and South Sudan. On average, non-concessional debt for frontier markets
Tunisia
Vietnam
Kenya
Jamaica
FYR Macedonia
Ecuador
Bolivia
Zambia
Cote d'Ivoire
Bulgaria
Mauritius
Ukraine
Serbia
Lebanon
Romania
Honduras
Bangladesh
Ghana
Botswana
Senegal
Rwanda
Reform momentum and needs in developing
countries
Source: World Bank; Haver Analytics.
While countercyclical fiscal and monetary policies can A. Oil Ex. = oil-exporting countries; Oil Im. = oil-importing countries.
FIGURE 1.27 Fiscal pressures Lower commodity prices are a reminder for
Fiscal balances in oil-exporting countries have come under pressure as resource rev-
commodity-exporting countries of the need to
enues have fallen. In oil-importing countries, declining fuel subsidies may help reverse diversify their economies away from commodi-
some government spending growth since the crisis. Still-moderate government debt in
oil-exporting countries and low-income countries may begin to rise as growth slows.
ties (see below).
In addition to ensuring long-term growth, some
A. F
iscal breakeven prices, oil B. C
hange in government expenditures reforms can support demand against the back-
exporters and revenues, 201014
drop of cyclically slower growth. These include,
US$ per barrel Percent change
350
2014
50
Ukraine especially, investments in critical infrastructure
300 Iraq
250
2015 45
and education.
200 40 Brazil
Saudi Arabia
Egypt, Arab
150
100
35 Rep.
Colombia
Turkey Productivity growth needs to be increased to
Expenditure
50
stem the trend slowdown in developing country
30 Mexico
China
0 PakistanIndia
25
Algeria
Yemen, Rep.
Bahrain
Saudi Arabia
Oman
Iraq
Qatar
Kuwait
United Arab
Malaysia
Indonesia Emirates
20
Iran, Islamic
Rep. Peru
15
Nigeria
Phillipines
The pace of reform has accelerated in some ma-
10
10 20
Revenue
30 40
Percent change
50
jor emerging-market countries in 201315. In
201314, Mexico approved a major energy reform
that includes opening up deep water and shale oil
C. F
iscal balance, oil and gas D. Fiscal balance, oil importers
exporters
fields to the private sector, increased competition
Percent of GDP Percent of GDP
in the telecommunications sector, widened the
2012-2014 2012-2014
15
2015-2017 8 2015-2017
tax base, and eased some employment restrictions.
5
4 China continues to gradually implement its Novem-
0
-5 -4
ber 2013 reform agenda. India formally adopted
-8 inflation targeting in 2015, thus strengthening the
-15 -12
credibility of the central bank; reduced barriers to
Korea, Rep.
Chile
India
Brazil
Colombia
China
Philippines
Pakistan
Ukraine
Peru
South Africa
Turkey
Saudi Arabia
Malaysia
Russian Federation
Nigeria
Iraq
Mexico
Indonesia
1990-95
1995-00
2000-05
2005-10
2010-15
2015-20
2020-25
2025-30
2030-35
2035-40
subsidies to their populations. In some cases, the -3
cost of subsidies exceeds 5 percent of GDP (IEA, EAP LAC ECA SAS SSA MNA DEV
1
60 Thailand
India Subsidy reform should be combined with energy
50
0
-1 40
Turkey
Indonesia tax reform. Fuel prices are low in many developing
Brazil
countries compared with high-income countries.
Nigeria
China
Russian Federation
Indonesia
Mexico
Brazil
Turkey
South Africa
India
Argentina
Russian Federation
Kazakhstan
Ecuador
For example, in several large developing countries
Venezuela, R.B.
in East Asia (Indonesia, Malaysia, Thailand), fuel
-2 -1 0 1 2 3
Index prices were well below those of high-income coun-
C. Ease of doing business by sector, D. Ease of doing business by sector,
tries in the region (Japan, Singapore; World Bank
BRICS, 2015 MINT, 2015 2015d). The fall in oil prices has been such that,
Distance to frontier score Distance to frontier score even after subsidy cuts, local fuel prices have fallen
Brazil Russia Mexico Indonesia
100
India
South Africa
China
High-income countries 100 Nigeria
Malaysia
Turkey
High-income countries
further. This could be offset by raising energy taxa-
80 80 tion, as has been done in India on petroleum and
60
40
60
diesel fuels in 2015.
40
20
20 Current low commodity prices are also a reminder
0
to commodity-exporting countries of the impor-
Starting a
Construction
Trading Across
Getting Electricity
Contracts
Paying Taxes
Insolvency
0
Enforcing
Dealing with
Business
Resolving
Permits
Starting a
Construction
Electricity
Trading Across
Contracts
Paying Taxes
Insolvency
Enforcing
Dealing with
Business
Resolving
Borders
Borders
progressive in a great majority of casessupporting accruing to lower-consumption households. Prospera, Mexicos main
lower income households more than higher income anti-poverty government cash-transfer program, has been quite success-
ful in targeting the poor, in contrast to electricity subsidies.
onesin contrast to energy subsidies (Komives et 13On the request of G20 leaders, the World Bank released a report in
al. 2007; Vagliasindi 2012; Figure 1.30). The ef- September 2014 providing a roadmap for transitional policies to assist the
fectiveness of such measures improves with careful poor while phasing out fossil fuel subsidies (World Bank 2014c).
G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5 chapter 1 49
BOX 1.3 Recent Developments in Emerging and Developing Country Labor Markets
The Great Recession had a relatively mild impact on the labor pect, employment contracted especially sharply in the coun-
markets of developing countries. Since 2010 unemployment rates tries that experienced the sharpest declines in output.
have generally been below pre-global financial crisis levels, and In contrast, unemployment rates in developing countries,
declining. This is in stark contrast to the steep rise, and sluggish based on official statistics, show a modest one-half percentage
decline, of unemployment rates in high-income economies. The point uptick in 2009, and a return to pre-crisis levels by 2011.
resilience of developing-country labor markets reflects, in large The largest increases in unemployment rates and declines in
part, stronger output growth during and after the crisis. As growth employment growth were in the regions with the largest out-
in developing economies slows from post-crisis peaks, labor mar- put losses: Europe and Central Asia (ECA); and Latin Amer-
kets may weaken. Since job creation plays a critical role in reduc- ica and Caribbean (Figures B1.3.3 and B1.3.4). This reflected
ing poverty, and promoting shared prosperity, this risk heightens contractions of demand in the export markets of Western Eu-
the importance of implementing reforms to support growth, and rope and the United States. Participation rates show a more
of removing structural constraints on labor markets. complex pattern, generally (but not uniformly) declining dur-
The 200709 financial crisis had a sizeable impact on global ing the global recession, and rising afterwards (with the excep-
labor markets, with social and human costs: a reduction of tion of East Asia (Figure B1.3.5). In other developing regions,
lifetime income, an increase in poverty, and the loss of hu- unemployment rates increased more moderately and partici-
man capital (Gourinchas and Kose 2013). Though global pation rates remained near pre-crisis levels. Chinas relatively
unemployment rates returned to pre-crisis levels by 2014, strong growth during the peak of the Great Recession helped
according to official statistics, labor markets of advanced and support developing country exports, particularly in East Asia.
developing economies followed very different paths. The un- The resilience of developing economy employment com-
employment rate in advanced economies increased by nearly pared to high-income economies during the Great Recession
three percentage points during 200709; in contrast, official can be attributed to three factors:
statistics show an increase of less than half a percentage point
in the jobless rate in developing countries over the same pe- Less severe contractions. The 200809 slowdown in
riod. In advanced countries, the unemployment rate remains developing countries was not particularly severe, rela-
about 1.5 percentage points above pre-crisis levels; in the tive to that of the advanced economies, or for that mat-
developing world it is one-percentage point below them. ter, relative to earlier recessions in developing countries,
Percent Percent
Developing economies Advanced economies EAP ECA LAC MNA SAR SSA
9 2
8 1
7 0
6 -1
5 -2
2000 2002 2004 2006 2008 2010 2012 2014
2007 2009 2011 2013
LAC
EAP
MNA
SAR
SSA
is also seen in divergences among developing regions. for every 1 percentage point increase in the unemployment rate, a countrys
For example, ECA and LAC experienced the biggest GDP will be about 2 percentage points lower than its potential. The dif-
ferences version (as originated in Okun, 1962) describes the relationship
drops in both output and employment growth. between quarterly changes in unemployment and GDP.
G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5 chapter 1 51
Percent
Additional growth is associated with a smaller reduction in the
200007 2008 2009 2013
85
unemployment rate in emerging and frontier markets than in
advanced markets.
Percentage point
0.0
70
55
-0.1
40 -0.2
ECA
EAP
SAR
AFR
MNA
Figure B1.3.8 Real GDP growth and change Figure B1.3.9Estimated informal
in unemployment rates in developing employment shares in selected countries,
economies, 200014 2011
Higher growth was associated with falling unemployment rates. Informal sectors are large in developing countries.
10
60
8
40
6
20
4
0
Sub-Saharan Africa
Middle East
Caribbean
0
-1.5 -1.0 -0.5 0.0 0.5 1.0
Unemployment rate,
average annual change, percent
Source: International Labor Organization; International Monetary Fund. World Bank staff
calculations. Source: International Labor Organization.
Note: Shaded area reflects 95 percent confidence interval. 2014 values are projections Note: Calculations based on a sample of 49 countries.
from WEO, IMF.
2007
2008
2009
2010
2011
2012
2013
Mexico
Ukraine
Brazil
high penalties on firing. In turn, these encourage infor- Countries with growing populations may be at risk
mality, or poor enforcement. Simulations of labor mar- of a youth bulge that increases competition for
ket models suggest that policy changes should be care- jobs, and dampens wage growth. Education pro-
fully sequenced, as increasing enforcement may reduce grams can assist skills development, while business
informality yet cause higher unemployment and lower environment reforms may enhance business entry
welfare. Policies that first reduce costs in the formal sec- and market access. Large public sector employ-
tor would help avoid this outcome (Ulyssea 2010). ment, on the other hand, may crowd out private
Country specifics. Relevant country idiosyncrasies in- sector opportunities and lead to an inefficient al-
clude economic institutions, natural resource depen- location of human capital (World Bank 2013).
dency, and demographics. In some regions, states are Resource-rich economies may need to focus on im-
embroiled in conflict, or post-conflict, situations that proving human capital and institutions. Excessive hir-
have large economic repercussions (World Bank 2012). ing by the public sector, or a loss of export competi-
For agrarian countries, improving transportation
tiveness due to an appreciation of real exchange rates
to cities will be a high priority, as will be improving during periods of high commodity prices, may crowd
productivity in agriculture. out private sector job creation (World Bank 2014).
labor (Callen et al. 2014). This non-tradables Building human capital. Government invest-
sector is typically characterized by low pro- ment, including in human capital, would be
ductivity growth relative to the tradables sec- an effective complement to efforts to accel-
tor, in particular manufacturing (Cherif and erate productivity growth in the tradables
Hasanov 2014). Reforms to provide market sector (Cherif and Hasanov 2012). In devel-
incentives for a transfer of resources towards oping countries, social returns to education
the non-resource-based tradables sector may have been shown to be significant, and poten-
tially higher than returns to physical capital
be helpful in some commodity-exporting
(OECD 2012; Psacharopoulos and Patrinos
countries.
2004).
Encouraging export diversification. Export di-
Measurable effects of reforms, in terms of growth
versification is associated with higher growth
and productivity, can take a long time to materi-
(Lederman and Maloney 2007). Public policy alize. Even in the short-term, however, reforms
can support export diversification and sophis- can have a considerable effect on activity. Poli-
tication by fostering vertical diversification in cies could be implemented to ease the short-term
oil, gas, and petrochemical sectors (i.e., in- transition cost, for example by assisting workers
creased processing of the raw materials), and to move to new jobs and speeding up the repair
horizontal diversification beyond these sec- of the capital bases of lending institutions. Some
tors (Cherif and Hasanov 2014). of the possible effects on activity are as follows:
G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5 chapter 1 55
Reforms that involve capital investment (e.g., FIGURE 1.30 Fuel subsidies
to address infrastructure needs) can stimulate Fuel subsidies typically benefit high-income households more than lower-income
domestic demand in the short-term. ones. In contrast, conditional cash transfers can be better targeted to low-income
households.
Labor market reforms, especially those that
reform social benefits, can increase the labor A. D
istribution of subsidy benefits B. Benefit incidence of social
by consumption quintile expenditures vis--vis electricity
supply (e.g., older workers), even though in subsidy
the short-run they may imply lower real in-
Percent Percent of income Conditional cash
comes (Blanchard and Giavazzi 2001; Krebs 50
Bottom 2 3 4 Top
1.6 transfers
Electricity subsidy
and Scheffel, 2013). Even if associated with 40 1.4
1.2
short-term disruptions, labor market reforms 30 1
can be critical complements to other reforms. 20 0.8
0.6
For example, labor market flexibility can am- 10
0.4
plify growth benefits from deregulation and 0 0.2
Africa South and Other All Regions 0
product market reforms (Aghion et al. 2008). Central Regions Bottom 2 3 4 5 6 7 8 9 Top
America decile decile
Product market reforms (such as increasing
competition or removing implicit and ex- Sources: Arze del Granado, Coady, and Gillingham (2012); Vagliasindi (2012).
A. Values are share of the total benefit from different fuel price subsidies for households grouped by
plicit subsidies) that result in unwinding ex- consumption levels.
cess capacity in inefficient firms (e.g., some B. The conditional cash transfers program (previously Opportunidades, now Prospera) is a Mexican government
social assistance (welfare) program founded in 2002. It was designed to target poverty by providing cash
state enterprises) can cause unemployment in payments to families in exchange for regular school attendance, health clinic visits, and nutritional support.
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SPECIAL FEATURE 1
We face a risk that longer-term interest rates will rise sharply at some point.
(Ben S. Bernanke, March 1, 2013)1
Long-term interest rates are at very low levels, and that would appear to
embody low term premiums, which can move, and can move very rapidly
(Janet Yellen, May 6, 2015)2
The U.S. Federal Reserve is expected to begin to gradually raise policy interest rates in the near term. Given that
it has been anticipated for some time and will take place against the backdrop of an ongoing U.S. recovery and
highly accommodative monetary policy by other major central banks, the launch of a series of U.S. rate increases
(liftoff) is likely to proceed smoothly. The risk remains, however, that the liftoff or subsequent rate increases could
lead to abrupt changes in market expectations regarding monetary conditions that could, in turn, prompt a spike
in U.S. long-term interest rates, volatility in global financial markets, and a sharp increase in borrowing cost for
emerging marketssimilar to the way initial discussions of U.S. monetary policy normalization triggered the
taper tantrum of May-June 2013. If, in response to the liftoff, U.S. long-term bond yields were to jump 100
basis points (as they did during the taper tantrum), capital inflows to emerging markets could decline by 0.81.8
percentage points of GDP. The change in external conditions driven by the liftoff or subsequent rate increases could
potentially combine with domestic factors to spark a sudden stop in capital inflows in some emerging markets,
especially those where vulnerabilities have increased, where there has been uncertainty about policy direction, or
where growth prospects have deteriorated significantly. In anticipation of such a risk, emerging markets should
prioritize monetary, financial, and fiscal policies that reduce vulnerabilities and strengthen credibility, and struc-
tural reform agendas that improve growth prospects.
The main authors of this Special Feature are Carlos Arteta, Ayhan
Kose, Franziska Ohnsorge, and Marc Stocker, with inputs from Derek point this year to take the initial step to raise the federal funds rate tar-
Chen, Raju Huidrom, Ergys Islamaj, Eung Ju Kim, and Tianli Zhao. get and begin the process of normalizing monetary policy. To support
Research assistance was provided by Trang Nguyen and Jiayi Zhang. taking this step, however, I will need to see continued improvement in
labor market conditions, and I will need to be reasonably confident that
1Bernanke (2013b). inflation will move back to 2 percent over the medium term.
2Yellen (2015b). 4Several recent studies have examined the links between capital
3In a recent speech, Federal Reserve Chair Janet Yellen (2015c) flows to emerging and developing countries and pull and push fac-
articulated her position on the timing of the rate hike: If the economy tors, including U.S. monetary policy and global risk aversion (Koepke
continues to improve as I expect, I think it will be appropriate at some 2015a).
66 S P E C I A L F E AT U R E 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2015
gradually less accommodative. Although posi- Lower global interest rates. Despite a recent pick
tive growth spillovers from advanced countries up, interest rates in major economies are still
would support activity in emerging markets, exceptionally low, and in some cases negative
higher interest rates would likely shift the rela- (Box 1.1). The low rates are accompanied by
tive return differential on financial assets in fa- prospects of a significant expansion of balance
vor of advanced countries. sheets by the European Central Bank (ECB)
Pull factors. While emerging markets as a group and the Bank of Japan. These monetary stimu-
continue to grow faster than advanced econo- lus measures will continue to shore up global
mies, prospects have softened and several emerg- liquidity and help keep interest rates low around
ing market countries face significant vulnerabili- the world.
ties. In some of them, uncertainty about policy Improved activity in advanced economies, includ-
direction is elevated and weighing on investor ing the United States. Since 2013, growth in ad-
sentiment. These factors increase the likelihood vanced countries has picked up markedly, and is
of a sudden market reappraisal of the inherent projected to reach 2 percent in 2015. In the
riskiness of emerging market financial assets. United States, in particular, labor markets have
This Special Feature analyzes the changes in the improved significantly since the taper tantrum
push and pull factors since the taper tantrum, risks (Chapter 1), suggesting that fulfillment of the
of disruptions around the liftoff, and potential im- Feds full employment mandate does not stand
plications for emerging markets and possible policy in the way of a nearing liftoff (Yellen 2015c).
options. Specifically, it addresses the following Going forward, a rise in U.S. long-term yields could
questions: reflect either continued improvements in the U.S.
How have growth prospects and policies in economy or highly anticipated U.S. monetary pol-
advanced countries changed since the taper icy changes, or both. Continued improvements in
tantrum? U.S. activity (a favorable real shock), especially if
surprising strongly and repeatedly on the upside,
What are the major risks around the liftoff? could bolster equity valuations and would reduce
What are possible implications of the liftoff for the need for the current highly accommodative
emerging markets? monetary policy stance. In tandem with rising re-
What are the major lessons for emerging mar- turns on equity, bond yields could rise on market
kets from the taper tantrum? expectations of nearing monetary tightening.
How have growth prospects and vulnerabilities Alternatively, financial markets could be surprised by
for emerging markets changed since the taper even a modestly less accommodative stance of mone-
tantrum? tary policy: it could appear as an accelerated tightening
to investors if their views about the U.S. economy dif-
What policy options are available to prepare for fer from the Feds (an adverse monetary shock). Simi-
risks around the liftoff? larly, if disappointing economic data were to reveal
supply-side challenges to potential growth, it could
lead to a faster-than-anticipated increase in (actual or
How Have Growth Prospects expected) inflation. This could in turn warrant faster-
and Policies in Advanced than-expected monetary policy tightening.5
A structural vector autoregression (VAR) model is
Countries Changed since employed to disentangle the contribution of such real
the Taper Tantrum?
5There remains considerable uncertainty on supply-side constraints
Advanced country growth, monetary policy, and affecting the U.S. economy, including the underlying pace of produc-
broader financial conditions are key global push fac- tivity growth (Gordon 2014; Hall 2014; Fernald and Wang 2015) and
tors driving capital flows to emerging markets. The labor participation (Aaronson et al. 2014; Council of Economic Ad-
visers 2014), as both have remained unusually low in the post-crisis
economic and policy context in advanced countries period. Signs of emerging supply-side constraints could raise inflation
has evolved notably since the taper tantrum in May- expectations, leading market participants to anticipate a faster normal-
June 2013 (Figure SF1.1). ization of policy rates in the short term.
GLOBAL ECONOMIC PROSPECTS | JUNE 2015 S P E C I A L F E AT U R E 1 67
and monetary shocks to movements in the long- Figure SF1.1 Conditions in advanced countries
term U.S. yields: those associated with changes in Long-term interest rates remain at historic lows, especially in the Euro Area, and global
U.S. growth prospects (proxied by the S&P 500 financial markets have been bolstered by exceptionally accommodative monetary
policies of the European Central Bank and Bank of Japan. The recovery in advanced
index), and those reflecting changes in market per- countries is gathering momentum, benefiting growth in emerging markets. In the United
ceptions of U.S. monetary conditions (proxied by States, labor markets are healing as the recovery is continuing.
the 10-year sovereign bond yield). The exercise as- A. Long-term interest rates B. Central bank balance sheets
sumes that an adverse monetary shock (such as Percent Index = 100 in January 2010
6
perceived accelerated monetary tightening) in- G3 long-term interest rates
U.S. long-term interest rates
400
Euro Area
5 350
creases yields and reduces stock prices in the 4 300 United States
Japan
United States, while a favorable real shock (such as 3
250
200
one reflecting better growth prospects) increases 2
150
both yields and stock prices (Matheson and Stavrev 1 100
0 50
2014; IMF 2014b; see Box SF1.1 for technical
Jan-07
Jul-07
Feb-08
Aug-08
Sep-09
Apr-10
Oct-10
Mar-09
May-11
Nov-11
Jun-12
Dec-12
Jul-13
Jan-14
Aug-14
Mar-15
0
details). 2010 2011 2012 2013 2014 2015 2016
2007
2008
2009
2010
2011
2012
2013
2014
2015
0
2012 2013 2014 2015
tion that suggested sufficiently strong U.S. growth Source: Bloomberg, Haver, World Bank.
momentum to warrant rising long-term bond A. Average of 10-year government bond yields of G3 countries (Euro Area, Japan, and United Kingdom) weighted
by GDP. Blue bar shows the taper tantrum period in May-June 2013. The latest data point is for June 8, 2015.
yields. As a result, real shocks contributed little to B. Grey area shows the forecast period.
movements in 10-year U.S. bond yields. C. Aggregate GDP growth of G4 countries (United States, Euro Area, Japan, and United Kingdom)
D. Blue bar shows the taper tantrum period in MayJune 2013
Since the taper tantrum, however, monetary shocks,
reflecting both domestic and external factors, have SF1.3).6 Such a fully anticipated normalization of
turned increasingly favorable. In late 2014, they began U.S. policy rates should not trigger volatility in
to push yields below May 2013 levels. Despite steadily global financial markets or sharp reversals in capital
shrinking Fed asset purchases between December flows in emerging markets.
2013 and October 2014, financial conditions re-
mained highly accommodative. Following ECB Presi-
dent Mario Draghis speech in Jackson Hole in August What Are the Major Risks
2014, market speculation intensified and was eventu-
ally proven right about the use of ECBs quantitative
around the Liftoff?
easing. The decline in Euro Area long-term bond yields The magnitude of the market reaction during the
also spilled over to U.S. long-term bond yields. At the taper tantrum of May-June 2013 underlines the
same time, indications of an increasingly robust labor risks surrounding the liftoff and subsequent rate
markets contributed to positive real shocks that exerted
upward pressure on long-term yields. 6In previous tightening episodes, the U.S. yield curve generally flat-
tened and term premia rose only modestly, if at all, during the first year of
If the timing of the liftoff and the subsequent path the first rate increase (Adrian, Crump, and Moench 2013a). The particu-
of policy rates are accurately reflected in market ex- larly steep 1994 tightening cycle helped stabilize medium-term inflation
pectations, the normalization of U.S. policy rates expectations, reflected also in a narrowing term spread. The 2004 tight-
ening cycle was accompanied by a narrowing term spread (also dubbed
amid robust growth prospects for the U.S. economy the conundrum), partly reflecting ample global liquidity and declining
will be part of a smooth transition for global finan- medium-term inflation expectations. This tightening episodewhich, like
cial markets. U.S. long term yields will rise only the upcoming liftoff, also started at very low U.S. policy interest rates
was the most benign for emerging market currencies and capital flows. In
modestly and the U.S. yield curve will flatten contrast, term spreads initially widened during the tightening cycle that
slightly, as in some earlier liftoff episodes (Figure accompanied the particularly strong recovery in 1999.
68 S P E C I A L F E AT U R E 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2015
Figure SF1.2Explaining movements in U.S. bond tal outflows.7 Although U.S. bond yields have since
yields: monetary and real shocks fallen back, long-term bond yields in emerging mar-
The sudden rise in U.S. long term yields after May 2013 was mainly due to adverse
kets remain above those of early 2013.
monetary shocks, as markets interpreted taper talk as signaling accelerated monetary
tightening. Since then, favorable financial conditions have been pushing yields down,
U.S. financial markets may currently be vulnerable to
offsetting upward pressure from strengthening labor markets and activity. a sharp tightening around the liftoff or subsequent
A. U
.S. long-term yields and stock B. U
.S. long-term yields
tightening cycle. The term premium is exceptionally
market index counterfactual low, expectations about medium-term interest rate
Percent Index Percentage point change since May 21, 2013
1.2
paths diverge between market participants and Fed-
3.5 Long-term interest rate 2,300
Stock price (RHS) eral Open Market Committee (FOMC) members,
3.0 2,100
0.6 and market liquidity conditions are fragile.
2.5 1,900
0.0
Low term premium. The term premium in the
2.0 1,700
Monetary shock Real shock United States is exceptionally compressed. 8 The
1.5 1,500
-0.6 current low U.S. term premium partly reflects
May-13
Aug-13
Feb-14
Aug-14
Feb-15
Nov-13
May-14
Nov-14
May-15
May-13
Aug-13
Feb-14
Aug-14
Feb-15
Nov-13
May-14
Nov-14
May-15
modest assessment of inflation risks and strong
global demand for U.S. treasuries as safe assets.9
C. Estimated monetary shocks D. Estimated real shocks
Percent Percent
This has been reinforced by low interest rates for
25 4 assets denominated in other reserve currencies,
15
2
which in part resulted from quantitative easing
5 programs by other major central banks (Ber-
-5 0 nanke 2015). Inherent in the current low term
-15 premium is the risk of a sudden widening, with
-2
greater uncertainty potentially leading to a surge
Aug-13
May-13
Feb-14
Aug-14
Feb-15
Nov-13
May-14
Nov-14
May-15
May-13
Aug-13
Feb-14
Aug-14
Feb-15
Nov-13
May-14
Nov-14
May-15
increases that could lie ahead. The 2013 episode 7Recent studiessuch as Snchez (2013); Dez (2014); Dahlhaus
was sparked by a statement that became known as and Vasishtha (2014); Ikeda, Medvedev, and Rama (2015); and Koepke
(2015b)emphasize the critical role of expectations in determining
taper talk, when Fed Chairman Bernanke men- the scale of macroeconomic adjustments in developing countries in the
tioned the possibility of the Fed slowing its asset event of a U.S. interest rate hike. They report that the large macroeco-
purchases in the next few meetings on May 22, nomic adjustments in developing countries during the taper tantrum
reflected the fact that the consequences of Fed tapering had not yet been
2013 (Bernanke 2013b). While financial markets
priced in. In contrast, the relatively milder movements in developing-
had expected such an action at some point in the country financial markets during the actual taper period (December
future, they were surprised by the mention of an 2013October 2014) suggested that markets had already adjusted their
approximate timeframe. Within a couple months expectations accordingly.
8Long term interest rates can be decomposed into expectations
of the initial taper talk, U.S. 10-year Treasury about the future path of real policy interest rates, inflation expecta-
yields increased by 100 basis points. tions, and a term premium. The term premium is therefore the extra
return required by investors to hold a longer-term bond instead of
The jump in U.S. yields was quickly followed by re-investing in successive short-term securities. Typically, the term
a spike in financial market volatility in emerging econ- premium is positive.
9See Williams (2015), Abrahams et al. (2015), Blanchard, Furceri,
omies. Specifically, emerging market currencies depre-
and Pescatori (2014), and Caballero and Farhi (2014) for details on
ciated, bond spreads rose steeply, foreign portfolio in- these observations.
flows to emerging-market bond and equity funds fell 10U.S. term premia are highly correlated with macroeconomic and
sharply, and liquidity tightened (Figure SF1.4). This financial uncertainty, reflected in disagreement about future inflation
among professional forecasters, consumer confidence, and implied
forced many emerging markets to tighten monetary volatility in U.S. Treasury markets (Abrahams et al. 2015). Previous
policy, intervene in currency markets, and, in some monetary policy surprises and the Federal Reserves large-scale asset pur-
cases, introduce exceptional measures to prevent capi- chases have been important drivers of U.S. term premia in recent years.
GLOBAL ECONOMIC PROSPECTS | JUNE 2015 S P E C I A L F E AT U R E 1 69
members of the FOMC (Figure SF1.3).11 This Figure SF1.3 A smooth liftoff in light of past episodes?
implies a risk that market perceptions suddenly If the liftoff proceeds smoothly as expected, the term spread would remain narrow as
adjust upwards. Such a change could, for exam- happened in some past episodes of first rate hikes in a tightening cycle. However, there
remains a risk of a spike in long-term interest rates, especially since term premia are well
ple, be triggered by a market reassessment of the below their historical average and market expectations of future interest rates are below
likelihood of a protracted period of low growth those of members of the Federal Open Market Committee (FOMC).
or inflation that would be associated with an ex-
A. U.S. yield curve B. U.S. term spreads around
tended period of monetary accommodation. previous U.S. tightening cycles
Percent Basis points; deviations from t = 0
Fragile market liquidity. Several factors make li- 4 Current yield on May 26, 2015 60
Feb-94 Jun-99 Jun-04 May-13
Source: IMF, Haver Analytics, Bloomberg, Federal Reserve Bank of New York, World Bank, U.S. Fed FOMC.
11This B. Term spread denotes the difference between 10-year U.S. Treasury and 6-month T-bill yields, four quarters be-
gap reflects uncertainty about prospects for policy rates over fore until four quarters after the launch of the U.S. tightening cycle (t= 0).
the medium and long run (Williams 2015; Hamilton et al. 2015), with C. Term premium estimates are obtained from the model described in Adrian, Crump, and Moench (2013b). This
model belongs to the affine class of term structure models which characterize yields as linear functions of a set of
market participants expecting them to remain low for a considerable pricing factors.
period of time while FOMC members foresee a gradual rise in coming E. The x-axis shows the number of quarters before and after t = 0, where t = 0 is February 1994, June 1999, June
2004, and May 2013.
years, as post-crisis legacies and uncertainties unwind (Yellen 2015a).
F. Excluding China.
12During the taper tantrum, market liquidity deteriorated rapidly
Figure SF1.4 U.S. bond yields and capital flows during indicators (industrial production) and financial
the taper tantrum market indicators (stock prices, nominal effective
Between 2012 and 2014, emerging market bond yields closely followed U.S. Treasury
exchange rates, long-term bond yields) for emerging
10-year yields. The sharp rise in U.S. yields in May-June 2013 was accompanied by a markets are regressed on the monetary and real
marked fall in capital inflows to developing countries and increased volatility. The volatil-
ity in U.S. bond markets coincided with volatility of developing-country bond yields and
shocks identified in the econometric exercise above.
capital inflows. As expected, the results suggest that a U.S. yield in-
A. Bond yields B. Bond yields and portfolio flows crease resulting from a favorable real shock has a
Percent
10-year U.S. Treasury yields
Percent Percent
10-year U.S.Treasury yields
US$, billions considerably more benign impact on emerging mar-
4
Emerging market sovereign yields (RHS)
7 3.0
Emerging market portfolio flows (RHS)
10 kets than one resulting from an adverse monetary
3 6
2.5 5 shock (Figure SF1.6). An adverse U.S. monetary
2.0 0 shock is associated with falling stock prices, depreci-
2 5 1.5 -5 ating emerging market currencies, and shrinking
1 4 1.0 -10 industrial productionall consistent with capital
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
sharp increase in yields in the Euro Area, Japan,
and the United Kingdom would trigger a sud-
den increase in market volatility and a tempo- B. Bid-ask spread on emerging market foreign currency bonds
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jul-10
Jul-11
Jul-12
Jul-13
Jul-14
Partial pass-through (as in taper tantrum). If
other major economies yields adjust in a man-
ner similar to the taper tantrum (when global C. Bid-ask spread on emerging market local currency bonds
yields increased by 70 basis points following an Basis points
0
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jul-10
Jul-11
Jul-12
Jul-13
Jul-14
quez 2013). Greater risk aversion and volatility, in turn, reduce capital
flows to emerging countries further (Fratzscher 2012; Forbes and War-
nock 2012; Bruno and Shin 2015; Lo Duca 2012; Ahmed and Zlate
2013; Bluedorn et al. 2013; Rey 2013). Source: Federal Reserve Bank of New York, Bloomberg, World Bank.
14Based on a variance decomposition, Diebold and Yilmaz (2015)
Note: Blue bars show the taper tantrum of May-June 2013.
suggest that long-term interest rates among non-U.S. major advanced A. Line shows primary dealer Treasury transactions divided by the Merrill Option Volatility Estimate (MOVE index)
(12-week moving average). Merrill Option Volatility Estimate (MOVE) is a yield curve weighted index of the normal-
economies co-move (with some lag) with U.S. long-term interest rates. ized implied volatility on 1-month Treasury options.
Hunter and Simon (2005) find that bond market returns and volatility B. C. Countries include Brazil, Chile, Colombia, Hungary, Indonesia, the Republic of Korea, Lithuania, Philippines,
in the United States lead those of German and Japanese bond markets. Poland, Romania, Turkey, and South Africa. Median bid-ask spreads on 10-year government bonds.
72 S P E C I A L F E AT U R E 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2015
Figure SF1.6 Implications of monetary and real shocks Under certain conditions, an abrupt increase in U.S
on activity and financial markets in emerging markets .yields could lead to outright sudden stops in capital
U.S. bond yield hikes caused by favorable U.S. real shocks have more benign effects
flows to some emerging markets, which could take a
on emerging markets than those caused by adverse U.S. monetary shocks. U.S. bond heavy economic toll.15 The sudden stops in capital
yield jumps associated with real shocks tend to raise equity prices and production in
emerging markets, and appreciate their currencies. Those caused by U.S. monetary
flows during the 1990s and 2000s had significant
shocks tend to raise bond yields in emerging markets and depreciate their currencies. economic costs (Claessens and Kose, 2014; Table
A. Bond yield B. Stock price
SF1.1). For example, about two-thirds of 33 sudden
Basis points Percent change
stop episodes through the 1990s and early 2000s
35 8.0
were associated with output collapsescontractions
30
25
6.0 in GDP of 4.4 percent from peak to trough (Calvo,
20 4.0 Izquierdo, and Talvi 2006).16 Some sectors are par-
15 2.0 ticularly vulnerable to output losses as a result of
10
0.0 sudden stops due to their reliance on debt finance,
5
0 -2.0
including construction, wholesale and retail trade,
Monetary shock Real shock Monetary shock Real shock
transport, and communications (Craighead and
C. Nominal effective exchange rate D. Industrial production
Hineline 2013). Compared with the earlier episodes,
Percent change Percent change
the impact of sudden stops on emerging market asset
1.6 2.5
prices could be amplified by the increasing role of
1.2 2.0
the non-bank sector and bond financing in channel-
1.5
0.8
ing liquidity to emerging markets (Shin 2013).
1.0
0.4
0.5
0.0
0.0
-0.4
-0.8
-0.5
Monetary shock Real shock
What Are the Major Lessons
Monetary shock Real shock
for Emerging Markets from
Source: Haver, Bloomberg, World Bank estimates.
Note: Impulse responses after 12 months from a panel VAR model including emerging markets industrial produc-
tion, long-term bond yields, stock prices, nominal effective exchange rates and bilateral exchange rates against
the Taper Tantrum?
the U.S. dollar, and inflation, with monetary and real shocks (estimated as in the previous section) as exogenous
regressors. All data are monthly or monthly averages of daily data, for January 2013-March 2015 for 19 emerging
markets. For comparability, the size of the U.S. real and monetary shocks is normalized such that each shock
The results above pertain to emerging markets as
raises developing-country bond yields by 100 basis points on impact. a group. However, tightening financial condi-
A. Bond yields refer to the yields on 10-year (or nearest equivalent) government treasury bonds.
B. Stock price indices are the general price indices from Haver. tions would likely put emerging markets with
C. An increase denotes an appreciation. GDP-weighted average of emerging-market exchange rates.
weak growth prospects, policy uncertainty, or
lingering vulnerabilities under greater pressure
0.8percentage point of GDP after a year. than their less vulnerable peers with better
Quantitative easing or other monetary policy growth prospects and policies.
easing by other major central banks could insu-
late their markets from pass-through and re- During the taper tantrum, around 12 percent of
duce the impact of rising U.S. bond yields on emerging market and developing countries expe-
emerging markets. rienced sustained declines in capital inflows, es-
pecially portfolio inflows (Figure SF1.7). Emerg-
The magnitude of the potential decline in capital
flows estimated here is both statistically and eco-
nomically significant, implying considerable chal- 15Koepke (2015b) reports that Fed tightening cycles coincide with
lenges for those emerging markets facing more higher incidence of financial crises particularly in the year of the first
rate hike, and to a lesser extent in the prior and the following year. Es-
acute vulnerabilities. However, the overall effect for colano, Kolerus, and Ngouana (2014) find the frequency of emerging
emerging and developing countries remains modest market sovereign debt crises increases around episodes of U.S. mon-
in view of the historical volatility of capital flows. A etary policy tightening that are associated with widening term spreads.
16Cardarelli, Elekdag, and Kose (2010), examining 109 episodes
decline of 40 percent in capital inflows, or 1.8 per- of large net private capital inflows to 52 countries over 19872007,
centage points of GDP, would be broadly equivalent report that the typical post-inflow impact on GDP growth for episodes
to a decline of one standard deviation in quarterly that end abruptly is about 3 percentage points lower than during the
episode, and about 1 percentage point lower than during the two years
flows since the start of the 2000s (compared with
before the episode. Claessens et. al. (2014) provide a comprehensive
the typical definition of a sudden stop in the litera- review of the literature on financial crises, including sudden stops, in
ture as a two-standard deviation shock). light of recent evidence.
GLOBAL ECONOMIC PROSPECTS | JUNE 2015 S P E C I A L F E AT U R E 1 73
ing market currencies depreciated, bond spreads Figure SF1.7 Surging U.S. yields and capital inflows to
jumped, foreign portfolio inflows to emerging- emerging and developing countries
market bond and equity funds fell sharply, vola- Changing global financial conditionsespecially U.S. yieldsaccount for a large part of
tility increased, and liquidity tightened.17 An movements in capital flows to emerging market and developing countries. A 100 basis-
point rise in U.S. 10-year yields could trigger a drop in capital inflows to developing
extensive literature has identified the following countries, which could lead to sudden stops.
key factors and policy responses characterizing
A. Drivers of capital inflows B. G
lobal interest rates and capital
the impact of the taper tantrum (Table SF1.2). inflows
Initial impact versus longer-term impact. The Percent of variance Deviation from baseline, percentage points
G4 long-term interest rates
20
taper talk initially triggered indiscriminate 15 2
Capital inflows to emerging and developing
capital outflows from emerging markets. 10
1
countries (percent of GDP)
G4 growth
equity markets
market growth
G4 short-term
G4 long-term
Volatility of
Emerging-
countries but not to others (Sahay et al., -1
rates
rates
2014; Lavigne, Sarker, and Vasishtha 2014). -2
2015 2016 2017
20
Large current account deficits following a pe-
10
riod of rapid real appreciation, modest inter- 10
markets. Larger and more liquid financial A. Figure shows the variance decomposition of capital inflows to developing countries after 8 quarters, according
to a six-dimensional VAR model estimated over the period 2000Q1 to 2014Q4. The model links aggregate capital
marketsincluding as a result of past capital inflows to developing countries (including foreign direct investment, portfolio investment and other investment as
share of GDP), to quarterly real GDP growth in both developing and G-4 countries (United States, Euro Area,
inflowsalso experienced greater exchange Japan and the United Kingdom), G-4 short-term interest rates (three month money market rates), G-4 10-year
government bond yields, and the VIX index of implied volatility of S&P 500 options. To compute the variance de-
rate pressures, foreign reserve losses, and eq- composition, a structural identification was derived from a Cholesky decomposition on the covariance matrix,
using the following order of variables: G-4 GDP growth, developing countries GDP growth, G-4 short-term rates,
uity price drops.18 In some countries, these G-4 long-term rates, VIX and capital inflows to developing countries. Impulse responses show that a shock in G-4
impacts were mitigated by proactive policy long-term rates has a peak effect on capital flows after 4 quarters, while the impact remains significant at a 90
percent confidence interval up to 6 quarters.
responses. Liquidity provision, interest rates B. The 100 basis point shock on the U.S. term spread was applied to the VAR model assuming a range of pass-
through rates to Euro Area, U.K. and Japanese bond yields, from zero to 100 percent. Grey area shows the range of
hikes, removal of restrictions on capital in- estimated effects on capital inflows depending on pass-through rates (the lower bound corresponds to a zero pass-
through rate implying a 40 basis points shock to global bond yields, while the upper bound corresponds to a 100
flows, and, in some cases, foreign currency percent pass-through rates, or a 100 basis points shock to global bond yields). In the median case, global bond yields
increase initially by 70 basis point, which corresponds to the observed pass-through rate during the taper tantrum.
intervention helped stem depreciations, stock C. D. Figures show the fraction of 86 emerging and developing countries that experienced a sudden stop. The
market declines, and bond yield jumps; fiscal methodology used to identify sudden stop episodes at the individual country level is based on Forbes and War-
nock (2012), with the threshold being defined as a decline in flows larger than one (or two) standard deviation(s)
policy announcements appeared to be less ef- around a five-year rolling mean. Blue bars show the taper tantrum period of May-June 2013.
Figure SF1.8 Growth prospects in emerging and How Have Growth Prospects
developing economies
Since the taper tantrum in May-June 2013, growth prospects of emerging markets have
and Vulnerabilities in
deteriorated and credit ratings have worsened. Emerging Markets Changed
A. Developing-country growth B. D
eveloping-country rating by
institutional investors
since the Taper Tantrum?
Percent
Developing Countries (excluding China)
Average rating, 100 = United States Country-specific pull factors, including macro-
Developing Countries 44
6
Average since 2000 43
economic fundamentals and policies, play an im-
5
42
portant role in determining the direction and mag-
Average since 2000 (excluding China)
4 41 nitude of capital flows. Since the taper tantrum,
40 macroeconomic fundamentals in several emerging
3
39 markets have weakened, and as a result, their credit
2
2012 2013 2014 2015
38
2007 2008 2010 2012 2013 2015
ratings have on average deteriorated (Figure SF1.8).
Growth prospects have dimmed for emerging mar-
C. P
roductivity growth in developing D. Fraction of developing countries
kets over the past five years. Specifically, growth in
regions with slower growth than 1990- emerging markets has slowed steadily since 2010
2008 average
and has repeatedly fallen short of expectations, in-
Percent, GDP weighted
5 2003-08
Percent
100
cluding in 2015. Investment growth in emerging
4
2010-13
2014-15 80 markets has slowed from pre-crisis rates (Chapter
1990-08
60 1), and it might be further held back by the upcom-
3
40 ing tightening in global financial conditions. Export
2
20 growth is expected to remain on its weak post-crisis
1
0 trend (World Bank 2015).
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015-17
0
EAP LAC ECA SAS SSA MNA DEV Although, on average, emerging markets macroeco-
nomic and financial vulnerabilities appear manage-
Source: Haver, World Bank estimates.
B. Unweighted average of 120 developing-country institutional investor ratings. Ratings are based on information
able, weak growth could reduce their resilience over
provided by sovereign-risk analysts at global banks and money management and securities firms. The countries
are graded on a scale of zero to 100, with 100 representing the least likelihood of default. Ratings are reported in
time (Figure SF1.9). Government debt levels are, on
percent of the United States score. The blue line shows the taper tantrum period in 2013H2. average, moderate around 45 percent of GDP.19 Fis-
C. GDP-weighted annual averages. DEV = developing-country average; EAP = East Asia and Pacific; ECA = Eu-
rope and Central Asia; LAC = Latin America and the Caribbean; MNA = Middle East and North Africa; SAR = cal deficits, while larger than in 2007, amount to
South Asia; SSA = Sub-Saharan Africa.
D. For each year, the fraction of developing countries in which growth is slower than its historical average for 1990-
about 4 percent of GDP but are expected to narrow
2008. For 2015-17, the average of three years is shown. in oil-importing countries as a result of declining
expenditures on fuel subsidies following last years
significant drop in oil prices. In oil-importing coun-
tries, inflation has fallen, allowing central banks in
(Basu, Eichengreen, and Gupta 2014), and drops
some countries to reduce monetary policy rates to
in equity market valuations were more uniform
support growth. In contrast, fiscal and monetary
across countries (Mishra et al. 2014; Rai and
policy room has shrunk in oil-exporting countries as
Suchanek 2014).
oil revenue shortfalls weakened fiscal balances (al-
Lessons from the taper tantrum episode are consis- though, on average, from near-balance) and depre-
tent with those from the broader literature on sud- ciation pressures reduced reserves (although typi-
den stops in capital inflows. Country-specific vul- cally from ample levels) or raised inflation.
nerabilities not only increase the probability of a
sudden stop, but also intensify its severity in terms
of currency depreciation, private sector credit con-
traction, and growth declines, and lengthen the
time it takes for growth to revert to its long-term
trend (see also Table SF1.1). A greater reliance on 19In frontier markets, however, government debt has increased since
the global financial crisis, partly reflecting a rapid increase in bond issu-
FDI and equity flows instead of debt flows and
ance in global capital markets (although from low levels). In some fron-
cross-border bank loans may reduce the severity of tier markets, rising government debt has been accompanied by rapidly
sudden stop episodes (Levchenko and Mauro 2007). growing private sector credit (World Bank 2015).
GLOBAL ECONOMIC PROSPECTS | JUNE 2015 S P E C I A L F E AT U R E 1 75
However, these averages mask considerable differ- Figure SF1.9 Debt, deficits and inflation in emerging
ences across countries (Figure SF1.10).20 markets: Oil exporters vs. oil importers
While there has been an improvement in current Fiscal positions in emerging markets have deteriorated since the crisis, but debt and
deficits remain, on average, moderate. Inflation has declined in oil-importing countries,
account balances among oil-importing econo- partly as a result of low oil prices.
mies, deficits remain elevated for several of them.
A. General government debt and balance
Foreign reserves have increased, but for some
countries only modestly, and came under pressure Percent of GDP Percent of GDP
Inflation has moderated for some oil-importing Government debt:Median Government primary
80 balance:Median(RHS)
countries, but is still at or above formal or infor- 8
mal inflation targets in several of them.
60
Private debt has edged up despite slower credit 4
2007
2014
2007
2014
2007
2014
2007
2014
Given the pre-eminent role of the U.S. dollar as
the currency denomination of cross-border Exporters Importers Exporters Importers
2009
2010
2011
2012
2013
2014
2015
weakened in prior years and had left it vulnerable to
capital outflows (Basu, Eichengreen, and Gupta Source: World Bank, International Monetary Fund, Haver Analytics.
2014). The Indian economy has since shown nota- A. Bar illustrates interquartile range for developing countries. Dot shows median for developing countries.
ble improvement, particularly in reducing its high B. For developing countries. Hydrocarbon exporters (as proxy for oil exporters) are Algeria, Angola, Argentina,
Azerbaijan, Cameroon, Cte dIvoire, Colombia, Chad, Ecuador, Gabon, Indonesia, the Islamic Republic of Iran, Iraq,
current account deficit and inflation. Kazakhstan, Libya, Malaysia, Mexico, Nigeria, Papua New Guinea, South Africa, Sudan, Turkmenistan, Uzbekistan,
Repblica Bolivariana de Venezuela, Vietnam, and the Republic of Yemen.
China
Mexico
Russian Federation
Malaysia
Hungary
Philippines
All
All
India
Colombia
Brazil
All
Mexico
Hungary
Malaysia
Thailand
Philippines
Russian Federation
China
South Africa
Turkey
Indonesia
All
Monetary and financial policies. In several oil-
importing countries, inflation is running at or
C. Inflation D. Private debt near the top of formal or informal target bands.
Percent 2013H1 Latest 6 months Percent of GDP For central banks in these countries, buttressing
11 250 2013H1 2014H2
200 monetary policy credibility may be a priority.
7 150
100 Elsewhere, for example in oil-exporting coun-
3 50
0
tries where growth has softened but inflation
-1
has been driven up by depreciation, banks with
China
Malaysia
Hungary
Thailand
Brazil
India
South Africa
Russian Federation
Turkey
Indonesia
Mexico
All
All
All
India
Brazil
Turkey
Russian Federation
South Africa
Hungary
Thailand
Colombia
Indonesia
Mexico
Philippines
All
China
Malaysia
Colombia
Mexico
Thailand
South Africa
China
Philippines
Turkey
Indonesia
Russian Federation
All
All
All
India
Malaysia
Brazil
Mexico
South Africa
Russian Federation
Thailand
Colombia
Indonesia
China
Turkey
Hungary
Philippines
All
outflows and inflows. In addition to raising Figure SF1.11 Foreign currency exposure and
long-term growth, some reformsespecially corporate debt
those requiring investment in infrastructure Foreign currency exposures in a number of emerging markets remain high, render-
projectscan support cyclically weak demand. ing them vulnerable to sharp movements in their currencies. Corporate debt has also
increased in many countries.
Should risks around the liftoff materialize, emerging
A. Foreign currency exposure in emerging markets
markets need to resort to policy measures to allevi-
Percent
ate short-term financial stress. These include, most 40 2007 2013 Change 07-13
Venezuela, RB
Thailand
India
Pakistan
Vietnam
Argentina
Hungary
Russian Federation
South Africa
Philippines
Indonesia
Turkey
to the 1990s, most emerging markets now main-
tain flexible exchange rate regimes. Allowing ex-
change rates to adjust will be an important buffer
to external shocks in many emerging markets B. Corporate debt of emerging markets
with limited currency mismatches on corporate Percent of GDP
and household balance sheets and credible mac- 120
Emerging market (excluding China) Emerging market
roeconomic policies (Davies et al. 2014).
100
Interest rate increases. Emerging markets con-
cerned about the balance sheet effects of sizable 80
South Africa
Poland
Turkey
Thailand
Indonesia
Czech Republic
Hungary
China
rary controls on certain outflows might tem- A. Foreign currency exposure is measured as the ratio of total foreign currency deposits in the domestic banking
system to total deposits in the domestic banking system. Latest available data for 2013.
per net outflows (IMF 2014d). B. GDP-weighted average. List of emerging markets includes China, Czech Republic, Hungary, India, Indonesia,
Mexico, Poland, South Africa, Thailand, and Turkey.
C. The 2007 data of South Africas corporate debt is not available and thus replaced by 2008Q1 data.
help convince investors of a commitment to ing conditions in market liquidity all heighten
sustainable macroeconomic and financial poli- risks to U.S. financial markets. If the risks around
cies. Credible commitments to structural re- the liftoff and subsequent tightening steps mate-
forms could enhance investors perceptions of rialize, U.S. interest rates could increase sharply.
long-term growth prospects. This could in turn lead to greater financial mar-
International policy coordination could poten- ket volatility and could significantly reduce capi-
tially help limit the risks of financial turmoil around tal flows to emerging market countries.
liftoff and, if they materialize, help emerging market Emerging markets have become more resilient
countries navigate them, and, in turn, avoid spill- since the early 2000s: fewer have fixed exchange
backs to advanced countries (Sahay et al. 2014). rates; most have sounder fiscal positions and bet-
Policy coordination could range from heightened ter monetary policy frameworks; and the extent
efforts by advanced country central banks to engage of liability dollarization has declined (Kose and
in clear and effective communication to the inter- Prasad 2010; Davies et al. 2014). Nevertheless,
nalization by central banks of the spillover effects of the taper tantrum is a reminder that emerging
their policies, although the latter may be difficult to market currencies could depreciate sharply, local
operationalize (Rajan 2014).24 More broadly speak- borrowing costs rise steeply, and balance sheets
ing, there may be scope for enhanced global and come under pressure.
regional safety nets, including through multilateral During the taper tantrum episode, a jump in U.S.
institutions and regional risk-sharing arrangements, long-term interest rates led, initially, to financial
to support emerging markets during periods of fi- stress across the entire spectrum of emerging mar-
nancial stress (Carstens 2015). ket assets. Over time, differentiation among
countries increased based on country-specific vul-
nerabilities, policies, and growth prospects. Since
Conclusion the episode, growth prospects have weakened and
vulnerabilities remain in some emerging market
As the Fed readies for its first policy rate hike
countries, heightening the risks of another simi-
after almost a decade, financial conditions are on
lar shock. Unless appropriate policy measures are
the cusp of becoming more challenging for
in place, the sudden realization of risks around
emerging market countries. Most likely, the lift-
the liftoff could potentially spark a perfect
off will proceed smoothly given that the U.S. re-
storm in some emerging market economies, in
covery appears well entrenched and financial
particular those that need to adjust to the pros-
markets are being bolstered by highly accommo-
pects of persistently low commodity prices and
dative monetary policies in other major advanced
tighter financial conditions, or that face domestic
countries. If the liftoff takes place in line with
policy uncertainty against the backdrop of linger-
market expectations, U.S. long-term yields will
ing vulnerabilities and weaker growth.
likely remain well contained, the term premium
will remain narrow, and movements in capital In anticipation of the risks surrounding the liftoff,
flows to emerging countries will be modest. emerging market countries should prioritize mone-
tary and fiscal policies that reduce vulnerabilities
However, as evidenced during the taper tantrum
and strengthen policy credibility, and structural
episode, there is a risk that if market expectations
policy agendas that improve growth prospects. In
adjust in a disorderly fashion, financial market
the event that risks materialize, exchange rate flexi-
volatility could spill over to emerging markets.
bility could buffer shocks in some countries but
Specifically, low U.S. term premia, diverging
may need to be complemented by monetary policy
views between markets and Fed policy makers
measures and targeted interventions to support or-
about the future path of interest rates, and chang-
derly market functioning. International policy coor-
dination could reduce the likelihood that these risks
24An example of coordination is the introduction of liquidity swap
materialize and could alleviate their impact on
lines by the Fed to other (mostly advanced country) central banks in
the 200809 global financial crisis (Fischer 2014). Dudley (2014) pres- emerging markets. While emerging economies may
ents a discussion of the impact of U.S. monetary policies on emerging hope for the best from the eventual liftoff of the
economies and summary of policy lessons from the taper tantrum. U.S. policy rates, they need to prepare for the worst.
GLOBAL ECONOMIC PROSPECTS | JUNE 2015 S P E C I A L F E AT U R E 1 79
This box briefly describes the main features of the three model) as exogenous regressors. The panel VAR in-
econometric models used to analyze the role of mone- cludes six variables for emerging markets: long-term
tary and real shocks in explaining movements in U.S. bond yields, stock prices, nominal effective exchange
yields, the spillovers of such shocks for emerging mar- rates, bilateral exchange rate with the dollar, industrial
kets, and the impact of a sudden increase in U.S. yields production, and inflation. The list of countries is:
on capital flows to emerging market and developing Argentina, Brazil, Chile, Colombia, the Czech Repub-
countries. lic, Israel, Mexico, Poland, South Africa, Turkey, India,
Contribution of monetary and real shocks to Indonesia, the Russian Federation, China, the Republic
U.S. long-term yields of Korea, Malaysia, the Philippines, Saudi Arabia, and
Thailand.d All data are monthly or monthly averages of
To analyze the drivers of moves in U.S. yields, the first daily data for January 2013March 2015. Spillovers are
econometric model uses a structural vector auto- then evaluated by tracing out the impulse responses of
regression (SVAR) framework with sign restrictions to these variables due to adverse monetary U.S. shocks
decompose daily movements in yields during January and favorable U.S. real shocks. The size of the U.S.
2013-March 2015 into two components: one reflecting shocks is normalized such that developing-country
real U.S. growth shocks and another reflecting U.S. bond yields increase by 100 basis points on impact.
monetary shocks.a The SVAR follows a similar approach
as Matheson and Stavrev (2014) and the International Spillovers from U.S. financial conditions to
Monetary Fund (2014b) based on three U.S. variables: capital flows
long-term interest rates, stock prices, and the nominal The effects of moves in U.S. yields on aggregate capital
effective exchange rate.b For reasons of data availability, inflows to emerging markets and developing countries
other economic data (e.g. inflation expectations) that are modeled using a VAR model, based on Lim, Mo-
may also be important drivers of the long-term interest hapatra, and Stocker (2014). This model links quarterly
rate are excluded from the model. The sign restrictions aggregate capital inflows (including foreign direct in-
assume that an adverse monetary shock (such as an vestment, portfolio investment, and other investment)
unexpected real or perceived policy tightening) in- to 86 emerging and developing countries (from BPM6
creases yields and reduces stock prices in the United balance of payment data, expressed in percent of gross
States, while a favorable real shock (such as reflecting domestic product [GDP]) to real GDP growth in both
better growth prospects) increases both yields and stock emerging market and developing countries and G-4
prices.c The shocks identified using these restrictions countries (the United States, the Euro Area, Japan, and
naturally reflect market perceptions of monetary policy the United Kingdom), G-4 short-term interest rates
and growth. (GDP-weighted average of three month money market
Spillovers from U.S. monetary and real shocks to rates for G-4 countries), G-4 long-term interest rates
activity and financial markets (GDP-weighted average of 10-year government bond
yields for G-4 countries), and the VIX index of implied
To assess the spillovers from the shocks driving U.S. volatility of S&P 500 options. This captures the re-
yields on emerging markets, a panel VAR model is sponse of capital flows to external shocks, and their
estimated for emerging market country variables, with propagation through global uncertainty and growth ef-
monetary and real shocks (estimated as in the above fects. The feedback between global interest rates and
investors risk appetite is captured by incorporating in
aDaily (rather than monthly) data is used to ensure that U.S. shocks, in the model the VIX index of implied stock market vola-
particular monetary shocks that reflect Fed announcements, and their near
immediate effects on stock prices are well identified. tility, which is often used as proxy of risk aversion and
bThe nominal effective exchange rate is added on technical grounds, deleveraging pressures (Adrian and Shin 2010 and
to ensure that the two identified shocks are orthogonal while also ensuring 2012), with significant repercussions for capital flows to
that the sign restrictions are satisfied. The results are broadly in line with
Matheson and Stavrev (2014) who leave out a third variable.
cSign restrictions are imposed on stock prices and yields. Responses of dTo avoid spurious results, the sample is restricted to large emerging
exchange rates are unrestricted and turn out to be statistically insignificant. markets that are highly integrated into global financial markets.
80 S P E C I A L F E AT U R E 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2015
developing countries (Rey 2013; Bruno and Shin 2013; quarters and remaining significant at a 90 percent confi-
Forbes and Warnock 2012). dence interval up to 6 quarters.
To compute impulse responses, the covariance matrix is For robustness, a similar VAR model was computed for
derived from a Cholesky decomposition. The Cholesky portfolio flows (balance of payment data), with the im-
decomposition is based on the following order of vari- pact of an interest rate shock estimated to be of similar
ables (from least to most endogenous): G-4 GDP magnitude, but peaking earlier and with wider confi-
growth, emerging markets GDP growth, G-4 short- dence intervals given greater volatility in quarterly
term rates, G-4 long-term rates, VIX, and capital inflows portfolio flows. A 100 basis-point shock to the U.S.
to emerging markets. Overall, the impact of a 25 basis- term spread is applied to the model, assuming a range
points (one standard deviation) shock in long-term in- of pass-through effects on Euro Area, U.K., and Japa-
terest rate across G-4 economies is estimated to reduce nese long-term yields (from zero to 100 percent). In
aggregate capital flows to emerging and developing the median case, global bond yields increase by 70
countries by 0.45 percent of their combined GDP (10 basis points on impact, roughly comparable to the
percent drop in flows), with the effect peaking after 4 pass-through rate observed during the taper tantrum.
GLOBAL ECONOMIC PROSPECTS | JUNE 2015 S P E C I A L F E AT U R E 1 81
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SPECIAL FEATURE 2
Growth in low-income countries has accelerated significantly since the early 2000s to its fastest pace in several
decades. For commodity exporters, the improvement has been underpinned by rising global commodity prices and
a surge in resource exploration and investment. The first section of this Special Feature explores the role of the com-
modity boom over the past decade in metal and mineral exporting low-income countries, and analyzes what the
recent decline in commodity prices may imply for growth in these economies. The second part takes a look at recent
economic developments and prospects for near-term growth in low-income countries. In non-commodity exporting
countries, growth will continue to benefit from strong domestic demand. For commodity exporters, however, the
medium-term outlook has become increasingly challenging as the importance of the natural resource sector in driv-
ing growth diminishes. The ability of these economies to navigate the headwinds will hinge on how well they have
invested the dividends from the past commodity boom, and on the successes of structural reforms in supporting
other sources of growth.
A. Implications of the Recent nomic stability. However, for many of todays LICs
located in Sub-Saharan Africa and some in Central
Decline in Commodity Prices and South Asia (Myanmar and Tajikistan), rapid
for Commodity-Exporting growth was driven by rising commodity prices and
rising demand from China (World Bank 2015a).
Low-Income Countries
In addition rising commodity prices also spurred in-
Economic activity in low-income countries (LICs) vestment in commodity exploration and produc-
began to surge in the early 2000s.1 Investment- and tion. Between 2000 and 2012, investment spending
export-driven growth averaged 6.2percent per year by global oil, gas, and base-metal mining companies
during 2000-14, double the pace of the previous rose five-fold to record highs. Counting investment
three decades (Figure SF2.1). Among metal and in other mined products, total investment in 2011
mineral exporting LICs (which account for almost 12 amounted to over $1 trillion. 3 In Africa, which
two-thirds of current LICs), the improvement was is home to most commodity-exporting LICs, min-
even more marked, with growth quadrupling dur- ing investment alone amounted to $100 billion in
ing the 2000s compared with the previous decade.2 2011.4 Less is known about the scale of investment
A number of factors contributed to the improve- that flowed into agriculture, but private sector in-
ment, including better policy environments, a de- vestment increased in agribusiness, in the develop-
crease in conflicts, and improvements in macroeco- ment of value chains, and in farmland in Africa
(FAO 2012). An estimate of foreign direct invest-
ment in agriculture and agribusiness in developing
The authors of this Special Feature are Tehmina S. Khan (Section A) countries for 2006/07 suggests that it was a small
and Gerard Kambou (Section B).
1As of 1 July 2014, low-income economies are defined as those with
fraction of that in mining.5 For reasons of data avail-
a gross national income (GNI) per capita, calculated using the World ability, the focus in this Feature is on the role of
Bank Atlas method, of $1,045 or less in 2013; between $1,045 but energy and mining booms in the LICs.
less than $12,746 for middle income; and $12,746 or more for high
income. Countries currently defined as low-income include Afghani-
stan, Bangladesh, Benin, Burkina Faso, Burundi, Cambodia, Central
African Republic, Chad, Comoros, Democratic Peoples Republic of
Korea, Democratic Republic of Congo, Eritrea, Ethiopia, The Gambia, 3Exploration and production spending by oil and gas companies
Guinea, Guinea-Bissau, Haiti, Kenya, Liberia, Madagascar, Malawi, quintupled to $500 billion in 2012. Investment in base metal min-
Mali, Mozambique, Myanmar, Nepal, Niger, Rwanda, Sierra Leone, ing rose by a similar magnitude to reach $120 billion in 2012. If
Somalia, Tajikistan, Tanzania, Togo, Uganda, and Zimbabwe. investments in other mined products, such as coal, iron ore, precious
2The definition of current metal and mineral commodity exporting metals, diamonds, and uranium is included, total mining investment
low-income countries is based on that in World Bank (2015a), which is much larger. Figures are not available for 2012, but total mining
defines these as countries where commodities comprise more than a investment (base and other metals) is estimated at $676 billion in
quarter of total exports. These include for mining exporters Benin, 2011 (ICMM 2012).
Burkina Faso, Eritrea, Guinea, Liberia, Mali, Niger, Sierra Leone, So- 4This amounts to 15 percent of global mining investment. The
malia and Zimbabwe; and for oil and gas exporters Chad, Myanmar, figure includes North Africa, so actual investments in LIC countries in
and the Democratic Republic of Congo. Countries that have recently Sub-Saharan Africa are much lower. See ICMM Report (2012).
started or are expected to start producing over the medium term due to 5Total foreign direct investment in agriculture and agribusiness
recent discoveries include Kenya, Madagascar, Mozambique, Tanzania, in developing countries was estimated at $13 billion in 2006/07, with
and Uganda. Africa receiving $1 billion (World Bank 2013).
94 S P E C I A L F E AT U R E 2 GLOBAL ECONOMIC PROSPECTS | JUNE 2015
Figure SF2.1 Growth in low-income countries formed country prospects. For instance, since 2000,
Growth in low-income countries doubled during the 2000s, compared with the average
120 giant oil and gas fields have been discovered
for the previous three decades. For many, particularly those in Sub-Saharan Africa, world-wide, located in seven clusters.6 Two of these
faster growth was underpinned by a sharp increase in global commodity prices, a boon
for commodity exporters.
clusters are in Africa, mostly offshore East and West
Africa. In Tanzania alone there have been 13 giant
A. LICs: GDP growth B. Commodity-exporting LICs:
Growth
oil and gas discoveries (alongside other major finds
in Kenya, Madagascar, Mozambique, Uganda), and
Percent Percent
8
GDP Growth 12 six in West Africa in the Gulf of Guinea. Another
7
6
8
4
major frontier for giant oil and gas fields has emerged
5 0 in the Krishna and Rakhine basins in the Bay of
4 -4
3 -8
1990s 2000-07 Bengal in South Asia (Bai and Xu 2014, Basu et al.
Average for period 2009-14
2
1
-12 2010; Figure SF2.2).7
GIN
MOZ
MDG
GIN
GMB
TZA
ZWE
ZWE
NER
TCD
MMR
ERI
BDI
LBR
TJK
RWA
DRC
SLE
CAR
TGO
0
-1 Other This section takes a closer look at the role of the
Oil and gas Metal ore mining
commodities boom in spurring faster growth in
1970
1975
1980
1985
1990
1995
2000
2005
2010
Gambia, The
Mozambique
Zimbabwe
Tanzania
Rwanda
Guinea
Togo
Congo, Dem. Rep.
Chad
Gambia, The
Madagascar
Tanzania
Tajikistan
DRC
Eritrea
Rwanda
Zimbabwe
Burundi
Liberia
Guinea
Sierra Leone
Zimbabwe
0
policies at home, which made investment and ex-
Middle East
Offshore Brazil
Offshore East
Central Asia
Gulf of Mexico
Northwest Shelf
Offshore West
(Bay of Bengal)
Rakhine Basin
of Australia
Africa
pared to a decade earlier. Oil and gas exports ac- of 500 million barrels of oil equivalent or more. Despite the increas-
counted for a much larger share of exports (more ing importance of unconventional shale oil and gas fields, current and
future oil and gas supply is dominated by conventional giant fields (Bai
than 10 percent) in five LICs; metal ore exports in and Xu 2014).
nine LICs; and other mining exports in two LICs. 7The 120 giant fields discovered since 2000 are estimated to hold
precious metal prices by over 300 percent, and FIGURE SF2.2 Trends in commodity prices, exploration
prices of agricultural and other raw materials com- and discovery
modities increased by 103 and 43 percent, respec- The commodity price rise also triggered a surge in global spending on mining explo-
tively (Figure SF2.1C). ration and capital expenditures on oil and gas exploration and production, which rose
to historical highs. With exploration spending increasing in low income countries,
The boom, which came after a long period of several have emerged as major frontiers for metal and oil and gas discoveries, with
weak or declining prices and cost-cutting in the significant finds in (offshore) East and West Africa and the Bay of Bengal. Globally,
lead times from disovery to production in mining are higher in developing than in
mining industry, increased returns in the mining advanced countries.
and oil and gas industries.8 This stimulated a A. G
lobal crude oil exploration and B. G
lobal mining exploration
steep increase in industry spending on mining production, and mining capital expenditures
expenditures
and production investments (Figure SF2.2).
US$, billions US$, billions US$, billions Percent
Global mining exploration expenditures also rose 600 140
35 2000 2012 Percent increase (RHS) 1600
Thousands
to an all-time high, more than ten-fold 2000 lev- 500
Crude oil exploration & production
spending
Base metal companies capital
120 30 1400
initiated) government participation in mining and the general absence amounts to over a third of the total (Raw Materials Group, cited from
of special resource profits taxes (UNECA 2011). UNECA 2011).
11Ugandas oil is of waxy constituency and needs heavy refining be- 13Mukumbira, R. (2007). Eritrea signs Bisha gold/base metals
fore further use (Gelb, Kaiser, and Vinuela 2012). mining agreement with Nevsun. Published on Mineweb. http://www
96 S P E C I A L F E AT U R E 2 GLOBAL ECONOMIC PROSPECTS | JUNE 2015
FIGURE SF2.3 Commodity exploration, spending and creasingly shifted from advanced countries towards
discoveries in Africa developing countries, notably frontier regions such
Africa has attracted a significant share of mining exploration investments reflecting the
as Africa and the Arctic (ICMM 2012).
fact that it is still a relatively unexplored region, with discoveries occurring close to the
surface. In addition, decreasing conflict and improving low-income country policy envi-
In mining, exploration in Sub-Saharan Africa was
ronments improved the investment climate. particularly attractive because of the regions rela-
tively unexplored potential and low cost. The value
A. G
lobal mining exploration B. A
verage depth of cover for of known sub-soil assets per square kilometer in
expenditures by region, 2012 discoveries, 2012
the region is estimated to be barely a quarter of
Percent of total Meters
Latin America 21 250 Excluding South Africa,
204
that in advanced economies (World Bank 2006,
the depth of cover falls
Sub-Saharan Africa 15
14
200
from 55 to 12 meters 2010). The cost of exploration was lower than else-
China
150 122
Australia 13 100 74 68 82
98 where, in part because African discoveries are oc-
Canada
United States 7
13 50 55 32 curring closer to the surface than anywhere else
0 12
Pacific/South East Asia 6 except Latin America (Figure SF2.3). Africa had
United States
Western world
Africa
Latin America
Australia
Canada
Western world
Southeast Asia
Rest of the
Former Soviet Union & E. Europe 6
the largest discoveries per dollar of exploration cost
average
Pacific/
Rest of the world 3
Western Europe 2 during 200312: it accounted for 22 percent of
0 5 10 15 20 25 discoveries but only 15 percent of global explora-
tion expenditures (Schodde 2013).
Improved investment climate. The improvement
C. M
ineral exploration spending and D. Policy potential index
discoveries, 2003-12
in the business climate was underpinned by several
factors.
Percent of world total, 200312 Policy Potential Index (100= best)
30
25 Exploration spending Discoveries
100
2006/2007 An easing of conflict or internal political ten-
80 2010/2011
20
60 sions (Central African Republic, Democratic
15
10 40 Republic of Congo, Eritrea, Myanmar, and
5
0
20
Rwanda) provided greater political stability.
0
United States
Africa
Latin America
Southeast Asia
Western
Canada
Rest of the
Australia
Madagascar
Tanzania
Guinea (Conakry)
United States
Canada (Alberta)
Zimbabwe
Niger
Mali
Burkina Faso
Western Australia
Congo, Dem Rep.
(average)
world
Pacific/
.mineweb.com/archive/eritrea-signs-bisha-goldbase-metals-mining mining tends to be long (e.g. up to 10 years for gold and 17 years for
-agreement-with-nevsun/ copper), especially in developing countries (Schodde 2103).
GLOBAL ECONOMIC PROSPECTS | JUNE 2015 S P E C I A L F E AT U R E 2 97
were discovered at Bisha in 2003. Mine con- FIGURE SF2.4 Impact on growth, production, and
struction began in 2008 and was completed by exports
2010. Gold production started in 2011, transi- The acceleration in growth in commodity exporting low income countries has been
tioning to commercial copper production in broad based. The large positive terms of trade shock between 2000 and 2011 was
2013 (Economist Intelligence Unit 2013). reflected in surging exports and a signficant increase in the production of commodi-
ties. With imports also rising, partly reflecting mine development capital goods, cur-
Myanmar: two years from new law to active explo- rent account deficits widened in some countries. Rising commodity sector revenues
boosted public sector receipts.
ration. Following the settlement of a maritime
boundary dispute with Bangladesh in 2012, A. C
ommodity-exporting LICs: B. C
ommodity-exporting LICs:
Distribution of growth Terms of trade
Myanmar reformed its foreign direct invest-
Number of countries Change in terms of trade, 2000-11, percent
ment law and provided greater revenue incen- 9 1990s 150
120
tives for international company investments in 8 2000-07
2009-14 90
7 60
2012. It has since issued oil and gas exploration 6 30
licenses for 20 blocks in the Rakhine Basin in 5
4
0
-30
2014, where giant gas discovery was first made 3
-60
Eritrea
Comoros
Guinea-Bissau
Togo
Togo
Mozambique
Nepal
Benin
Gambia, The
Bangladesh
Niger
Burkina Faso
Tanzania
Kenya
Burundi
Haiti
Madagascar
Zimbabwe
Cambodia
Uganda
Rwanda
Sierra Leone
Guinea
Congo, Dem. Rep.
Ethiopia
2
in 2002 . Bangladesh, in contrast, has been sig- 1
nificantly slower in inviting exploration bids, 0
<0 0 to 2 2 to 4 4 to 6 6 to 8 8 to 10 >10
with only five offshore blocks allocated for ex- Average GDP growth rate, percent
ploration in 2014.
C. LICs: Primary sector exports D. A
frica: Value of commodity
Uganda: at least a decade from discovery to pro- production
duction. In Uganda, internal disputes over taxes Exports, US$, billions
Petroleum and natural gas
Constant 2010 US$, billions Percent
2000
and the viability of building a refinery for oil 40 Metal ores
Coal
35 2010
Increase 2000-10 (RHS)
200
30
reserves discovered in 2006 have significantly Agriculture, forestry, fishing, and mining
9.3 25 150
30 20
delayed the award of production licenses and, 7.8
15
100
Copper
Iron ore
Oil
Gas
Mining total
Coal
Food
17.3
planned, to 2018, or later.
0
Guinea: at least two decades from exploration to 1990 1995 2000 2005 2010
Cameroon
Guinea
Benin
Tanzania
C. African Rep.
Tajikistan
Niger
Gambia, The
Guinea-Bissau
Togo
Mozambique
Malawi
Liberia
Eritrea
Burundi
Kenya
Congo, Dem. Rep.
Burkina Faso
Mali
Rwanda
Ethiopia
Sierra Leone
TZA
GMB
ERI
SLE
CAF
RWA
TGO
LBR
TJK
UGA
MOZ
GIN
DRC
TCD
MMR
Metal ore and Oil and gas
mining exporters exporters
now-for-2020
economies?
16Project development costs are estimated at $20-$30 billion, in-
cluding rail lines needed to provide port access. The commodity boom boosted investment and ex-
17These started with the government decision in 2008 to revoke Rio
ports, and resulted in a broad-based improvement
Tintos rights to mine half of the blocks it had been awarded, assigning in growth. Rising revenues from the commodity
them instead to another company, which in turn sold a portion on to
Vale, another international miner. Rio Tinto had to pay $700 million sector meanwhile enabled increases in growth-
in 2011 to secure the remainder of its concession. Although a new gov- enhancing government investment (Figure SF2.4).
ernment is investigating the award of past contracts, the ongoing legal This led to increased employment and incomes,
dispute has continued to delay production.
98 S P E C I A L F E AT U R E 2 GLOBAL ECONOMIC PROSPECTS | JUNE 2015
FIGURE SF2.5 Impact on investment umented, including for Africa (Deaton and Miller
Investment growth accelerated significantly in LICs relative to previous decades,
1996, Awel 2012, Raddatz 2007).18 Model simula-
reflected in a rising share of GDP. In some resource rich countries, cumulative mining tions of a 10 percent shock to commodity prices
investments between 2000 and 2011 amounted to over 20 percent of GDP.
result in an approximately 1 percent increase in
A. LICs: Investment growth B. LICs: Contribution to GDP growth GDP per capita in Africa (Raddatz 2007). Overall
Percent Percentage points growth impacts from terms-of-trade improvements
20 10 Investment
8
Net exports and increasing commodity exports to China have
15 Investment growth Private consumption
6
Government consumption also proven to be significant in a number of com-
10 GDP growth (percent)
4 modity-producing countries in Africa (Busse
5
Average for period 2 et al. 2014).
0
0
-5
Output and exports: Between 2000 and 2010,
-2
-10 -4
commodity production in Africa increased by about
1970 1980 1990 2000 2010 1970s 1980s 1990s 2000s 2010-14 one-quarter, albeit with considerable variation
C. LICs: Investment, 2014 D. Cumulative investments in
across different metals and hydrocarbons (UNECA
mining, 200011 2013). Separate data is not available for global LIC
Percent of GDP
Change relative to average level in 2000-03
Percent of GDP Percent of GDP output; however exports can be used as a proxy for
60 Level in 2014 30 120 500
production given the limited domestic use. Metal
100 Lower estimate
400
40 20 Upper estimate
80
60
300 and hydrocarbon exports of LICs rose fifteen-fold
20 10
0 0
40
200
during 200013 (Figure SF2.5); and the contribu-
20 100
-20 -10 0 0 tion of exports to growth doubled over this period.
Comoros
Afghanistan
Burkina Faso
Benin
Tajikistan
Guinea-Bissau
Mali
Madagascar
Malawi
Cambodia
Burundi
C. African Rep.
Haiti
Sierra Leone
Kenya
Bangladesh
Togo
Mozambique
Myanmar
Gambia, The
Tanzania
Niger
Uganda
Cameroon
Nepal
Congo, Dem. Rep.
Rwanda
Ethiopia
Niger
Namibia
Sierra Leone
Mauritania
Mozambique
Guinea
Liberia (RHS)
has brought structural shifts in local employment, FIGURE SF2.6 Employment and poverty
raising employment and non-seasonal work op- Widespread artisanal and small scale mining in Sub-Saharan Africa is likely to
portunities for women that tend to last beyond the have helped support private consumption. Poverty rates have fallen in commodity-
exporting LICs, but overall rates remain extremely high.
life of the mine (Kotsadam and Tolonen 2015). In
addition, for every mining job, there 0.5 to 3 ad- A. Commodity-exporting LICs: Artisanal B. C
ommodity-exporting LICs:
ditional jobs in supporting activities; (McMahon and small scale-mining Extreme poverty rates
and Tracy 2012; McMahon and Remy 2001; Kap- Thousands Thousands Percent
1,600 10,000
stein and Kim 2011). Number of dependents (RHS)
8,000
100 2000 or earliest 2012 or latest
1,200 80
6,000
It should also be noted that mining activity in 800 Number of artisanal and
small-scale miners 4,000
60
40
many Sub-Saharan LICs includes wide-spread di- 400 2,000 20
rect local employment by artisanal and small-scale 0 0 0
Congo, Dem.
Tajikistan
Gambia, The
Chad
Tanzania
Sierra Leone
C. African Rep.
Niger
Togo
Rwanda
Burundi
Mozambique
Liberia
Madagascar
Guinea
Chad
Liberia
Uganda
Burkina Faso
Sierra Leone
C. African Rep.
Eritrea
Mali
Mozambique
Niger
Madagascar
Zimbabwe
Tanzania
Ethiopia
mining operations, as well those of international
corporations (Figure SF2.6, UNECA 2011). This
has helped support incomes, private consumption
and welfare in the area. For instance, the opening Source: UNECA (2011). World Development Indicators
of a new large-scale mine is found to changes eco- B. Extreme poverty rates are the share of the population living on $1.25 or less per day (PPP-adjusted, 2005 U.S.
dollars).
nomic outcomes, such as access to employment
and cash earning, with evidence pointing to in-
creased household expenditure on housing and en- FIGURE SF2.7 Public sector receipts and spending
ergy, and lower infant mortality (Chuhan-Pole et.
Government revenues in commodity exporting LICs have been bolstered by rising
al. 2014). That said, although sustained growth receipts from the mineral sector. Prior to the global financial crisis, most countries
and rising demand for non-tradable services have appeared to have contained spending pressures. Since then however, spending has
increased significantly as a share of GDP in some countries.
contributed to a decline in poverty rates, at 43 per-
cent, the average poverty headcount in resource A. C
ommodity-exporting LICs: B. Commodity-exporting LICs:
exporters remains high (Figure SF2.6). Government revenues Government spending
Real exchange rate appreciation and Dutch Dis- Percent of GDP Percent of GDP
30 80
ease. In oil-exporting LICs in the CFA franc 20
60 2000 2007 2014
10
zone, rapid growth of natural resource sectors has 0 40
been associated with real appreciations, and -10 Change, 2000-07
-20 Change, 2009-14 20
weakened competitiveness of other tradables ac- -30 2014
0
tivity (Trevino 2011). For example, real exchange
GMB
TZA
GIN
MOZ
ERI
CAF
RWA
LBR
TGO
TJK
SLE
UGA
DRC
MMR
TCD
GMB
UGA
GIN
MOZ
ERI
CAR
SLE
TGO
TZA
RWA
TJK
LBR
TCD
MMR
DRC
rate appreciation in African economies associated Metal ore and Oil and gas Metal ore and mining Oil and gas
mining exporters exporters
with rising exports to and investment flows from exporters exporters
China, may have hampered industrial diversifica- Source: World Bank, IMF.
by some (Kenya, Tanzania and Uganda) in the after- nearly 40 percent, and between 1020 percent in the
math of the global crisis and greater spending on Democratic Republic of Congo, Guinea, Liberia
growth-enhancing infrastructure spending.19 and Sierra Leone (World Bank 2015a). This sets
back growth, as export and commodity-related fiscal
What are the implications of the recent fall in revenues fall.20 These negative effects will be likely be
commodity prices? reinforced by rising volatility in commodity terms of
trade (Blattman et. al. 2007, Cavalcanti et al. 2012).
Given heavy dependence on commodities for export Indications are that volatility in prices, particularly
earnings and fiscal revenues, commodity exporting base metals and oil, is also increasing (World Bank
LICs are especially vulnerable to commodity price 2015a, 2015d).
movements. Since their peak in February 2011, en-
ergy and metals prices have declined sharply (see The fall in commodity prices complicates the task of
Chapter 1). Prices of copper, iron ore, and oil have macroeconomic management, as pressures on public
declined by 3863 percent reflecting oversupplied sector balance sheets and exchange rates mount in
markets and weaker global demand, including from several LICs at a time when growth is slowing (see
China. The deterioration in the terms of trade since following section). Although many commodity-
2011 has been large (Figure SF2.8). Since 2014, the exporting LICs have made progress in enhancing
terms of trade decline in Chad has amounted to transparency in the resource sectoreleven are com-
pliant with the Extractive Industries Transparency
19Kasekende et al. (2010).
Initiative (EITI) standardsonly nine have fiscal
rules or stabilization funds in place to act as buffers
FIGURE SF2.8 Commodity dependence: An Achilles heel to cope with adverse shocks (IMF 2013). Revenue
dependence on the commodity sector, meanwhile,
The terms of trade shock since 2011 associated with the decline in commodity prices
has been large. With a substantial share of fiscal revenues derived from the extractive
remains high. If governments are forced to scale back
sector, fiscal pressures have increased. The number of oil rigs has begun to decline, spending on social services and critical public infra-
suggesting that oil and gas investment is beginning to slow. Manufacturing sectors
remain small in most, suggestive of Dutch Disease effect.
structure projects as resource-revenues fall, gains in
poverty reduction could be lost, and prospects for
A. Commodity exporting LICs: Terms B. C
ommodity exporting LICs: future growth could be damaged by growing infra-
of trade since 2012 Growth-enhancing expenditures
structure deficiencies and bottlenecks.
Change in terms of trade from maximum Percent of GDP
value in 201012 vs. 2014, percent
20
25
2000 or earliest available
Over the medium term, persistently low commod-
20
10
15
2013 or latest available ity prices may reduce the attractiveness of mining
0
-10
10 and oil and gas investment. Mining investment is
5
-20
0
highly cyclical and, after discovery, mining and en-
-30
ergy projects typically require several years (and
Uganda
Gambia, The
Benin
Guinea-Bissau
Guinea
Liberia
C. African Republic
Sierra Leone
Niger
Congo, Dem. Rep.
Madagascar
Togo
Rwanda
Malawi
Burundi
Tanzania
Mozambique
Mali
Guinea-Bissau
Guinea
Burundi
Burkina Faso
Sierra Leone
Madagascar
Tanzania
Uganda
Kenya
Malawi
Ethiopia
Comoros
Cambodia
South Africa
Rwanda
Benin
Togo
Gambia, The
Zimbabwe
Haiti
Mozambiqe
Bangladesh
Eritrea
Nepal
Eritrea
Niger
C. African Rep.
Myanmar
Tanzania
Burundi
Tajikistan
Chad
Sierra Leone
Rwanda
Madagascar
Togo
Mozambique
Zimbabwe
Congo, Dem. Rep.
100 40
South America Africa (RHS)
cantly slower pace even in a context of high but non-increasing com-
20
0 0
modity prices. More precisely, if prices were to remain stable at their
2013 average levels, average annual GDP growth over the medium term
2003
2005
2007
2009
2011
2013
2015
til the next upswing in prices to resume investment. been unduly inflated. It is difficult therefore to see
In addition, in a riskier environment, with interest how other sectors could, over the medium term,
rate increases in the United States on the horizon, fully pick up the slack left by declining exports and
the rising financing cost for smaller exploration investment spending.
companies could curtail their ability to carry out ex-
ploration. Rising financing costs and low commod- Conclusion and policy recommendations
ity prices may sharply curtail exploration and devel-
opment activity. The commodity boom has been pivotal in raising
growth, exports and investment in metals and min-
Sharp commodity price declines have disrupted
erals in commodity-producing LICs. However, im-
new foreign investments and in some cases produc-
provements in poverty reduction, and in higher pro-
tion in extractive-based industries. The number of
ductivity employment, are less clear. Looking ahead,
oil rigsfor on-land oil drillinghas already de-
the sheer size of recent commodity discoveries in
clined from its peak in the fourth quarter of last
some countries will continue to bode well for long
year, by 15 percent in South America, and 11 per-
term growth prospects in some countries, notably in
cent in Africa. In Sierra Leone, falling iron ore
East Africa. However, over the medium term, the
prices have lowered profits and reduced the market
global economic environment will be less favorable
value of the iron ore companies operating in the
to growth in commodity-exporting LICs than it has
country (the collapsed London Mining and African
been over the past decade and a half. Prospects are
Minerals). This has led not only to lower foreign
for a protracted adjustment to lower and more vola-
investments in the sector but also to the shutdown
tile commodity prices, weaker demand for exports,
of operations in Tonkolili (the second largest iron
ore mine in Africa and one of the largest magnetite and reduced resource investment and production in
deposits in the world). In Sub-Saharan Africa, proj- the next few years.
ects considered to be most at risk include the ex- The ability to navigate these headwinds will cru-
pensive ultra-deepwater and pre-salt projects in cially depend on the extent to which policymakers
West Africa, and the liquefied natural gas projects have saved the windfalls from the commodity boom
in East Africa (BMI 2015). over the past decade, or used them for growth-
As rents decline, country specific factors will likely enhancing investments (Gill et al. 2014). Among
become more important, including changes in do- countries that are highly dependent on natural re-
mestic mineral policy regimes. For example, new source sectors, those with low policy and reserve
mining taxes, or tighter ownership and exploitation buffers, and large fiscal or current account deficits,
rules, or delays in licenses will add to production face potentially disruptive adjustments. In other
costs (Guinea, Uganda, Zimbabwe). In some re- countries, with more diversified economies, such as
gions rising conflict or security risks are an increas- Kenya, Tanzania and Uganda, the emergence of a
ingly serious issue (e.g., Mali). A decline in resource- large, vibrant, middle-class should help to support
related investment is likely to be associated with private consumption (McKinsey 2011).
declining investment in auxiliary projects, especially Going forward, policy will continue to play a criti-
transport infrastructure. cal role. Policies that improve the conditions to do
Finally, Dutch Disease associated with the commod- business and ease supply side and infrastructure
ity boom means that, for many commodity-export- constraints will increase the return on capital in
ing LICs, shifting growth away from a shrinking both the resource and the non-resource sectors. Pol-
natural resource sector may prove hard. Rising infra- icy makers should refrain from trying to offset head-
structure investment in some countries in East Af- winds from the turn in the commodity cycle with
rica, assisted by growing investment and aid flows demand stimulus that would also deplete buffers.
from China, could offset some of the headwinds Instead, in the interests of more stable growth in the
from slowing commodity sectors (see Box 2.1). future, they should focus on structural reforms that
However, for many LICs, non-resource tradable sec- support the non-commodity sectors. This would in-
tors have atrophied to a point where they will be dif- clude building infrastructure, and sound institu-
ficult to revive, and in some cases service sectors have tions (Gill et al. 2014). Evidence for Africa shows
that better institutions encourage low inflation, as
102 S P E C I A L F E AT U R E 2 GLOBAL ECONOMIC PROSPECTS | JUNE 2015
FIGURE SF2.9 Drivers of growth in low-income countries metals.21 Several commodity-exporting LICs have
Although several low-income countries are heavily dependent on the natural resource
limited buffers to absorb this deterioration. Oil-
sector for exports and fiscal revenues, many low-income country economies have large importing LICs, on the other hand, are expected to
agricultural sectors and receive significant remittance inflows. benefit from shrinking vulnerabilities as current ac-
A. LICs: Commodity exports, 2013 B. L
ICs: Commodity revenues, latest
count balances improve on falling oil import costs.
available
Political uncertainty has mounted in some LICs.
Percent of total exports
100 Energy
Percent
20 Percent of GDP
Percent
80
Elections are scheduled for October 2015 in Tanza-
80 Metals
Agricultural
15
Percent of government revenues (RHS)
60 nia and Afghanistan. Afghanistan is in the midst of
60
40
10 40 a political and security transition, partly related to
20 5 20 the withdrawal of U.S. troops, which is taking a toll
0 0 0
on the economy. Bangladesh is experiencing signifi-
Burundi
Guinea-Bissau
Kenya
Niger
Benin
Chad
Liberia
Myanmar
Mozambique
Ethiopia
Uganda
Sierra Leone
Togo
Sierra Leone
Tanzania
Burkina Faso
Niger
Mozambique
Afghanistan*
Togo
Madagascar*
Mali
Percent of GDP Percent of GDP Exchange rates have come increasingly under pres-
40
50
35 sure, in commodity-exporting and -importing
40 30
30 25 countries alike. This has reflected partly the broad-
20
20
15 based strengthening of the U.S. dollar since mid-
10 10
0 5 2014, and partly a reassessment of country risks and
0
vulnerabilities.22 The currencies of metal-exporting
Uganda
Rwanda
Kenya
Benin
Guinea-Bissau
Mali
Niger
Afghanistan
Bangladesh
Togo
Gambia, The
Liberia
Comoros
Haiti
Tajikistan
Nepal
Zimbabwe
Guinea
Uganda
Malawi
Tanzania
Bangladesh
Tajikistan
Rwanda
Mozambique
Nepal
currencies peg to the euro. Low-income CFA franc zone countries in-
clude Benin, Burkina Faso, Central African Republic, Chad, Guinea-
Bissau, Mali, Niger, and Togo.
GLOBAL ECONOMIC PROSPECTS | JUNE 2015 S P E C I A L F E AT U R E 2 103
Despite lower commodity prices, the forecast is for A. LICs: Growth prospects B. L
ICs: Exchange rate depreciation
against the U.S. dollar, mid-2014
mining output to rise in a number of countries as to March 2015
past investments come on stream (e.g., gold and Percent Percent
35
copper in Democratic Republic of Congo, coal in 9
8 30
Mozambique) and other mining investments pro- 7 25
20
6
ceed, albeit at a slower pace (Mozambique, Tanza- 5
15
10
nia). Several governments are prioritizing infrastruc- 4
3
5
0
ture projects, including in the energy sector, in some 2 -5
Madagascar
Guinea
CFA Franc zone
Uganda
Tanzania
Malawi
The Gambia
Kenya
DRC
Sierra Leone
Eritrea
Burundi
Rwanda
Comoros
Mozambique
Ethiopia
Haiti
Bangladesh
Nepal
LIC oil and metal exporters
1 LIC others
as part of recent regional agreements to upgrade re- 0
gional energy grids (Kenya, Rwanda). Elsewhere,
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
heavy government infrastructure investment is sup-
ported by Chinese financing (Cte dIvoire and Source: IMF World Economic Outlook, IMF staff reports, World Bank, Haver Analytics.
in Bangladesh in the near-term, although domestic de- A. Fiscal deficits, 2014 B. LICs: Current account deficits, 2014
mand should remain supported by resilient remit- Percent of GDP Percent of GDP
0 10
tances. In Nepal, strong remittance inflows should -2
0
-4
help support domestic demand and post-earthquake -6 -10
reconstruction. Recovering activity in Guinea, Liberia, -8
-10
-20
-30
and Sierra Leone as the effects of the Ebola crisis wane -12
-40
-14
should also help to support growth in these countries.
Cambodia
Chad
Bangladesh
Nepal
Mozambique
Guinea-Bissau
Mali
Sierra Leone
Uganda
Myanmar
Togo
Burkina Faso
Haiti
Liberia
Zimbabwe
Guinea
Niger
Burundi
Gambia, The
Rwanda
DRC
Kenya
Tajikistan
Tanzania
Ethiopia
Benin
Malawi
Cameroon
Eritrea
Afghanistan
Guinea
Eritrea
Gambia, The
Kenya
Haiti
Malawi
Cameroon
Togo
Liberia
Chad
Mali
Uganda
Tanzania
Sierra Leone
Rwanda
Burundi
Mozambique
Niger
Myanmar
Bangladesh
The outlook is subject to significant and increasing C. LICs: International reserves, 2014
Gambia, The
Kenya
Tanzania
Burundi
Myanmar
Togo
Uganda
Rwanda
Sierra Leone
Malawi
Mozambique
Congo, Dem.
Ethiopia
Chad
ments in 2015 (Guinea, Mozambique, Tanza-
Rep.
account inflows, and exchange rates, and on debt government spending has reduced fiscal space. As a
service costs of countries that have tapped inter- result, several now have large twin deficits, with fiscal
national capital markets since the crisis (Tanza- and current account deficits in excess of 5 percent of
nia, Kenya, Rwanda, Mozambique, Ethiopia). GDP (Guinea, Kenya, Mozambique, Niger).
LICs continued to have limited buffers to absorb
stresses should risks materialize. Current account
deficits, and government borrowing requirements References
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CHAPTER 2
Regional
Outlooks
EAST ASIA and
PACIFIC
Regional growth is expected to ease further to 6.7 percent in 2015 and remain flat thereafter. This reflects a con-
tinued slowdown in China that is offset by a pickup in the rest of the region. As a net hydrocarbon importer, the
region is expected to benefit from low fuel prices. In 2015, headwinds from tighter fiscal policy (Malaysia, Viet-
nam) and macroprudential regulation (China, Malaysia, and Thailand) are expected to be largely offset by
gradual recovery of investment and manufacturing exports associated with a global recovery and continued low
financing cost. Softer commodity prices have affected commodity exporting countries like the Lao Peoples Demo-
cratic Republic and Indornesia. Risks to this outlook remain tilted to the downside. Policy makers, especially in
economies with a high share of U.S. dollar-denominated debt, will find it increasingly challenging to balance the
needs of supporting growth and preserving export competitiveness against maintaining financial stability amidst
an appreciating U.S. dollar and prospects of rising U.S. interest rates.
ports (particularly of commodities), and lead indi- nesses added a total of 41.5 million jobs in the services sector, more
than four times the jobs that state-owned firms added during this pe-
The main author of this section is Ekaterine Vashakmadze. riod (Rutkowski 2015).
109
110 Chapter 2 G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5
Figure 2.1East Asia and Pacific: Regional growth and (iv) capital flight related to the ongoing anti-
performance in China graft campaign.
Growth in East Asia and Pacific region slowed by a modest 0.2 percentage points to Foreign-currency reserves declined by an estimated
6.9 percent in 2014, as expected, largely because on a continued slowdown in China.
Chinas growth decelerated further in the first quarter of 2015. Beyond China, growth
US$263 billion (7 percent of total) between June
in the first quarter of 2015 slowed in Indonesia, Malaysia, and Thailand reflecting con- 2014 and March 2015. This was largely driven by
tinued adjustment to lower commodity prices, weak external demand, and still weak valuation effects (about 2/3 of the decline).3 Not-
confidence in Thailand.
withstanding this decline, Chinas foreign exchange
A. Real GDP growth B. Selected countries: Real GDP growth
reserves remain solid (about 38 percent of GDP and
Percent change, year-on-year Percent, quarterly change, saar 24 times monthly imports). The renminbi depreci-
16 2013 2014 12
14
12
2015-17 (average) 2001-12 (average)
10
2014Q3 2014Q4 2015Q1 ated sharply in mid-March against the U.S. dollar,
10
8
8 after several months of steady appreciation. This sig-
6
4
6
naled the PBCs intention to deter speculators who
2 4
0 2
had been betting on one-way appreciation of the
EAP
China
Cambodia
Mongolia
Lao PDR
Vietnam
Indonesia
Philippines
Thailand
Solomon Islands
Papua New Guinea
Malaysia
Indonesia
Thailand
Malaysia
Philippines
terms, the renminbi has appreciated by around 6
percent since end-2014, and by 27.4 percent since
2010.
C. C
hina: Stock price and REER D. China: Balance of payments
indices (2010=100), and EMBI Despite the slowdown in China, economic activity
spreads elsewhere in the region accelerated sharply in the
Index 2010 = 100
Stock Market Index
Basis points Percent of GDP last quarter of 2014, partly helped by lower fuel
180 350 10 Capital Account, FA & Net Errors & Omissions
REER Index
EMBI spreads (RHS)
Current Account
300 8 Reserves
prices and more accommodative policies. For 2014
160
250 6 as a whole, growth was 4.7 percent, in line with the
140 4
120
200 2 Global Economic Prospects (GEP) projection in
150 0
100 -2
January 2015, but nevertheless lower than in 2013
100
80 50
-4
-6
(5.2 percent). Domestic demand, especially con-
sumption, remains the main driver of regional
2012 Q1
2012 Q2
2012 Q3
2012 Q4
2013 Q1
2013 Q2
2013 Q3
2013 Q4
2014 Q1
2014 Q2
2014 Q3
2014 Q4
60 0
growth. Lower fuel prices, dynamic capital and la-
2010
2011
2012
2013
2014
2015
2Corporations are increasingly holding on to their foreign currency 3Related to the weakening of non-US$ currencies (including euro
proceeds (both onshore and offshore) and hedging their foreign cur- and yen depreciation, which account for about 40 percent of Chinas
rency exposures. foreign exchange reserves) (Miner 2015).
G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5 C h a p t e r 2 | E AS T AS I A a n d PAC I F I C 111
persistent fiscal and sizeable current account defi- Figure 2.2 Key exports
cits.4 However, reserve coverage of imports and EAP countries are the worlds largest producers of palm oil, rice and natural rubber and
short-term debt remains solid in most countries in have significant global market shares in other commodities. Some are heavily depen-
dent on exports of a few commodities. Except for Indonesia and Malaysia, all are net fuel
the region. importers. The largest trading partner is Japan, followed by China and the United States.
Headline inflation (core inflation plus food and en-
ergy costs) has dropped to very low levels in several A. S
hare of EAP countries B. C
ommodity share in total exports,
countries (Malaysia and Thailand, Figure 2.3). How- commodity exports in global 2013
exports, 2013
ever, there is little risk of deflation, except perhaps in
Thailand where the core and headline rates are well Percent of global exports
90 Thailand Philippines
Percent of total exports Mineral fuels & oils
Palm oil
below the official target rate. In contrast to other 80
70 Vietnam Myanmar 100 Ores, slag and ash
Rice
60 Malaysia Indonesia
80
countries in the region, the high rate of inflation in 50
40
China
60
Rubber
Wood
30
Indonesia remains a challenge for policymakers. 20
10
40
0 20
The majority of regional currencies depreciated
Palm oil
Rice
Natural rubber
Wood
Other
Copper
Coal
Tin
Gas
0
Aluminium
Nickel
Thailand
Mongolia
Malaysia
Fiji
Vietnam
Timor Leste
PNG
Indonesia
Lao PDR
Myanmar
Philippines
against the U.S. dollar, but appreciated against the
euro and yen and in real effective terms, affecting
export competitiveness. Those countries with exter-
nal debt above 50 percent of GDP and deteriorating
terms of trade (Malaysia, Mongolia, and Papua New C. Export market destinations, 2013 D. Fuel trade balance, 2013
Guinea) saw their currencies depreciate strongly over Percent of total export market Share of GDP
Dev. ASEAN & Pacifics Japan & NIEs 5
the past 18 months.5 The strengthening U.S. dollar China
EU
USA
0
creates significant balance-sheet pressures for corpo- 100%
-5 EAP average
rations with large dollar-denominated liabilities. 80%
-10
60%
With the notable exception of Malaysia, capital 40%
-15
-25
ing quantitative easing in the Euro Area, and linger- 0%
LAO
PLW
WSM
FJI
SLB
MYS
IDN
MNG
VNM
PNG
CHN
VUT
PHK
FSM
KHM
TON
THA
TUV
KIR
Malaysia China Indonesia Philippines Thailand
ing demand for higher-yielding, emerging markets
debt.6 Malaysia is at risk of further portfolio out- Sources: UN Comtrade, World Bank.
flows due to a narrowing current account surplus B. Includes coal and petroleum gases.
C. NIE are Newly Industrialized Economies. Dev. ASEAN (Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar,
because of declining fuel prices, sizable short-term Philippines, Thailand, Vietnam) and Pacifics (Fiji, PNG, East-Timor, other smaller Island States; here also includes
Australia and New Zealand).
bank external debt, and significant foreign holdings D. Includes hydrocarbons and coal. Excludes Timor-Leste, which has large positive fuel trade balance.
Figure 2.3 Inflation and real exchange rates fuel prices, but the impact will vary across countries,
Lower oil prices have reduced headline inflation but core inflation has remained stable
reflecting the magnitude of net fuel imports, energy
and, in Indonesia, elevated. In real trade-weighted terms, most currencies have appreci- intensity of production, and the share of oil and gas
ated against the U.S. dollar, while strong capital inflows into the region.
in energy consumption.
A. Headline inflation B. Core inflation
In China, growth is projected to moderate to 7.1 per-
Percent, year-on-year Percent, year-on-year China
10 China Indonesia Thailand 6 Indonesia
cent in 2015 and 6.9 percent in 2017, reflecting pol-
Malaysia Vietnam Philipines
8 5
Thailand icy efforts to achieve a more sustainable growth path.
6
4 Continuing measures to contain local government
4
2
3 debt, curb shadow banking, and tackle excess capac-
0 2 ity may reduce investment and industrial output.
-2 1 Measures aimed at curbing energy consumption and
2013M04
2013M08
2013M12
2014M04
2014M08
2014M12
2015M04
0
reducing pollution may have the same effect. Low oil
2010
2011
2011
2012
2013
2014
2015
prices will soften the impact of these reforms, and
targeted policy measures are expected to be applied as
C. S
elected countries: Real effective D. Gross capital inflows
exchange rates needed to ensure a gradual slowdown.
Index, Jan 2010 = 100
China Indonesia US$, billions
Equity issue
In the region excluding China, the forecast is for
130 Thailand
Vietnam
Malaysia
Philippines
120 Bond issue
Bank lending growth to reach 4.9 percent in 2015 and 5.4 percent
120
110
100 in 2017, driven by the large ASEAN economies
100
80
(Table 2.2).
60
90
40
In Indonesia, which continues to adjust to
80
70 20 lower commodity prices, growth will moderate
further to 4.7 percent in 2015 before picking
2010
2011
2012
2013
2014
2015
0
2009 2010 2011 2012 2013 2014
up to 5.5 percent in 2016-17, supported by a
Sources: Haver, IMF IFS, BIS, World Bank WDI, Dealogic.
B. Excludes food and energy prices.
recovery of investment and stronger exports.
C. CPI-deflated real effective exchange rates. An increase denotes an appreciation.
In Thailand, real GDP growth is projected at 3.5
percent in 2015, with exports picking up slightly.
However, domestic demand will remain weak,
Cambodia and Lao PDR are making progress toward despite increased social stability. Growth is ex-
debt reduction, despite declining donor grants. In Pa- pected to strengthen in 2016-17 to 4 percent, as
cific Island countries, fiscal positions generally im- commodity prices remain low and the recovery
proved, reflecting strong revenues from taxes on tour- in high-income economies strengthens.
ism and from donor grants. Across the region, tax
revenue collection remains relatively low. Govern- In Malaysia, growth will likely slow to 4.7 per-
ment spending in several countries (especially Indo- cent in 2015, as low oil prices dampen invest-
nesia and Malaysia) have tended to be correlated with ment in the oil and gas sector and credit growth
commodity-related exports (Figure 2.5) reflecting continues to slow. In addition, private con-
also the earlier relatively large fuel subsidies. sumption will moderate as a result of the intro-
duction of the Goods and Services Tax (GST, a
value-added tax) in April 2015 (World Bank
2015d). Capital expenditures in the oil and gas
Outlook sector, a key driver of strong investment growth
Regional growth is expected to ease to 6.7 percent in in the past three years, will be delayed by lower
2015 and remain stable thereafter. The continued oil prices. An acceleration in growth to 5 per-
slowdown in China should be gradually offset by a cent is expected in 2016-17, as some normaliza-
pickup in the rest of the region, which is benefiting tion occurs.
from the strengthening recovery in advanced coun- In Vietnam, GDP growth is forecast at 6 per-
tries, low energy prices, improved political stability, cent in 2015, rising gradually to 6.5 percent in
and ample liquidity in global financial markets de- 2017 on the back of continued strong perfor-
spite an expected gradual tightening in the United mance of the manufacturing sector, exports,
States. EAP countries will mostly benefit from low and foreign investment.
G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5 C h a p t e r 2 | E AS T AS I A a n d PAC I F I C 113
Vietnam
Philippines
Indonesia
Mongolia
Cambodia
2009
2010
2011
2012
2013
2014
2015
will continue. In Lao PDR, growth will ease to 6.4
percent in 2015 due to lower public spending and ef-
forts to reduce credit growth, and recover to 7 percent
C. S
elected countries: Total D. Selected countries: Household,
over the medium term, led by electricity exports, with domestic and external debt, 2013 non-financial corporate, and
mining production remaining flat. government debt
Percent of GDP External Percent of GDP
Growth in the smaller Pacific Island countries will be 300 Domestic 270 Household
250 Change during 07-13 Non-financial corporate
supported by rising trade, tourism, and remittances, 200 220 General government
150
and generally positive country-specific develop- 100 170
Solomon Islands
China
Mongolia
Malaysia
Thailand
Vietnam
Fiji
Lao PDR
Cambodia
Indonesia
Philippines
2015. The economic gains from liquefied natural gas 20
(LNG) exports, which began in May 2014 and in-
2007
2014
2007
2014
2007
2014
2007
2014
2007
2014
-30
creased rapidly, will more than offset the completion IndonesiaPhilippines Thailand Malaysia China
of LNG-related construction work. In Timor-Leste, Sources: Moodys Statistical Handbook. Haver, IMF IFS, BIS, World Bank WDI, Debt database, McKinsey.
government spending is expected to help non-oil B. Foreign currency exposure is measured as total foreign currency deposits in the domestic banking system/
total deposits in the domestic banking system. Foreign currency vulnerability indicator is defined as (total foreign
growth to gradually strengthen to 7 percent by 2017, currency deposits in the domestic banking system)/(official foreign exchange reserves + foreign assets of
domestic banks).
while low prices dampen oil output. C. Includes both public and private-sector debt. Includes local currency denominated debt held by foreigners
(large part of external debt in Malaysia). Ratios for Malaysia will improve with the rebased GDP. In Mongolia, a
large share of external debt represents intra-company debt.
Figure 2.5 Policy issues Finally, as the surge in Chinas stock market con-
Across the region, tax revenue collection remains low by advanced country standards,
tinues, the financial and economic consequences
and dependence on commodity/fuel related exports cause procyclical fiscal pressures from a possible correction will increase. Should
in several countries (e.g. Indonesia, Malaysia).
it materialize, a sharp slowdown in China could
A. Tax revenue, 2014 B. Ease of Doing Business: Distance usher in a prolonged period of slow growth as the
to frontier score, 2015
economy heals, and would have regional and
Percent of GDP
40
Index global spillovers (World Bank, 2014a). A one-
OECD average 80
35
30
time 1 percentage point decrease in Chinas
U.S. 60
25
20
growth relative to the baseline (a 2 percentage
40
15
10
point decrease in investment growth) would re-
20
5
0 duce growth in the region by approximately 0.2
0
percentage points (World Bank, 2014a). The im-
Malaysia
Thailand
China
Vietnam
Lao PDR
Philippines
Cambodia
Indonesia
Malaysia
Thailand
Vietnam
China
Indonesia
Cambodia
Lao PDR
pact would vary across countries, with commod-
ity exporters with less diversified economies and
Source: WDI. OECD. IMF, Fiscal Monitor, WEO. World Bank. Doing Business indicators.
B.The distance to frontier score aids in assessing the absolute level of regulatory performance and how it regional supply chain economies affected the
improves over time. This measure shows the distance of each economy to the frontier, which represents the
best performance observed on each of the indicators across all economies in the Doing Business sample
most (Ahuja and Nabar, 2012). Nevertheless,
since 2005. This allows users both to see the gap between a particular economys performance and the best
performance at any point in time and to assess the absolute change in the economys regulatory environment
China is in a strong fiscal position with policy
over time as measured by Doing Business. An economys distance to frontier is reflected on a scale from 0 to
100, where 0 represents the lowest performance and 100 represents the frontier. For example, a score of 75 in
buffers that appear adequate to contain risk re-
DB 2014 means an economy was 25 percentage points away from the frontier constructed from the best per-
formances across all economies and across time. A score of 80 in DB 2015 would indicate the economy is
lated to financial sector distress.
improving. In this way the distance to frontier measure complements the annual ease of doing business rank-
ing, which compares economies with one another at a point in time.
Policy Challenges
systemic risk and the possibility of sharp in- In China, the key policy challenge is to put growth
creases in country risk premiums. on a sustainable path, while improving financial sta-
A weaker-than-expected recovery in high-income bility. The authorities have initiated several programs
countries, especially in the United States, the to implement the comprehensive structural reform
Euro Area, Japan, and the Newly Industrialized agenda announced in November 2013 (World Bank,
Economies would weaken global and regional 2014a). The objective is to increase the role of mar-
trade and impair the regions exports. High-in- kets and to facilitate resource reallocation to sectors
come country exports account for about 60 per- with high returns. The key policy challenge is to shift
cent (Thailand) to 90 percent of the regions growth towards more sustainable sources in the me-
exports. dium-term, while avoiding a sharp slowdown, or fi-
A sharp slowdown in China, while unlikely, nancial distress, in the short-term. A couple of areas
would have spillover effects on regional trading stand out as candidates for early action:
partners and commodity exporters. A hard land- fiscal reforms to place local government finances
ing could originate from: on a more solid footing and facilitate a shift
a steep decline in property prices that forces from investment to consumption; and
developers and banks to deleverage quickly financial sector reforms to improve resource al-
and investment in real estate to contract location, strengthen market discipline, and
sharply; contain a further buildup of financial sector
a sharp slowdown in infrastructure invest- vulnerabilities.
ment following the implementation of the
Next in line would be reform of state-owned enter-
local government debt framework;
prises, land ownership, and labor markets. Such
bankruptcies in primary and heavy indus- changes would help maintain growth and lift em-
tries (now suffering from overcapacity); or ployment (World Bank and Development Research
a decline in shadow banking activity that Center of the State Council, the Peoples Republic
causes a sharp cutback in credit availability. of China, 2014).
G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5 C h a p t e r 2 | E AS T AS I A a n d PAC I F I C 115
The authorities have made some progress in imple- (Myanmar). The Pacific Island countries face signifi-
menting their comprehensive reform agenda. In- cant medium-term fiscal sustainability challenges.
creasingly, the business tax is being replaced with Monetary and exchange rate policies have to adjust
value-added taxation (e.g. in railways from January to soft commodity prices and to the likelihood of
2014; in telecommunications from June 2014), en- somewhat tighter global financial conditions (Indo-
vironmental taxes have been increased, and the in- nesia, Mongolia, Papua New Guinea). Strong regu-
troduction of a reformed national property tax is lation and supervision to protect financial stability
planned (Lam and Wingende 2015). A revised bud- may also require proactive use of macroprudential
get law and new rules on local borrowing were in- policies to moderate the effects of the financial cycle
troduced to swap local government debt into lower- on asset prices, credit, and aggregate demand (IMF
cost government bonds. Pilot property tax systems 2015a). In Malaysia, the GST, introduced in April,
have been rolled out in a few cities. The deposit rate will broaden the base of federal revenues and diver-
ceiling was raised and deposit insurance (a prerequi- sify it away from volatile oil and gas revenues. The
site for further interest rate liberalization) was intro- vast majority of the budget subsidies have been elim-
duced on May 1, 2015. The exchange rate band was inated. Policies should focus on building the mecha-
widened from 1 to 2 percent, and the Shanghai- nisms to avoid re-introducing subsidies when oil
Hong Kong Stock Connect program is promoting prices go up. In Indonesia, moderate fiscal consoli-
some international capital flows. Specifics of gradual dation should be underpinned by a broadened tax
reforms to the hukou system were announced, in- base. In Thailand, fiscal support may be appropriate
cluding the granting of some social benefits to some in the short-term to boost the economy. However,
100 million migrant workers over the next seven support measures should be framed within a me-
years and a relaxation of residency requirements in dium-term fiscal plan to strengthen revenue, in-
smaller towns.9 A pilot program was started under crease investment, and bolster fiscal institutions.
which farmers can turn their land-use rights into
shares in farming enterprises or cooperative societ- Across the region, structural reforms are required to
ies. This pilot is part of a series of reforms to priva- mitigate the effects of slowing productivity growth,
tize the land rights to protect farmers interests. The and aging populations. Development of human
process of documenting farmers land use rights has capital and physical infrastructure remains a key
been initiated. China accelerated administative re- medium-term priority. In Thailand, for example, re-
form, including by streamlining and centralizing forms to state enterprises, rice and rubber price-sup-
preconstruction approvals, and simplifying court port schemes, infrastructure procurement, and tax
proceedings to facilitate contract enforcement. administration and expenditures would improve
transparency, investor confidence, and fiscal sustain-
Falling world fuel prices create an opportunity to ability. For hydrocarbon producers like Indonesia
eliminate fuel subsidies, which have strained public and Malaysia, the decline in fuel prices underscores
finances and weakened current accounts in both the need to enhance fiscal institutions to better
fuel exporters and importers. Energy taxes should manage volatile natural-resource rents. Further-
also be reformed for the same purposes. Recent more, the accumulation of foreign assets during
steps to reduce such distortions have gathered mo- good times can prevent currencies from appreciat-
mentum, which now needs to be sustained. Broad- ing to the point that non-energy activities become
ening the revenue base and improving the effective- non-competitive. Other measures to promote eco-
ness of public spending remains a priority across nomic diversification include ensuring high-quality
much of the region. In most large economies, ex- education, increasing the integration and depth of
penditures could be rationalized to focus on effec- domestic financial markets, providing infrastructure
tive productivity-enhancing or poverty-reducing to remove bottlenecks, and creating competition re-
programs. Some countries have no option but to gimes that remove special privileges for established
consolidate to control a buildup of debt (Mongolia, sectors or enterprises. Energy importers have an op-
Lao PDR, Vietnam) or safeguard fiscal buffers portunity to enact efficiency-promoting changes.
Finally, a more supportive trade and investment cli-
9A hukou is a record in the system of household registration
mate would expand the export base, stimulate job
required by law in China. creation, and raise potential growth.
116 Chapter 2 G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5
Increasing competitiveness in services through fur- ever, progress has been modest so far, and ASEAN
ther regional integration will be necessary for remains among the most restrictive regions in the
ASEAN economies to sustain growth in the long world with respect to trade in services. Correcting
run. Recognizing this, the ASEAN members have this will require a focus on promoting regulatory co-
committed to liberalizing and integrating their ser- operation and coordination through harmonization
vices markets, in the context of the formation of the or mutual recognition, together with the develop-
ASEAN Economic Community at end-2015. How- ment of regulatory capacity (World Bank 2015b).
G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5 C h a p t e r 2 | E AS T AS I A a n d PAC I F I C 117
Regional growth is expected to decelerate to 1.8 percent in 2015 from an already weak 2.4 percent in 2014.
Plunging oil prices and geopolitical tensions, and related spillovers, including from the Russian Federation, are
only partly offset by a moderate recovery in the Euro Area and the benefits from low fuel prices to net fuel import-
ers. Recently, confidence has improved slightly, reflecting the stabilization of oil prices, the peace agreement reached
in Ukraine, and policy measures implemented in several economies. Assuming a marginal recovery of oil prices in
2016-17, continued implementation of stabilization measures, and no major deterioration in geopolitical ten-
sions, growth is expected to strengthen to an average of 3.5 percent in 2016-17. Key risks include a deepening
recession in the Russian Federation and Ukraine, declining oil prices, and abrupt tightening of global financial
conditions.
Turkmenistan, and Uzbekistan). The western part of the region includes 2001 to 83.3 percent in 2014.
Central and Southeastern Europe (Bulgaria, Hungary, and Romania) 3Net capital outflows from Russia slowed to US$32.6 billion in the
and the Western Balkans (Albania, Bosnia and Herzegovina, the Former first quarter of 2015, compared to US$77.4 billion in 2014Q4, and
Yugoslav Republic of Macedonia, Montenegro, Serbia), and Turkey. US$48 billion in 2014Q1.
119
120 Chapter 2 G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5
Figure 2.6 Russian Federation: Growth and oil price financed from the countrys oil fund.4 This reflects
A sharp decline in oil prices and the impact of sanctions have dampened activity in
the combination of falling oil prices (crude petro-
Russia. leum oil accounts for about 70 percent of exports),
Percent US$ per barrel recession in Russia (exports to Russia accounted for
2 120 around 7 percent of exports in 201014), declining
confidence and lower capital inflows. Unlike Russia,
0 100 Kazakhstan relied heavily on foreign exchange re-
serves to defend the exchange rate peg after a 19
-2 80 percent devaluation implemented in February 2014.
2015 growth forecast This was done to mitigate depreciation-induced in-
(consensus forecast)
-4 Growth (YTD, y/y) 60 flation, and to buffer corporate and household bal-
Oil Price (RHS) ance sheets with large liabilities denominated in
-6 40 U.S. dollars. Despite weaker domestic demand and
May-14 Sep-14 Jan-15 May-15 slower import growth, the current account surplus
Source: World Bank and Consensus Forecasts.
has narrowed, as a result of the sharp drop in com-
modity exports. Fiscal balances have deteriorated
significantly. A 3 percent deficit is projected in
Figure 2.7 Selected economies, EMBI spreads 2015, largely reflecting lower revenues from oil ex-
ports (World Bank 2015g). Spreads eased from De-
Confidence has improved and spreads eased on a peace agreement in Ukraine, stabi-
lization of oil prices and policy actions.
cember 2014 peaks, but as of April 2015 are higher
than in Russia.
Basis points Basis points
800 Russian Federation Kazakhstan Ukraine (RHS) 5000 In Azerbaijan, growth decelerated to 2.8 percent in
2014, reflecting low oil prices, interruptions in oil
4000
600 sector output, and a sharp deceleration of non-oil
3000 GDP growth due to declining public investment.
400
2000
Both current account and fiscal surpluses declined
200
sharply. The current account surplus is projected to
1000 decline to 3.9 percent of GDP in 2015, from 14.1
0 0 percent in 2014, despite a 34 percent devaluation of
the manat in February 2015.
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
total loans), weakening profitability and large de- Figure 2.8Ukraine: Recent developments
posit withdrawals amounting to one-quarter of de- Despite a drawdown of official reserves, the hryvnia depreciated sharply and inflation
posits (12 percent of GDP) since January 2014.5 spiked above 45 percent.
Following the ceasefire agreement signed in Febru- Percent, US$, billions US$ per Hryvnia
ary, the IMF approved a four-year support program 80 0.14
for Ukraine in March 2015.6 This, together with the
0.12
immediate disbursement of the first US$5 billion 60 Inflation (y/y, %)
tranche in March, led to stabilization of Ukrainian Foreign Reserves (EOP, US$, billions) 0.10
40 Exchange rate (RHS)
hryvnia and easing of spreads from their February 0.08
peaks.7 20
0.06
Almost all economies in the region, have been nega-
0
tively affected by the spillovers from the recession in 0.04
slowdown in oil-exporting Azerbaijan and Kazakh- Source: World Bank and Haver Analytics.
stan, to various degrees. Only Uzbekistan and Turk-
menistan, two relatively closed, resource-rich econ-
omies with strong buffers and linkages with the East Figure 2.9 Selected economies: Exports by selected
and South East Asia regions, were reportedly less destinations (average 201114)
affected by the commodity price declines and re- Almost all economies in the region have been affected by spillovers from oil exporters
gional headwinds. In the eastern part of the region, in the region through trade.
these regional headwinds had significant negative Percent of total exports Russia (Services)
60 Azerbaijan and Kazakhstan (Goods)
repercussions on the regions oil-importing econo- Selected Europe (Goods)
China (Goods)
mies through trade, investment, and remittances United States (Goods)
Russia (Goods)
(Figures 2.9, 2.10, and 2.11), which more than off- 40
Kyrgyz Rep.
Tajikistan
Uzbekistan
Armenia
Ukraine
Serbia
Montenegro
Moldova
Georgia
and Georgia, as did remittance flows to Georgia, the
Kyrgyz Republic, Moldova, and Tajikistan. With
most imports invoiced in U.S. dollars, and foreign
exchange receipts in rubles, the slide of the ruble Source: World Bank; IMF; Bank of Russia.
and the strengthening of the U.S. dollar triggered a Note: Average does not capture the structural shifts (e.g. in Georgia, Moldova, Ukraine). Selected Europe includes
ten largest European importers including Germany, France, UK, Italy, Belgium, Spain, Switzerland, Austria and
deterioration in the terms of trade. The resulting de- Sweden.
program that Ukraine faces a financing gap of about US$40 billion the Slovak Republic and Slovenia). The nascent re-
(one-third of 2014 GDP) for 2015-18 and identifies sources to meet covery has reflected a pick-up in consumer and busi-
the financing gap (IMF 2015b). ness confidence and has been supported by lower
7Despite this improvement, Ukrainian spreads are still among the
highest globally.
fuel and food prices, and accommodative policies.
122 Chapter 2 G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5
Figure 2.10 Selected economies: Remittances inflows, Headline inflation has fallen to near zero in several
2014 countries thanks to lower energy prices (Figure
Several smaller oil-importing countries have been affected by spillovers from oil export-
2.14). With output well below potential levels, core
ers through falling remittances. inflation also remains generally low. The recovery has
Percent of GDP
Remittance inflow from the EU and ROW
been uneven across the sub-region, held back by
50
legacies of the global financial crisis, especially still-
Remittance inflow from Russia
40 stretched balance sheets (Bulgaria, Serbia and to a
30 lesser extent Romania). Investment has remained
20
subdued, as high corporate debt overhangs, non-
performing loans, and weak demand have continued
10
to constrain lending to the corporate sector, not-
0
withstanding lower interest rates. The Former Yugo-
Tajikistan
Kyrgyz Rep.
Bosnia &
Montenegro
Serbia
Moldova
Armenia
Georgia
Uzbekistan
Albania
Ukraine
Herz.
Hungary
Ukraine
Kyrgyz Rep.
Serbia
Kazakhstan
Romania
Belarus
Federation
Moldova
Armenia
Uzbekistan
Georgia
Azerbaijan
Russian
lio flows.
Kyrgyz Rep.
Tajikistan
Kazakhstan
Armenia
Moldova
Georgia
Azerbaijan
rioration of the geopolitical climate, regional growth is
expected to strengthen to an average 3.5 percent in
201617.
Source: World Bank and Haver Analytics.
In Russia, a contraction in economic activity by 2.7 Note: Latest values are for April 2015 except for Kyrgyz Rep. (March) and Tajikistan (February).
Growth should strengthen to 2.5 percent in 2017 as Percent, year-on-year Range (last 3 years) Latest
15
investment recovers. However, it will remain below
potential, at about half of the average in 200010, 10
held back by remaining structural bottlenecks. This
5
outlook is highly uncertain and assumes a modest
recovery in oil prices and no major deterioration in 0
geopolitical tensions. For the other oil exporters in
-5
the region, prospects also remain closely tied to oil
Serbia
Hungary
Romania
Montenegro
Bosnia& Herz.
FYR Macedonia
Kosovo
Bulgaria
Albania
prices. The modest strengthening of prices expected
over the forecast horizon should gradually support
activity in these economies. In Kazakhstan, growth
is projected to decline to 1.7 percent in 2015 as pro- Source: World Bank and Haver Analytics.
duction delays in the Kashagan oil field persist, but Note: Latest values are for April 2015 except for Montenegro (February).
reduced medium-term potential growth. Domestic Fiscal policy is expected to remain accommoda-
demand will be dampened by fiscal consolidation tive until June. Private spending is expected to
measures, including cuts in pensions and utility recover after the June elections, assuming that
subsidies. Some price and structural reformsin- political uncertainty is resolved. Soft fuel prices
cluding sizable energy tariff increases, bank restruc- and robust exports will contribute to a further
turing, governance reforms of state-owned enter- reduction in Turkeys trade deficit. External fi-
prises, and legal changes aimed at combating nancing requirements are expected to decline by
corruption and strengthening the rule of laware US$20 billion (to about US$200 billion) in
underway. They are necessary for restoring macro- 2015. Maturing external debt totaling US$166
economic stability, boosting investor confidence, billion in 2015 will be rolled over.
and anchoring inflation expectations but are likely
to weigh on growth in the short-term.
The western part of the region is expected to see Risks
growth remaining flat in 2015 (2.8 percent).
While a significant improvement from the previ- The risks for the region remain tilted to the down-
ous two years, it remains below the regions po- side. Key risks include further declines in oil prices,
tential and is insufficient to significantly reduce escalation of geopolitical tensions, and abrupt tight-
high and persistent unemployment. Activity is ening of global financial conditions. A weaker-than-
projected to strengthen gradually to 3.3 percent expected global recovery and unfavorable resolution
in 201617. Domestic demand is expected to of problems between Greece and its creditors pres-
continue to recover, as household real disposable ent additional risks to the outlook.
incomes rise, energy cost remains low, and low Should oil prices decline or geopolitical tensions in
inflation allows further monetary policy rate the region escalate, the consequence could be a
cuts. As activity in the Euro Area gains momen- deeper recession in the Russian Federation in 2015
tum, exports are expected to pick up. Some which could also extend to 2016, growth slowdown
countries in the region should also benefit sub- in other major oil exporters, and a delayed recovery
stantially from EU structural funds (Croatia, Ro- in Ukraineand a sharp slowdown in regional
mania, and Slovenia). Nonetheless, at least over growth. Policy changes related to the establishment
the short term, high non-performing loans of the Eurasian Economic Union, specifically the
(NPLs) and a heavy debt burden, will continue restrictions on migrant workers to the Russian Fed-
to limit credit growth. Elevated government debt eration from non-member states may lead to a sig-
will limit room for fiscal support to growth (Al- nificant number of labor migrants returning to Ta-
bania, Croatia, Hungary, FYR Macedonia, Mon- jikistan and Uzbekistan. Net energy exporters in the
tenegro, and Serbia). The nature and impact of region would struggle to adjust to further falls in oil
these financial constraints varies considerably prices. For the regions oil importers, the windfall to
across countries. In Bulgaria, for example, the ef- households via higher disposable incomes and to
fects of the 2014 domestic banking turmoil lin-
firms via lower production costs would accelerate
ger. Growth in the Western Balkans is expected
the tailwinds of a recovery, but this will not fully
to be a modest 1.5 percent in 2015 (up from 0.4
offset the opposing forces.
percent in 2014), as a pick-up in net exports is
expected to offset slowing investment and con- Any faltering in the global economic recovery, espe-
sumption. The Western Balkans remain weighed cially in the Euro Area, would pose risk to the re-
down by the lack of new credit and non-per- gions predicted expansion (Chapter 1). It would
forming loans are the highest in the ECA region impact exports and undermine business confidence.
(above 16 percent). With investment already constrained by deep-
rooted structural factors (including high NPLs, ele-
In Turkey, activity is expected to be subdued in
vated debt, and weak competitiveness), domestic
the first half of 2015, but growth is projected at
3 percent in 2015. Households and corporations demand alone will be insufficient to bolster growth.
are expected to postpone spending due to policy A disorderly adjustment in global financial markets
uncertainty and in advance of the June elections. to the anticipated tightening of U.S. monetary pol-
G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5 C h a p t e r 2 | E U R O P E A N D C E N T R A L AS I A 125
icy could disrupt financial markets in the region. forest fires) with increased frequency. In addition to the
Turkey and other economies in Central Asia remain impact on crops and livestock, the changing seasonal-
particularly exposed as their economies are relatively ity of river flows undermines hydropower production,
more reliant on dollar inflows than those in the a particularly important sector in Albania.
Central and South Eastern Europe region, which
carry more euro or Swiss franc liabilities on their
balance sheets. Policy Challenges
Economic and financial stress in Greece presents an
additional risk to the regional outlook, although the Monetary policy challenges
exposures of other parts of the Euro Area have di-
minished since 2010. Foreign bank exposures to Spillovers from the plunge in oil prices and geo-
Greek sovereign and non-sovereign debt have de- political tensions have complicated monetary
clined sharply. The ECBs quantitative easing pro- policies in the eastern part of the region, but
gram, which began in March, has shielded sovereign eased monetary policy constraints in the west.
bonds in other peripheral countries from contagion In two relatively large oil-exporting economies of
risks. Several new institutional mechanisms could the region, Azerbaijan and Kazakhstan, policy
help contain contagion.8 Finally, the Euro Area has flexibility has been constrained by elevated infla-
emerged from recession, with recoveries gathering tion and balance sheet concerns (Figures 2.16
strength in Spain, Portugal, and (especially) Ireland. and 2.17). Efforts to stem currency depreciations
There are pockets of vulnerabilities among develop- in these countries resulted in some losses of re-
ing countries, however. Banking systems in Albania, serves and slow external adjustments (current ac-
Bulgaria, FYR Macedonia, Romania, and Serbia re- count balances are expected to deteriorate in
main vulnerable to contagion through sizeable local both countries in 2015). Russia, where external
subsidiaries of Greek banks. In Bulgaria and Alba- pressures were stronger, allowed greater exchange
nia, for example, a respective 23 percent and 18 per- rate flexibility. This facilitated current account
cent of banking assets are held by Greek banks, pre- adjustments, but contributed to higher inflation
senting risks of spillovers from potential banking and increased financial stability risks because of
system stress in Greece. Bulgarias exposure to the large share of foreign currency-denominated
Greece through trade has declined over the past few debt. In general, such debt has risen considerably
years, but is still significant. Exports to Greece de- in the region since 2011 and poses a significant
clined from 4.1 percent of GDP in 2008 to 3.6 per-
cent of GDP in 2014, the highest share of any coun-
try in the ECA region.9 Albania receives remittances Figure 2.16 Selected economies: Real effective
from Greece equivalent to 3.7 percent of its GDP. exchange rates
Recent floods in Bosnia and Serbia, which destroyed Exchange rates helped absorb external shocks in Russia, but policy flexibility has been
about 15 percent of Bosnias output and 2 percent of constrained by elevated inflation and balance sheet concerns in other oil-exporting
Serbias, point to the wider vulnerabilities unfavorable economies, particularly Kazakhstan.
weather conditions pose to the region. Many of the Index (Jan. 2014=100)
countries in the region are facing warmer tempera- 150
Russian Federation Germany Kazakhstan Azerbaijan
tures, a changing hydrology, and more extreme cli-
125
matic conditions (droughts, floods, heat waves and
100
8The 500 billion European Stability Mechanism may serve as a buf-
fer to mitigate short-term volatility and pressures on periphery banks and
75
sovereign debt issuers; the new bank resolution system could help insulate
sovereign debt issuers from banking system stress; the new single supervisory
system and the 2014 asset quality review have improved confidence in Euro 50
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
with exports to Germany accounting for 6.3 percent of GDP. Greece is now
the fifth largest export destination for Bulgarias exports after Germany, Tur- Source: World Bank and Haver Analytics.
key, Italy, and Romania. Note: Decline denotes depreciation.
126 Chapter 2 G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5
Figure 2.17 Foreign currency exposure and foreign Almost all oil-exporting countries in the region have
currency vulnerability indicators, 2013 significant buffers in the form of foreign assets. This
In oil-importing economies, high dollarization constrains policy flexibility.
has allowed them to avoid steep spending cuts, de-
spite significant loss in oil revenues, or implement
Percent Foreign currency exposure countercyclical expenditure increases. Fiscal break-
100 Foreign currency vulnerability indicator even oil prices are estimated to remain at or over
80 US$90 per barrel (Kazakhstan and Azerbaijan), and
60 considerably above the US$5864 projected for
40 2015-16 to cover government spending, which has
20 increased in recent years in response to rising social
0 pressures and infrastructure development goals. As a
result of the oil price decline, all countries in the
Ukraine
Serbia
Turkey
Bosnia &
Kazakhstan
Romania
Hungary
Albania
Georgia
Armenia
Lithuania
Moldova
Federation
Azerbaijan
Russian
Herz.
ity growth. Barriers to open markets and access to Figure 2.18Unemployment, 2013
finance are well above-average in Azerbaijan, the Despite the nascent recovery, output remains below potential and unemployment rates
Kyrgyz Republic, and Ukraine (World Bank 2015k). high in the western part of the region.
Reducing these barriers would spur productivity and
Percent of labor force
increase resilience to external shocks. While reform 30
needs are country specific, they fall into a few cate- 20
gories. These include shifting the composition of 10
Poland
Croatia
Armenia
Moldova
Kyrgyz Rep.
Tajikistan
Bulgaria
Slovenia
Slovak Rep.
Azerbaijan
Serbia
FYR Macedonia
Kosovo
Belarus
Ukraine
Kazakhstan
Turkmenistan
Uzbekistan
Romania
Hungary
Turkey
Russian Federation
Czech Rep.
Georgia
Albania
Montenegro
A cross cutting theme for the region is the need for mates, particularly for Belarus.
Serbia
Tajikistan
Hungary
Romania
Montenegro
Albania
Bulgaria
Azerbaijan
Moldova
Macedonia
better collateral enforcement, fostering more out-
FYR
of-court debt restructuring, strengthening insol-
vency frameworks, and clearing bottlenecks in
overloaded court systems.
Source: IMF, Financial Soundness Indicators.
Current low commodity prices are also a reminder Note: Alternative estimates (using strict definitions) for Ukraine assess nonperforming loans at around 32 percent
of total loans in 2014.
to commodity-exporting countries of the impor-
tance of diversification. Diversification efforts could
include efforts to build institutions that reduce eco- In Ukraine, which faces extraordinary challenges,
nomic volatility, change incentives away from non- the reform agenda should focus on governance re-
tradables, encourage export diversification, and forms, including anti-corruption and judicial mea-
build human capital (see Chapter 1 for additional sures, deregulation and tax administration reforms,
discussion). and reforms of state-owned enterprises to improve
Some reforms can take a long time to feed into corporate governance and reduce fiscal risks. Broader
higher productivity and sustained growth. However, energy sector reforms will increase energy efficiency
some reforms can have a considerable effect on eco- and foster energy independence.
nomic activity even in the short term. For example, Finally, recent floods in Bosnia and Serbia, which
policies can ease short-term transition costs by as- destroyed about 15 percent of Bosnias output and 2
sisting workers to move to new jobs, or they can percent of Serbias, point to the wider vulnerabilities
speed up the repair of capital bases of lending insti- unfavorable weather conditions pose to the region.
tutions (see Chapter 1 for additional discussion). Many of the countries in the region are facing
128 Chapter 2 G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5
Figure 2.20 Net foreign liabilities, 2014 warmer temperatures, a changing hydrology, and
High foreign liabilities pose risks to the banking sector.
more extreme climatic conditions (droughts, floods,
Percent of GDP heat waves, forest fires, earthquakes), some of them
120 with increased frequency. In addition to the impact
on crops and livestock, the changing seasonality of
80 river flows undermines hydropower production, a
particularly important sector in Albania, the Kyrgyz
40
Republic, and Tajikistan. Planning for extreme
weather events will help to support preparedness for
a variety of other emergencies.
0
Serbia
Kyrgyz Rep.
Hungary
Romania
Bosnia& Herz.
Georgia
Bulgaria
Armenia
FYR Macedonia
Moldova
Ukraine
Albania
Source: World Bank and IMF International Financial Statistics.
Note: Latest data available for Albania, Bosnia and Herzegovina, Bulgaria, Kyrgyz Republic, Romania, Serbia,
and Ukraine is for 2013.
G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5 C h a p t e r 2 | E U R O P E A N D C E N T R A L AS I A 129
Facing lower prices for oil and other commodities, challenging domestic business climates and widespread droughts,
growth in Latin America and the Caribbean slowed to 0.9 percent in 2014. South America, deeply affected by
the oil price decline, was also impacted by domestic macroeconomic challenges among its largest economies. In
contrast, developing Central and North America, along with the Caribbean, benefited from the strengthening
United States, and saw an acceleration of activity. The ongoing recovery among advanced countries is expected to
support external demand in the medium-term, lifting growth to an average of 1.7 percent in 201517. A deeper
and more protracted decline in commodity prices, or a slower-than-expected recovery of the Euro Area, represent
major downside risks.
Brazil
Mexico
The Caribbean
Latin America & the
Dominican Republic
Central and North America and the Caribbean (Fig-
America
Caribbean
131
132 Chapter 2 G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5
Figure 2.22 Prices of key commodity exports growth increased from 3.8 percent in 2013 to
Weakness in commodity prices from 2014 carried over to 2015.
5.5 percent in 2014.
Percent change, year-on-year Despite the drop in world energy and food
10 2014 2015 2016 prices, inflation remained high in some of the
0 large economies of South America. Annual infla-
-10 tion reached about 65 percent in Repblica Boli-
-20 variana de Venezuela in the second half of 2014.
-30 In Argentina, annual inflation was 15.8 percent
-40
as of April 2015. In Brazil, both headline and
core inflation have risen as a result of several fac-
-50
tors: depreciation of the real, increases in regu-
Wheat
Crude Oil
Iron Ore
Soybeans
Copper
Gold
lated prices, a tight labor market, and a pro-
longed drought that has led to a potential energy
shortage as water at hydroelectric dams reaches
Source: World Bank.
low levels. A sharp depreciation also contributed
to an increase in inflation in Colombia, where it
Figure 2.23Export shares of key commodity exports, has breached the central banks upper target
2013 limit. Core inflation rose in most countries (ex-
cept in Costa Rica, the Dominican Republic,
Commodities constitute significant shares of exports.
Mexico, and Paraguay). However, partly due to
Percent
100 falling oil and food prices, headline inflation has
80 declined across the region, especially in oil-im-
60 porting countries (Figure 2.24). On average,
40 compared to rates in 2014, headline inflation
20 rates in developing Central and North America
0 have fallen by a third, while those in the Carib-
Peru (copper)
Venezuela, R.B.
Bolivia (gas)
Brazil (soy)
Republic (gold)
Ecuador (oil)
Colombia (oil)
(oil)
continued to account for the vast majority of to- Figure 2.24 Average annual inflationheadline and core
tal issuance, posing exchange rate risks from U.S. Headline inflation edged down in 2015, especially among oil importers.
dollar appreciation.
Percent, year-on-year
Many international banks have been reluctant to Headline-H1 2014 Headline-H2 2014
Headline-YTD H1 2015 Core-H1 2014
lend during the balance sheet restructuring of 9
Core-H2 2014 Core-YTD H1 2015
8
recent years. In 2015, however, cross-border 7
6
bank lending appears to be gaining some ground, 5
4
with more attractive pricing and terms for bor- 3
2
rowers. At a 10-year low in 2014, equity issu- 1
0
ance volumes are likely to remain weak going -1
forward, as many of uncertainties that affected
Brazil
Colombia
Panama
El Salvador
Nicaragua
Bolivia
Jamaica
Ecuador
Honduras
Mexico
Costa Rica
Peru
Paraguay
Guatemala
Dominican Rep.
the region persist, notably sharply lower oil
prices, which undercut prospects for regional
energy producers.
Most currencies in the region depreciated in nomi- Source: Haver Analytics, World Bank.
Note: Core inflation excludes volatile food and energy prices.
nal terms against the U.S. dollar. Nominal deprecia-
tions were particularly persistent in Argentina, Bra-
zil, and Peru where soft commodity prices and/or Figure 2.25 Monthly gross capital flows to LAC region
challenging business environments have weakened Regional capital inflows weakened after July 2014.
the growth outlook (Figure 2.26). However, rela-
US$, billions
tively high inflation rates in in a number of coun- 30 Bank lending Bond Equity
tries across the region caused their currencies to ap-
25
preciate in real terms in 2014.
In an effort to stem depreciations, a number of 20
El Savador
Bolivia
Colombia
Dominican Rep.
Nicaragua
Brazil
Haiti
Guatemala
Jamaica
Mexico
Honduras
Peru
Argentina
Paraguay
sentiment improves on better policies, growth is ex-
pected to rebound to 2.0 percent in 2016, and to 2.8
percent in 2017 (Figure 2.28). However, there is a
divergence among the sub-regions, with prospects for
Source: Haver Analytics Central and North America and the Caribbean being
Note: Local currency spot exchange rates (increase denotes appreciation)
relatively brighter than in South America.
South America is projected to contract in 2015 as
Figure 2.26b Real effective exchange rates low commodity prices are expected to persist, fiscal
Most regional currencies appreciated in real effective terms.
consolidation remains a priority, and investor confi-
dence continues to be dampened. In Brazil, in par-
Percent change over period
45
ticular, output will contract as investment slumps in
H1 2014 H2 2014 YTD H1 2015
part due investigations surrounding a corruption
30
scandal, concerns with inflation and fiscal sustain-
15 ability, and slowing infrastructure investment. Inad-
0 equate infrastructure remains a key bottleneck for
production. The baseline projects a gradual recovery
-15
in 2016 and 2017 on the following assumptions:
Venezuela, RB
St. Vincent
Dominica
Colombia
Bolivia
Grenada
Brazil
Mexico
Ecuador
Belize
St. Lucia
Guyana
Costa Rica
Dominican Rep.
Paraguay
Nicaragua
Mar-14
Jul-14
May-14
Nov-14
Mar-15
Sep-14
Jan-15
May-15
percent in 201617 on higher export demand from Figure 2.28 Regional medium-term growth outlook
the United States. In Mexico, as the reforms ap- Regional growth is projected to strengthen from 2016 onwards.
proved in 201314 are implemented and gain trac-
tion, investment should strengthen, and offset the Percent
6 2014 2015 2016 2017
drag from lower oil prices. Mitigating weak domes-
tic demand growth, stronger external demand and 4
continued tourism growth are expected to support
growth in the Caribbean of about 3.7 percent in 2
201617, while being mitigated by stronger exter-
nal demand and continued tourism growth, which 0
region. 0
Panama
Mexico
El Salvador
LAC Region
Venezuela, RB
Colombia
Belize
Suriname
St. Lucia
Brazil
Bolivia
Dominican Rep.
Ecuador
Costa Rica
Jamaica
Grenada
Dominica
Haiti
Guatemala
Honduras
Guyana
Nicaragua
Peru
Argentina
St. Vct. & Gren.
Antigua & Barbuda
Paraguay
Despite some moderation, growth prospects are still
robust for a number of economies in the medium-
term. Peru, for example, suffered a slowdown in
2014 due to weak copper and gold prices, but is
expected to see a solid rebound in 2015 and further Source: IMF Direction of Trade.
strengthening in 2016, on stimulus measures and
the gradual implementation of new infrastructure
and mining projects. Bolivia faces a medium-term Figure 2.30 FDI into selected countries by source
slowing, reflecting weaker energy and commodity country, 2012
prices. However, growth will be robust in coming
The U.S. accounts for a significant share of FDI into LAC.
years thanks to public investment projects and Bra-
zilian and Argentinian demand for natural gas. Cap- Percent of total FDI
100
U.S. E.U. LAC Others
ital infrastructure projects, including investment in
80
the private ports system, will lift Panamas growth
rates among the highest in the region. 60
40
Risks 20
0
Brazil
Colombia
Argentina
Dominican
Mexico
Figure 2.31 Consensus forecasts six years ahead, several countries (Figure 2.31), with Mexico being
200915 an exception. If capital outflows and a reassessment
Six-year-ahead growth projections for selected LAC countries have been declining.
were to trigger a further sharp depreciation of local
Percent
currencies against the U.S. dollar, borrowers bal-
Brazil Mexico Colombia Peru
7 ance sheets could be strained, since much regions
debt is denominated in U.S. dollars2. LAC coun-
6
tries show elevated levels of vulnerability to a U.S.
5 interest rate increase (Figure 2.32).
Lower commodity prices. Although a boost for oil
4
importers, the recent slump in oil prices, if pro-
3
longed, will also pose significant challenges for oil
exporters in the region. Spillovers from weaker ac-
2 tivity in the regions oil-exporting countries would
2009 2010 2011 2012 2013 2014 2015
mitigate some of the benefits from lower oil prices
Source: Consensus Forecasts.
in oil-importing countries. Similarly, larger-than-
expected declines in commodity prices will further
Figure 2.32 Federal Reserve Board Vulnerability Index, deteriorate terms of trade, dent export earnings and
2014 worsen current account balances of regional com-
modity exporters. FDI into commodity sectors will
LAC countries show elevated levels of vulnerability.
also be affected.
Index
14 Slower-than-expected recovery in the Euro Area.
12 Although there are indications of a broad-based re-
10
8
covery in the Euro Area, it is still fragile. Euro Area
6 growth is projected to remain subdued in the me-
4 dium term, and is subject to significant downside
2 risks from financing stress in Greece, and from geo-
0 political tensions surrounding Ukraine. For several
Brazil
Colombia
Mexico
Philippines
China
Indonesia
Thailand
Turkey
Chile
South Africa
Malaysia
Korea, Rep.
India
Federation
and Japan, less rapid growth in China, and adjust- Figure 2.33 Overall fiscal balance as a share of GDP
ment to lower commodity prices and more broadly Fiscal balances have deteriorated.
the end to the commodity super-cycle.
Percent of GDP 2007 2014 Change
While there are cyclical elements to the ongoing
slowdown in the region, the key concern for the re- 5
gion is how it adapts to the end of the double tail- 0
wind era when Chinas economy was surging and -5
commodity prices were booming (World Bank. -10
2015l). Currently, with the slowdown in China and -15
lower commodity prices, both expected to be sus-
Colombia
Brazil
Panama
Bolivia
El Salvador
Venezuela, R.B.
Jamaica
Nicaragua
Argentina
Mexico
Guatemala
Paraguay
Dominican Rep.
Peru
Honduras
Ecuador
Costa Rica
Haiti
tained at least in the medium-term, the region needs
to find new sources of growth and address longer-
term structural impediments that are holding back
potential growth.
Most countries have limited room to support Source: IMF World Economic Outlook April 2015, Paraguay Ministry of Finance
Note: General government net lending/borrowing.
growth with countercyclical fiscal and monetary
policies. Fiscal deficits and fiscal space have deteri-
orated and remain considerably weaker than before Figure 2.34 Share oil/gas revenue in total government
the Great Recession (Figure 2.33, World Bank. budget, 2013
2015k). The deterioration has been most pro- Oil and gas revenues account of significant shares of government revenues
nounced in countries where commodity-based rev- Percent
enues account for large shares of total revenues 40
Figure 2.35Global rankings on quality and perience suggests that increases in domestic savings
extensiveness of infrastructure, 201415 together with improvements in regulatory institu-
Regional economies suffer from a gap in the quantity and quality of tions could yield benefits in terms of infrastructure
infrastructure. provision and growth (Engel, Fischer, and Galetovic
Ranking 2013). To enhance investment rates, countries could
140
120 deepen long-term domestic savings by streamlining
100 regulations of financial institutions that serve resi-
80
60
dents. Similarly, pension, social security, and tax
40 reform could have major impacts on savings levels
20 (IDB 2013).
0
Panama
El Salvador
Mexico
Brazil
Colombia
Suriname
LAC average
Nicaragua
Guatemala
Costa Rica
Jamaica
Peru
Argentina
Dominican Rep.
Honduras
Bolivia
Venezuela, R.B.
Guyana
Paraguay
Haiti
Source: World Economic Forum (2014).
Note: Rankings out of 144 economies.
G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5 C h a p t e r 2 | L AT I N A M E R I CA A N D T H E CA R I B B E A N 139
After an easing in tensions in early 2014, the Middle East and North Africa region is again experiencing major
and increasingsecurity challenges. In addition, since mid-2014, it is also adjusting to the oil price drop. This is
a particular challenge for oil-exporting countries, many of which also face severe security issues. For oil-importing
countries, the potential positive effect of lower oil prices is partially offset by spillovers from within the region, in-
cluding through lower remittances and security problems, and by long-standing constraints on growth potential.
Growth is expected to average about 2.2 percent in the developing countries of the region in 2015, and to pick up
modestly in 2016-17. Risks remain tilted to the downside, more so than in other regions. Policy makers face the
challenges of adjusting to lower oil prices and coping with security risks in the short-run, and bolstering growth,
employment, and fiscal positions in the long-run.
Middle East and North Africa region while high-income Gulf Coopera- 2Developing oil-exporting countries are: Algeria, the Islamic Re-
tion Council (GCC) countries are excluded. The developing countries public of Iran, Iraq, Libya, and the Republic of Yemen. Syrian Arab
are further divided into two groups: oil-importers and oil-exporters. Republic is excluded due to data limitations.
141
142 Chapter 2 G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5
Figure 2.36 Oil production tion. In Lebanon, a mid-year lull in violence, rapid
Oil production is rising modestly in high income oil exporting countries.
credit growth, and an inflow of refugees supported
domestic demand (World Bank 2014c; Ianchovi-
Millions barrels per day
china and Ivanic 2014). In Jordan, growth picked
12
2014 2015Q1 up slightly to 3.1 percent. Disruptions to transport
10 routes limited the expansion, as did capacity con-
8 straints as Jordan absorbed a large inflow of refugees
6
from Syria that began in 2013. In contrast, growth
slowed sharply in Morocco to 2.6 percent due to a
4
contraction in agricultural output after a bumper
2 crop in the previous year and weak exports to the
0 Euro Area.
Yemen, Oman Libya Qatar Kuwait Iraq Iran, United Saudi
Rep. Islamic Arab Arabia Growth momentum appeared to be faltering in sev-
Rep. Emirates
eral oil-importing economies in early 2015. In
Source: International Energy Agency. Egypt, fragile export growth and higher costs of in-
puts (after a step depreciation in January) have held
back industrial production and dented confidence.
Figure 2.37 Oil revenues, 2014
In Tunisia, tourist arrivals weakened even before the
Fiscal revenues are highly dependent on oil. terrorist attacks in March. In contrast, on somewhat
Percent of total revenues improved security, industrial production and tour-
100 ism in Lebanon (especially from Arab countries) ap-
90
80 pears to have expanded in January and February.
70
60 The impact of trade-weighted U.S. dollar apprecia-
50 tion since mid-2014 on exchange rates and inflation
40
30 differed depending on country circumstances, in-
20 cluding the exchange rate regime. Both oil-import-
10
0 ing as well as oil-exporting countries continued to
Syrian
Arab
Yemen, Rep. Algeria Iraq Libya face depreciation pressures. To maintain competi-
Republic tiveness, central banks in Algeria, Egypt, Morocco,
and Tunisia allowed their currencies to depreciate by
Source: IMF (2014a and b); IMF (2013a and b); IMF (2010).
Note: For Syria, data is for 2010. 4-8 percent against the U.S. dollar in the first three
months of 2015. In trade-weighted terms, their ex-
change rates depreciated modestly. In contrast, pegs
basic state functions. In the Republic of Yemen,
against the U.S. dollar in Iraq, Jordan, and Lebanon
growth continued to be positive in 2014, but in
caused a significant trade-weighted appreciation
Iraq, the economic disruptions of the ISIL insur-
(Figure 2.38).
gency, and flat government expenditures, contrib-
uted to a contraction in 2014. Algeria saw strong Currency depreciations and the prevalence of ad-
domestic demand and activity in non-oil sectors, ministered fuel prices have limited the impact of
partly as a result of double-digit credit growth. lower global food and energy prices on domestic
Growth in oil-importing developing countries was consumer prices (Figure 2.39). As a result, inflation
broadly flat at 2.8 percent in 2014.3 Growth in has remained elevated in Algeria, Egypt, and Tuni-
Egypt (on calendar year basis), Lebanon and Jordan sia, and increased in Morocco. In contrast, in Leba-
picked up in 2014. In Egypt, the economy benefited non, Jordan, and Iraq, which maintain exchange
from a rebound in tourism, public spending, and a rate pegs against the appreciating U.S. dollar, infla-
return of confidence, as a result of political stabiliza- tion slid to near-zero (Jordan) or has turned nega-
tive (Lebanon, Iraq).
3Developing
Fiscal deficits widened markedly in 2014 in oil-
oil-importing countries are: Djibouti, the Arab Re-
public of Egypt, Jordan, Lebanon, Morocco, Tunisia, and West Bank exporting developing countries, but narrowed mar-
and Gaza. ginally in oil-importing ones. For oil exporters,
GLOBAL ECONOMIC PROSPECTS | JUNE 2015 MIDDLE EAST AND NORTH AFRICA 143
sharp oil revenue losses and rapid spending growth Figure 2.38 Nominal effective exchange rates
on public sector wages and subsidies have widened Exchange rates have appreciations in countries with exchange rates pegged to the
deficits to 5.2 percent of GDP from 2.7 percent of U.S. dollar.
GDP in 2013. In oil-importing countries, fiscal bal-
Percent change, Dec. 2014 Apr. 2015
ances have improved somewhat, as spending pres- 13
sures from subsidies eased with falling oil prices, and 11
national banks were also active in Lebanons sover- Source: World Bank.
eign bond issuance.
positive factors include higher real household in- Iraq). Still-robust growth in GCC countries,
comes from low oil prices and rising external de- driven by government spending that benefits sec-
mand as the Euro Area recovery gains traction. Re- tors that heavily employ migrants, as well as
silient, albeit slowing, remittance growth is also strengthening Euro Area growth, will raise remit-
expected to support activity. Improving investor tance inflows especially in Egypt, Jordan, Tunisia,
confidence should attract capital inflows, especially and Yemen.
into Egypt and Lebanon. Official financing is ex-
pected to remain robust, both to finance budgets in
Egypt and Lebanon and to support refugee needs Risks
across the region. In Tunisia, however, the attacks in
March are expected to set back tourism; growth is Risks remain tilted to the downsidemore so than
expected to remain weak at 2.6 percent in 2015. in other regionsas a result of security challenges.
The key risks remain an escalation of violence and
Due to continued security challenges and low oil oil price volatility.
prices, growth is expected to nudge downwards
in oil-exporting countries to 1.1 percent on aver- Security risks loom large across the whole region.
age in 2015. However, as oil prices stabilize and Violence could escalate in countries that are cur-
recover and security concerns gradually ease, rently experiencing conflict, and could spread to
growth is expected to rebound to 3.3 in 2017. In neighboring countries, as demonstrated in the ter-
Iraq, an agreement between the central govern- rorist attacks in Tunisia. Even if violence does not
ment and that of the Kurdish region is expected permanently disrupt economic activity, it could dis-
to allow for an expansion in oil production. For rupt or sever transport links that are critical for the
the Islamic Republic of Iran the baseline scenario small, open economies in the region (Ianchovichina
assumes sanctions relief in line with the interim and Ivanic 2014). Activity in the tourism sector
steps taken so far. In Libya, the baseline scenario would contract and domestic and external investor
assumes that oil output will expand very gradu- confidence would weaken. This would especially
dampen FDI in non-natural resource sectors. Al-
ally amid a challenging security situation. If,
though FDI in the natural resource sector tends to
however, a comprehensive political agreement is
be less sensitive to security risks, it may also decline
reached, oil exports could quickly resume and
if oil prices fall further, or do not gradually recover
GDP rebound by more than 50 percent in 2016.
as currently expected (Burger, Ianchovichina, and
The decline in oil prices will have major, and en- Rijkers 2015; Witte et al. 2015).
during, effects on fiscal and external positions in
If violence damages oil installations and disrupts oil
oil-exporting and oil-importing countries alike.
production on a large scale, oil prices could spike
Exporters will continue to rein in spending in a
sharply for an extended period. The economic dis-
(procyclical) effort to offset sharp falls in oil rev-
ruption would outweigh any benefit from higher oil
enues. Nevertheless, their fiscal deficits are ex-
prices for the region as a whole, although some oil-
pected to widen to 8.2 percent of GDP in 2015.
exporting countries unaffected by the disruption
In contrast, deficits in oil importers should nar-
may benefit. Oil-importing countries, however,
row to about 8.7 percent of GDP in 2015, as a
would see spikes in inflation, fiscal and external
result of lower costs of fuel subsidies. By 2017,
pressures. These could be accompanied by sharp
improving growth and adjustment measures slowdowns or reversals in capital inflows. Since vir-
should help narrow deficits for both oil-import- tually all countries in the region (except the Islamic
ing and -exporting countries by an average of Republic of Iran) have current account deficits in
about 6 percent of GDP. excess of 5 percent of GDP, a disruption or reversal
Current account balances are expected to im- of capital inflows could cause large exchange rate
prove in oil-importing countries and deteriorate pressures. Conversely, a further fall in oil prices
in oil-exporting countries. In some oil-exporting would intensify the external and fiscal pressures cur-
countries, however, where new oil production is rently faced by oil exporters, while growth in oil im-
expected to be available for export, current ac- porters could continue to be held back by structural
count balances are expected to improve (Algeria, impediments to growth. Long-standing problems,
GLOBAL ECONOMIC PROSPECTS | JUNE 2015 MIDDLE EAST AND NORTH AFRICA 145
including high unemployment, especially among Figure 2.40 Share of exports to GCC and Euro Area
youth and women, and the poor quality of basic ser- countries, 2013
vices, such as education and health, remain unsolved The slowdown in oil-exporters in the region dampens activity in trading partners.
(World Bank 2015k). EU GCC
Percent
One significant upside risk is a possible perma- 80
The GCC countries and the Euro Area are the Source: UN Comtrade.
regions largest trading partners and the outlook Note: The GCC includes Bahrain, Kuwait, Qatar, Oman, Saudi Arabia, and United Arab Emirates.
Algeria
Jordan
Egypt, Arab
Iraq
Tunisia
Lebanon
Djibouti
Yemen, Rep.
Morocco
Iran, Islamic
Rep.
Rep.
Iraq
Jordan
Morocco
Tunisia
Yemen, Rep.
Libya
Percent, year-over-year,
4-quarter moving average
30
20
10
0
-10
-20
-30 Jordan Lebanon
Morocco Tunisia
-40 Egypt, Arab Rep.
2010Q3
2010Q4
2011Q1
2011Q2
2011Q3
2011Q4
2012Q1
2012Q2
2012Q3
2012Q4
2013Q1
2013Q2
2013Q3
2013Q4
2014Q1
2014Q2
2014Q3
2014Q4
Growth in the South Asia region rose to 6.9 percent in 2014 and is expected to continue firming over the forecast
period, led by a cyclical recovery in India and supported by a gradual strengthening of demand in high-income
countries. The decline in global oil prices has been a major benefit for the region, driving improvements in fiscal
and current accounts, enabling subsidy reforms in some countries, and facilitating the easing of monetary policy.
Macroeconomic adjustments in India since 2013 have reduced potential vulnerability to headwinds from the
tightening of monetary policy in the U.S. Risks to the outlook are balanced, and depend on the implementation
of structural reforms, including those that help to delink fiscal balance sheets from global energy prices. Political
uncertainty, stressed bank balance sheets, and the ability to maintain fiscal discipline are some of the other key risks
to the region.
149
150 Chapter 2 G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5
Figure 2.46 India: Industrial production and credit migrants increasing from about 1 million in 2010 to
High frequency data show industrial production gaining momentum but weak external
around 2 million in 2013). However, remittances
demand and slow credit growth. growth decelerated in 2014, possibly reflecting less
use of formal transfer channels. Remittances to In-
Percent, 3m-on-3m saar Year-on-year,percent, 3-month
moving average dia were broadly flat during 2014 and may reflect
60 16
the diversion of investment-oriented remittances
40 towards the higher returns offered by Indian stock
12
20 markets under a simplified portfolio investment re-
gime for the diaspora introduced in late 2013.
0 8
Lower oil prices have improved the terms of trade
-20
4 and helped narrow regional trade deficits (Figure
Industrial production
-40 2.48). Trade deficits in Bhutan, Maldives, Pakistan,
Nominal credit (RHS)
-60 0 and Sri Lanka, should see the largest improvements,
Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 given evidence of stronger short-term response of
Sources: IFS, Haver Analytics, and World Bank.
Note: SAAR refers to seasonally adjusted and annualized data.
imports to oil price movements. Although India is a
major (net) oil importing economy, the improve-
ment is expected to be relatively more modest as
Figure 2.47Export growth
diesel and other petroleum products comprise a sig-
Regional exports have struggled to build momentum since the second half of last year. nificant share of exports (World Bank, 2015m).
Nevertheless, with lower inflation expectations
Percent, quarter-on-quarter saar curbing demand for imported gold as a hedge, In-
60
Bangladesh India Pakistan Sri Lanka dias trade deficit is improving and this has helped
40 narrow the current account deficit to 1.4 percent of
20 GDP in 2014, down from 5.0 percent in
mid-2012.
0
External balances in the region have also been sup-
-20
ported by strong remittance inflows. In the case of
-40 Pakistan, remittances have been a key factor in help-
ing contain the current-account deficit at an esti-
-60
Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 mated 1.2 percent of GDP in FY2014/15. Together
Sources: IFS, Haver Analytics, and World Bank. with the strong economic prospects of some econo-
Note: SAAR refers to seasonally adjusted and annualized data.
mies, strong capital inflows, and healthy or improv-
ing current account balances, local currencies have
ects to connect Chinas western regions with Paki- broadly held their value against the U.S. dollar (Fig-
stans Gwadar port have buoyed investor confidence, ure 2.49). However, the Rupee has come under
with current 5-year CDS spreads some 400 basis some pressure in late April and early May, in part
points lower than in December 2014. reflecting reduced foreign investor appetite for equi-
Remittances inflows have been particularly strong ties and bonds in response to unexpected tax bills
in Pakistan, amounting to $13.3bn in the first three that India imposed late last year. On a trade-
quarters of FY201415 (a 15 percent increase from weighted basis, though, currencies have appreciated
a year earlier), helping shore up consumption in the slightly in recent months (Figure 2.50) implying a
face of energy bottlenecks that have hampered pro- loss of price-competitiveness at a time when export
duction and exports. Flows to Sri Lanka and Ban- momentum is already negative.
gladesh have also remained strong, in the latter, Inflation has fallen to record or multi-year lows in
helping to blunt the impact on the economy of re- the region (Figure 2.51). Partly reflecting favorable
cent political tensions and a transport blockade in base effects and the impact of lower energy and food
February that affected garment exports. In Nepal, prices, the disinflation trend has been further rein-
the outflow of migrants has continued to be strong forced by relatively strong local currencies, and has
after a period of massive growth (with the stock of facilitated policy easing in India and Pakistan, and
G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5 C h a p t e r 2 | s o u t h as i a 151
most recently in Sri Lanka. In India, lower inflation Figure 2.48Goods trade balance
has primarily been driven by a sharp deceleration in A lower oil import bill is helping curb trade deficits.
food prices, although improvements in the monetary
US$, millions, 3-month moving average
policy framework may have also begun to help an- Bangladesh Pakistan Sri Lanka India (RHS)
0 0
chor inflation expectations. Core inflation has also
eased in line with inflation expectations. -500
-5,000
In India, although diesel prices were liberalized, pe- -1,000
for diesel and gasoline respectively, but is higher Sources: Haver Analytics and World Bank.
in Pakistan and Sri Lanka (World Bank, 2015m), Figure 2.49Exchange rates against the U.S. dollar
where reductions in (administered) fuel prices
have helped to push inflation to multi-year or re- Regional currencies have only depreciated marginally against the US dollar...
cord lows. Inflation has eased somewhat in Ban- LCU vs. US$, index 100 = January 2013
Figure 2.51 Inflation Reforms are also underway elsewhere in the region,
Inflation has fallen to multi-year or record lows.
albeit at a slower pace. In Pakistan, an ambitious but
piecemeal privatization program has been launched.
Percent, year-on-year
14 Bangladesh India Severe energy shortages in January 2015 exposed
Nepal Pakistan
12 Sri Lanka
the slow progress thus far on energy reforms. How-
ever, almost half ($15.5 billion) of recent invest-
10
ments agreed with China in April are estimated to
8 be channeled into coal, nuclear, renewable energy
6 and hydropower projects in the next few years.
4 These are expected to add some 10,000mw in elec-
2
tricity generation to the national grid (about half of
current installed capacity) by 2017, which should
0
Jan-13 Sep-13 May-14 Jan-15 help ease energy constraints. Nepal introduced re-
Sources: Haver Analytics and World Bank.
forms to the subsidy system in 2014Q4, including
the liberalization of petroleum product prices.
However, progress on rationalizing prices and dis-
Figure 2.52 Government finances mantling subsidies for liquefied petroleum gas
Deficits remain large in several countries and debt levels high. (LPG) has been slower despite a large fiscal cost. In
Percent of GDP, 2014 Percent of GDP, 2014 Sri Lanka, policy actions by the newly-elected gov-
6 160
Fiscal deficit Public debt (RHS) ernment include a one-off tax increase for large cor-
2
120 porates, a cut in infrastructure spending, and a sub-
-2 stantial increase in public sector salaries. These
80
-6 actions have added to investor uncertainty ahead of
-10
40 upcoming parliamentary elections in June.
-14 0
Pakistan
Maldives
Sri Lanka
Afghanistan*
Nepal
Bangladesh
India
Bhutan
Outlook
Regional GDP growth is expected to remain firm at
Sources: World Bank.
Note: Asterisk denotes that data is not available for public debt. just over 7 percent during 2015, and rise at a moder-
ate pace toward 7.5 percent in 2017, in line with the
tion in monetary and fiscal policy has strength- ongoing recovery in India and broadly stable growth
ened. On the fiscal side, this is reflected in the in the rest of the region. In the baseline, stronger
improvement in the quality of fiscal consolidation regional growth is underpinned by strengthening
planned in the latest government budget (albeit at public investment. Private investment should also
the cost of a slower pace of fiscal tightening) that improve, but at a slower pace as high levels of NPLs
includes an expansion in public investment, simpler on banking sector balance sheets in Bangladesh,
and lower corporate taxes offset by higher excise Bhutan, India, and Pakistan hold back the recovery
taxes on fuel. Legislation is also pending on a goods in credit growth.
and service tax (GST), which would replace the ex- Tailwinds from the fall in global commodity prices
isting system of multiple (and distortionary) local and falling inflation should support real incomes and
and state taxes with a single unified national GST, consumer spending in the early part of the forecast
but this will likely take time to pass. Regarding mon- period, as should relatively stable growth in remit-
etary policy, the adoption of a formal inflation target tance inflows, which are a substantial share of GDP
has boosted the independence of Indias central bank in the region (World Bank 2015k). Although there
and provides a clear anchor for inflation expecta- are risks that the recent fall in global oil prices could
tions. Other key reforms in India include the elimi- adversely impact remittances from oil-producing
nation of diesel subsidies in 2014 and, more recently, Gulf economies (a major destination for migrants
an increase in foreign shareholding limits in the in- from SAR), there are several offsetting trends. These
surance sector, which should boost FDI. include large fiscal and sovereign wealth fund buffers
G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5 C h a p t e r 2 | s o u t h as i a 153
in Gulf Cooperation Council (GCC) countries that should also help support business confidence
should help to support activity there alongside on and lift private investment.
going large scale construction activities (including Energy shortages in Pakistan, which have
preparations for the 2022 FIFA World Cup in Qa- weighed on investment, and activity in recent
tar), and improving economic prospects in the U.S. years, are expected to diminish gradually as in-
and Euro Area. Most governments are expected to vestment in energy projects increases supply.
remain focused on rebuilding fiscal space and curb- Credit growth is also expected to pick up,
ing fiscal deficits through a mix of expenditure and helped by fiscal consolidation. Coupled with
revenue measures (notably the introduction of GSTs solid growth in remittances, and recovering
or VATs in India and Bangladesh). manufacturing and service sector growth,
Accordingly, growth will be driven primarily by do- GDP growth is forecast to rise from 3.7 per-
mestic demand during the early part of the forecast cent in 201516 to 4.5 percent in 201718.
period, with a rising contribution from external de- In Bangladesh, the growth forecast for
mand in later years as growth in advanced economies FY2015 has been revised down on account
picks up. Although imports should rise as the invest- of recent political tensions. The forecast is
ment strengthens, current account balances should now 5.6 percent, compared with 6.4 percent
remain manageable, reflecting macroeconomic ad- in the previous forecast and 6.1 percent in
justments in recent years (in India, partly in response FY2014. As tensions settle, growth should
to currency pressures during the taper tantrum in pick up in line with a recovery in exports and
mid-2013), domestic fiscal consolidation efforts, and investment. Consumption should also re-
lower oil import bills. As a large, financially-open main supported by resilient remittance in-
emerging market economy, India remains exposed to flows, particularly following the resumption
volatility in global financial markets and shifts in of migration of Bangladeshi workers to Saudi
global portfolio allocations that may follow policy Arabia. With the economy running at capac-
ity, growth is expected to remain at close to
rate hikes in the United States, expected later this
potential over the forecast period.
year. However, the substantial reduction in current
account deficits since 2013, record-high foreign ex- Among the smaller economies of the region,
change reserves, and improvements in the policy en- the severe earthquake in April will weigh on
vironment should also help contain such risks. growth in Nepal this year. However activity
should rebound as reconstruction efforts are
India is expected to continue on its path of re- stepped up, and should also remain sup-
covery, with growth expected to reach 8 percent ported by relatively healthy service sector
in FY201718, from 7.5 percent in FY2015 growth and private consumption spending
16. The improvement in the outlook hinges on (with remittances expected to increase). Both
steady progress on key reforms, including re- Bhutan and Nepal, whose currencies are
moving bottlenecks in public-private partner- pegged to the Indian rupee, should also ben-
ships, the GST bill, and input market reforms efit from strengthening growth and lower in-
(land, labor and finance) which are needed to flation in India over the forecast period. In
ease supply side and energy constraints. The Bhutan, the construction of major hydro-
GST would help create a single markets for power projects and the relaxation of credit
goods and broaden the tax base. Fiscal disci- controls are expected to lift growth over 7
pline elsewhere would help public capital ex- percent over the forecast period, and even
penditures to rise as announced in the recent higher once hydro-electricity exports to In-
budget, and potentially attract private invest- dia begin to rise. Growth in Sri Lankais ex-
ment, which has been extremely weak in recent pected to decelerate gradually to its potential
years. The slower pace of fiscal consolidation growth rate, as the government reassesses the
over the next few years means that fiscal tight- investment-led growth model, partially off-
ening will prove less of a drag, while lower cor- set by increases in consumption, and strong
porate taxes and base-broadening measures tourism and remittance inflows. In Afghani-
154 Chapter 2 G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5
stan, growth is projected to rise from 2.5 sage of key legislative bills pending in parliament
percent in 2015 to 5 percent over the fore- (land acquisition reforms and GST) is delayed
cast period if political uncertainty dimin- which could dampen investor sentiment and weigh
ishes and the security environment improves. on infrastructure spending plans. Energy remains a
However, the fiscal revenue shortfall is ex- key constraint, and the fall in oil prices over the past
pected to persist if reforms to improve revenues year represents a rare opportunity to rationalize en-
continue to stall. ergy prices as well as undertake wide-ranging energy
sector reforms. To the extent that credible reform
agendas boost investor sentiment, they will also
Risks and Policy Challenges help create a virtuous cycle of stronger investment
(including foreign investment) and output growth
The key risks for the region are balanced and mainly in the short term. If, however, reforms stall, this
domestic in nature. They relate to whether invest- could result in significantly lower investment and
ment growthwhich has stalled in recent years in growth than projected in the baseline.
India, continues to decline in Pakistan (Figure
Political uncertainty remains an important risk factor
2.53), and has weakened in Bangladesh more re-
in Afghanistan, Bangladesh, Nepal, and Pakistan. In
centlystrengthens as forecast. External risks in-
addition to delaying or distracting attention from
clude potential headwinds from financial market
legislative reforms, it could hold back broader invest-
volatility as monetary policy is tightened in the
ment sentiment and spending. In Pakistan, promised
U.S., although these are mitigated by a significant
Chinese investments are contingent on improve-
improvement in current account balances in the re-
ments in security and the fulfillment of institutional,
gion. Slower growth in the Gulf region or a disrup-
regulatory, logistical and other commitments by the
tion of oil trade (due to conflicts in the MENA re-
government. In Bhutan, delays in the construction of
gion) could affect remittance inflows and lift oil
hydropower projects, and in Nepal uncertainty over
prices, with repercussions for the region. Upside
the extent to which FDI commitments translate into
risks include a faster pace of reforms in India and
hydropower investments remain key risks. The recent
other countries, better-than-anticipated growth in
natural disaster in Nepal has added to these risks,
high-income countries, and a fall in oil prices below
with policy makers likely to be focusing attention on
current baseline projections.
disaster relief and reconstruction.
The regional growth outlook is predicated on the
In addition, stressed banking sectors and corporate
ability of governments to deliver on reforms and on
balance sheets are key downside risks in several
a pickup in domestic investment, both of which are
countries in the region. Corporate leverage in India
essential to ease infrastructure bottlenecks over the
is among the highest among major emerging market
medium term. In India, there is a risk that the pas-
economies, and foreign currency debt in the form of
external commercial borrowings has been steadily
Figure 2.53Investment increasing over the past decade (Lindner and Jung,
Investment as a share of GDP has trended lower in Pakistan in recent years to extremely
2014). In both India and Bangladesh banking sector
low levels. strains are largest in state-owned banks. In Pakistan,
Percent of GDP the heavy reliance of the government on the banking
40
Bangladesh India Pakistan Nepal sector for budgetary borrowing is crowding out pri-
35 vate sector credit growth. In the absence of measures
to address problem loans on banking sector balance
30
sheets (Figures 2.54 and 2.55), rising global funding
25 costs (as U.S. policy rates rise) could impede already
20
weak credit growth (Figure 2.56) and a strengthen-
ing of investment. In Nepal, significant damage to
15 physical infrastructure (private and public) may
10
present short to medium term risks to financial sec-
2000 2002 2004 2006 2008 2010 2012 2014 tor stability from potential runs on the banking sec-
Sources: Haver Analytics and World Bank. tor that trigger a liquidity crisis, and if banks see
G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5 C h a p t e r 2 | s o u t h as i a 155
their capital buffers eroded by the physical destruc- Figure 2.54 India: Impaired loans
tion of real estate pledged as collateral or a surge in Bank asset quality has deteriorated in India in recent years.
NPLs (as income streams of debtors are disrupted).
Percent of total assets
11
Other key risks and policy challenges include the
ability to maintain fiscal discipline. In India, fiscal 9 Restructured loans NPL ratio
FY2008
FY2009
FY2010
FY2011
FY2012
FY2013
FY2014
Sep-14
taxes), the ability to meet fiscal deficit targets is
likely to depend on the ability of the government to
restructure and privatize loss-making enterprises. Sources: IMF, Haver Analytics and World Bank.
Pakistan
Sri Lanka
Afghanistan
Bangladesh
India
Bhutan
Bangladesh and Pakistan. In Pakistan, energy pric-
ing reforms are particularly important given the
countrys heavy dependence on imported oil in elec- Sources: IMF
tricity generation, and heavily subsidized electricity Note: Data for India includes restructured loans
Finally, greater regional integration and further which has weighed on bank lending.
1Indiahas deregulated diesel prices, increased excise duties on trade barriers would provide opportunities to bene-
petroleum and diesel, and under the Direct Benefit Transfer scheme,
begun to deposit entitled subsidies directly into the bank accounts of
fit from technological spillovers, improve access to
consumers for the purchase of market-priced LPG cylinders. See World the large U.S. market, and stimulate more produc-
Bank (2015m) for more details. tive growth in domestic industries.
156 Chapter 2 G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5
GDP growth in Sub-Saharan Africa rose from 4.2 percent in 2013 to 4.6 in 2014, supported by domestic de-
mand. The World Bank forecast has the region expanding at a slower pace in 2015, with growth averaging 4.2
percent, a downward revision of 0.4 percent relative to the January 2015 Global Economic Prospects (GEP).
Prospects in Angola and Nigeria have deteriorated because of the sharp drop in the price of oil, and in South
Africa because of the ongoing difficulty in overcoming electricity problems. Risks to the outlook remain tilted to
the downside. On the domestic front, risks associated with elections, the Boko Haram insurgency, the Ebola crisis,
and fiscal vulnerabilities dominate. Chinas slowdown, tightening of monetary policy in the United States, and
the fragility of the recovery in Europe, remain as key external risks.
Nigeria
Congo, Rep.
Angola
Gabon
Cameroon
Ghana
Africas oil exporters, which account for nearly half
of the regions GDP, are experiencing a major ad-
verse shock1. Their economies depend heavily on
oil for revenues and foreign reserves (Figure 2.57).
Between June 2014 and January 2015, oil prices de-
clined by nearly 50 percent, more than the prices of Source: IMF Country reports. Note: Latest available from latest IMF Article IV reports.
other commodities, and have remained low despite
the recent uptick (Figure 2.58). This has put sub-
stantial pressures on the fiscal and current account cent to $34.25 billion (6.0 percent of GDP), drawn
balances of oil exporters. down by the central bank in its attempt to support
The oil exporters in Sub-Saharan Africa are less resil- the naira. In March, Standard & Poors downgraded
ient to the price shock than many other oil-exporting Nigerias credit rating from B+ to BB-.
countries because of their much more limited policy Several of the regions oil exporters have started to
buffers. In Nigeria, the Excess Crude Account, a sov- adjust. In Angola, the oil price assumption in the
ereign wealth fund, totaled just $2.0 billion at the 2015 budget was revised down to $40/bbl from the
end of 2014. Gross international reserves fell 20 per- original assumption of $81/bbl. In Nigeria, it was
reduced to US$53/bbl from the earlier forecast of
$65/barrel. The corresponding downward revision
The main author of this section is Gerard Kambou. in expected revenues induced plans to cut public
1The regions main oil exporters include Angola, Cameroon, Congo
spending. In Angola, Parliament approved a 25 per-
(Republic), Chad, Equatorial Guinea, Gabon, and Nigeria. Of these,
Nigeria and Angola are the largest; they are also the regions first and cent reduction in spending from the original plan
third largest economies. for 2015. The cuts cover public investment projects
157
158 Chapter 2 G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5
Figure 2.58 Commodity prices February 2015 was more than 20 percent (Figure
Since June 2014 oil prices have declined by more than 40 percent.
2.59). In response, the central bank ended its man-
aged float exchange-rate regime, closing down the
Percent change of nominal indices,
2010=100, June 2014April 2015
Dutch Auction System window. The exchange rate
0 is now set in the interbank market. The naira re-
-10 bounded in March and was stable through April,
-20
as successful elections helped improve market senti-
-30
ment, but remained weak (Figure 2.60).
-40 In Angola, the central bank hiked its key interest
-50 rate by 50 basis points, to 9 percent, in the fourth
quarter, to anchor inflation expectations. Following
Natural gas
Cocoa
Iron ore
Gold
Coffee
Tea
Copper
Platinum
Oil
Nov-14
Dec-14
Mar-15
Apr-15
Jan-14
Mar-14
Jul-14
Feb-14
May-14
Jun-14
Aug-14
Feb-15
quarter of 2015, however. Growth was held back by Figure 2.60Exchange rates
energy shortages, output contraction in agriculture, The regions major currencies continue to depreciate against the U.S. dollar.
weak investor confidence, policy uncertainty, and the
LCU/US$, percent change, year-to-date
anticipated gradual tightening of monetary and fiscal 10
policy. Elsewhere, the economies of Guinea, Liberia,
0
and Sierra Leone, the countries most affected by the
-10
Ebola outbreak, remained weak as activity in mining,
services, and agriculture continued to contract. -20
-30
Spreads on sovereign credit-default swaps rose
sharply in a number of commodity exporters, sug- -40
Angola Ghana Kenya Nigeria
gesting that investors are discriminating among the -50 Uganda South Africa Zambia
Oct-14
Nov-14
Dec-14
Mar-15
Apr-15
Jan-14
Mar-14
Jul-14
Feb-14
May-14
Jun-14
Aug-14
Feb-15
regions frontier markets based on their economic
outlook. The sovereign spreads for the oil exporters
Angola, Gabon, Ghana, and Nigeria have remained
high, well above the 2013 taper tantrum peak Source: Bloomberg.
(Figure 2.63). The spreads for Zambia have also Figure 2.61Inflation
remained elevated, reflecting investors concerns
With the exception of Ghana price pressures look contained in the region.
about soft copper prices, and uncertainty over gov-
Year-on-year, percent Sub-Saharan Africa
ernment policy. 35 Angola
Ghana
At the same time, many of the regions frontier mar- 30 Kenya
Nigeria
kets are taking advantage of the very low global in- 25 South Africa
Uganda
terest rates, and have issued Eurobonds to finance 20 Zambia
World
infrastructure projects. Eurobond issuance in the 15
region has remained robust (Figure 2.64), as financ- 10
ing costs in the Euro Area have fallen sharply follow- 5
ing the European Central Banks introduction of an 0
Jul-10
Jul-11
Jul-12
Jul-13
Jul-14
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
ambitious program of quantitative easing in March.
Frontier markets increased access to international
capital markets was demonstrated by Ethiopias over-
subscribed debut 10-year US$1 billion bond, issued Source: World Bank
in December 2014, and Cte dIvoires return to Figure 2.62 Real effective exchange rates
the market in February. Debt-to-GDP ratios for the
countries with increased bond market access (Cte With the exception of the Nigerian naira, REERs have remained broadly stable.
Outlook 80
70
60
Growth in Sub-Saharan Africa is projected to slow to 4.2
Jul-10
Jul-11
Jul-12
Jul-13
Jul-14
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Figure 2.63 Sovereign bond spreads 5.0 percent in 2015 and 5.6 percent in 201617, a faster
Sovereign spreads of oil exporters rose sharply.
pace than several other developing regions (Figure 2.65).
Basis points Sub-Saharan Africa
Consumption dynamics will differ for oil export-
1,300 Emerging markets
Angola
ers and importers. Private consumption growth is
1,100 Gabon
Ghana
expected to slow in the oil exporters as cuts to sub-
900
Nigeria sidies to alleviate pressure on the budget result in
South Africa
Zambia higher fuel costs. Purchasing power is also expected
700
to decline due to currency weakness, which would
500
push up the cost of imports in local currency. By
300 contrast, lower fuel prices are expected to contribute
100 to lower inflation in the oil importers, which should
Apr-12
Jun-11
Oct-11
Dec-11
Oct-13
Dec-13
Apr-14
Apr-15
Aug-11
Feb-12
Jun-12
Oct-12
Dec-12
Apr-13
Aug-12
Feb-13
Jun-13
Aug-13
Feb-14
Jun-14
Oct-14
Dec-14
Aug-14
Feb-15
help boost consumers purchasing power and sup-
port domestic demand. The price level impact of
Source: Bloomberg. currency depreciation could, however, offset some
of these effects. Meanwhile, remittance inflows in
Figure 2.64Eurobond issuance the region are projected to decelerate in 2015, re-
flecting in part the appreciation of the U.S. dollar,
Eurobond issuance in the region is set to rise further.
before picking up gradually in 201617.
Total value of Eurobonds
issued since 2009, US$, millions Chinas investment slowdown, and low commod-
14,000
ity prices, suggests that FDI flows may not provide
12,000
much support to growth. Furthermore, government
10,000 plans in oil exporting countries to reduce the bud-
8,000 get deficit are likely to hit capital expenditure more
6,000 than current expenditure, as governments seek to
4,000 limit cuts in public-sector wages or social spending.
2,000 However, governments in most oil-importing coun-
0
tries, especially the low-income, non-oil commodity
2009 2010 2011 2012 2013 2014 exporters, are expected to continue to expand public
Source: Bloomberg. investment in priority sectors such as electricity and
roads. Frontier markets are expected to continue to is-
Figure 2.65GDP growth outlook sue Eurobonds to finance key infrastructure projects.
Growth is expected to slow in the region in 2015 and pick up moderately in 2016-17. The fiscal policy stance is expected to remain tight
Percent throughout 2015 in oil-exporting countries. The
Sub-Saharan Africa excluding South Africa
8 Sub-Saharan Africa revised budgets in Angola and Nigeria indicate that
7 Developing countries excluding China while capital expenditures will bear the brunt of ex-
6 penditure measures, recurrent expenditures will also
5 be reduced. Despite these adjustments, fiscal deficits
4 in these countries are likely to remain high because of
3 low revenues. Fiscal deficits are also expected to re-
2 main elevated in oil-importing countries, as spending
1 on goods and services and wages continues to expand.
0 Net exports are projected to make a marginally neg-
2007 08 09 10 11 12 13 14 15 16 17
ative contribution to real GDP growth. Low com-
Source: World Bank.
Note: The shaded area represents forecasts.
modity prices will depress export receipts, especially
among oil exporters, even as export volumes rise in
some countries. The current account surpluses in
support growth, because of stronger prospects in high- Angola and Nigeria are expected to turn into a defi-
income economies. Excluding South Africa, GDP cit as their terms of trade have deteriorated sharply.
growth for the rest of the region is projected to average Among oil importers, current account balances are
G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5 C h a p t e r 2 | S U B - S A H A R A N A F R I CA 161
Figure B2.1.2 Sub-Saharan Africas trade Figure B2.1.4 Cumulative Chinese foreign
flows with China, 2013 direct investment in Sub-Saharan Africa
Sub-Saharan Africa exports to China are dominated by commodities.
The stock of Chinese FDI to Sub-Saharan Africa has doubled since
Percent of total 2009.
100
Other US$, billions
90
Other 25
80 Footwear
Apparel
70
Machinery Manufact. 20
60 goods
and
50 transport
15
40 Fuel and
chemicals
30
Manufact. goods 10
20
Metal
10
Fuel and chemicals comm. 5
0
SSA imports from China SSA exports to China
Source: UN Comtrade mirror data. 0
2009 2012
Source: Government of China 2013.
ects to gain a foothold in local African markets (Gov- SSA specifically. According to the Chinese Ministry of Commerce, by the
ernment of China 2013; Chun 2013). The distinction end of 2009, 88 percent of the FDI stock in Africa was located in SSA (cited
from GAO Report 2013).
between foreign direct investment (FDI) and official 2Chinese Ministry of Commerce statistics from http://www.chinaafri-
Figure B2.1.5 Chinese and U.S. foreign Figure B2.1.7 SSA manufacturing exports
direct investment in Africa to China
Chinese and US FDI flows to Africa are broadly comparable. Exports to China have grown rapidly.
US$, billions
Percent of total
12 China flows to Africa 14
Development finance
Figure B2.1.6 Chinese foreign direct
investment in Africa, by sector, 2012 Africa is the largest recipient of Chinese development
financing and its share is increasing. Africa received
The largest share of Chinese FDI to Africa has been directed to the
resource sector.
nearly half of the cumulative $54 billion provided by
Manufacturing
$3.4bn,
China in global foreign aid through 2012 (Figure
16% B2.1.8), significantly more than any other region
(Government of China 2011, 2014).
Financial sector
$3.9bn, Chinese official development assistance has been, by
18%
and large, complementary to aid from Organisation for
Economic Co-operation and Development (OECD)
Agriculture
$0.8bn, 4% countries. Chinese and OECD official development as-
$13.1bn,
62%
Other (inc. minerals,
infrastructure, transport) Figure B2.1.8 Distribution of aid and
Source: Government of China 2013. development financing flows from China
manufacturing is also indicative of Chinese firms ef- Africa is one of the largest recipients of Chinese aid.
Others
Asia
Africa
10 0
WB IDA lendimg
China(b)
OECD countries
United States(a)
ODA lending by
0
-10
-20
-30
2005 2007 2009 2011 2013 Source: World Bank 2013 Annual Report .
a. 2012 OECD Development Assistance Committee statistics.
Sources: OECD; Chinese Statistical Yearbook; MOFCOM. Cited from http://www.china b. Chinese Statistical Yearbook and MOFCOM. Cited from http://www.chinaafricarealstory
africarealstory.com/p/chinese-aid.html. .com/p/chinese-aid.html.
Note: OECD = Organisation for Economic Co-operation and Development.
sistance differ substantially in scale, nature, and degree of China and the African Development Bank in 2014.6
of concessionality (Brutigam 2011b; Strange et al. Finally, OECD country development assistance is typi-
2013).4 Although Chinese assistance increased rapidly cally accompanied by greater conditionality on social
as OECD disbursements declined (Figure B2.1.9), development projects and policy reforms. As a result,
Chinese aid remains well below the OECDs, amount- almost two-thirds of OECD assistance to Sub-Saharan
ing to $3.2 billion in 2013 compared with the $26 bil- Africa flows to the social infrastructure in health, edu-
lion disbursed by OECD countries in the same year cation, water, and sanitation, or toward emergency re-
(Figure B2.1.10). Chinese development assistance is lief and food aid (Figure B2.1.11). In contrast, half of
frequently packaged into agreements that mix grants Chinese assistance is for infrastructure.7
and investment, and concessional and non-concessional What has been the impact on growth in SSA?
loans (Brutigam, 2011a, 2011b).5
Growth has accelerated strongly in the region over the
China is also increasingly channeling development as- past two decades, coinciding with the expansion in eco-
sistance through multilateral institutions, including a nomic ties with China. There has been a direct impact
$2 billion co-financing fund between the Peoples Bank
institutions primarily for the purpose of promoting welfare and economic keeping and security operations in Sub-Saharan Africa, supported by
development in the recipient country. China is not a member of the OECD growing political relations. An example is the dispatch of combat troops
and does not follow its definition or practice on development aid. By this under the UN mandate in Malia first for China, which has previously
measure, the bulk of Chinese financing in Africa falls under the category of dispatched only noncombat personnel. In part, the increased engagement
development finance, but not aid (Strange et al. 2013). reflects a desire to reduce the impact of political instability on its supply
5There has been a longstanding debate over how the concessionality chain. Thus, the mediation efforts undertaken by China, between govern-
of these loans is defined. The 2014 White Paper on Aid by the Chinese ment and rebel forces in South Sudan in 2013, and the expanded naval co-
government offers some clarification, indicating that the difference be- operation with Djibouti to secure the Gulf of Aden, may be seen in the light
tween the concessional interest rates and the benchmark interest rates of the of Chinas imports of oil from South Sudan. In the first 10 months of 2013,
Peoples Bank of China is subsidized by the governments budget. these amounted to 14 million barrels, twice those from Nigeria (Sun 2014).
G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5 C h a p t e r 2 | S U B - S A H A R A N A F R I CA 167
Figure B2.1.11 Bilateral aid from OECD Figure B2.1.12 Contributions to growth
countries to Sub-Saharan Africa, by sector, in gross domestic product in Sub-Saharan
2013 Africa
OECD aid is concentrated in the social sector. Investment and exports have underpinned faster growth in
Percent of total bilateral commitments by OECD countries
Social infrastructure Sub-Saharan Africa since the 2000s.
and services*
Humanitarian aid Percent GDP growth
and food aid Investment (cont'n, %pts)
6 Exports (cont'n, %pts)
Economic infrastructure
services** GDP growth: average 1980-2013
5
Agriculture, forestry,
and fishing 4
Multisector
Sub-Saharan Africa 3
Action related to debt
Developing countries 2
Other program assistance
1
Industry, mining,
construction 0
0 China;
10OECD20 30on FDI.
40 50 -1
Sources: Ministry of Commerce, Statistics
Note: OECD = Organisation for Economic Co-operation and Development. 1980s 1990s 2000s 2002-2007 2010-2013
* Includes education, health, water and sanitation, and other such services. (pre-crisis (post-crisis
** Includes transport and communications and energy. period) period)
all African countries were to catch up with Mauritius (the country in SSA 9Busse, Erdogan, and Muehlen (2014) find a positive growth impact
with the densest road network), per capita growth in the region could in- from terms-of-trade effects in resource-rich economies (but no impact from
crease by 2.2 percentage points Chinese FDI).
168 Chapter 2 G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5
between Mombasa and Nairobi in Kenya, the first phase of a line that will rica by India actually surpassed the $45 billion by China during 200312. It
eventually link Burundi, Rwanda, South Sudan, and Uganda. Under the covered a wider range of sectors, including agro-processing, energy (including
deal, the Exim Bank of China will provide 90 percent of the cost to re- renewables), consumer goods, and financial services (OECD 2013). Green-
place the decades-old British colonial-era line with a 609.3 kilometer (379 field FDI is where a parent company constructs new operational facilities.
mile) standard-gauge link, while Kenya will fund the balance of 10 percent. In addition to the boost from the investment itself, the hiring of staff to run
http://news.xinhuanet.com/english/china/2015-02/24/c_134014338.htm. these facilities creates new long-term jobs.
G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5 C h a p t e r 2 | S U B - S A H A R A N A F R I CA 169
the development of human capital. Closer economic important for the regions growth prospects, better in-
cooperation among African countriesfor instance, tegration of the mineral sector into development and
harmonizing laws and facilitating cross-border busi- macroeconomic policy would help shield resource-ex-
ness and collaborationcould allow Africa to leverage porting countries from volatility in commodity prices
the benefits of commerce with the major emerging and assist with more sustainable, longer-term socioeco-
market economies (OECD 2013; Jacoby 2007). This nomic development (UNECA 2011). A higher degree
would also help lower the costs of bureaucracy and im- of processing of agricultural and raw materials would
prove competitiveness. Improvements in regional in- take better advantage of preferential access to Chinese,
frastructure would encourage investment (domestic U.S., and European Union markets and would mean
and foreign). Since natural resource wealth will remain more exports and jobs.
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statistical
appendix
Additional statistical data can be found online at
www.worldbank.org/gep
176 Global Outlook G LOBAL E C O N O M I C P R O S P E C T S | J U N E 2 0 1 5
June 2015
G lobal growth is expected to be 2.8 percent in 2015,
but is expected to pick up to 3.2 percent in 201617. Global
Economic
Growth in developing countries and some high-income
countries is set to disappoint again this year. The
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