Developing countries could be 'starved' of capital as financial stimulus ends
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Version 0 of 1. Adverse financial market reaction to the end of growth-boosting stimulus policies in the west could leave vulnerable developing countries starved of capital, according to the World Bank. In its annual Global Economic Prospects, released on Tuesday, the Washington-based bank said a severely negative response to the return of monetary policy to normal might lead to capital flows to emerging markets falling by up to 80% for several months. The bank said growth prospects were brighter this year than they had been in 2013 but the first co-ordinated expansion in five years in the west's "big three" economies – the US, Japan and euro region – had the potential to cause problems elsewhere in the global economy. Last December, the US Federal Reserve began to taper away the stimulus provided by its quantitative easing programme (an increase in the money supply caused by the purchase of bonds). The bank said that provided this adjustment happened in an orderly manner, there would be only a modest impact on developing countries. "However, should the adjustment be disorderly, as it was in response to speculation about when a taper might begin during the spring and summer of 2013, interest rates could rise more quickly. "In such a scenario, countries that have large current account deficits, large proportions of external debt and those that have had big credit expansions, would be among the most vulnerable." Andrew Burns, author of the Global Economic Prospects report, said: "The strengthening recovery in high-income countries is very welcome, but it brings with it risks of disruption as monetary policy tightens." Burns said the bank had modelled the outcome if financial markets were unsettled by the process. He added that an increase in interest rates of one percentage point would lead to a 50% decline in capital flows, while a two percentage point fall would lead to an 80% drop, potentially "provoking a crisis in some of the more vulnerable countries". The bank is forecasting that global growth will pick up from 2.4% in 2013 to 3.2% this year, and to<strong> </strong>3.4% in 2015. It believes much of the acceleration will be due to an improvement in economic conditions in high-income countries, where for the first time in five years all three of the main regions – the US, Europe and Japan – will be growing. Developing countries are expected to grow by 4.8% in 2014, slower than previously envisaged and 2.2 points down on the growth rates experienced in the half-decade before the financial crash of 2007. "Almost all of the difference reflects a cooling off of the unsustainable turbo-charged pre-crisis growth, with very little due to an easing of growth potential in developing countries," the bank said. The Global Economic Prospects study pencils in expansion of 2.2% for advanced countries in 2014, up from 1.3% in 2013. "Among high-income countries the recovery is most advanced in the US, with GDP growing for 10 quarters now. "Growth in the euro area, after two years of contraction, is projected to be 1.1% this year, and 1.4% and 1.5% in 2015 and 2016 respectively." Jim Yong Kim, president of the World Bank, said: "Growth appears to be strengthening in both high-income and developing countries, but downside risks continue to threaten the global economic recovery. "The performance of advanced countries is gaining momentum, and this should support stronger growth in developing countries in the months ahead. "Still, to accelerate poverty reduction developing nations will need to adopt structural reforms that promote job creation, strengthen financial systems and shore up social safety nets." Our editors' picks for the day's top news and commentary delivered to your inbox each morning. |