Global
Economic
Prospects

Volume 7 | June 2013

Less volatile,
but slower growth
The World BankA World Bank Group Flagship ReportGLOBAL
7 ECONOMIC
2013 PROSPECTS

VolumeJune

Less volatile,
but slower growth© 2013 International Bank for Reconstruction and Development / The World Bank
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The cutoff date for the data used in the report was June 7, 2013.

ACKNOWLEDGMENTS
This report is a product of the Prospects Group in the Development Economics Vice Presidency ofthe World Bank. Its principal authors were Andrew Burns and Theo Janse van Rensburg.
The project was managed by Andrew Burns, under the direction of Hans Timmer and the guidanceof Kaushik Basu.
Several people contributed substantively to the report.
The modeling and data team was led by Theo Jansevan Rensburg, assisted by Trung Thanh Bui, Muhammad Adil Islam and Irina Magyer. The projections, regional write-ups and subject annexes were produced
by Dilek Aykut (Finance, Europe & Central Asia), John
Baffes (Commodities), Damir Ćosić (Commodities),
Allen Dennis (Sub-Saharan Africa and International
Trade), Tehmina Shaukat Khan (Middle East & North
Africa), Eung Ju Kim (Finance), Sanket Mohapatra(South Asia and Exchange Rates), Theo Janse van
Rensburg (High-Income Countries), Cristina Savescu(Latin America & Caribbean and Industrial Production)
and Ekaterine Vashakmadze (East Asia & the Pacificand Inflation).
Regional projections and annexes were produced incoordination with country teams, country directors, andthe offices of the regional chief economists and PREM
directors. The short-term commodity price forecasts
were produced by John Baffes and Damir Ćosić. The
remittances forecasts were produced by Gemechu
Ayana Aga, Christian Eigen-Zucchi and Dilip K. Ratha.
Simulations were performed by Trung Thanh Bui and
Theo Janse van Rensburg.
The accompanying online publication, Prospects for
the Global Economy, was produced by a team comprised of Marie-Anne Chambonnier, Muhammad Adil
Islam, Vamsee Krishna Kanchi, Katherine Rollins, andDana Vorisek, with technical support from David Horowitz, Ugendran Machakkalai, and Malarvishi Veerappan.
Cynthia Case-McMahon, Indira Chand, and Merrell
Tuck-Primdahl managed media relations and the dissemination. Kristina Cathrine Mercado managed the
publication process.

Several reviewers offered extensive advice and comments. These included Abdul de Guia Abiad, Ahmad
Ahsan, Sara B. Alnashar, Jorge Araujo, Merli Baroudi,
Roshan D. Bajracharya, Andrew Beath, Kirida
Bhaopichitr, Parminder P.S. Brar, Penelope J. Brook,
Timothy John Bulman, Kevin Carey, Young Hwan Cha,
Shubham Chaudhuri, Rodrigo A. Chaves, Nada
Choueri, Karl Kendrick Tiu Chua, Punam ChuhanPole, Francoise Clottes, Andrea Coppola, Tito Cordella, Augusto de la Torre, Shantayanan Devarajan, Tatiana Didier, Hinh Truong Dinh, Sebastian Eckardt, Khalid El Massnaoui, Philip English, Pablo Fajnzylber,
Manuela V. Ferro, Daminda Eynard Fonseka, Samuel
Freije-Rodriguez, Bernard G. Funck, Marcelo Giugale,
Chorching Goh, Susan G. Goldmark, David Michael
Gould, Gloria M. Grandolini, Kiryl Haiduk, Bert Hofman, Zahid Hussain, Elena Ianchovichina, Fernando
Gabriel Im, Roumeen Islam, Ivailo V. Izvorski, Carlos
Felipe Jaramillo, Sergio Alvaro Jellinek, Markus
Kitzmuller, Auguste Tano Kouame, Thomas Blatt
Laursen, Daniel Lederman, Xiaofan Liu, Sandeep Mahajan, Ernesto May, Deepak Mishra, Denis Medvedev,
Lars Christian Moller, Lalita M. Moorty, Claudia Nassif,
Antonio Nucifora, Antonio M. Ollero, Kwang Park, Catalin Pauna, Keomanivone Phimmahasay, Samuel
Jaime Pienknagura, Miria Pigato, Mohammad Zia
Qureshi, Martin Raiser, Susan R. Razzaz, Christine M.
Richaud, David Rosenblatt, Frederico Gil Sander, Philip Schuler, Sudhir Shetty, Maryna Sidarenka, Alexis
Sienaert, Carlos Silva-Jauregui, Karlis Smits, Vinaya
Swaroop, Mark Roland Thomas, Volker Treichel, Nattaporn Triratanasirikul, Cevdet Cagdas Unal, M. Willem van Eeghen, Axel van Tortsenberg, R. Gregory
Toulmin, Sergei Ulatov, Aristomene Varoudakis,
Mathew A. Verghis, Gallina Andronova Vincelette,
Ekaterina Vostroknutova, Muhammad Waheed, Marina
Wes, Deborah L. Wetzel, Kirthisri Rajatha Wijeweera,
Hernan Jorge Winkler, Soonhwa Yi, Salman Zaidi, andAlbert Zeufack.

ACRONYMS
ASEAN

Association of South East Asian Nations

BRICS

Brazil, Russian Federation, India, China, and South Africa

CDS

Credit Default Swap

ECB

European Central Bank

FDI

Foreign Direct Investment

GDP

Gross Domestic Product

IMF

International Monetary Fund

ODA

Official Development AssistanceOECD

Organization for Economic Cooperation and Development

OMT

Outright Monetary Transactions

OPEC

Organization of Petroleum Exporting Countries

PMI

Purchasing Manager’s Index

QE

Quantitative Easing

SAAR

Seasonally adjusted annualized rate

TFP

Total Factor Productivity

TABLE OF CONTENTS
Main Text…………………………………………………………………………...…...…... 1

Topical Annexes
Industrial production …………………. …………………………………………………....... 31
Inflation. …………………………………………………………………..…………….......... 41
Financial markets ……………………………………………..…………...…………….......... 53
Trade ……………………………………………………………………..……….…….......... 67
Exchange rates ………………………………………………………………..……..……..… 77
Commodity markets …………………….……………………………………..….….………. 91
Regional Annexes
East Asia & the Pacific ………………………………………………...…...…..……….…… 117
Europe & Central Asia …………………………………………………..……...…..….……. 133
Latin America & the Caribbean ……………………………………...………………….….... 149
Middle East & North Africa ……………………………………………………………..….. 163
South Asia ………………………………………………………….………………................ 181
Sub-Saharan Africa ……………………………………………….…………………...…….. 199

GLOBAL ECONOMIC PROSPECTS | June 2013

Overview andmain messages

growth, the relaxation of capacity constraints insome middle-income countries, and stronger
growth in high-income countries are expected toyield a gradual acceleration of developing-country
growth to 5.1 percent this year, and to 5.6 and 5.7
percent in 2014 and 2015, respectively.

The global economy appears to be transitioning
toward a period of more stable, but slower growth.
Global gross domestic product (GDP), whichslowed in mid-2012 is recovering, and a modest
acceleration in quarterly GDP is expected during
the course of 2013. That progress will be masked in
the annual data, however, with whole-year growthfor 2013 projected at 2.2 percent, a touch slower
than in 2012. The strengthening of quarterly
growth will show up in whole-year global GDP
growth of 3.0 percent for 2014 and 3.3 percent in 2015
(table 1).

Most developing countries have recovered fromthe crisis, so room for additional acceleration islimitedThe overall acceleration is not stronger because themajority of developing countries have more-or-lessfully recovered from the 2008 financial crisis. For
many of these countries, current and projected
growth is broadly in line with underlying potential
growth—leaving little room for acceleration. Thus,
GDP in the East Asia & Pacific region is projected
to increase 7.3 percent in 2013, but then expand at
a broadly stable 7½ percent rate in each of 2014,
and 2015. In Latin America, growth is expected topick up in 2013 to about 3.3 percent, but then to
stabilize at just below 4 percent in each of 2014 and2015. Already, growth in several countries in bothregions is being held back by supply-side
constraints that are manifesting themselves in
inflation, asset-price bubbles, and deteriorating current
account balances.

Financial conditions in high-income countries
have improved and risks are down, but growth
remains subdued, especially in Europe

High-income countries continue to face challenges
to restore financial sector health, reform
institutions, and get fiscal policy onto a sustainable
path. However, the likelihood that these challenges
provoke a major crisis has declined.

Many countries in Sub-Saharan Africa are also
running at, close to, or above potential output, andrisk building up inflationary pressures. Growth in
the region is projected to firm over the projection
period to 4.9, 5.2, and 5.4 percent in 2013, 2014,
and 2015, respectively. Growth in South Asia is
projected to pick up to 5.2 percent this year,
following a very weak 2012 and then to firm only
gradually to 6.0 and 6.4 percent in 2014 and 2015
as spare capacity is reabsorbed.

Although acute risks have diminished, real-side
activity remains sluggish. Among high-income
countries, the challenges are especially difficult inhigh-income Europe, where growth is being heldback by weak confidence and continued bankingsector and fiscal restructuring. The recovery is on
more solid ground in the United States, where afairly robust private sector recovery is being heldback, but not extinguished, by fiscal tightening.
Meanwhile, in Japan, a dramatic relaxation ofmacroeconomic policy has sparked an uptick in
activity, at least over the short term. Overall,
growth in high-income countries is projected toaccelerate slowly, with GDP expanding a modest
1.2 percent this year, but firming to 2.0 and 2.3
percent in 2014 and 2015, respectively.

In developing Europe and the Middle East &North Africa, output gaps remain and growthis projected to strengthen

Many countries in developing Europe have still notrecovered from the crisis. Unemployment andspare capacity remain high, because activity has
been weighed down by banking-sector, household,and fiscal restructuring (much like high-income
Europe). As adjustments are completed, growth in
the region is projected to strengthen progressively
from 2.7 percent last year to 4.2 percent by 2015.
Growth in the Middle East & North Africa has

Growth is firming in developing countries, butconditions vary widely across economies
In developing countries, GDP is expected to firm
somewhat. Less volatile external conditions, arecovery of capital flows to levels that support
1

GLOBAL ECONOMIC PROSPECTS | June 2013

Table 1.

The global outlook in summary(percentage change from previous year, except interest rates and oil price)
Global Conditions
World Trade Volume (GNFS)
Consumer Prices
G-7 Countries 1,2
United States
Commodity Prices (USD terms)
Non-oil commodities
Oil Price (US$ per barrel) 3
Oil price (percent change)
4

Manufactures unit export value
Interest Rates$, 6-month (percent)€, 6-month (percent)International capital flows to developing countries (% of GDP)
Developing countries
Net private and official inflows
Net private inflows (equity + debt)
East Asia and Pacific
Europe and Central Asia
Latin America and Caribbean
Middle East and N. Africa
South Asia
Sub-Saharan Africa
Real GDP growth 5
World
Memo item: World (PPP weights)
High incomeOECD Countries
Euro Area
Japan
United States
Non-OECD countries
Developing countries
East Asia and Pacific
China
Indonesia
ThailandEurope and Central Asia
RussiaTurkeyRomania
Latin America and Caribbean
BrazilMexicoArgentina
Middle East and N. Africa
6

Egypt
Iran
AlgeriaSouth Asia

6, 7

India
Pakistan 6, 7
Bangladesh 6
Sub-Saharan Africa
South Africa
Nigeria
AngolaMemorandum items
Developing countries
excluding transition countries
excluding China and India

2011

2012

2013e

2014f

2015f

6.2

2.7

4.0

5.0

5.4

5.3
2.4

-0.6
2.1

-0.1
2.4

0.9
2.5

1.0
2.5

20.7
104.0
31.6
8.5

-9.5
105.0
1.0
-2.1

-4.7
102.4
-2.5
2.4

-1.1
101.0
-1.3
2.2

-1.5
101.0
-0.1
1.9

0.8
1.6

0.5
0.2

0.7
0.5

1.1
1.2

1.4
1.5

5.2
5.0
5.7
5.5
5.4
1.3
3.3
4.2

5.0
4.9
4.6
5.7
6.4
1.4
4.0
3.5

4.7
4.7
4.2
6.5
5.9
1.1
3.6
3.8

4.4
4.4
3.9
6.1
5.5
1.4
3.4
3.9

4.3
4.3
3.8
6.0
5.3
1.7
3.3
4.2

2.8
3.8
1.7
1.5
1.5
-0.5
1.8
4.9
6.0
8.3
9.3
6.5
0.1
5.7
4.3
8.8
2.5
4.4
2.7
3.9
8.9
-2.2
1.8
1.7
2.4
7.3
6.2
3.0
6.7
4.7
3.1
7.4
3.4

2.3
2.9
1.3
1.2
-0.5
2.0
2.2
2.8
5.0
7.5
7.8
6.2
6.5
2.7
3.4
2.2
0.7
3.0
0.9
3.9
1.9
3.5
2.2
-1.9
2.5
4.8
5.0
3.7
6.2
4.4
2.5
6.5
8.1

2.2
3.1
1.2
1.1
-0.6
1.4
2.0
3.1
5.1
7.3
7.7
6.2
5.0
2.8
2.3
3.6
1.7
3.3
2.9
3.3
3.1
2.5
1.6
-1.1
2.8
5.2
5.7
3.4
5.8
4.9
2.5
6.7
7.2

3.0
3.8
2.0
1.9
0.9
1.4
2.8
3.7
5.6
7.5
8.0
6.5
5.0
3.8
3.5
4.5
2.2
3.9
4.0
3.9
3.0
3.5
3.0
0.7
3.2
6.0
6.5
3.5
6.1
5.2
3.2
6.7
7.5

3.3
4.1
2.3
2.2
1.5
1.3
3.0
3.9
5.7
7.5
7.9
6.2
5.5
4.2
3.9
4.7
2.7
3.8
3.8
3.8
3.0
4.2
4.8
1.9
3.5
6.4
6.7
3.7
6.3
5.4
3.3
7.0
7.8

6.5
4.5

5.0
3.3

5.3
3.5

5.8
4.2

5.9
4.4

Source: World Bank.
Notes: PPP = purchasing power parity; e = estimate; f = forecast.
1. Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.
2. In local currency, aggregated using 2005 GDP weights.
3. Simple average of Dubai, Brent, and West Texas Intermediate.
4. Unit value index of manufactured exports from major economies, expressed in USD.
5. Aggregate growth rates calculated using constant 2005 dollars GDP weights.
6. In keeping with national practice, data for Bangladesh, Egypt, India, and Pakistan are reported on a fiscal year basis in table 1.1. Aggregates that
depend on these countries are calculated using data compiled on a calendar year basis.
7. Real GDP at factor cost, consistent with reporting practice in Pakistan and India. See Table SAR.2, South Asia Regional Annex for details.

2

GLOBAL ECONOMIC PROSPECTS | June 2013

been disrupted by political and social tensions andEuro Area weakness. Assuming that tensions in theregion gradually ease, growth is projected to slowly
strengthen from 2.5 percent in 2013 to 3.5 percent
in 2014 and 4.2 percent in 2015.

peak). If prices decline to their longer-term
equilibrium more quickly than assumed in thebaseline, GDP growth among Sub-Saharan African
metal exporters could decline by as much as 0.7
percentage points, while current account and fiscal
balances could deteriorate by 1.2 and 0.9 percent ofGDP, respectively. Lower oil prices would have
similar impacts for oil exporters (-0.4 percent ofGDP), but would tend to benefit developing
countries as a whole (+0.3 percent of GDP).

Risks are less pronounced and more balanced than ayear ago, with new risks gaining prominence
Although acute risks in high-income countries aredown, more modest downside risks linger as these
economies continue to adjust. Importantly, downside
risks are now balanced by the possibility ofstronger growth should confidence improve more
quickly than anticipated in the baseline.

… and the potential impacts of a withdrawal ofquantitative easing
Quantitative easing has benefited developing
countries by stimulating high-income-country
GDP, lowering borrowing costs, and avoiding afinancial-sector meltdown. On balance, theincreased liquidity has not generated excessive
capital flows to developing countries. Net capital
flows to developing countries have recovered to
4.2 percent of developing-country GDP, but
remain well below the 2007 level of 7.2 percent of
GDP. However, flows have been more volatile.
Based on this experience, the recent intensificationof monetary easing in Japan should not prove too
disruptive for developing countries over the
medium term, but it could generate large
fluctuations in flows over the short run that are
difficult to manage.

For developing countries that have alreadyrecovered from the crisis, or that are expected to in
2013, macroeconomic policy may need to betightened to contain or prevent inflation, assetprice bubbles, and deteriorating current accounts.
Tightening would have the further advantage ofrestoring depleted policy buffers. In countries
where unemployment remains high and sparecapacity is ample, notably in developing Europe, aloosening of policy may be in order where policy
space exists. The rebalancing effort in China, and its
unsustainably high investment rate are ongoingchallenges.

Most countries need to prioritize structuralreforms to expand their growth potential

Once high-income countries begin to pursue
quantitative easing less actively or begin to unwind
long-term positions, interest rates are likely to rise.
Higher interest rates will increase debt-servicing
costs, and could increase default rates on existingloans. Banks in countries that have enjoyed verystrong growth and asset-price inflation, together
with high levels of government or private sector
debt, may be at particular risk. In the longer term,
higher interest rates will raise the cost of capital indeveloping countries and can be expected toreduce the level of investment that firms wish to
maintain. As investment rates adjust to these higher
capital costs, developing-country investment
spending and growth can be expected to decline by
as much as 0.6 percentage points per annum after
three years.

While projected growth rates are satisfactory andwell above the growth rates of the 1990s, they are 1–2 percentage points slower than in the pre-crisis
boom period. To achieve higher growth on asustained basis, developing countries will need tofocus on domestic challenges. These differ acrosscountries, but share common themes. In general,policymakers will need to redouble efforts torestore and preserve macroeconomic stability andreduce bottlenecks by streamlining regulations;improving their enforcement; and investing ininfrastructure, education, and health.

New risks include a faster decline in commodity
prices, ...
Over the past year, energy and metals prices havebeen easing in response to supply and demand-side
substitution induced by high prices (metal prices
are down 30 percent since their February 2011
3

GLOBAL ECONOMIC PROSPECTS | June 2013

Recent Developments

The better financial conditions in the Euro Area, intandem with the extraordinary monetary policy
steps undertaken by the Federal Reserve Bank in
the United States, the Bank of England, the ECB,
and most recently the Bank of Japan, have flooded
markets with liquidity. This in turn has reduced
yields on long-term debt and the price of riskier
assets—including developing-country equities,
bonds, and bank loans. As a result, by May grosscapital flows to developing countries, which wereweak for most of the post-crisis period, haverecovered to close-to-peak levels. Bank lending andequity issuance has doubled relative to the same
period a year ago (figure 2). Nevertheless, as apercent of developing-country GDP, capital flows
remain well below pre-crisis levels.

The global economy is transitioning into what is
likely to be a smoother and less volatile period.
Financial market risk indicators, such as credit
default swap rates, sovereign debt spreads, andstock market volatility indicators have all improved
significantly since June 2012 (figure 1).

Financial market conditions have
improved over the past year
The improvement reflects progress toward fiscal
sustainability in the Euro Area, reinforced
assurances that the European Central Bank (ECB)
will do whatever it takes to save the Euro Area, andconcrete steps toward reinforcing those aspects ofinstitutional weakness that contributed to EuroArea difficulties (box 1).

The recovery in bank flows is especially important,because it suggests that the most acute effects ondeveloping countries of the deleveraging among
high-income banks have passed. Most of the recent
recovery in banking flows has benefitted
developing Europe and Central Asia, which was
the developing region hardest-hit by the crisis andby the Euro Area deleveraging process. Flows inmost regions, except the Middle East & North
Africa1, were significantly higher than in 2012, with
Europe & Central Asia (mainly banking and bond),and East Asia & Pacific (mainly bond and equity)
recording the biggest increases.

These improved financial market conditions havepersisted for almost a whole year, despite being
subjected to stresses, including elections in several
economies, concerns about a potential banking
crisis in Slovenia, the Cyprus rescue package, andan extended period of very slow or negative
growth. The durability of the improved indicators
attests to the improvement in conditions.
Nevertheless, concerns remain, particularly amongbanks in high-spread countries, which continue tobe burdened by relatively large quantities ofunderperforming loans and relatively weak levels ofcapitalization (IMF 2013b).

Despite the improvement in gross flows andin financial indicators among high-income
countries, developing-country financialmarket prices have been weak. Thus, while
stock markets in high-income countries
surged in the post–June 2012 period (theFinancial indicators worldwide have
improved since June 2012

Figure 1.

Change since June 2012, basis points

Figure 2.

Gross capital flows to developing countries, 3month ma, $billions
80

Change since June 2012, percent

300

30

200

20

100

10

0

0

-100

-10

-200

-20

Gross capital flows to developing countries
have recovered in nominal terms

60

40

20

-300
-400

0

-30
CDS Rates
High-spread
Euro Area

Commercial banks
Euro Area

Bond Yields
High-spread
Euro Area

Developing-country

Volatility
VIX

Equity market valuations
U.S. (S&P 500)

Europe (STOXX
600)

-40

2009Q1New equity issuance

2009Q4

2010Q3

Bond issuance

Source: World Bank; Dealogic.

Source: World Bank; Bloomberg.

4

2011Q2
Bank Loans

2012Q1

2012Q4

GLOBAL ECONOMIC PROSPECTS | June 2013

Box 1.

Concrete steps taken to reduce Euro Area fragilities

A wide range of significant steps taken over the past few years have calmed investors and led to a significant rebound in
key markets. These steps and developments include: ECB President Mario Draghi’s forceful “whatever it takes” speech on July 26, 2012 and the introduction of a new
Outright Monetary Transactions (OMT) facility; Widespread fiscal consolidation that has brought Euro Area government deficits down from 6.4 percent of GDP
in 2009 to an estimated 2.9 percent in 2012 (IMF 2013a), although the deficits of Ireland, and Spain still exceed
5 percent of GDP;
 Euro Area agreements to establish a banking union for the area; reinforce monitoring and respect of budgetaryrules; require countries to enter into binding fiscal reform contracts; and proposals to increase democratic legitimacy;
 Early repayment of more than 25 percent of ECB crisis loans by Euro Area banks during the first quarter of 2013
(the loans were not due until 2014 and 2015).
Other developments in 2013 have tested the resilience of this improved climate, including: Inconclusive elections in Italy and weak polls for other leaders that underscore ongoing political risks; Uncertainty about government’s willingness to accept conditionality if the OMT were activated; Fears that the bailing in of depositors during the Cyprus rescue would lead to deposit flight in other European
jurisdictions.
While these developments led to some widening of credit default swap (CDS) rates and yields on the debt of highspread Euro Area countries, the increases were modest compared with earlier declines, and yields for high-spread countries are down for the year to date.
IrelandSpain

PortugalIreland
Portugal
Ireland
Portugal

Italy
Box FigureSpain
1.1
Ireland

1800
Spain

Italy

Italy

Box Figure 1.2

5-year sovereign CDS rates, basis points

Yields on 10-year sovereign debt, basis points
60 Portugal

1600
Spain

Portugal

20

1200
Portugal

1000

0

Ireland

800

-20

600

Italy
-40

400
Spain

200

Ireland
Italy
Spain

0
Jan '10Between January-March
Since March

40

Portugal

1400

Jul '10Source: Bloomberg.

Jan '11Jul '11-60

Jan '12Jul '12-80

Jan '13

Italy

Portugal

Spain

Source: Bloomberg.

Italy
IrelandStoxx Europe 600, Standard & Poor’s 500
Index, and Nikkei 225 are up 17.5, 18.1, and44.5 percent, respectively), overall indexes fordeveloping countries have declined. This said,
some developing-country stock markets haveshown strong gains, raising concerns about
overvaluation. Equity market indexes inIndonesia, Malaysia, the Philippines, andThailand all recorded highs in 2013, partly
reflecting strong inflows of foreign private
capital. Indeed, stock markets in thesecountries have declined lately as concerns
about high valuations and prospects ofscaling back of the U.S. stimulus program
weighed in on investor sentiment.

The generally better performance of high-income
stock markets in the recent period reflects both adifference in timing (developing-country stocks
recovered earlier in the cycle), and the relatively
high valuations that developing-country stock
markets had at the start of the crisis. Currently
price-earnings ratios of major developing-country
firms remain much lower (between 12 and 18) than in
high-income countries (where they are between 16
and 24).
Overall, net capital flows (inflows + outflows) todeveloping countries fell by about 7 percent in
2012, reflecting broadly stable net inflows (1.5
percent) and a 28.4 percent increase in outflows,
5

GLOBAL ECONOMIC PROSPECTS | June 2013

Table 2.

Net financial flows to developing countries ($ billions)
2008

2009

2010

2011

2012e

2013f

2014f

2015f

Current account balance

409.4

233.0

173.3

129.6

-16.7

-74.9

-108.2-126.3

Capital Inflows

812.7

701.0

1,218.8

1,175.0

1,192.4

1,260.9

1,297.4

1,394.8

Private inflows, net
Equity Inflows, net
Net FDI inflows
Net portfolio equity inflows
Private creditors. Net
Bonds
Banks
Short-term debt flows
Other private
Official inflows, net
World Bank
IMF
Other official

782.3
583.4
637.0
-53.6
198.8
-8.6
223.3
-17.1
1.3
30.4
7.2
10.8
12.4

620.0
541.3
427.1
114.2
78.7
61.0
-11.9
17.8
11.7
81.0
18.3
26.8
35.9

1,145.6
710.5
582.3
128.2
435.1
129.7
37.2
257.6
10.7
73.2
22.4
13.8
36.9

1,145.1
710.4
701.5
8.9
434.6
123.8
108.2
189.3
13.3
30.0
6.6
0.5
22.8

1,178.3
758.1
670.0
88.1
420.2
190.3
82.0
141.0
7.1
14.1
4.6
-3.9
13.4

1,250.2
791.1
719.3
71.8
459.1
187.3
104.7
158.5
9.2
10.7

1,290.7
803.5
715.7
87.8
487.2
164.4
125.3
188.2
10.4
6.7

1,391.7
863.5
758.2
105.3
528.2
151.9
146.9
221.1
9.8
3.1

Capital outflows-321.2-175.2-314.1-284.7-365.4-371.3-416.3-464.4-211.8
-32.1
-78.3
1.0

-144.3
-75.9
50.7
-5.7

-213.9
-50.6
-57.3
7.7

-198.0
4.3
-81.0
-10.0

-238.0-12.4-103.0-12.0-275.0
-17.3
-72.0
-7.0

-325.0
-24.3
-61.0
-6.0

-370.0
-29.4
-56.0
-9.0

Net capital flows (inflows + outflows)

491.5

525.8

904.7

890.4

827.1

889.6

881.1

930.4

Net unidentified Flows/a-82.1-292.8-731.3-760.8-843.8-964.5-989.3-1,056.7

FDI outflows
Portfolio equity outflows
Private debt outflows
Other outflows

Source: The World Bank
Note: e = estimate, f = forecast/a Combination of errors and omissions, unidentified capital inflows to and outflows from developing countries

roughly proportionately distributed across foreign
direct investment (FDI), equity, debt, and otheroutflows (table 2). Both net inflows and outflows
are projected to rise. Overall net capital inflows
should rise by about 5.7 percent in 2013, withmuch of the increase reflecting the stronger flows
toward the end of 2012. They are expected to riseby 2.9 percent in 2014 and 7.5 percent in 2015,
reaching $1.4 trillion or about 4.3 percent ofdeveloping-country GDP in 2015.

despite the improved ratings of developing
countries, and strong investor appetite fordeveloping-country bonds.2
Rising spreads, even as demand is strong andgrowing, may reflect a welcome and ultimately
healthy improvement in market perceptions of theriskiness of investing in high-income countries.
Part of the decline in developing-country risk
premiums over the past five years was due to theincreased riskiness of high-income country debt.3
Now that those risks have receded, investors may
be shifting their portfolios back into high-income
country assets, resulting in an increase indeveloping-country yields and spreads and better
stock-market performance in high-income
countries.

Capital costs are rising, reflecting
reduced high-income country risks
Not only have developing-country stock markets
underperformed high-income stock markets,
developing country sovereign credit default swap
(CDS) rates and yields (figure 3) have been rising,
6

GLOBAL ECONOMIC PROSPECTS | June 2013

Figure 3.

Developing country borrowing costs have risen
but remain below historical averages

Basis points
500

Figure 4.

Aggregate industrial activity has picked up% change in industrial production, 3m/3m saar
20

EMBIG sovereign bond spreads

2000-2007 Average

15

China

440

10
380

5
320
Sep 09-May 11

Other developing0

Average260-5Euro area

2005-2007 Average

-10

200
Jul '11

Oct '11Jan '12

Apr '12Jul '12

Oct '12Jan '13Jan '11

Apr '13

Source: World Bank; JP Morgan.

Jul '11Jan '12Jul '12Jan '13

Source: World Bank; Datastream.

These developments may also reflect concern on
the part of investors about inflation of asset prices
in some developing countries (such as Brazil,
Indonesia, Lao PDR, Philippines, Thailand, andTurkey) and the recent easing of commodity prices.
Risk premia could have risen because high asset
prices have been interpreted as a harbinger of
sharp future correction; or if an expectation oflower commodity prices had raise concerns about
future government revenues and governments’capacity to repay existing debt and spending
programs.

(more than ½ a million jobs were added in thefirst quarter). Investment demand, which was
unusually weak in the second half of 2012, hasalso contributed (durable goods orders
increased at a 20 percent annualized pacethrough March, although order growth has
since eased).

Improved financial conditions areyielding stronger economic activity
Global economic activity has strengthened over the
past several months (figure 4). The turn around,which began in the East Asia & Pacific region, hasspread more widely. Developing-country industrial
production grew at a 5.1 percent annualized paceduring the first quarter of 2013 (0.6 percent if
China is excluded), and high-income-country
industrial production expanded at a 2.9 percent
annualized pace.



In Japan, the move toward a much morerelaxed monetary and fiscal policy (firstannounced in November 2012 but made more
concrete during the first quarter of 2013)
prompted a sharp acceleration in GDP, whichgrew at a 4.1 percent annualized pace in thefirst quarter of 2013.



In the Euro Area, GDP contracted once again
in the first quarter, declining at a 0.8 percent(saar, -0.2% q/q sa), with growth in Germany
turning marginally positive. For the region as awhole, industrial production expanded at a 0.7
percent annualized rate in the first quarter, andthe annualized pace of decline among highspread economies eased to only 0.3 percent.

Developing-country growth eased in
2013Q1 but remains solid

Despite Euro Area weakness, high-income-country
GDP growth strengthened in the first quarter of
2013.


Other
high-income

Among those developing countries that reportquarterly GDP, data suggest an acceleration in
activity during the fourth quarter of 2012—notably
in East Asia & Pacific, where quarterly GDP
expanded by 8.3 percent in the fourth quarter (formore regional detail, see box 2 and the regional
annexes). In South Asia, however, growthcontinued to be weak, with GDP growing at only a

In the United States, GDP rose 2.4 percent in
the first quarter of 2013, despite sharp payroll
tax increases that have cut into consumer
incomes. The strength was supported by arecovering housing market (house prices are at
a two-year high) and an increase in payroll jobs
7

GLOBAL ECONOMIC PROSPECTS | June 2013

4.7 percent annualized pace in the final quarter of2012. Industrial production data, which areavailable for a wider range of countries, display aclearer acceleration trend toward the end of2012.

below post-crisis rates, despite relatively easy policy
stances and amid indications of overheating insome (see discussion beginning on page 17).

The sharp recovery in trade appears
to be losing momentum

During the first several months of 2013, however,the pace of growth in developing countries appears
to have slowed, particularly in East Asia, wherequarterly growth in China, and Indonesia has eased,
and actually turned negative in Malaysia andThailand. Elsewhere signs are more mixed.
Growth has slowed in Chile, Mexico, and South
Africa, but strengthened in Philippines, Lithuania,
Peru, Turkey, and Ukraine. First quarter GDP in
India also disappointed, expanding only 4.8 percent
y-o-y or about 5 percent q/q saar.

After contracting for several months, global trade
is expanding once again (figure 6), with the total
volume of exports and imports rising at a 5.0
percent annualized pace in the first quarter of 2013.
The upturn in trade was driven by developing
country imports, which rose at an 18.0 percent
annualized pace in 2013Q1. This helped stir a 2.9
percent annualized increasein high-income
country exports in 2012Q4 (figure 6).

Available industrial production data confirm thismixed picture (figure 5), with activity rates slowing
in East Asia & Pacific (to 8.6 percent saar), firmingin Europe & Central Asia (at 2.4 percent), returning
to positive territory in Latin America & the
Caribbean (0.5 percent), and easing somewhat inSouth Asia at a robust 7.7 percent. Available data
show that activity was contracting in Sub-SaharanAfrica and rapidly in the Middle East & North
Africa during the three months ending February
2013.

The pick-up in import demand among developing
countries was broadly-based, with import volumes
rising in East Asia & Pacific, Latin America & the
Caribbean, and South Asia. Data for the Middle
East lag and, as of February 2013, do not show
signs of acceleration. The pick-up in global
demand, including in high-income countries, is also
supporting faster export growth in developing
countries (box 3). Developing countries exports
were expanding at a 15.5 percent annualized paceduring the first quarter of 2013.

Although there are some signs of acceleration,
output in several large middle-income countries
remains weak, compared with the pre-crisis boom
period. Growth rates in Brazil, India, the RussianFederation, Turkey, and South Africa are all well

Most recently, there are signs of an easing in thepace of global trade. Developing-country importdemand slowed to an annualized pace of 10.8
percent in April, and both export (-5.4 percent) and
import demand (-3.6 percent) from high-income

Figure 5.

Regionally, output shows signs of slowing in East Asia & Pacific, and stability or strengthening elsewhere% change in industrial production, 3m/3m saar
20

2012 Q1

2012 Q2

2012 Q3

2012 Q4

2013 Q1

15
10
5
0
-5
-10
-15

-20
East Asia &Pacific

Europe &Central Asia

Latin America &Caribbean

Source: World Bank.

8

Middle-East &North Africa

South Asia

Sub-SaharanAfricaGLOBAL ECONOMIC PROSPECTS | June 2013

Box 2.

Recent Regional Economic Developments(The regional annexes to this volume contain more detail on recent economic developments and outlook, including country-specific forecasts.)

The East Asia & Pacific region led the rebound in global economic activity during the fourth quarter of 2012. The landscapefor trade and industrial production is changing, however, reflecting China’s rebalancing efforts, the yen depreciation, lower
commodity prices, capacity constraints (in Indonesia, Malaysia, the Philippines, and Thailand), and a gradual tightening ofmacroeconomic policies. These factors have combined to reverse earlier output gains in China, Indonesia, Malaysia, Thailand, and Vietnam contributing to easing of industrial production growth from double digit rates to just 6 percent annualizedpace during the first quarter of 2013. Growth rates of both exports and imports are also moderating but regional trade continues to expand at double-digit rates. Industrial activity in the Philippines, which relied less on domestic stimulus measures,continues to expand by a double-digit rate in early 2013, partly because of the country’s strong trade linkages to a rebounding Japan. A relatively loose policy stance in the region, excluding China, during 2012 has contributed to a buildup of debt
and has fueled goods and asset price inflation.
Output in the developing Europe & Central Asia region also improved considerably, growing at a 2.4 percent annualizedpace in the three months ending March 2013. With the exceptions of Ukraine and Latvia, all countries had positive industrial
production growth, and the rebound was particularly strong in Serbia. The US. dollar value of imports also accelerated during
the first quarter, suggesting firming of domestic demand. However, US dollar value of regional exports have slowed withweak growth in Russia and Latvia, despite the strong import demand from developing countries and strengthening importdemand from high-income Europe. Inflation has eased slightly since food price hikes and administrative tariffs caused it togain momentum in the second half of 2012.
Economic activity in Latin American & the Caribbean softened in the first quarter of 2013, with industrial production remaining relatively flat, after a slight contraction in the fourth quarter. Slower domestic consumption in conjunction with weak external demand caused economic activity to slow in many countries in the region, with annualized quarterly growth easing in
Brazil, Mexico, Chile, and contracting in Venezuela. As elsewhere, regional import demand bounced back in 2012Q4 but has
eased to a more sustainable pace of 8.7 percent annualized pace in 2013Q1. Meanwhile, lower commodity prices contributed to significant declines in export revenues. Despite slower growth than during the pre-crisis period, several countries in theregion continue to struggle with high and even rising inflation, suggesting structural bottlenecks. Price controls in Argenti na
have partially contained inflation but could lead to shortages of certain goods, while in Venezuela the recent currency devaluation has exacerbated local price pressures. In Brazil, inflation continues to surprise on the upside on higher food and service
prices.
Economic outturns in the Middle East & North Africa continue to be dominated by political and social developments.
Among oil exporters, hydrocarbon output resumed its downward trend in the second half of 2012 as the boost from Libyan oil
production to prewar levels faded. Output among oil importers rebounded at an annualized 10.4 percent pace in Q1, reflecting a recovery in Egypt from sharp declines in 2012, but momentum has slowed reflecting rising political tensions in Egypt
and Tunisia, spillovers from the Syrian conflict to Jordan and Lebanon, and weak external demand that have dampened activity among oil importers. With the exception of Iraq and Morocco, inflation remains persistently high across the region, risingover 40 percent in the Islamic Republic of Iran because of a tightening of international sanctions. But there has been a slighteasing in some economies as global food prices have moderated. Declining foreign exchange reserves, widening external
and fiscal financing gaps (only partly reflecting weak demand from Euro Area trading partners) pose challenges to macroeconomic stability and management in the region. Aid from the wealthier economies in the region has helped bridge financing
gaps in Egypt, Jordan, Morocco, and Tunisia.
Economic activity in South Asia picked up in the second half of 2012, supported by strengthening external demand andfiscal and policy reforms. By the first quarter of 2013, industrial production was rising at different paces in Bangladesh, India,
and Pakistan, while in Sri Lanka, it stabilized in 2012Q4. After slowing sharply in 2012, regional export volume growth accelerated to a 15.7 percent annualized pace in the three months ending in April 2013. Year-on-year inflation rates are moderating across the region, helped in part by an easing of international commodity prices. As inflation moderated, monetary policy
eased in Pakistan (in late 2012), in Bangladesh and India (in the first half of 2013), and in Sri Lanka (2012H2 and 2013H1)
to support growth. However, inflation momentum remains strong, particularly in Bangladesh and India, mainly reflecting supply-side constraints and entrenched inflationary expectations.
Exports from Sub-Saharan Africa were not exempt from the decline in global trade during 2012 (the exception being agricultural exporters whose trade held up during the second half of the year). Industrial production slowed sharply in the second
half of 2012 among oil exporting economies (Angola, Gabon, and Nigeria), partly because of domestic challenges in Nigeria.
Similarly, labor unrest was partly responsible for the flat growth in South Africa’s industrial production in 2012Q2 and Q3.
South Africa GDP rebounded to 2.1 percent annualized pace in 2012Q4, before slumping once again in Q1 2013 to 0.9 percent (q/q saar). Although more recent data for the rest of the region is not available, a similar mixed result is expected, withstronger global industrial production supporting growth in some, but weaker commodity prices cutting into incomes in others.
Earlier policy tightening (particularly in East Africa) and improved harvests in 2012 have contributed to slow regional inflation,with prices rising at a 6.8 percent annualized pace during the first quarter. Rwanda took advantage of low interest rates andinvestor appetite for higher-yielding assets to issue its inaugural Eurobond in April 2013, while other countries in the region(including Ghana, Kenya, and Nigeria) have plans to follow suit.

9GLOBAL ECONOMIC PROSPECTS | June 2013

Figure 6.

Developing-country imports have led a reboundin trade

Figure 7.

Annualized growth of export and import volumes (3m/3m saar)
40

240

30

220

Commodity prices have been falling despite stronger growth, due to increase supply

USD Price index, 2005=100
Metals and minerals
Agricultural goods

Food

Developing Countries (Imports)

200

20

10

180

Euro Area(Exports)

Energy
160

0

-10

Other
High-income(Exports)

140

Jan '13120
Jan '10-20
Jan '11Jul '11Jan '12Jul '12Jul '10Jan '11Jul '11Jan '12Jul '12Jan '13

Source: World Bank; Datastream; Haver.

Source: World Bank.

countries turned negative in April. Also, China's
economic growth appears to be losing momentum
as export growth slowed from 12.7 percent (y/y) in
April to one percent (y/y) in May - its slowest
expansion in 15 months. With China being animportant trading partner in many developing
countries, weaker growth there will weigh down on
the imports of other developing countries.

Similarly, the coming on stream of new projects in
Latin America (Chile, Peru), Africa (Zambia,
Democratic Republic of Congo), and Asia (China,
Mongolia) have placed substantial downward
pressure on metals prices even as sales havestrengthened. But demand suppression has also
been at work. Global demand for refined metals
increased 4.5 percent in 2012 (9.9 percent in
China), but metal demand by Organization For
Economic Cooperation and Development(OECD) member countries fell by 3.9 percent in2012.

Commodity prices have weakened in
response to new capacity

Despite the strengthening of the global economy,
the prices of most industrial commodities havebeen declining (figure 7). While it is still too early tobe certain, the declines appear to result from bothincreased supply and increased substitution on the
demand side induced by the high prices of the past
several years.

The combination of increased supply and weak
demand has yielded a buildup in global stocks. For
example, combined copper stocks at the major
metals exchanges are up 46 percent since 2012.
Aluminum stocks, which have been rising since
end-2010, increased 8 during the past 12 months.

Since 2000, capital expenditures by major firms inoil and metals markets have quintupled (figure 8).
Overall, they increased an average of 15 percent
annually since 2005 in the case of oil and 20
percent in the case of metals. The impact ofincreased supply is most visible in energy markets(figure 9), where higher prices have madetechnologies economically viable and spurred large
increases in North American oil and natural gas
production and large increases in African oil
production (see the Commodity Annex for a more
complete discussion). Recent developments havealso been influenced by the recovery of productionin Middle East countries such as Libya and Iraq.

Figure 8. Capital expenditure in the resource sector is up
5-fold since 2000, putting pressure on prices
Crude Oil Exploration & Production Spending
600 USD billion

Base Metals Companies' Capex
150
USD Billion

500

125

400

100

300

75

200

50

100

25

0

0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Source: World Bank; Bloomberg.

10

GLOBAL ECONOMIC PROSPECTS | June 2013

Box 3.
Box .3

South-South Trade

As reported in the January 2013 edition of Global Economic Prospects (World Bank 2013a), more than half of developingcountry trade is now with other developing countries, up from 37 percent in 2001. China has played a big role in this process (26 percent of total exports from all developing countries are going to China, up from 14 percent in 2001). But evenexcluding China’s trade with other developing countries, and not withstanding rhetoric suggesting that developing-country
growth has come on the back of high-income imports, growth of trade between the remaining developing countries has also
outpaced trade with high-income countries by a wide margin throughout the first decade of this century (box figures 3.1 and
3.2).
The U.S. dollar value of trade between developing countries has grown annually by an average of 19.3 percent over the
past decade (17.5 percent if trade with China is excluded) versus about 11 percent for developing-country exports to highincome countries. Importantly, every developing region shows the same basic trend, with intra-developing-country trade
outstripping developing-developed trade, and by a large margin—except for Europe and Central Asia, where EU integration
helped increase trade between the region and high-income countries.
Interestingly, the rapid expansion of intra-developing-country trade reflects more than just commodity trade, with the valueof developing-country exports of manufactures rising at about the same rate as the value of commodities as a whole. The
result is all the more surprising because commodity prices more than doubled over the sample period, suggesting that thevolume of manufacturing trade between developing countries was expanding particularly rapidly. The one broad commodity
grouping that exceeded manufacturing trade growth was metals and ores, mainly reflecting the very strong demand in China for these products. Excluding China from developing-country trade, the intra-developing country value of metals and ores
trade grew somewhat less quickly than manufactures.
Box Figure 3.2 South-South trade by region

Box Figure 3.1 South-South imports, by type

Average annual growth 2000-2011, percent
Average annual growth 2000-2011, percent
25
Average(excl. China)

20

All developing
Developing, ex China

25

All developing

Developing (excl. China)
Average (excl. China)

20

Average all developing countries

Average all developing countries

High-Income Imports
Average exports to
High Income countries

15

15

10
10

5
5

0
East Asia & Europe &Pacific
Central Asia

0Agricultural
Raw Materials

Ores and
MetalsFuels, All

Fuels,Petroleum

Manufactured
Goods

Source: World Bank; UNCTAD.

Latin
America &Caribbean

Middle-East& NorthAfricaSouth Asia Sub-SaharanAfricaSource: World Bank; UNCTAD.

Expectations are that prices will continue to easeover the medium term. The World Bank forecast,which calls for the price of a barrel of oil to ease to$102 in 2013, and to $101 in 2015, reflects atechnical assumption that oil prices will slowly
decline between now and 2025 to a level consistent
with the real cost of producing a barrel of oil fromthe Canadian tar sands using today’s technology(the Canadian tar sands are among the mostabundant and most expensive to produce sourcesof crude oil). Metals prices are expected to decline
in real terms by 3.7 and 1.4 percent in 2013 and2014, respectively, reflecting increased supply and a
gradual reduction in the metals intensity ofdeveloping-country (especially Chinese) growth(see Commodity Annex for more details). Foodprices are also projected to decline (7.7, 6.0, and 5.5
percent over 2013–15), reflecting a gradualimprovement in supply conditions and reduced
production costs due to lower energy and fertilizer
prices.

Inflationary pressures remain subdued
Despite the monetary stimulus in high-income
countries and an acceleration in developing-country
growth in 2012Q4, inflationary pressures remain
relatively subdued, although East Asia & Pacific,
the Middle East & North Africa and South Asia areshowing signs of rising inflation (figure 10).
11

GLOBAL ECONOMIC PROSPECTS | June 2013

Figure 9.

Figure 10.

Increased supplies have opened up
arbitrage opportunities

Inflation is broadly under control

Annualized change in consumer prices, 3m/3m saar

US$/mmbtu
25

10

Brent

8

20

Developing Countries
6

15
WTI

East Asia excl. China P.R.

LNG Japan
10

NGas Europe

45NGas US

2

0
2009

0
2010

2011

2012

2013

China

High Income Countries
2011Q1

2011Q3

2012Q1

2012Q3

2013Q1

Source: World Bank; Datastream.

Source: World Bank; Datastream.

Inflation in high-income countries remains low.
Inflationary pressures in China appear to haveeased but may be intensifying in Indonesia and Lao
PDR following years of rapid growth and relatively
loose macroeconomic policy, and core inflation
remains high in Vietnam. In the Middle East &North Africa, high prices reflect both efforts to
reduce the fiscal burden of price subsidization byraising some regulated prices, as well as supply
disruptions caused by civil and armed strife. In
South Asia, increases in regulated prices have also
played a role, as have tight market conditions
despite the relatively slow pace of growth.

Although global inflationary pressures remain
benign, given the lags in monetary policy
transmission, this additional easing may add to astrengthening activity already under way, resulting
in additional inflationary pressures in countries
operating close to full capacity, without much
payoff in additional output.

Economic weakness in high-income
countries has cut into aid flows
Ongoing fiscal adjustments and budgetary
problems among high-income countries have led toa decline in aid for two consecutive years for the
first time since 1997. According OECD (2013)
data, net official development assistance (ODA)
flows in 2012 fell 4 percent in real terms to $125.6
billion, bringing the total decline since 2010 to 6
percent. As a share of Gross National Income indonor countries, ODA for developing countries
fell to 0.29 percent in 2012 from 0.31 percent in2011. Cuts to aid budgets were steepest among
high-spread Euro-area economies, with Spain
having cuts its aid budget by 50 percent, Italy by 35
percent, Greece by 17 percent, and Portugal by 13
percent. ODA increased among only nine reporting
economies, with Korea (18 percent), Luxembourg(10 percent), and Australia (9 percent) reporting thelargest increases. Turkey almost doubled its
assistance to North African countries after the
Arab spring.

In contrast, inflation rates in developing Europe
and Central Asia have declined to close to 7
percent, down somewhat from the 8½ to 9 percent
average during the pre-crisis period. The easing
partly reflects still-large output gaps, but structuralreforms have also contributed.
Monetary policy in developing countries continues
to ease. Since January, the Reserve Bank of India
has cut interest rates by a cumulative 75 basis
points despite still strong inflationary pressures. In
Mexico, the central bank has cut rates by 50 basis
points—its first interest rate cut since July 2009.
Other policy easing included a 100-basis-point cut
implemented by the Bank of Colombia in threeconsecutive actions. Interest rates were also
lowered in Albania, Azerbaijan, Belarus, Georgia,
Kenya, Mongolia, Sri Lanka, Thailand, Turkey,
Uganda, and Vietnam. Only five developing
countries (Brazil, the Arab Republic of Egypt,
Gambia, Ghana, and Tunisia) have raised interest
rates in 2013; Serbia raised and then cut rates.

The outlook for aid remains gloomy for poor
countries. The OECD expects aid flows to recover
only modestly in 2013 and to remain stable during
12

GLOBAL ECONOMIC PROSPECTS | June 20132014 to 2016. The bulk of the increase in flows is
expected to benefit middle-income Asian
economies, with flows to countries with the largest
Millennium Development Goals gaps declining.
Bilateral aid to Sub-Saharan economies declined 7.9
percent in 2012 in real-terms.

percent, respectively. By contrast, developing
regions that are more closely tied to high-income
Europe (figure 11), where the protracted debt crisis
has taken a severe toll on economic activity,
experienced much weaker increases in remittances.
Remittance flows to the developing Europe &Central Asia region fell 3.9 percent and increased
1.6 percent in Sub-Saharan Africa in U.S. dollar
terms in 2012, following increases of 13.5 and 4.9
percent, respectively, in 2011. Flows to Latin
America were hit especially hard by the continuing
downturn in Spain, where the unemployment raterose above 26 percent, forcing many Latin
American migrants to return home. The dollar
value of remittance flows to Latin America rose 0.9
percent in 2012, with absolute declines in somecountries like Colombia (-2.3 percent) that havesignificant numbers of migrants in Spain.

Outside Europe, remittance flows todeveloping countries are largely
unaffected
The European debt crisis and rise in
unemployment rates in high-income countries(which account for the bulk of remittance flows todeveloping countries) has negatively affected
incomes of migrants and, in turn, their ability tosend money home (for a more detailed discussion,see World Bank 2013a). Nevertheless, migrants
appear to have absorbed these shocks to someextent and continue sending remittances to theirfamily and friends in need. As a result, the value ofremittances to developing countries rose to $401
billion in 2012, up 5.3 percent. or about half the
11.5 percent increase recorded in 2011. As a shareof recipient-country GDP, remittances rose only
0.2 percentage point.

The U.S. dollar value of remittance flows todeveloping countries is projected to increase 6.7
percent in 2013 and to gradually firm to a 10.2
percent rate of increase in 2015, reflecting a modest
easing in oil prices and a gradual strengthening ofgrowth in high-income countries. Despite theincreases in nominal terms, flows are projected toremain broadly stable when expressed as a share ofdeveloping countries’ GDP.

Global outlook: lessvolatility, somewhat
stronger growthThis aggregate story masks important differences
across countries. For instance, the large number of
migrants in the Arabian Gulf generated significant
increases in remittance flows from the Gulf
Cooperation Council countries—with the U.S.
dollar value of remittances to South Asia and the
Middle East & North Africa rising 12.3 and 14.3
Figure 11.

Remittances continued to expand in 2012,broadly in line with developing country GDP% of GDP

5

Hard data so far this year point to a global
economy that is slowly getting back on its feet.
However, the recovery remains hesitant anduneven. Several times since the onset of the crisis
in 2008, expectations of a firming of growth haveended in disappointment. And the current
conjuncture is no different. Forward-looking
indicators, including business surveys, havestrengthened over the past six months only to
weaken again recently (figure 12).

Billions of USD

6

120
Value of Remittances (RHS axis)
Remittances as% of GDP (LHS axis)

100

4

80

3

60

2

40

1

20

0

0
East Asia &Europe &Pacific
Central Asia

Latin
America &Caribbean

Middle East
& N. Africa

South Asia Sub-SaharanAfricaWhile an important clue as to current and future
developments, a pessimistic bias has crept into theSource: World Bank.

13

GLOBAL ECONOMIC PROSPECTS | June 2013

Figure 12.

In the United States, the private sector recovery
appears to be relatively robust. By some measures,growth in the first quarter of 2013 was stronger
than expected with industrial production expanding
at a 4.4 percent annualized pace, and retail sales at a2.9 percent pace. First quarter GDP growth was
relatively weak at 2.4 percent, in part because of adecline in government spending. The gathering
momentum in the U.S. economy is both reflectedin and prompted by an improving labor market(unemployment has fallen to 7.6 percent) andrecovery in the housing market.

Business confidence has improved, but remains weaker than conditions would suggest

Balance of responses, > 50 implies expansion
59

56
High Income non-EU

Developing excl. China

53

50
China
47
Euro area

Progress toward agreeing on a credible plan tobring the deficit down to sustainable levels has
been slow. However, policy makers have extended
both the debt ceiling and spending authorizations
well into the future, thereby reducing the likelihoodof a debt-ceiling confrontation and the threat ofdefault. On the downside, both the tax increases
agreed at the beginning of the year and thespending sequester will be a drag on growth incoming quarters, continuing to offset some of thestrength from the private sector recovery. Overall,
GDP growth for the year is projected to slow
somewhat, compared with 2012, to about 2.0
percent in 2013, before strengthening to 2.8
percent in 2014 and 3.0 in 2015.

44
Jan '11Jul '11Jan '12Jul '12Jan '13

Source: World Bank; Haver Analytics; Markit.

relationship between Purchasing Manager’s Indexes(PMI) and actual output. Based on the historical
relationship between industrial activity and theWorld Bank’s global PMI indicator (a weighted
average of national and Markit PMI indicators),
PMIs between 2010 and 2013 have beensystematically about 3.0 points lower than theyshould have been.
While this pessimistic bias could be just a statisticalartifact, it could also be an indicator of increased
caution on the part of firms. Under thisinterpretation, firms having been disappointed bypoor growth outcomes in the past may be skepticalof stronger growth now, and could be holding backon investment until they are sure that anotherslowing is not in the offing. Such behavior, may be
self-fulfilling and could explain why despite
improved conditions in financial markets, and thegradual accumulation of pent-up demand for
consumer and investment durables, the recovery(especially in Europe) remains modest.

The economy of the Euro Area remains very weakdespite improved financial conditions and somesigns of strengthening. On the positive side,
funding costs in core Euro Area countries havedeclined, and lending has started to grow again.
Imports, exports, and industrial production have all
returned to positive (albeit modest) growth.
However, borrowing costs in high-spread
economies remain very high; unemployment
continues to rise (including in so-called coreeconomies); and weak growth is compromisingprogress on the fiscal front. Moreover, although
important structural and fiscal consolidation
reforms have been undertaken (see box 1), the paceof progress has eased, leading to concerns ofreform fatigue, while several elections havehighlighted popular discontent with austerity.
Finally, unemployment is crushingly high inperiphery economies (27 percent in Spain and
Greece, 18 percent in Portugal, 14 percent in
Ireland, and 12 percent in Italy).

A gradual recovery in high-income
countries
Activity in high-income countries has been underconsiderable pressure from fiscal and banking
sector consolidation and associated uncertainties.
These pressures are expected to remain over theforecast period, although the drag they are exertingon growth is projected to diminish, in part becausemuch of the necessary adjustment has already beenaccomplished.

14

GLOBAL ECONOMIC PROSPECTS | June 2013

Growth in the Euro Area is expected to pick up
slowly during the course of 2013, in part because
the drag from fiscal consolidation and banking
sector restructuring in the core countries is
expected to become less intense.4 As a result,quarterly growth for the Euro Area as a whole isexpected to return to positive territory in the
middle of 2013 and then gradually gain strength.
Nevertheless, whole year GDP is projected tocontract by 0.6 percent in 2013, with annual growth
slowly strengthening to 0.9 percent in 2014 and toabout 1.5 percent by 2015. Despite the return topositive growth, little progress is expected to bemade in reducing unemployment. Weakness inhigh-spread economies where the deepest
adjustments are occurring will continue, withgrowth not turning positive until 2014 and then
only to a soft 0.3 percent.

toward looser monetary policy made in November
and confirmed with announcements of a large
quantitative easing, fiscal stimulus and structuralreform policy in January. Growth is projected tocome in at 1.4 percent this year and in 2014 and at
1.3 percent in 2015. For growth to remain strong
through 2015, however, Japan will have toimplement a robust set of productivity enhancing
policy changes. Measures announced to date,include deregulation of the agriculture andelectricity sectors, a relaxation of rules in healthcare, investment tax incentives, (including FDI);
some corporate governance reforms; and a partial
relaxation of restrictions on the investment
behavior of pension funds.

Prospects for developing countries
vary widely, reflecting local economic
and policy conditions

Growth in Japan rebounded in the fourth quarterof 2012 and into the first quarter of 2013,
expanding at a 4.1 percent annualized pace, with
consumer demand rather than investment a major
driver—although industrial production expanded
rapidly (8.9 percent in 2013Q1). Tradedenominated in U.S. dollars has dropped off
precipitously (as of April 2013, it was 8.0 percent
lower than in June 2012), in part because of the 18
percent depreciation of the Yen vis-à-vis the dollar
since March 2012. The decline also reflects bilateral
weakness in Japan’s exports and imports to andfrom China, apparently linked to tensions overdisputed territories.

Overall, developing-country GDP is expected tofirm somewhat in 2013, growing by 5.1 percent andgradually rising to 5.6 percent in 2014 and 5.7
percent in 2015 (Box 4 provides a regional
breakdown of prospects, while the regional
annexes provide additional detail). That aggregate
story, however, hides considerable regional andcountry-level variation (figure 13). At least fourclasses of developing countries can be identified:The strength in the Japanese economy partly
reflects the effects of announcements of a shift
Figure 13.

10

countries (including many in East Asia and Sub-Saharan Africa) that are growing rapidly andalready close to or above potential, andtherefore at risk of overheating;Acceleration will be muted in regions already operating at close to full capacity

Annual GDP growth, percent

2011

8

2012

2013

2014

2015

Latin America & Middle East & N.
Caribbean
AfricaSouth Asia

6
4
2
0
-2
-4
High Income
Countries

East Asia &Pacific

Europe &Central Asia

Source: World Bank.

15

Sub-SaharanAfricaGLOBAL ECONOMIC PROSPECTS | June 2013

Box 4.

Regional outlook

Growth in the East Asia & the Pacific region slowed to 7.5 percent in 2012 largely due to weakening of growth in China(relative to the recent path). The regional growth is projected to slow further to 7.3 percent in 2013 with still weak 7.7 percent
growth in China and easing of growth in the region excluding China from 6.2 percent in 2012 to 5.7 reflecting weak global
demand and domestic policy tightening. The regional growth is projected to pick up to 7.5 percent in 2014 and 2015 as China's growth firms up and growth in the region excluding China accelerates to 5.9 percent in 2014 and then 6 percent in 2015
supported by strengthening global trade flows. The main risks to the region are internal, associated with a sharp reduction in
Chinese investment, quantitative easing in Japan and rapidly rising debt and asset prices pose risks for Indonesia, Malaysia,
Thailand and the Philippines. Efforts to enhance productivity gains through market reforms should deepen, especially in
Cambodia, the Lao PDR, Myanmar, and Vietnam, while building buffers against future shocks remains a policy priority in Lao
PDR, and small Pacific islands.
GDP growth in Europe & Central Asia is estimated to have sharply slowed to 2.7 percent in 2012 from 5.6 percent in 2011
as the region faced significant headwinds including weak external demand, deleveraging by European banks, a poor harvest,
and inflationary pressures. While GDP growth in 2013 in the region will be supported by improved agricultural performanceand reduced deleveraging pressures, the rebound will nevertheless be constrained by the weak carryover growth caused bylow economic activity in 2012Q4; ongoing fiscal adjustments by the region’s economies, and high unemployment. The recovery in export demand is expected to be gradual. The region’s growth is expected to reach 2.8 percent in 2013 and 4.2 percent by 2015. Medium-term prospects for the region will critically depend on progress in addressing structural constraints toeconomic growth including capacity constraints, high unemployment, and lack of competitiveness.
Growth in Latin America & the Caribbean is expected to strengthen to 3.3 percent in 2013, from 3.0 percent in 2012, supported by stronger demand domestically and abroad. Growth should converge toward potential after very weak growth in2012 in Brazil (0.9 percent) and Argentina (1.9 percent). Growth in most other countries is expected to ease slightly or decelerate this year. Growth is expected to decelerate markedly in Venezuela (to 1.4 percent), as highly expansionary policies arereversed. Over the medium term, the regional economy is expected to grow just under 4 percent annually, supported bystronger capital flows (notably FDI), recovering external demand, and structural reforms in some of the larger economies.
Such improvements will be essential if the region is to sustain stronger growth over the medium term in the context of slow
growth among major trading partners. Risks facing the region include the possibility of overheating in some of the faster growing economies and the potential impacts of even weaker-than-projected commodity prices.
Growth in the Middle East & North Africa region is projected to slow to 2.5 percent in 2013, from 3.5 percent in 2012, reflecting a second year of recession in the Islamic Republic of Iran, subdued growth in the Arab Republic of Egypt, and a modest pickup in Algeria. Political tensions remain high in advance of scheduled elections and referendums, and security risks
are dragging down activity and investment. In the wake of lower private capital inflows since 2010, fiscal and external accountimbalances among oil importers are increasing, in turn exacerbating funding pressures and undermining fiscal sustainability
particularly in Egypt. However, a gradual strengthening of demand in key Euro Area trading partners and the moderation in
global food prices could provide some respite in the near term. Among oil exporters, surging government spending has increased vulnerability to a sustained fall in oil prices. Medium-term prospects hinge on the resolution of political tensions andsecurity risks, and on the implementation of reforms to place the region’s economies on a more sustainable footing and toboost investment, jobs, and growth.
GDP growth in South Asia slipped to 4.8 percent in 2012, mainly reflecting a continued deceleration in India, and slower
growth in Sri Lanka and Bangladesh. Growth in Pakistan and Nepal remains sluggish, below regional peers. Regional GDP
growth is projected to pick up to 5.2 percent in 2013, before accelerating to 6.1 percent and 6.4 percent in 2014 and 2015, inline with strengthening external demand, normal monsoons (after poor rains in 2012), and a gradual pickup in investment
spending. Continued progress in fiscal consolidation and implementation of reforms that reduce structural constraints andlower inflationary expectations will determine the pace of recovery. Domestic risks that have gained in importance include a
possible derailing of reforms, a resurgence of inflation, and weaker-than-expected monsoon rains.
Growth in Sub-Saharan Africa has remained robust at an estimated 4.4 percent in 2012 (5.4 percent if South Africa is excluded), supported by resilient domestic demand and still relatively high commodity prices. Strengthening external and resilient domestic demand, an accommodative policy environment, increasing investment, still high commodity prices, and increased export volumes in countries with new mineral discoveries (Sierra Leone, Niger, and Mozambique) are expected tounderpin a return to the region‘s pre-crisis growth rate of around 5.2 percent over the forecast horizon (2013–15). Nonetheless, risks remain tilted to the downside. A weaker-than-expected recovery in high-income countries and sharper-thanexpected decline in commodity prices will slow growth in the region and lead to deterioration in fiscal and current accountbalances, which remain strained in a number of economies in the region. Other domestic risks include overheating in economies operating close to capacity, adverse weather conditions, and political instability.

16

GLOBAL ECONOMIC PROSPECTS | June 2013







countries that appear to be running up against
capacity constraints at growth rates well below
the growth rates of the pre-crisis period,
including several large and economicallyimportant middle-income countries;

Figure 14.

Inflation tends to be higher in countries
with limited spare capacity
Tightness *4.0

Sierra Leone

3.5
3.0

countries with considerable slack in theireconomies, whether because of the severity ofthe post-crisis downturn (developing Europe),or because of social and political disruptions toeconomic activity (Middle East & North
Africa); and finally

Ghana
2.5
Gabon

Paraguay
Central African
Republic

2.0

BurundiCambodia

1.5
Laos PDR

Cote d’Ivoire
Seychelles

1.0

Bolivia

Chile

0.5

Philippines
Niger

developing countries where recovery from thecrisis appears complete, and there are no
outward signs of overheating—this is thelargest group of the four.

-10

-5

Sri Lanka
Burkina Faso

Mauritania
Rwanda

0.0
0

Togo

Indonesia
Pakistan

5

10

Mongolia

15

20

Quarterly inflation (saar), 2013Q1 %* Tightness is the sum of the output gap in 2013 and the difference between the actual and potential growth rates in 2013

Source: World Bank; Datastream.

order. That would be especially desirable incountries where monetary conditions have beenrelaxed in recent years, or where structural deficits
are relatively high and the economy could therefore
benefit from restoring some of the fiscal cushions
that were expended in responding to the crisis.

Strong growth and capacity constraints areissues for many countries in East Asia, SubSaharan Africa, and Latin America
Policy makers in fast-growing economies that areclose to (or above) full capacity should be focusing
on avoiding overheating, rebuilding fiscal andmonetary conditions, and implementing structuralreforms to allow their economies to sustain the fast
growth. Managing macroeconomic policy isdifficult at the best of times. For fast-growing
economies—especially those that are having
success in exploiting previously untapped
potential—the challenge is particularly difficult
because judging where an economy is relative topotential is daunting when domestic economic
structures are rapidly changing and both foreignand domestic investors are expressing strong
confidence in an economy’s future (box 5). While
there are clear costs associated with overheating,especially when fast growth has been accompanied
by rapid credit expansion, there are equally clear
opportunity costs associated with prematurely
slowing an economy and potentially forgoing fast
growth and rising incomes.

In China, ongoing rebalancing efforts remain apriority as does engineering a gradual decline in its
unsustainably high investment rate. Should
investments prove unprofitable, the servicing ofexisting loans could be come problematic —potentially sparking a sharp uptick in nonperforming loans that could require stateintervention (see World Bank 2013a, for more).

In still other countries, growth in the post-crisis
period has been weaker than during the boom
because of underlying supply-side constraints
Growth in Brazil, India, Russia, and South Africa
has been 2–3½ percentage points slower since2010 than it was during the pre-crisis boom periodof 2003–07 (table 3). While different factors are atplay in each of these middle-income countries,
there are several common factors. First, growthduring the boom period was much stronger thanduring the preceding four years or even 10 years.
Many began to think that these higher pre-crisis
growth rates might be consistent with potential
output growth, a view that the strong bounce-backof growth in the period immediately following thecrisis seemed to confirm.5 However, countries have
had difficulty sustaining such rapid growth without
generating goods or asset price pressures. This,For countries that combine rapid growth andalready tight capacity conditions, the risks ofoverheating are higher; these risks include high orrising inflation or both (figure 14); growing current
account deficits (as domestic supply is unable tomeet rapidly rising demand); and asset pricebubbles. In these economies, a tightening of either
or both fiscal and monetary policy might be in
17

GLOBAL ECONOMIC PROSPECTS | June 2013

Table 3.

Growth post-crisis has been much weaker than during the pre-crisis period in several middle-income
countries

Average Growth

Output Gap

Growth in 2012

1995-99

1999-03

2003-072010-12

2007

2010

2012

ActualPotential

1.4

2.3

4.7

1.8

1.7

2.4

-0.8

0.9

3.2

India

6.6

5.4

8.8

6.1

2.5

2.2

0.9

5.3

6.8

Russia

-0.4

6.8

7.6

3.9

9.7

-1.9

-1.3

3.4

3.7

Turkey

3.4

3.0

7.3

5.4

4.3

-2.4

-0.2

2.2

4.0

South Africa

2.4

3.4

5.2

2.8

5.0

-0.7

-1.0

2.5

3.0

BrazilNote 1: Average annual compound growth rate
Note 2: Calendar year average of fiscal year GDP measured at factor cost for India
Source: World Bank.

plus increasing current account deficits, suggestthat underlying potential output growth was slower
than pre-crisis growth rates might have suggested.
Indeed, World Bank estimates of potential output
indicate that, in each of these countries, pre-crisis
growth was well in excess of potential growth.
Weak post-crisis growth in several of thesecountries has not generated significant spare capacity.
Rather it has eliminated what were in some cases large
positive output gaps in 2007.

suggesting limited scope for growth to accelerate in
the short run (growth in 2012 was slower thanpotential growth in most of these countries).
Moreover, growth rates in the future are likely to
be constrained by the rate of growth of potential,
which although higher than post-crisis averages forthese countries, remains well below pre-crisis
growth rates.
Of course, there is considerable uncertainty
surrounding these (or any) estimates of potential
output.6 However, inflation increased over the past
year in two of the five countries in table 3, andcurrent account balances deteriorated in all but
one. These developments suggest that supply
constrains rather than deficient demand nay be at
the root of the slower growth during recent years(table 4).

To the extent that current output gaps are relatively
small (or positive), efforts to increase growththrough monetary and fiscal stimulus risk being (ormay have been) ineffective and might add to debt
or inflationary pressures without any sustained
progress in increasing output or reducing
unemployment.
According to the World Bank estimates in table 3,
the 2012 output gap in Brazil, India, and Turkey iseither positive or close to zero (less than 1 percent),
Table 4.

For all of these countries, if growth is to return topre-crisis growth rates on a sustainable basis, much
more attention will need to be paid to policies thattackle supply-side bottle necks, whether they stemfrom weak or poorly enforced regulations,corruption, inadequate or irregular provision ofelectricity, or inadequate investments to improveeducational and health outcomes.

Inflation is rising or current account deteriorating in countries with tight output gaps

Levels (MRV)
Current
Inflation account(y/y) (% GDP)

Change in past year
Inflation Current
percentage accountpoints (% GDP)

Brazil

6.5

-2.3

1.4

-0.2

India

9.4

-5.4

-0.9

-1.9

Russia

7.4

3.9

3.6

-1.4

Turkey

6.5

-6.0

-5.0

3.7

South Africa

5.9

-6.2

-0.2

-2.8

Output gaps and unemployment are persistentproblems for many countries in developing
EuropeSeveral countries in developing Europe participatedin the excesses of the pre-crisis boom period, withboth households and firms taking on high levels ofdebt often denominated in foreign currency andoften used to finance consumption rather than

Source: World Bank.

18

GLOBAL ECONOMIC PROSPECTS | June 2013

Box 5.

Slower growth in the post-crisis period mainly reflects a return to underlying potential growth rates after
above-potential growth during the boom period
Box table 5.1

Defining potential growth and why it is important

Forecasting is always a challenging exercise—even more sowhen the global economy is going through a large adjustment.
To provide some anchor to the forecasting process, the WorldBank relies on potential GDP (growth).
Potential output is defined as the trend growth in the productive
capacity of the economy, that is, it is the estimated level of output attained when the entirety of the capital stock and effective
labor supply is employed. It is thus a measure of the maximum
sustainable output (growth)—the level of real GDP (growth) in agiven year that is consistent with a stable inflation and the way
in which the factors of production, capital and labor, are optimally combined in the production process.
In calculating the potential GDP, working-age data comes fromthe United Nations, while the capital stock is estimated using
the perpetual inventory method from investment data and assuming a depreciation rate of 7 percent (IMF 2005). TFP was
calculated using a Hodrick-Prescott filter through spot estimatesof total factor productivity (TFP) (i.e. the Solow residual).
In the pre-crisis period, developing-country GDP grew 2 percentage
points faster, on average, than potential GDP

Developing-country GDP grew on average by 8.3 percent eachyear between 2005 and 2007, approximately 2.0 percentage
points faster than the annual growth of potential output 1 duringthat period. As a result, World Bank estimates suggest that developing-country demand was fully 3.5 percentage points higher
than supply in 2007 (output was broadly in balance in 2005).
The crisis erased excess demand, with most countries returning
reabsorbing spare capacity relatively quickly

Potential output and its determinants
1995-2005 2005-2007 2007-2009 2009-2012 2012-2015(Average annual percent change)

Developing countries
Actual GDP
Potential GDP
Total Factor Productivity
Capital Stock
Working-Age Population
East Asia & Pacific
Actual GDP
Potential GDP
Total Factor Productivity
Capital Stock
Working-Age Population
Europe & Central Asia
Actual GDP
Potential GDP
Total Factor Productivity
Capital Stock
Working-Age Population
Latin American & Caribbean
Actual GDP
Potential GDP
Total Factor Productivity
Capital Stock
Working-Age Population
Middle-East & North Africa
Actual GDP
Potential GDP
Total Factor Productivity
Capital Stock
Working-Age Population
South Asia
Actual GDP
Potential GDP
Total Factor Productivity
Capital Stock
Working-Age Population
Sub-Saharan Africa
Actual GDP
Potential GDP
Total Factor Productivity
Capital Stock
Working-Age Population

4.8
4.9
2.1
4.3
2.0

8.3
6.3
2.7
7.7
1.8

3.8
6.1
2.5
7.9
1.7

6.2
5.8
2.3
8.0
1.5

5.5
5.7
2.3
7.3
1.7

7.4
8.1
4.0
9.4
1.6

11.6
9.1
4.9
10.5
1.4

8.0
8.9
4.7
11.1
1.2

8.5
8.6
4.4
11.3
1.1

7.5
8.0
4.2
9.5
1.3

4.0
3.2
2.8
-0.1
0.6

7.7
5.4
2.7
7.3
0.7

-1.5
4.3
2.0
5.8
0.8

4.6
3.7
1.8
5.5
0.4

3.6
3.8
1.8
5.3
0.5

2.9
2.9
0.7
2.7
2.0

5.5
3.8
1.2
4.5
1.7

1.0
3.7
1.2
4.6
1.6

4.4
3.6
1.1
4.7
1.5

3.7
3.4
0.9
4.9
1.4

4.4
4.3
1.0
3.3
3.2

5.6
4.3
0.9
5.4
2.4

3.7
3.8
0.5
6.0
2.1

1.9
3.1
0.1
5.1
2.1

2.4
2.8
0.1
4.0
2.2

8.9
7.4
2.9
9.8
2.1

5.3
7.1
2.8
9.3
2.0

7.3
6.7
2.6
9.1
1.9

5.9
6.1
2.4
7.5
1.9

6.7
5.2
1.5
5.9
2.7

3.6
5.3
1.3
7.1
2.7

4.7
4.9
1.2
6.4
2.6

5.2
5.1
1.1
6.9
2.7

With the crisis, developing-country growth slowed sharply from
5.8
8.5 percent to 1.9 percent between 2007 and 2009, broadly the
6.0
same slowdown observed in high-income countries in percent2.3
age point terms (6.6 points for developing countries, 6.3 points
6.4
for high-income countries). As a result, the excess demand of
2.4
the end of boom period was erased and a negative output gap
of 0.9 percent of potential GDP was opened up by 2009. The
4.0
rebound in activity in 2010 more than absorbed the gap, with
3.8
positive or close to zero output gaps in all developing regions
1.0
except Europe and Central Asia. Slower-than-potential growth
2.4
in East Asia & Pacific, and South Asia closed output gaps from2.8
above, while growth broadly in line with potential in Latin America has kept the gap closed in that region. In Sub-Saharan Afri- Source: World Bank.
ca, where estimates of potential are particularly difficult, GDP
Output gaps
has grown less quickly than potential in the post-crisis period, Box table 5.2
opening up a small negative output gap.
2005 2006 2007
Growth since the crisis has been constrained by domestic bottle- Output Gap ((actual GDP - potential)/potential, %)necks and productivity, stymieing efforts to use expansionary mac- Developing
-0.2
1.5
3.5
roeconomic policy to boost growth-2.0 -0.4
2.5
While growth during the post-crisis period has been slower than East Asia & Pacific
3.4
6.0
8.0
during the pre-crisis period, it has, on average, been in line with Europe & Central Asia
underlying potential growth. Potential growth for all developing Latin America & Caribbean -0.5
1.3
2.9
regions has slowed relative to the boom period by an estimated
0.9
2.6
0.5 percentage point. Slower population and TFP growth have Middle-East & North Africa 0.0
-0.5
0.8
2.3
contributed to the slower growth. The rate of growth of the capi- South Asia
tal stock for all developing regions increased, but declined if Sub-Saharan Africa
0.4
1.8
3.2

2008

2009

2010

2011

2012

2013

3.1
2.2
7.0
2.8
2.6
0.8
2.9

-0.9
0.8
-3.6
-2.5
2.4
-1.0
-0.2

0.6
1.6
-2.1
-0.3
4.1
1.8
-0.1

1.0
1.5
-0.2
0.4
2.1
2.4
-0.3

0.1
0.6
-1.1
-0.1
-1.0
0.8
-0.8

-0.6
-0.2
-1.9
-0.1
-2.5
-0.1
-0.9

China is excluded from the calculation. In terms of contributions Source: World Bank.
to potential growth, about ¼ of the slowdown is attributable toslower population growth for the developing world excluding China and ⅔ due to slower TFP growth. The major contributor toslower potential growth in South Asia was slower capital stock accumulation. Weaker TFP growth was the largest driver ofslower growth among BRICS, while in Latin America & the Caribbean, weaker population growth was a major factor.
To achieve faster growth, developing countries will have to focus on supply-side reforms

There is obviously significant uncertainty surrounding measures of output gaps and potential output, particularly among developing countries where the structure of economies is changing so quickly. Nevertheless, these results serve as a reminderthat developing countries will need to continue with structural policy reforms that eliminate bottlenecks, enhance productivity,and stimulate capital accumulation if they are to achieve sustainably faster growth rates over the medium term.
1.

The data reproduced in this box derive from the World Bank’s macroeconometric model and its estimates of total factor productivity (TFP) and potential
output. These estimates are derived following a production-function technique similar to that used by the OECD and the European Commission, as describedin (Burns, Janse van Rensburg, and Bui 2013). Future TFP growth, which influences current TFP growth through the employed smoothing algorithm, isassumed to be equal to the average observed in the pre-boom period 1995-2005.

19

GLOBAL ECONOMIC PROSPECTS | June 2013

Output gaps are small and appear to be closing
for the majority of developing countries

investments in new productive capacity. In
addition, the banking sectors in many of thesecountries had close relations with European banks.
As a result, their own difficulties in dealing withrising quantities of nonperforming loans weremagnified by a drying up of external funding
sources upon which many banks had relied. As in
high-income Europe, the adjustment that ensued
following the crisis was brutal. Unemploymentsoared to record levels, as banks deleveraged andhouseholds and firms cut into spending in an effort
to repair damaged balance sheets. Fiscal conditions
deteriorated throughout the region, with severe
consequences in a few countries where public debt
levels had risen even during the boom years.

The bulk of developing countries are in a relatively
positive place, with modest output gaps (countries
close to the center of the figure 16), that are closing(countries in the green-shaded portions of thegraph), either because output growth has slowed
below potential and is therefore easing inflationarypressures, or because output is growing somewhat
faster than potential. In these economies, policy
appears to be broadly on track, although authorities
may need to examine the overall stance of fiscal
policy to evaluate whether there is scope for a
gradual tightening to regenerate buffers consumed
during the crisis period or to tighten monetary
policy and in some cases rebuild reserves toprovide room for a monetary policy easing should
the global economy weaken sharply.

The good news is that growth rates for many of thehardest-hit countries have recovered to levels close
to their underlying potential output. However,growth has not been strong enough to makesignificant inroads into existing unemployment andspare capacity.7 Arguably, these economies havebeen caught in a high unemployment equilibrium.
Traditional policy advice in situations like thiswould be to use fiscal and monetary policy tostimulate growth and help close output gaps, but
for many countries already high fiscal deficits andthe necessity of restoring bank balance sheets limit
the scope for such actions (figure 15). For thesecountries, policy may have to focus on increasing
economic flexibility (including labor retraining) topromote improved competitiveness and takeadvantage of faster growth elsewhere.

Post-crisis risks havereceded, with domestic
challenges gaining
prominence
The cumulative steps taken by Euro Area countries
over the past several years have greatly reduced thefiscal sustainability problems on the continent. The

Figure 15.

Fiscal space is limited among many
economies with large output gap

Output gaps are small or closing in the
majority of developing countries

Figure 16.

Speed of gap closure in 2013,
percentage points

5

Percent of GDP, 2012403Overhea ng

Gap closing from below

-1

2
1

-2

Size of output
Gap (2012)

0
-5

-4

-3

-2

-3

-1

0

1

2

3

4

5

-1
-2

-4

Output Gap

Crashing-3
China

Fiscal Deficit-5-4

Gap closing from above

-5

-6
Mali

RomaniaSt.
Vincent

UkraineBulgaria

Slovenia Lithuania Cameroon

South
AfricaSource: World Bank.

East Asia & Paciﬁc

Europe & Central Asia

La n America & caribbean

Middle-East & North Africa

South Asia

Sub-Saharan Africa

Source: World Bank.

20GLOBAL ECONOMIC PROSPECTS | June 2013

International Monetary Fund (IMF) estimates that
⅔ of Euro Area countries have already done
enough fiscal adjustment (through end of 2013) toachieve debt sustainability and debt reduction (IMF
2013b, 8). This fiscal consolidation althoughenormously painful has, in conjunction withreassurances offered by the European Central Bank
(ECB), helped restore confidence in the Euro Areaeven as concerns about individual countries andbanks remain. Indeed, as the uncertainty evoked by
the Cyprus rescue effort illustrated, continued
careful management of conditions at both thecountry level and the regional level is required.
Much of the uncertainty that surrounded U.S. fiscal
policy toward the end of 2012 has dissipated.
Congress has twice extended the debt ceiling wellin advance of reaching it, reducing the likelihoodthat a return of brinkmanship will cause the debt togo unpaid. The decision to allow payroll taxes to
expire and increase tax rates on some wealthier
individuals, together with the spending cuts
associated with the sequester have reduced the U.S.
general government deficit by an estimated 1½
percent of GDP.



the potential effects of the radical relaxation ofboth fiscal and monetary policy in Japan;the potential impacts on revenues, government
balances, and growth among commodity
exporters, if the increased supply and demand
suppression that high commodity prices haveevoked begins to generate strong downward
pressures on commodity prices;

domestic challenges, including inflationarypressures and asset price bubbles, and weaker
than pre-crisis growth rates.



The challenges that the eventual withdrawal ofquantitative easing may bring.

Dealing with sharply relaxed fiscal
and monetary policy in Japan
After several months of signaling that they would
be loosening fiscal and monetary policy, Japanese
authorities announced at the beginning of 2013 a
three-pronged macroeconomic growth strategy,
comprising new public works spending of ¥10
trillion, a new monetary policy aimed at reaching a
2 percent inflation target in the medium term, andstructural policies aimed at increasing total factor
productivity growth. For the moment, the precise
nature of the programs is not entirely clear—for
example, only about half of the announced new
spending appears to be net new spending. Similarly,
the impact and details of announced to incite firms
to invest, reduce protection in the service andagricultural sectors and stimulate female labor
participation is unclear. The monetary easing,which, as announced, would about the same size as
the third round of quantitative easing (QE3) in the
United States, has only just begun.

Nevertheless, little progress has been made towardsetting U.S. fiscal policy on a sustainable mediumterm path. At 7.0 percent of GDP in 2012, thegeneral government deficit remains very high, andgross general government debt is projected toreach 107 percent of GDP in 2013. As a result, theIMF 2013b) estimates that an additional deficit
reduction of some 8.2 percent of GDP will be
required before fiscal policy in the United States
returns to a sustainable path (almost twice theestimated cuts required in the Euro Area). In Japan,
the same number is more than twice as high again,even when seeking the less ambitious objective of
reducing general government gross debt to 173
percent of GDP.

Traditional risks have receded, butother risks and challenges haveemerged or grown in stature

Japanese quantitative easing can be expected toaffect developing countries in three ways:


Even as the post-crisis risks from the high-income
world have declined in importance, a new set of
uncertainties and risks are emerging or gaining instature. For instance, developing countries are
increasingly concerned about:

21

The yen’s depreciation is likely to dampen
developing-country exports (figure 17). However,income elasticities are typically larger than pricesensitivities and in this particular instance,developing countries gain from increased
import demand from Japan might outweighthe losses associated with the Yen’s (real)depreciation;

GLOBAL ECONOMIC PROSPECTS | June 2013

Figure 17.

Figure 18. Since early 2011, metals and energy prices havebeen weakening

Japanese depreciation has pushed up developing country real effective exchange rates

Real effective exchange rates (January 2005=100)
150

160

USD price index, Jan 1 2012 =100

Nickel

140
130
130

120
Copper

110
100

100
90

Jan '06

Developing Countries
China
East Asia excl. China

Jan '08

Jan '10Europe & Central Asia
Latin America & Caribbean

Crude OilJan '12South Asia
70
Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12Oct-12

Jan-13Apr-13

Source: World Bank.; IFS; JP Morgan.

Source: World Bank; Datastream.

measures (see the following discussion for more on
this point).



By adding to the looseness of global monetaryconditions, through lower global interest rates
and perhaps increased capital inflows,
potentially adding to overheating pressures,
especially in developing East Asia & Pacific;

Past investments are boosting the
supply of industrial commodities,
potentially ending the supercycle

Through increased demand for final goods andintermediate products used in Japanese
exports, mainly benefiting countries involvedin the supply chains of Japanese exporters.

Since early 2011, industrial commodity prices havebeen weakening, a process that appears to beintensifying in 2013, despite signs that the global
economy is gaining strength (figure 18). Indeed,since their peak in early 2011, the price of metals
and minerals is down 30 percent and that of energy
is down 14 percent, with prices off 12 and 5
percent, respectively, between January 2013 and theend of May 2013. This price weakness has sparked
discussion about whether a supercycle incommodity prices is coming to an end—
particularly within the metals industry, where large
increases in supply are coming on stream in
response to investments spurred by the high pricesof the past several years. 8

Longer-term unless the structural componentof the reform agenda is successful in boostingproductivity and GDP growth, the fiscal andmonetary stimulus elements are unlikely tohave a lasting positive effect for developing
country GDP, while increased liquidity andindebtedness could prove destabilizing.

Ultimately the overall impact on individual
developing countries will depend in part on theimportance of Japan as a trading partner, the sizeof liquidity leakage from the Japanese economy, theextent that individual developing countries attract
additional capital flows, and the extent to which thequantitative easing boosts Japanese final andintermediate demand for the exports of developing
countries (box 6 and the Exchange Rate Annex
cover different channels and likely impacts in moredetail).

While the baseline assumption of a gradual easing
in prices over the projection period remains themost likely outcome, a steeper decline cannot be
ruled out. Table 5 reports the results of two
simulations. The first scenario examines theimpacts on developing-country GDP, current
accounts, and fiscal balances of a scenario whereoil prices, reach the real long-term supply cost of$80 per barrel (industry experts’ current estimateof the cost of profitably extracting oil from the

Finally, the financial impact of Japanese quantitative easing could be attenuated by the scaling
back or even withdrawal of U.S. quantitative

22

GLOBAL ECONOMIC PROSPECTS | June 2013

Box 6.

Potential impacts of Japanese quantitative easing on developing countries

The yen’s depreciation caused developing-country exchange rates to appreciate 1.7 to 3.7 percentage points more than would
have been the case otherwise

Since September 2012, the yen has depreciated in real effective terms by 21 percent. So far, the impact on developing
economies is measurable, if relatively muted. Developing-country real-effective exchange rates appreciated by 4.7 percent
over the same period, which was 3.5 percentage points more than their average appreciation over any six-month period
between 2005 and 2012. Countries in East Asia & Pacific have closer direct trade ties with Japan and their currencies were
hit harder, rising by 6.1 percent versus an earlier average appreciation of 2.4 percent. Thailand experienced a sharp 12.5
percent real-effective appreciation of its currency. Simulations suggest that in the absence of the yen’s depreciation, currencies in developing countries generally and in East Asian developing countries specifically would have appreciated 1.7 and3.7 percentage points less quickly.
The yen’s depreciation likely to dampen developing-country exports
The yen’s depreciation will tend to make imports more expensive for Japanese consumers and will, therefore, initially reduce Japanese demand for developing-country imports. However, typically income elasticities are larger than price sensitivities and in this particular instance, developing country exporters’ gains from increased import demand from Japan might outweigh the losses associatedwith the Yen’s (real) depreciation.
Effects are not larger because few developing countries compete directly with Japan

Impacts on developing-country exports to the rest of the world would be limited because few compete directly with Japan.
Only four developing countries have an export similarity index with Japan in excess of 50 (100 implies an identical export
structure), and even for those where similarities are relatively high, impacts may be limited given differences in markets
served (Mexico competes in the auto sector, but is focused in the U.S. market, which represents only 22 percent of Japanese auto exports).
Countries like Thailand and Philippines that are in Japan’s supply chain may benefit from increased Japanese exports

Suppliers of parts and components to Japan in regional production networks, particularly Thailand and the Philippines,
could benefit from gains by Japanese exporters in global markets and even derive additional benefits through increased
potential FDI from Japan. Firms in trade partner countries (including those in East Asia & Pacific) would also benefit fromJapanese technology, machinery, and equipment at competitive costs. In the area of service trade, tourists from developing
East Asia to Japan would have increased purchasing power that would contribute to further narrowing Japan’s trade deficit
with the region. Trade partners in the region and globally would benefit from an increase in Japan’s demand for global imports.
Quantitative easing will help keep interest rates low and may contribute to the volatility of capital flows

The announced quantitative easing component of the Japanese stimulus package is roughly twice the size of QE3 in the
United States. However, financial leakages to developing countries are unlikely to be twice those associated with the U.S.
QE3 because capital outflows from the United States tend to flow more directly to developing countries than do Japanese
outflows (only 3 percent of Japanese portfolio outflows are directed to developing countries, versus 8.3 percent for the United States). However, Japanese capital markets are thinner than U.S. capital markets and, therefore, may be less able toabsorb the additional capital flows, forcing a larger share to leak out. Finally, IMF (2013d) found that the impacts of QE3 ondeveloping countries was much less marked than earlier episodes because markets were much calmer then (as they arenow).
Evaluations of the effect of U.S. QE on developing countries offer unclear guidance about the potential impact of Japanese QE

Finally, it is not all that clear what the impact of the leakages (however large they may be) will be on developing countries.
Research by the Asian Development Bank (2013) suggests that the main impact on developing countries of the U.S. quantitative easing was globally positive, mainly because it lowered borrowing costs and boosted demand. Similarly IMF (2013d)
suggests that flows to developing countries have not been excessive and have been broadly manageable, although volatility associated with changed sentiment in high-income countries has generated temporary strains and monetary policy challenges. While lower interest rates may be contributing to asset bubbles and excess risk taking, they have also permitted therelatively inexpensive financing of a great deal of capacity enhancing investment.
By extending periods of low interest rates and boosting capital flows, Japanese QE could exacerbate regional bubbles

Japanese QE will undoubtedly serve to keep borrowing costs down for an even longer period than would have occurred
otherwise. That may contribute to asset price bubbles and volatile capital flows, although to what extent is difficult to evaluate, just as the evidence concerning the impact of the U.S. policy in this regard is mixed.

23

GLOBAL ECONOMIC PROSPECTS | June 2013

Table
5.
Table .5

Impact of a more rapid supply-induced decline in industrial commodity prices

Scenario 1: Oil price gradually declines to $80/bbl real by June 2014, other commodity prices react endogenously

2013
0.1
0.1
0.1

Real GDP
2014
0.4
0.5
0.3

2015
0.3
0.4
0.1

Oil exporters
Developing countries
East Asia and Pacific
Europe and Central Asia
Latin America and Caribbean
Middle East and N. Africa
South Asia
Sub-Saharan Africa

-0.1
0.1
-0.2
-0.1
-0.4
n.a.
-0.3

-0.4
0.4
-0.8
-0.3
-1.4
n.a.
-1.4

Oil importers
Developing countries
East Asia and Pacific
Europe and Central Asia
Latin America and Caribbean
Middle East and N. Africa
South Asia
Sub-Saharan Africa

0.2
0.2
0.1
0.0
0.1
0.2
0.0

0.6
0.8
0.4
0.2
0.5
0.9
0.2

World
High income countries
Developing countries

Current Account (% of GDP)
2013
2014
2015

Fiscal Balance (% of GDP)
2013
2014
2015
0.0
0.1
0.0
0.0
0.2
0.1
0.0
-0.2
-0.3

0.1
0.0

0.4
0.0

0.5
-0.1

0.1
0.4
-0.3
0.4
0.1
n.a.
-0.8

-0.3
0.0
-0.5
-0.2
-0.8
n.a.
-0.9

-1.4
0.0
-2.3
-0.8
-3.5
n.a.
-4.5

-1.4
0.1
-2.3
-0.7
-2.2
n.a.
-4.4

-0.2
0.0
-0.4
-0.1
-0.4
n.a.
-0.6

-1.1
-0.2
-1.8
-0.6
-2.1
n.a.
-2.9

-1.1
-0.3
-1.8
-0.5
-2.3
n.a.
-3.3

0.1
-0.1
0.3
0.1
0.4
0.8
0.2

0.2
0.2
0.2
0.0
0.1
0.3
0.0

0.7
0.8
0.8
0.2
0.5
1.4
0.2

0.5
0.4
0.9
0.2
0.6
1.5
0.2

0.1
0.1
0.1
0.0
0.0
0.1
0.0

0.2
0.2
0.2
-0.1
0.2
0.7
0.0

0.1
0.1
0.1
-0.2
0.1
0.7
0.0

Scenario 2: Metal prices gradually decline by a cumulative 20% by June 2014

2013
0.0
0.0
0.0

Real GDP
2014
0.0
0.0
0.0

2015
0.0
0.1
0.0

Metal exporters
Developing countries
East Asia and Pacific
Europe and Central Asia
Latin America and Caribbean
Middle East and N. Africa
South Asia
Sub-Saharan Africa

0.0
n.a.
0.0
0.0
n.a.
n.a.
-0.1

-0.2
n.a.
-0.2
-0.1
n.a.
n.a.
-0.7

Metal importers
Developing countries
East Asia and Pacific
Europe and Central Asia
Latin America and Caribbean
Middle East and N. Africa
South Asia
Sub-Saharan Africa

0.0
0.0
0.0
0.0
0.0
0.0
0.0

0.1
0.1
0.2
-0.2
0.1
0.2
0.0

World
High income countries
Developing countries

Current Account (% of GDP)
2013
2014
2015

Fiscal Balance (% of GDP)
2013
2014
2015
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
-0.1

0.0
0.0

0.0
0.0

0.0
0.0

-0.1
n.a.
-0.1
-0.1
n.a.
n.a.
-0.5

-0.1
n.a.
-0.1
0.0
n.a.
n.a.
-0.2

-0.3
n.a.
-0.3
-0.2
n.a.
n.a.
-1.2

-0.3
n.a.
-0.3
-0.2
n.a.
n.a.
-1.2

0.0
n.a.
0.0
0.0
n.a.
n.a.
-0.1

-0.2
n.a.
-0.3
-0.2
n.a.
n.a.
-0.8

-0.3
n.a.
-0.3
-0.2
n.a.
n.a.
-0.9

0.0
-0.1
0.1
-0.1
0.1
0.2
0.0

0.0
0.0
0.1
-0.1
0.0
0.1
0.0

0.2
0.2
0.3
-0.3
0.2
0.4
0.1

0.1
0.1
0.3
-0.4
0.2
0.4
0.1

0.0
0.0
0.0
0.0
0.0
0.0
0.0

0.0
0.1
0.0
-0.3
0.1
0.2
0.0

0.0
0.0
-0.1
-0.3
0.1
0.2
0.0

Source: World Bank.

24

GLOBAL ECONOMIC PROSPECTS | June 2013

Canadian tar sands) by mid-2014 rather thandeclining gradually to that price by 2025, as in thebaseline. The faster decline is assumed to comefrom a shift in expectations about future prices
brought about by increasing production andreserve discoveries in the United States and othernonmembers of the Organization of Petroleum
Exporting Countries (OPEC). In this simulation,
the price of other commodities react in line withhistorical cross-price and output elasticities (energy
is a major cost factor in the production of both
metals and agricultural commodities). As a result,metals and food prices also fall, by about 7 and 3½
percent, respectively, relative to the baseline.

GDP, and the fiscal balance by nearly 1
percent.
Unlike oil exporters, these impacts are more likely
to be binding for developing metals exporters
whose average government and current accountdeficits are equal to 2.7 and 6.3 percent of GDP.
Assuming that increases in government deficits
above the 3 percent level cannot be financed, GDP
impacts would increase to -0.5 percent for the
metal exporting countries facing financing
constraints, versus –0.2 percent for countries
where there are no financing constraints.
Notwithstanding the 16 percent decline in oil
prices between their March 2012 peak and May
2013, commodity prices are much higher than they
were at the turn of the century. For example,
between their 2001 record lows and 2012, nominaloil prices are up more than 300 percent, while
metals and agricultural prices are up 225 and 157
percent, respectively.

In this scenario, global GDP is positively affected(up 0.4 percentage point in 2014 relative tobaseline), because the positive effects on oilimporting economies outweigh the negative impact
on oil-exporting countries. The GDP ofdeveloping-country oil exporters is projected to
decline by a relative modest 0.4 percent in this
scenario in 2014, but the effects on current accountand fiscal balances are larger—-1.4 and -1.1 percent
of GDP, respectively. The simulation assumes thatexporters are able to finance the deterioration inthese balances. If they were unable to do so, GDP
impacts would be substantially larger. For the mostpart, developing-country oil exporters are stillrunning current account surpluses, but fiscal
deficits exceed 3 percent of GDP in 6 of 16
countries for which data exist. If countries could
not finance additional deficit, they could be forced
into a procyclical tightening of policy that would
exacerbate the cycle.

The eventual tightening of monetary
policy in high-income countries may
slow growth in developing countries
Although much of the current debate in developing
countries concerns the potential impacts ofJapanese quantitative easing (see earlier discussion),
the implication for developing countries of backing
away from current levels of stimulus and even thewithdrawal of stimulus are at least equallyimportant. Although Japan has embarked on a new
stimulus policy, there are increasing signs that theUnited States will soon either reduce the size of orstop its QE efforts. If that happens, not only will
the net effect of Japanese easing likely be offset (atleast partially) by tighter policies in the UnitedStates, but over the medium term, developing
countries are likely to face tighter financial
conditions, with potentially important real-side
implications.9

The second simulation analyzes the impact of amore rapid decline in metals prices, which areassumed to fall by a further 20 percent by June2014 relative to the baseline, in response to
additional capacity coming onstream following past
investments (see earlier discussion). In this
scenario, the effects on global and oil-importing
country GDP are broadly unchanged, in part
because, unlike oil, the share of metal and minerals
in the imports of most countries is small (even in
China, which consumes a disproportionate share of
the world’s metals, metals and minerals represent
only 16 percent of total imports). The impact on
metals exporters is more severe. Among SubSaharan African metal exporters, GDP could fallby as much as -0.7 percent in Sub-Saharan Africa,balance of payments declining by 1.2 percent of

As monetary policy in high-income countries
begins to be less accommodative, long-term
interest rates can be expected to rise. Currently,
U.S. long-term interest rates are some 110 basis
points below their pre-crisis level and 140 basis
points lower than their long-term average in realterms. Assuming that a relaxation of quantitative
25

GLOBAL ECONOMIC PROSPECTS | June 2013

Higher interest rates could also
expose risks in countries with highdebt levels

easing leads U.S. long-term interest rates to rise to
their long-term average in real terms, and thatdeveloping-country interest rate spreads remain
constant, developing-country borrowing costs
would rise by the same amount as long-term U.S.
rates.

In addition to the longer-term effects that a return
to higher capital costs would have, there is also therisk that the transition to higher rates occurs in an
abrupt and disruptive fashion (IMF 2013d). In sucha scenario, rather than a gradual increase in longterm rates as monetary stimulus eases, markets
react preemptively, causing rates to jump quickly,
potentially trapping some participants in vulnerable
positions that appeared manageable under low
interest rates but proved not to be under suddenly
higher interest rates.

Econometric evidence suggests, however, thatdeveloping-country spreads tend to rise when baserates increase. Work done for the 2010 edition of
Global Economic Prospects suggests that a 100-basispoint increase in high-income-country base rates is
associated with a 110 to 157 basis point increase indeveloping-country yields (World Bank 2010;
Kennedy and Palerm 2010, 2013and IMF 2013a).
If real base rates return to their long-term averages,
they would rise from about 188 basis points today
to around 322 basis points (the mean level between
1990 and 2007). Based on historical experience,that could cause developing-country yields to riseby between 150 and 270 basis points, withcountries with relatively good credit histories andlow spreads at the bottom end of the range andthose with less good records toward the upper endof the range. This is broadly in line with recent
IMF (2013a, 38–39) estimates that suggest thatthree-fourths of the 465 basis point decline indeveloping-country yields since December 2008
has been caused by external rather than domestic
factors.10

Developing countries that have run up private andpublic sector debt during the low-interest period
could be particularly vulnerable. So too would becountries with relatively weak domestic financial
sectors and elevated current account or
government deficits that might make themvulnerable to either a sharp increase in capital costs
or a reduction in flows.
Although the majority of developing countries
appear to be in good condition in this regard,
public debt levels are high and proving difficult tomanage in countries such as Cape Verde, Egypt,
Eritrea, Jamaica, Jordan, Lebanon, Pakistan, andSudan. IMF statistics suggest that gross general
government debt exceeds 50 percent of GDP in 36
low- and middle-income countries and increased in
12 of these by 10 or more percentage points of
GDP between 2007 and 2012 (figure 19).

Simulations suggest that the associated increase in
the cost of capital would cause desired capital-tooutput ratios in developing countries to decline,
resulting in slower investment growth for an
extended period as well as a slower rate of growthof potential output of around 0.6 percentage points
per annum after three years during the transition
period to a lower capital-output ratio. Longer term,
potential output could be lower by between 7 and12 percent unless measures are undertaken to
reduce domestic factors that contribute to the highcost of capital in developing countries. Efforts inthis regard could more than completely offset the
impact of tighter global conditions.

Figure 19.

% of GDP
160
140
120
100
80
60
40
20

0

Source: IMF.

26

Several developing countries combining
high and rapidly rising government debt are
at risk
Debt in 2012
Change in debt since 2007 (percentage points)

GLOBAL ECONOMIC PROSPECTS | June 2013

Figure 20. Private sector debt levels, as well, are elevated in some developing countries
Albania
Zimbabwe
El Salvador
Guatemala
Malaysia
GuyanaTurkeyBelarus
Chile
Bosnia and Herzegovina
Armenia
Macedonia, FYR
Jamaica
JordanLao PDR
SerbiaGeorgia
Lithuania
Kyrgyz Republic
Nicaragua
Romania
Moldova
UkraineKazakhstan
Bulgaria
Papua New Guinea
LatviaSeychelles

0

20

40

60

80

100

Private Domestic Debt (% GDP)*

Colombia
Macedonia, FYR
Russian Federation
Samoa
Costa Rica
SerbiaBangladesh
Honduras
India
TurkeyBhutanMongolia
St. Vincent & the Grenadines
Nepal
Lithuania
Maldives
Bosnia and Herzegovina
Montenegro
UkraineDominica
BelizeBrazilCape Verde
Vanuatu
Chile
MoroccoBulgaria
JordanFijiTunisia
GrenadaLatviaLebanonMauritius
ThailandPanamaSt. Lucia
Vietnam
Malaysia
South Africa
China

External Private Debt (% GDP)

0

120

40

80

120

160

Source: World Bank; International Debt Statistics; World Development Indicators; IMF IFS.
Note 1: External private debt include private nonguranted external debt with short- and long-term maturity.
Note 2: Domestic credit to private sector refers to financial resources provided to the private sector, such as through loans, purchases of nonequity securities, and trade credits and other accounts receivable, that establish a claim for repayment. For some countries these claims include credit to public enterprises.
Note 3: Orange bars indicate low income countries.

Individual country exposure is not limited togeneral government debt. In several economies,
private sector debt has been increasing rapidly as
well. And private debt can rapidly become a publicsector problem as the recent financial crisis
illustrated for high-income countries and the East
Asia crisis for developing countries. In this respect,
18 developing countries have private external debt
exposures in excess of 30 percent of GDP. Threequarters of these are in developing Europe andCentral Asia reflecting strong banking and intercompany linkages with high-income Europe. In thecase of Seychelles and Papua New Guinea, thegross private sector debt reflects a thriving offshore-banking system (figure 20). While that changes thenature of the associated risk, it does not eliminate
it, as the recent experiences of Cyprus, Iceland, andIreland illustrate.

bond markets) suggest a number of countries
where debt levels are especially high (second panelof figure 20.) However, interpreting the data isdifficult, because while debt to GDP levels canreflect vulnerability, they also reflect the extent ofintermediation — which is generally associatedwith stronger growth and higher incomes.
Countries where debt levels are high, and havebeen rising rapidly, may represent the greatest risk.
In East Asia for example, combined nonfinancial
corporate and household debt has increased inseveral countries, reaching 130 percent of GDP in
China and Malaysia in 2012. For the East Asia
region as a whole, private debt has increased by 19
percentage points of GDP since 2007, while in
Latin America it has increased by 9 percentage
points. Household debt (only by deposit-taking
corporations) in Thailand has risen 15 percentage
points since 2007 and now stands at 63.4 percent
of GDP (see World Bank 2013 for more). Total
household debt is estimated to be about 77 percent
of GDP in Thailand and almost 80 percent of
GDP in Malaysia.

While external debt is sometimes more
problematic, because exchange rate movements canaffect domestic agents’ ability to service loans, local
currency debt can also problematic — especially if
problems with domestic debt provoke a local
banking crisis.
Data on domestic banking claims on the private
sector (such data exclude debt associated with local
27

GLOBAL ECONOMIC PROSPECTS | June 2013

Concluding remarks

The external risks facing developing countries havealso evolved:

The recent decline in industrial commodity
prices is, perhaps, signaling an end to the
upward phase of the commodity cycle. Policy
makers in commodity-exporting countries needto take a close look at the potential
consequences of a sharper-than-anticipateddecline in commodity prices for growth,
government finances, and their externalfinancing needs.

For countries in East Asia, the recent
intensification of monetary easing in Japan
could prompt strong and disruptive capital
inflows, adding to already existing inflation andcurrency pressures.

Longer term, as high-income monetary policy
becomes less accommodative, interest rates indeveloping countries will rise. Higher rates may
generate difficult adjustments and possibly
domestic crises, especially in countries where
public and private sector indebtedness has
been on the upswing.

Over the longer term, higher interest rates willtranslate into increased capital costs, potentiallyslowing developing-country growth by asmuch as 0.6 percentage points per annum after
three years as firms reduce debt levels to moremanageable levels.

Overall, the global economy is moving into a newand hopefully less volatile phase. The extreme risks
and swings in perceptions that have driven global
capital and output markets have eased significantly,
even as new risks and challenges have gained inprominence.
The majority of developing countries havenavigated the crisis and immediate post-crisis
period very well. With the exception of somecountries in developing Europe and the Middle
East & North Africa, they recovered relatively
quickly from the crisis and have enjoyed solid, if
less rapid than boom period, growth rates. With
the demand gaps opened up by the crisis largely
filled, future growth will increasingly be determinedby the success with which countries succeed inaddressing supply-side bottlenecks, including gaps
in physical, social, and regulatory infrastructure:

In many countries, policy attention isappropriately returning to simplifying
regulations, opening up to trade and foreign
investment, investing in infrastructure andhuman capital. These are the policies that haveunderpinned the acceleration in developing
country growth over the past 20 years, and it is
only through continued reform and progress inthese policies that the strong productivity
growth of the past 20 years can be maintained.
For the many countries operating at close to oreven above full capacity, macroeconomic
policy may need to be tightened—both toreestablish fiscal space that was used up in
response to the crisis and to prevent
inflationary pressures and asset bubbles frombuilding up.

28

GLOBAL ECONOMIC PROSPECTS | June 2013

Notes
1. Equity flows to the Middle-East & North Africa completely dried up in the first four months of 2013, with just one
bond issue from Lebanon ($1.1 billion) and two syndicated bank deals worth about $643 million.
2. Traditionally, risk premiums are measured as the difference between developing-country yields or CDS rates andthose of similar U.S. assets, with the idea that the U.S. assets proxy for the risk-free rate of return. As the crisis hit,
the riskiness of U.S. financial assets clearly went up, even if yields did not, either in the short run because of flightto-quality effects or later because of quantitative easing. At the same time, spreads on developing-country financial
assets declined. Only part of that decline can be explained by improved credit quality (IMF 2013b), the rest being
explained by the increased riskiness of the base rate and the reduced cost of credit.
3. Since January 2013, 10 developing-country borrowers have been upgraded and only six downgraded. In addition,over the past 18 months, eight developing countries (or developing-country governments)—Angola, Bolivia,
Honduras, Mongolia, Paraguay, Rwanda, Tanzania, and Zambia—have issued bonds for the first time (in Bolivia’scase, for the first time in more than 90 years). Since 2010, 14 countries have entered international bond markets for the first time.
4. The IMF (2013a) estimates an overall fiscal contraction for the Euro Area of 0.7 percent of GDP, compared with
0.5 percent in 2012 and 2.1 percentage points in 2011.
5. The measures of potential used here are based on a production function method and rely on estimates of trend totalfactor productivity growth as well as assumptions that the full capacity rate of employment (employment divided byworking-age population) are constant over time and that all of the services of the capital stock are available—where
the capital stock is estimated as equal to the sum of all past investments depreciated at a 7 percent rate.
6. For instance, the South African Reserve Bank’s latest estimate of annual long-run potential output growth is 3.5
percent. However the bank also notes that “our estimates for South Africa over the same period as the ECB study
reflect a decline from an average of 3.9 per cent (2000–07) to 2.8 per cent (2008–10); more or less similar to theestimated magnitude of decline in the euro area and the United States” (Ehlers and others 2013, 10).
7. For negative output gaps to close, growth must temporarily exceed the rate of growth of potential and vice versa.
8. Heap (2005) argues that industrial commodities go through a super-cycle where prices are likely to stay high for an
extended period of time. Jerrett and Cuddington 2008 have empirically visualized the hypothesis for a number ofmetals. Erten and Ocampo (2012) identify four super-cycles in real commodity prices during the period 1865-2009,
ranging between 30-40 years with amplitudes 20-40 percent higher or lower than the long run trend (similar cycles
have been identified by Cuddington and Zellou (2013) for metals).
9. See World Bank 2010, chapter, 3 for a more detailed discussion of the impact of higher borrowing costs.
10. The IMF work differs from the World Bank work in citing high-income-country stock market volatility as the main
external factor underpinning the decline in spreads. The World Bank (2010) includes high-income stock-market
volatility with a much wider range of risk appetite indicators to derive a synthetic price-of-risk indicator thatsimultaneously determines developing country and high-income country risk premiums.

29

GLOBAL ECONOMIC PROSPECTS | June 2013

References
Asian Development Bank. 2013. Asian Development Outlook, 2013: Asia’a Energy Challenge. Asian Development Bank,
Manilla, Phillipinnes.
Alan Heston, Robert Summers and Bettina Aten, Penn World Table Version 7.1, Center for International Comparisons of
Production, Income and Prices at the University of Pennsylvania, Nov 2012.
Burns, A., T. Janse van Rensburg, and T. Bui. 2013. “Estimating Potential Output in Developing Countries”. World Bank
Prospects Paper. forthcoming
Cuddington, John T. and Abdel M. Zellou (2013). “A Simple Mineral Market Model: Can it Produce Super Cycles inprices?” Resources Policy, vol. 38, pp. 75-87.Cuddington, John T. and Abdel M. Zellou (2013). “A Simple Mineral Market
Model: Can it Produce Super Cycles in prices?” Resources Policy, vol. 38, pp. 75-87.
Ehlers, N., L. Mboji, and M. M. Small. 2013. “The Pace of Potential Output Growth in the South African Economy.” South
African Reserve Bank Working Paper WP/13/01, South African Reserve Bank, Pretoria.
Erten Bilge and Jose Ocampo. 2012. “Super-Cycles of Commodity Prices since the Mid-Nineteenth Century.” Initiative for
Policy Dialogue ,Working Paper Series, Columbia University.
Heap, Alan. 2005. “China—The Engine of a Commodities Super Cycle.” Citigroup Smith Barney, New York.
IMF (International Monetary Fund). 2005, World Economic Outlook. Washington, DC: IMF.
______. 2013a, Fiscal Monitor Report. April, Washington, DC: IMF.
______. 2013b, Global Financial Stability Report. April, Washington, DC: IMF.
______. 2013c, World Economic Outlook. April, Washington, DC: IMF.
______. 2013d, Unconventional Monetary Policies—Recent experience and prospects. May, Washington, DC: IMF.
International Energy Agency (IEA). 2012a, Oil Market Report (13 November 2012). OECD/IEA, Paris.
______. 2012b, World Energy Outlook 2012. OECD/IEA, Paris.
Jerrett, Daniel and John T. Cuddington. 2008. “Broadening the Statistical Search for Metal Price Super Cycles to Steeland Related Metals.” Resources Policy, vol. 33, pp. 188-195.
Kennedy, Michael, and Angel Palerm. 2010.“Emerging Market Bond Spreads: The Role of World Financial Market
Conditions and Country- Specific Factors.” World Bank Prospects Working Paper, Washington, DC. Downloaded 5/24/2013
http://siteresources.worldbank.org/INTPROSPECTS/Resources/334934-1295458722434/ProspectsPaper2010Nov.pdf______. 2013. “Emerging Market Bond Spreads: The role of global and domestic factors from 2002 to 2011”, Journal ofInternational Money and Finance. Forthcoming.
OECD Briefing Note. 2013. "Aid to poor countries slips further as governments tighten budgets"
http://www.oecd.org/dac/stats aidtopoorcountriesslipsfurtherasgovernmentstightenbudgets.htm
World Bank. 2011B. Global Economic Prospects: Finance, Maintaining Progress amid Turmoil. World Bank. WashingtonDC.
_____. 2012A. Global Economic Prospects: Uncertainties and Vulnerabilities. World Bank. Washington DC.
_____. 2012B. Global Economic Prospects: Managing Growth in a Volatile World. World Bank. Washington DC.
_____. 2013A. Global Economic Prospects: Assuring growth over the medium term. World Bank. Washington DC.
______. 2013B, Migration and Development Brief, No. 20. Washington, DC. World Bank. http://siteresources.worldbank.org/
INTPROSPECTS/Resources/334934-1288990760745/MigrationDevelopmentBrief20.pdf

30

GLOBAL ECONOMIC PROSPECTS | June 2013

GLOBALECONOMICPROSPECTS

June
2013

Industrial Production Annex

Annex

INDUSTRIALPRODUCTION

GLOBAL ECONOMIC PROSPECTS | June 2013

Industrial Production Annex

Recent economic
developments

Overview
Growth in industrial sectors in the post 2008-2009
period has been unimpressive globally, with the
exception of East Asia and Pacific, and China inparticular. After bouncing back in the immediate
aftermath of the crisis global industrial production
growth weakened again in the second half of 2010,
and after a short-lived acceleration dipped again in
mid-2011 and in the second half of 2012. Financial
turmoil in high-income countries, and uncertainties
surrounding the course of policy actions in highincome countries combined in some cases with
policy-induced slowdowns in some of the larger
developing countries and/or capacity constraints
have restrained the pace of activity.

Industrial production growthstrengthened to an above trend pacein early 2013
Output strengthened in much of the world toward
the end of 2012 and into the first quarter of 2013,
with global output expanding at a close to 3.4
percent annualized pace in the three month leadingto March, supported by strengthening final demand
and rising inventories (figure IP.1).

Overall, more than four years after the financial
crisis began, global industrial output is only 5.3
percent higher than its pre-crisis peak. Output inhigh-income countries is still 6.5 below pre-crisis
levels, with output in the Euro area and Japan
sharply lower and output in the United States
having almost regained pre-crisis levels. Output indeveloping countries outside China is 2.6 percent
higher than its pre-crisis peak.

Developing countries industrial output expanded atabout a 5.1 percent annualized pace during the firstquarter of 2013, with East Asia and Pacific’s
industrial production growing at a 8.6 percent
annualized pace and China’s industrial output
expanding at a 9.7 percent annualized pace in thefirst quarter of 2013 (figure IP.2). Industrial output
growth in other developing regions has variedmarkedly, but has been generally much softer.
Growth has remained unimpressive in Latin
America and the Caribbean as performance in
Mexico has been softening and despite a modest
improvement in growth in Brazil (figure IP.3).
Output growth remained relatively flat in Europe& Central at 2.4 percent annualized pace in the firstquarter of 2013, on account of relatively weakGrowth in developing countries has been mostdynamic in East Asia and Pacific mainly reflecting
double-digit IP growth in China, where output is
67.9 percent higher than the pre-crisis high, versus
12 percent in the remaining countries in the region.
Industrial output in South Asia and Europe andCentral Asia are 19.6 and 2 percent higher
respectively than their pre-crisis peaks. Industrial
output in Latin America and the Caribbean and
Sub Saharan Africa is more or less in line with the
pre-crisis levels. Middle East and North Africa is
the only developing region where industrial output
is lower than four years ago, largely due to the fallin production associated with the socio-politicalunrest during the Arab Spring.

Fig IP.1

Global industrial production expands at
an above-trend pace in Q1 2013

Percent, 3m/3m saar
20
10
0
-10
-20
-30
-40
Jan '06

Jan '08

Developing Countries

Jan '10High Income Countries

Source: World Bank; Datastream.

33

Jan '12WorldGLOBAL ECONOMIC PROSPECTS | June 2013

Fig IP.2

Industrial Production Annex

Strong industrial production growth inEast Asia in Q1 2013

Fig IP.3

Percent, 3m/3m saar
20

Industrial production growth recovers in
Europe and Central Asia in Q1 2013

Percent, 3m/3m saar
20

10

0
0

-10

-20
-20

-30
Jan '10South Asia

Jul '10Jan '11Jul '11

Sub-Saharan Africa

Jan '12Jul '12-40
Jan '10Jan '13Jul '10Jan '11

Europe & Central Asia
Latin America & Caribbean

East Asia and PacificJul '11Jan '12Jul '12Jan '13

Middle East & N. Africa

Source: World Bank; Datastream.

Source: World Bank; Datastream.

performance in Russia and Turkey. Growth
remained strong in the South Asian subcontinent
despite a deceleration of growth in India expandingat an 7.7 percent annualized pace in the firstquarter of 2013. Data for the Middle-East andNorth Africa and Sub Saharan Africa lags, but was
still declining in both regions in the three months
to February.

production was behind the improved outturns.
Excluding Germany, where output performancehas been more robust (up 1.2 percent annualizedpace in the first quarter of 2013), the improvement
in industrial sector performance is less dramatic as
output declined most rapidly among the highspread economies that are enduring the harshest
fiscal consolidations.

Among high-income countries outside of the EuroArea industrial output also accelerated – reaching
3.5 percent up from 0.7 percent in the fourth
quarter of 2012, mostly on rapid expansion in the
United States and Japan. A recovering housing
market and the creation of more than half a million
payroll jobs in the first quarter of 2013 havesupported the acceleration in activity, boosting
consumer demand. Investment demand has also
recovered with capital goods orders rising at a 20
percent annualized pace in the first quarter of 2013.
As a result industrial production in the U.S.
expanded at a 4.4 percent annualized pace in thefirst quarter of 2013, up from the 2.6 percent
annualized pace recorded in the final quarter of
2012, despite a significant fiscal drag. In Japan, therelaxation of both monetary and fiscal policies,
have prompted a sharp rebound in activity, withindustrial production growth rebounding to 9
percent annualized pace in the first quarter of 2013.

Capital-goods orders point to increased global
capital spending in early 2013, but momentum may
be weakening. After a sharp decline in mid-2012,
G3 capital goods orders recovered briskly in thelatter part of 2012, with shipments following asimilar path (figure IP.4). Capital- goods orders
Fig IP.4

Capital goods orders are picking up in both
high income and developing countries

Percent, 3m/3m saar
60
40
20
0
-20
-40
-60
Jan '11In the Euro area industrial production stabilized,
expanding 0.7 percent annualized in the firstquarter of 2013 compared to a 8.1 percent
annualized pace of decline in the fourth quarter of2012. An increase in energy and capital goods

Jul '11Developing countries capital
goods imports

Jan '12Jul '12

GermanyJapan

Jan '13
USA

Source: World Bank; Datastream.
Note: US capital goods orders exclude defense and aircrafts orders.
Capital goods import orders for developing countries.

34

GLOBAL ECONOMIC PROSPECTS | June 2013

Industrial Production Annexrose at a rapid pace in the first quarter of 2013,
with US capital goods orders rising at a 21.4
percent annualized pace, up from a 13.8 percent
expansion in the fourth quarter of 2012. In Japan,
after a robust recovery in the last quarter of 2012(15.5 percent) capital goods orders growth
accelerated markedly to 31.8 percent in the firstquarter of 2013, while in Germany capital goods
orders rose 3 percent over the same period, almost
half the pace recorded in fourth quarter of 2012(8.3 percent). In developing countries, capital
goods orders eased only slightly, rising at an 22
percent annualized pace in the first quarter of 2013,
down marginally from the 19 percent pacerecorded in fourth quarter of 2012, pointing
to sustained investment growth in these
economies.

Business sentiment in the U.S. is weighed down by
the fiscal drag, with higher taxes likely to weigh on
consumer spending, and budget sequestration
further limiting domestic demand growth. The US
manufacturing ISM index softened at the end of
the first quarter and dropped below the 50 growthmark in May, on softer domestic demand andnotwithstanding a boost in external demand.
Meanwhile the business sentiment as gauged by theMarkit PMI deteriorated to a six-month low in
April, before inching up to 52.2 in May, remaining
in growth territory.

Data for April suggest however that the paceof expansion of capital goods orders might beeasing in the US in the second quarter of theyear. Similarly capital import orders bydeveloping countries are also showing signsof moderating.

The moderation in output in East Asia is expected
to be relatively broad, as suggested by PMI indexes.
The May PMI has been weaker than expected in
China, where the PMI retreated 1.2 points to 49.2.
In China industrial output growth has decelerated
further to 7.4 percent annualized pace in the threemonths leading to April. Interpreting the trade andindustrial output data for East Asia is made moredifficult by the timing of the Lunar New Year
which fell in February this year.

PMIs in major developing countries such as
Brazil, China, India, Russia and Turkey all
declined for two or more consecutive
months.

...but there are signs of moderation in
the pace of expansion into thesecond quarter

Although PMIs improved in the Euro area in May,to the highest level since 2012, they continue toindicate contraction albeit at a slower pace.
Sentiment improved in Germany, France, Italy, andSpain (albeit from depressed levels). Meanwhile
sentiment in Japan improved for a fifth consecutive
month, to its highest level in more than a year, as
inventories are relatively low while orders arerising.

Forward-looking indicators like purchasing
manager’s indexes suggest a slower pace of activity
for the second quarter, as fiscal tightening in the
US cuts into activity there and capacity constraints
in many developing economies moderate growth –which should nevertheless continue to expand
broadly in line with underlying potential. Indeed
the step down in the global manufacturing Markit
PMI in April to the lowest level since December(but still above the 50 mark that indicates
expansion) followed by a marginal increase in May
suggest that global manufacturing output growth ismoderating into the second quarter of 2013.
Sentiment regarding leading indicators components
such as new orders and finished goods inventories
improved only modestly.

Noteworthy is the fact that despite stabilizing at ahigher level than the one recorded in the fourth
quarter of 2012, business sentiment remains at
historically low levels globally, suggesting business
confidence remains fragile and is yet to return topre-crisis levels.

…nevertheless growth is expected toremain solid at a trend like pace

Notably high-income and developing countries
PMIs moved in opposite directions in May, withsentiment improving in most high-income
countries surveyed and deteriorating in threequarters of developing countries.

Industrial production growth in developing
countries is expected to moderate to a moresustainable pace over the short term, with growth
35

GLOBAL ECONOMIC PROSPECTS | June 2013

Industrial Production Annex

in China remaining in the low double-digit range,
while output elsewhere in East Asia moderates.
The continuation of supportive fiscal policy with afront-loading of infrastructure spending is expected
to benefit China’s industrial production. In
addition, according to recent surveys labor demand
continues to outpace labor supply, especiallyin the service sector, and might lead toincreased labor income in the months ahead,
which should be supportive of private consumption.

Growth in Middle East and North Africa will
recover but remain subdued despite large excess
capacities, in part due to weak domestic demand.
In the Euro Area output is projected to strengthen
modestly in the second half of the year, as the paceof fiscal consolidation eases and pent-up demand
forces should support growth.
The recent declines in commodity prices, including
oil and metals prices appear to mainly reflect higher
supply (see commodity annex and main text).
Lower input prices rather than suggesting slower
demand going forward, should provide a fillip toactivity, both by increasing real incomes andreducing production costs.

Some of the manufacturers in the region may bechallenged by the large depreciation in the Japaneseyen, induced by monetary easing, and may lose
market share over the short-term, although otherthan China and Thailand, most countries in theregion do not compete directly with Japan (seeMain Text). Japanese output is expected tocontinue to post a robust recovery, following an 8
percent annualized bounce back in the first quarterof 2013.

In order for growth in global industrial production
to return to its long time trend over the medium
term the pace of growth in high-income economies
needs to accelerate as they still account for asignificant share of global industrial output, andlead in global innovation for local markets, which is
expected to support growth in industries such as
automobile, chemicals, machinery andpharmaceutical (McKinsey 2012).

Growth in industrial output is also expected toremain soft in countries with capacity constraints,
including some of the larger developing economies.
Industrial output performance will remain weak in
Brazil, despite significant stimulus from thegovernment, as high production costs, and capacity
constraints continue to weigh on growth.
Furthermore retail sales growth has decelerated
markedly, as rising inflation has caused real wage
growth to slow. Quarterly industrial production
growth in South Asia is projected tomoderate, as growth in India slows fromunsustainable levels.

In terms of growth rates industrial sectors weremuch more dynamic in developing countries,
expanding at an annual pace of 8.5 percent over the
2002-2007 period compared to 2.6 percent in highincome countries (figure IP.5). Among developing
countries East Asia and Pacific was the mostdynamic region (11.2 percent average annual pace),followed by South Asia (9.4 percent) and Europe

In Latin America, the weakness in the Mexican
industrial sector should be reversed in mid-2013, as
the Mexican manufacturing sector growth will relink with the better performing U.S. manufacturing.
However, performance in Argentina’s industrial
sector is likely to be weak as a result of recent
policies that restrict access to foreign currency for
essential capital imports.

Fig IP.5

Growth in major developing economies
is weaker than in the pre-crisis period

Percent, 3m/3m saar
20
15
10
5
0

Growth in industrial production is expected tostrengthen in the second half of 2013 in Europe
and Central Asia, supported by modestly stronger
domestic and high-income European demand,
which should help narrow the still wide output gap
in the region. Still weak private credit growth willcontinue to weigh on industrial sector activity this
year.

-5
-10
-15

1992
India

1996
South Africa

2000
BrazilSource: World Bank; Datastream.

36

2004
China

2008

2012

GLOBAL ECONOMIC PROSPECTS | June 2013

Fig IP.6

Industrial Production Annex

Fig IP.7

Contribution to global industrial production
growthpercentage points
12

Percentage points
40
30

10

20

8

10

6

0

4

-10

2

-20

0

-30
-40

Regional contributions to developing
country industrial production-2
1995
High-income

1998

2001

2004

2007

-4

2010

Developing

1995

1998

South Asia
Middle East and Africa

2001

2004

Latin America & Caribbean
Europe & Central Asia

2007

2010

East Asia & PacificSource: World Bank.

Source: World Bank.

and Central Asia (8.1 percent). Latin America andthe Caribbean’ performance was less impressive(5.1 percent), expanding at the same pace as that of
Sub-Saharan Africa. Middle East and North Africa
expanded at a slowest pace among developing
regions (4.1 percent).

economies with large infrastructure gaps such
as India and Brazil, whose infrastructures areperceived as inadequate given their level of
economic development (WEF 2012-2013).
Overall growth in the industrial sector, andmanufacturing in particular, stands to gain from theshift in demand towards developing economies.
Output in industries that need to be close to
consumers due to cost structures (hightransportation costs) and that produce productsthat are not heavily traded (food processing) islikely to expand rapidly as income in developing
countries continue to rise.

During the boom years (2002-2007) global
industrial production expanded at an average paceof 4.1 percent a year, with developing countries
accounting for about 54 percent of growth inglobal industrial production (figure IP.6). East Asia
and Pacific contributed more than 36 percent toglobal growth, with China alone accounting foralmost a third. Among developing regions thesecond largest contributor to growth in global
industrial production was Latin America and the
Caribbean (8.7 percent), followed by Europe andCentral Asia (6.4 percent) and South Asia (5.4
percent) (figure IP.7).

Risks andvulnerabilities

A significant part of the expansion in the
global industrial production came from rapid
growth in the construction, mining, andutilities sectors in developing countries.
These sectors together accounted for close to
30 percent of overall global growth during
the 2000-2010 period, with China accounting
for more than half of that contribution (17percent). The expected slowdown ininvestment in China over the coming years,
partly as the property market cools down,
may subtract from the global industrial
production trend growth if not supplemented
by stronger growth in other major emerging

The downside risks of a further deteriorationin performance in the Euro area, of steeper
fiscal consolidation in the United States andJapan, persist although the probability
associated with these risks has declined since
our January 2013 edition. An additional risk
is that of an abrupt slowdown in investment
in China which would have significant
consequences for exporters of capital goods
in particular in East Asia but also Germany
and the United States.
37

GLOBAL ECONOMIC PROSPECTS | June 2013

Industrial Production Annex

If commodity prices decline markedly capital
expenditures, which have risen sharply during theboom years especially in oil and metals markets,
could slow significantly, affecting capital goods
producing countries. Lower commodity prices andlower fuel prices in particular could boost real disposable
incomes and bolster demand for other manufactures.
There is also an upside risk associated with theperformance of the U.S. economy and its resiliencein the face of the fiscal drag. Similarly theperformance in the Euro Area could be stronger
than in our baseline.
As policies in high-income countries become lessaccommodative the cost of capital is likely to riseover the medium term and costlier capital could
limit investment and growth in industrial
production. (GEP 2010).

38

GLOBAL ECONOMIC PROSPECTS | June 2013

Industrial Production Annex

References
McKinsey Global Institute. November 2012 Manufacturing the future: The next era of global growth and innovation.
WEF (World Economic Forum). 2012-2013 Global Competitiveness Report. Washington DC.
World Bank. 2010. Global Economic Prospects: Crisis, Finance, and Growth. World Bank. Washington DC.

39

GLOBAL ECONOMIC PROSPECTS | June 2013

GLOBALECONOMICPROSPECTS

June
2013

Inflation Annex

Annex

INFLATION

GLOBAL ECONOMIC PROSPECTS | June 2013

Inflation Annex

Global inflation is subdued as costpressures related to commodity
prices continue to ease and demand
factors in high income countries
remain weakfrom more accelerated growth over the past
two quarters.
T he r ecent down tick in developing
countr y inflation is notable, pr es umably
s ignaling an end to the gradual rise thatbegan in the summer of 2012 — prompted by
the upturn in international grain prices
related to droughts in the US, Eastern
Europe and Central Asia and shortage ofgrain supplies.

Despite loose global monetary conditions and an
acceleration in economic activity, global consumer
prices rose at a modest 2.7 percent annualized ratein the three months ending April of 2013 (figure
INF.1).

Among developing countries, inflation in low
income economies has shown the fastest
declining trend throughout 2012, both on a
year-over-year and a quarterly annualizedbasis.

This was the slowest first quarter increase inglobal consumer prices since 2009, reflecting
subdued high-income country growth and amoderation of global commodity prices(figure INF. 2).

The year-over-year inflation in these
economies is now about half of the 14
percent rate recorded a year ago (figure INF.2
and 3).

Core inflation1 eased insignificantly in the majority
of countries for which consistent data series areavailable. For the OECD country group as a whole,quarterly core inflation declined to 1.6 percent in
1Q2013 compared to 1.9 percent in 1Q2012.

Quarterly inflation on an annualized basis
bottomed out in August of 2012 after slowing
to a 5.5 percent rate with price acceleration
partly reflecting the temporary increase ininternational food prices in Q42012 (seeabove).

Developing country inflation ticked
down in April 2013 on declining
commodity prices

More recently, as commodity prices haveeased and growth has weakened, quarterly
inflation has also moderated falling back to a
5.5 percent annualized rate in the threemonths ending April of 2013.

Developing country prices 2 rose at a 6.9
percent annualized rate in the three months
to April of 2013 showing some moderation
Fig INF.1

Fig INF.2

Global inflation slowed in Q1 2013

CPI, % change, 3m/3m, saar
8

Inflation decline reflect easing
commodity prices

Price indexes, % change, year-on-year

Developing

6

50

16

40

14
12

30

10

20

8
10

4

6

0
10M10

High income

11M04

11M10

12M04

12M10

-10

2

2

-20

0

Apr '11Jul '11

Oct '11 Jan '12 Apr '12

Jul '12

Oct '12 Jan '13 Apr '13

0
International Energy (LHS)International Food (LHS)

Developing CPI (RHS)

Low Income CPI (RHS)

Developing Local Food CPI (RHS)

Source: World Bank; Datastream; ILO.

Source: World Bank; Datastream.

43

4
12M4

GLOBAL ECONOMIC PROSPECTS | June 2013

Fig INF.3

Inflation Annex

In Japan, the sharp depreciation of the yen since
September 2013 (see main text and exchange rate
annex) has pushed quarterly inflation into a
positive territory in January and February.

Low-income country inflation has shown
the fastest decline

CPI, % change
1412More recently however, price pressures in Japan
eased again reflecting moderating global
commodity prices. Quarterly inflation on an annual
basis dropped to a negative 0.6 percent in the threemonths to April and the year-over-year inflationstood at a negative 0.7 percent — well below theauthorities new 2 percent annual inflation target.

10
8
6
4
2
0

Jan '12

Apr '123 month-over-3 month

Jul '12

Oct '12Jan '13

Global monetary conditions continue
to be loose with Japan implementing
aggressive monetary easing

Apr '13

year-over-year

Source: World Bank and Datastream.

High-income country inflation remains
weak

In high-income countries low interest rates are
combined with the Federal Reserve’s Federal Open
Market Committee’s continued monthly purchasesof $85 billion of housing-market debt andTreasuries and quantitative easing in the UK andJapan and further policy easing in the Euro Area
with the interest rate cut by another 25 basis points
to 0.50 percent implemented in May.

Year-over-year inflation in high-income
countries has remained under 2 percent sinceApril 2012, while quarterly inflation has
displayed more volatility partly reflectingchanges in energy prices (figure INF. 4).

Developing country monetary policy
has loosening bias in general

Quarterly core inflation on an annualizedbasis for the G-7 country group declined to
1.4 percent in 2013Q1 compared to 1.7
percent in 1Q2012. The low trend rate of
inflation in high-income countries reflects
still ample spare capacity, and the weaknessof the recovery especially in the Euro Zone
and Japan.
Fig INF.4

The majority of the developing country central
banks continue to keep their interest rates on holdat historical low levels in their effort to stimulatedomestic demand as global economic activity

Unconventional monetary policy helped major high-income economies to avoid disinflation but Japanis still caught in disinflationary trap

CPI, % change, 3m/3m, saar

CPI, % change, year-over-year

8

5

7
6

4

5
4

3

3

2

2
1

1

0
-1

0

-2

-1

-3
Jan '11

Apr '11High income

Jul '11

Oct '11USA

Jan '12Japan

Apr '12Jul '12

Oct '12Euro area

Jan '13

Apr '13UK

Source: World Bank; Datastream.

44

High income Euro Area

USA2011 average

2013 year to date2012 average

UK

JapaneInflation targetGLOBAL ECONOMIC PROSPECTS | June 2013

Inflation Annex

remains weak and inflation pressuresgenerally subdued. Some developing countries
implemented additional rate cuts mostrecently
following
quite
disappointing
Q12013 growth outcomes in the overall
context of moderating global price pressures.

sharp output contraction in the first quarterof 2013.
Monetary policy was tightened by about six
developing central banks in 2013, including
Brazil, Ghana, Gambia, Serbia 3 , Tunisia andEgypt in an attempt to curtail inflationarypressures fueled by domestic factors,
including rapid credit expansion and currency
depreciation, particularly in Egypt.

About twenty developing and seven highincome countries and economic unions
implemented policy rate cuts in the firstmonths of 2013. This included a cumulative
75 basis point rate cut implemented by the
Reserve Bank of India and a 50 basis point
rate cut in Mexico–first easing since July
2009. Other policy easing measures in LAC
included a 100 basis point rate cut (to 3.25
percent) by the Bank of Colombia in threemonthly consecutive rate cuts and a 50 basis
points rate cut by the Bank of Jamaica.

Monetary policy globally and indeveloping countries is increasingly
embracing inflation targeting
The Central Banks in most of the major countries
are now following some type of inflation targeting
regime.4 For the most part, inflation remains within
inflation target (figure INF. 5) — with the notable
exception of some large middle income countries,
including Indonesia, Brazil, Russia, Turkey andSouth Africa, where headline inflation has tended
to exceed targets due to recurring price pressuresrelated to supply constraints.

In Sub-Saharan Africa Angola, Kenya, Sierra
Leone and Uganda continued to ease policy
and Botswana and the West African States
implemented their first rate cuts in few years.
In ECA—where growth has weakened andprice pressures have generally moderated—
policies have been eased in a number ofdeveloping countries, including Albania,
Azerbaijan, Belarus, Georgia, Macedonia andTurkey.

Loose policy stance in developing
countries may be counterproductive
in countries operating at full capacity

In the EAP Mongolia cut its policy rate by
175 basis points, Vietnam implemented a 100
basis point cut this year and Thailand
implemented a rate cut in May following a

Fig INF.5

In general, the central banks worldwide are keeping
rates low with major focus still on downside risks
in the global economy. Accommodative policy
Fig INF.6

With some exceptions inflation isanchored within the targeted rates

Developing country inflation outcomes are
increasingly reflecting local conditions

11

CPI, % change, 3m/3m, saar
12

9

10

7

8

CPI, % change, year-over-year

5

6

3

4

1

-3

2

India
Nigeria
UgandaBrazilRussiaSouth Africa
Georgia
Indonesia
Armenia
TurkeyPhilippines
MexicoChile
Colombia
China
Thailand
Peru
UK
Euro area
USA
Japan

-1

Apr-130Upper bound of inflation target

East Asia &Pacif ic

ECA excludes LAC (excludes Sub-Saharan MENA (excl.
Belarus)
Venezuela)
Af rica
Iran and Syria)

2011 (average)

Source: World Bank; Datastream.

2012 (average)

Source: World Bank; Datastream.

45

South Asia

2013 (year-to-date)GLOBAL ECONOMIC PROSPECTS | June 2013

Inflation Annex

stance may be adequate in the economies withremaining output gaps and subdued demand.

In China, although the headline inflation rate
remains under the central bank target of 3.5
percent, price pressures are present. Quarterly
inflation accelerated to a 3.7 percent annualized
rate in the three months to February, the highest
since October 2011, but eased in March inresponse to tightening of monetary conditions andadministrative measures addressed toward curbing
property prices.

Some developing regions continue to experience
price pressures reflecting local conditions despite
benign global inflationary pressures (figure INF.6).
In the economies that are operating at full capacity
the loose policy stance may be counterproductive
contributing to domestic price pressures without
much payoff in additional output.

In Indonesia, inflation has been building up
rapidly,withthequarterly
inflation
accelerating to a 9.5 percent annualized ratein the three months to April reflecting
currency depreciation and hikes in food prices
due to trade restrictions. Core inflation inIndonesia eased to 4.21 percent (year-over-year) in
March from February's 4.29 percent but remains high.

Moreover, a loose policy stance and low rates areencouraging risk taking attitude, fueling asset
bubbles and pushing domestic debt to risky levelsin the economies that are operating above their full
capacity.5

Headline inflation in East Asia andthe Pacific region accelerated in early2013 reflecting a strong rebound ineconomic activity andaccommodative policies

In Malaysia and Thailand currency appreciation
combined with broadly stable commodity prices
has helped curb inflationary pressures. Inflation
also eased in Mongolia to 10.4 percent (year-onyear) in April which was the lowest rate observed
since July 2011 reflecting a slow-down in economic
activity.

Inflation has ticked up in a number of countries inthe East Asia and the Pacific region in the firstquarter of 2013 after declining through much of
2012. Annualized quarterly inflation in the East
Asia and the Pacific region accelerated to 3.5
percent rate in the three months to March 2013
compared with 2 percent a year earlier (figure INF.
7) reflecting price acceleration in China, Indonesia
and Lao, PDR.

Overall, the headline inflation remains within thecentral bank targeted range in the majority of theEAP countries, with the exception of Indonesia.
Given limited spare capacity in the region, thegenerally loose stance of macroeconomic policy
could stoke inflationary pressures and amplify thecredit and asset price risks, especially in case of thevolatile capital inflows including from Japan inrelation to the latest quantitative easing.

Fig INF.7

Fig INF 8

Price pressures are building up in
EAP

Inflation eased in ECACPI, % change, 3m/3m, saar
16

CPI, % change, 3m/3m, saar
14

14
12

12

10

10

8
8

6

6

4

4

2
0

2

-2
Jan '110
Jan '11

May '11

Sep '11

EAP (excluding China)
China

Jan '12May '12Indonesia

Sep '12Lao, PDR

Jan '13

May '11

Sep '11Jan '12May '12

Sep '12Jan '13

May '13

ECA (excl. Belarus)
RussiaMalaysia

Central & Eastern Europe

Source: World Bank; Datastream.

Source: World Bank; Datastream.

46

TurkeyMay '13

GLOBAL ECONOMIC PROSPECTS | June 2013

Inflation Annex

Inflation has moderated in Europe andCentral Asia but price pressures are high inlarge middle income countries

easing commodity prices contributed tomoderating price pressures in 2013. Quarterly
inflation slowed to 5.3 percent (q/q saar) and
year-over-year at 6.4 percent (saar) in April
2013 was at the lower point of the 6-8
percent annual inflation target band.

In Europe and Central Asia, inflation has
eased recently due to declines in food prices
following last summer’s poor crop (figure
INF. 8). Besides, in most economies, ample
spare capacity and high unemployment is
keeping inflationary pressures at bay.

In Belarus, quarterly inflation remains high at
35.8 percent (saar) in the three months toApril 2013. Price pressures increased in thefirst quarter of 2013 following a significant
decline to 10.3 percent annualized rate in thethree months to November from the earlier
hikes in response to stabilization measures.
Belarus has been experiencing high level ofinflation since 2011 following almost athreefold devaluation of the national currency
against the US dollar implemented to correct
external macroeconomic imbalances.

Azerbaijan, Bulgaria, Georgia and Macedonia
have been experiencing considerable easing in
consumer price inflation since the end of2012 reflecting weak domestic demand andeasing commodity prices with Georgia
experiencing deflation since October 2012.
The year-over-year inflation remains high insome large economies (notably Turkey andRussia), reflecting limited spare capacity.
Quarterly inflation in those economies eased
most recently reflecting slowing growth anddeclining commodity prices, but the timing
and the pace of easing price pressures diverge
and reflect domestic policies.

Although inflation remains sticky inthe largest countries of the region,
price pressures moderated acrossthe rest of the Latin America and the
Caribbean

Quarterly inflation has slowed to 3.8 percent
annualize rate in the three months to April in
Russia where monetary policy remained tightdespite slowing growth. The headline
inflation at 7.2 percent in April wasnevertheless above the central bank’s 5-6
percent targeted rate. 6

Quarterly inflation in Latin America and the
Caribbean (excluding Venezuela) eased to 5
percent in 1Q2013 from 5.9 percent in
4Q2012 indicating easing of price pressures,
partly reflecting moderating commodity(notably food) prices (figure INF.9).

Policy easing in Turkey contributed toaccelerating inflation to 9.7 percent
annualized rate in the three months to March
2013. Turkey’s quarterly core inflation eased
to 6.5 percent in 1Q2013 compared to 9.6
percent in 1Q2012. The headline inflation
also dropped to 6.1 percent in April reflecting
global decline in commodity prices, but
remains above the central bank’s 5 percent
annual inflation target.

Fig INF.9

Diverging inflation trends across LAC

CPI, % change, 3m/3m, saar
14

40

12
10

30

8
6

20

4
2

10

0

In Kazakhstan, adjustments in regulated
prices put a temporary upward pressure on
inflation with quarterly inflation increasing to
7.9 percent annualized rate in the threemonths to November 2012. Tight policy and-20
Jan '11 Apr '11

Jul '11

Oct '11 Jan '12 Apr '12 Jul '12

LAC (excl. Venezuela)
BrazilArgentina
Venezuela (RHS)

Source: World Bank; Datastream.

47

Oct '12 Jan '13 Apr '13

Colombia
MexicoGLOBAL ECONOMIC PROSPECTS | June 2013

Inflation Annex

In the Middle-East & North Africa highprices reflect both supply disruptions
caused by civil and armed strife aswell as the measures addressed atadjusting large macro-economic
imbalances

Inflation outcomes across countries mirror
diverging policy stances, with Colombia,
Chile, Peru and Mexico seeing strong growth
combined with moderate consumer priceinflation.
Brazil has been on the other hand trapped inslow growth and high inflation equilibrium.
Headline inflation was 6.5 percent in April
2013—just at the upper limit of the central
bank’s 4.5 percent +/-2 inflation targetingband.

Average inflation in the Middle-East & North
Africa exceeds 22 percent with quarterly
inflation even higher. Prices pressuresemanate from variety of sources, including
high costs associated with importing foodand fuel (Jordan and Tunisia) due to theregion’s high dependence on internationallytraded food commodities, supply shortages
caused by political and armed conflict insome countries and international sanctions inothers (Iran and Syria), and currency
depreciation and administered price increases
adding to pressures in some countries (e.g.
Egypt) (figure INF.10).

Till very recently monetary policy had been
easing contributing to a cumulative 525 basis
point cut between August 2011 and end of
2012. Brazil was however one of the few
developing countries that starts to tighten its
policies in 2013 by implementing two
consecutive rate cuts in April and May(cumulative 75 basis point rate increase).
Currency devaluation has exacerbated local
price pressures in Venezuela, where the yearover-year inflation reached 35.2 percent inMay—12.6 percentage points higher than lastyear.

In South Asia consumer price based
index remains high but the wholesale
price index-based inflation moderated
significantly, especially in India

In Argentina, quarterly inflation on anannualized basis, which has accelerated in
Q42012 eased most recently partly reflecting
moderating commodity prices. However, theyear-over-year inflation remains stubbornly
high partly reflecting import restrictions
combined with loose policies.
Fig INF.10

Year-over-year inflation ticked down in South
Asia region in April on moderating
commodity prices, but quarterly inflation still
Fig INF.11

Inflation accelerated in MENA

Inflation remains high in South Asia

CPI, % change, 3m/3m

CPI, % change, 3m/3m, saar
35

19

30

15

25
20

11

15

7

10
5

3

0

-1

-5
Jan '11

Apr '11Jul '11

Oct '11Jan '12

MENA (excl. Iran and Syria)
Egypt

Apr '12

Tunisia

Jul '12

Oct '12

MaroccoJan '13Jan '11

Apr '13

MENA

May '11

South Asia
India

Sep '11Jan '12

Pakistan

Source: World Bank; Datastream.

Source: World Bank; Datastream.

48

May '12

Bangladesh

Sep '12Jan '13

Shri-Lanka

May '13

GLOBAL ECONOMIC PROSPECTS | June 2013

Inflation Annex

shows some acceleration. This mainly reflects
an upward adjustments to domestic fuelprices (figure INF. 11) implemented over the
past months.

energy reflecting raising household incomes
combined with tight supplies related tobottlenecks and structural constraints in the
production and distribution of food andutilities.

On a country level, in India, year-over-year
consumer-based inflation declined below 10
percent in April, and the wholesale priceindex-based inflation declined below 6
percent for the first time in more than three
years.
Howeverquarter-over-quarter
consumer-price based inflation continued torise and stood at 11.3 percent annualized ratein the three months to April.

Inflation experienced a steep decline
in Sub-Saharan Africa, but pricepressures prevail in a number oflarge countries reflecting capacity
constraints and loose policies

Other countries in the region, including
Bangladesh and Pakistan, and Sri-Lanka until
most recently, have been experiencing
moderating price pressures recently reflecting
decline in commodity prices with both
quarterly and annual inflations easing during
the first quarter of 2013 in line with theglobal trends.

In Sub-Saharan Africa (excluding South
African republic) quarterly inflation eased byabout 6 percentage points since last year
reflecting commodity price moderation andtight monetary conditions (see main text).
But with many countries operating at little orno spare capacity, loose policies directly
contribute to consumer price inflation.
Ghana and Kenya, for example have seen
their quarterly inflations accelerating in April
to 15.4 percent annualized rate and 8.5
percent
respectively
reflecting
easingpolicies.

Several countries in the region eased
monetary policy between mid-2012 and 1Q
2013 as they saw core inflation coming down.
Those countries include Pakistan, which cut
its key policy rate by a cumulative 250 basis
points between August and December 2012,
and Sri-Lanka and India where policy rates
have been eased more recently.

In South Africa, year-over-year inflation has
been around the upper limit of the Central
Bank targeted rate since some time despite
slow growth due to weakening of the rand
and wage hikes. Core inflation also
accelerated to 5 percent (y/y) in 1Q2013.

Price pressures in South Asia continue tostem from growing demand for food andFigINF.12
INF.11Fig

Inflation has recently eased in SubSaharan Africa but selected countries
are experiencing price pressures

CPI, % change, 3m/3m, saar

In some countries of East Africa, notably
Uganda and Tanzania, inflation remains
contained following a massive decline in 2012
(figure INF.12). In West Africa, moderating
commodity prices and tight policies
contributed to easing price pressures. In
Nigeria, for example, the year-over-year
inflation eased to 8.6 in March 2013—thelowest level in five years. Inflation also
remained low in the countries of West
African Economic and Monetary Union(WAEMU) (Benin, Burkina Faso, Coted’Ivoire, Guinea Bissau, Mali, Niger, Senegal,
and Togo).

50

20

40

16.4

30
12.8

20
9.2

10
5.6

0
-10

2

Jan '11 Apr '11

Jul '11

Oct '11Jan '12Sub-Saharan Africa (excl.
South Africa)

Apr '12Jul '12South Africa

Oct '12Jan '13

Apr '13

Ghana

Nigeria

Source: World Bank; Datastream.

49

GLOBAL ECONOMIC PROSPECTS | June 2013

Inflation Annex

Some developing countries continue
to experience high inflation rates orsevere disinflation due to country
specific conditions

while destabilizing currencies and exerting upward
pressure on inflation. This risk is however unlikely
to unfold over a short term period given the weak
pace of recovery in high-income countries and in
the context of the latest (May 2, 2013) interest ratecuts in Euro Area.

Year-over-year inflation exceeded 15 percent in
only seven developing countries in the first quarterof 2013 including Belarus (>20%), Iran (>40%),
Malawi (>35%), South Sudan (>24%), Sudan(>40%), Syria (>49%), and Venezuela (>35%).

In the near term, global inflation is likely to remain
at around 3 percent (year-on-year) largely due todepressed price pressures in the high-income
countries. Developing country inflation is projectedto accelerate to 7 percent in the case of a continued
loose monetary policy environment.

Burundi, Eritrea, Ethiopia and Guinea all
experienced sharp inflationary peaks in 2012,
but managed to reduce price pressurescontaining inflation rate below 15 percent asof April of 2013.

The inflation outlook is subject to any supply-side
shock related risk. Upside risks may entail amoderate acceleration – but even with this increaseinflation is likely to remain below its 2011 levels.
Global oil supply risk is related to a possible
deterioration in political conditions in the Middle
East but can also stem from the technicalproblems. A major supply cutoff could limit
supplies and result in prices spiking well above US$
150/bbl depending on the severity, duration andresponse from OPEC, emergency reserves, anddemand curtailment.

Outlook and risks
The inflation outlook mirrors the growth outlook
and remains uncertain. Under the baseline scenario,
which assumes global economic recovery andmoderating
commodity prices, inflation is
projected to pick up only gradually withstrengthening global demand as it remains to be
predominantly anchored around the targeted rates.
Moreover, the impact of accelerating inflation indeveloping countries will be counterbalanced by
subdued price pressures in the high-income
economies, reflecting a continued low consumer
confidence and slow economic activity. Pricepressures are likely to persist in a selected numberof economies such as Brazil, India, Russia, Turkey,
South Africa with supply bottlenecks, especially incase of demand stimulating policies.

Downside risks include further easing in inflationin high-income countries in case of continued low
confidence and weak economic activity. There isalso a downside risk related to slower economic
growth, especially by emerging economies,
including China.
While the Fed and ECB’s interventions havehelped to avoid the worst potential effects ofbanking-sector de-leveraging and liquidity
constraints in high-income Europe, the ultra-loose
monetary policy in high-income countries,
including in Japan, could once again be sowing theseeds for the kinds of disruptive, inflationary, andasset-bubble creating capital inflows thatcharacterized the second half of 2010.

In addition, many developing countries remain
vulnerable to medium-term price pressures throughexcessive credit and debt build-up, feeding into
asset prices. Moreover, with international reserves
declining and/or deficit countries relying on
foreign capital inflows, there is not only limited
scope for monetary easing, but there is a mediumterm risk that a “normalization” of monetary policy
in developed countries may encourage capital flightand put "unwanted pressure" on foreign exchange
markets and potentially (further) erode reserves,

Moreover, in some developing countries monetary
policy has also been very loose, while debt burdens
have risen rapidly. Although global inflationarypressures remain benign, given the lags in monetary
policy transmission, additional easing may add to astrengthening activity already underway resulting in
additional inflationary pressures in countries
operating close to full capacity, without much
payoff in additional output.
50

GLOBAL ECONOMIC PROSPECTS | June 2013

Inflation Annex

Notes:
1.

Consumer prices, all items non-food, non-energy. OECD data and classification.

2.

Developing country inflation is calculated on a GDP weighted basis.

3.

Following earlier tightening Serbia has recently cut its policy rate by 25 basis points.

4.

The UK has a 2 per cent inflation target with no explicit upper bound. If inflation rises more than 1 percentage
point above the target the Governor of the Bank must write an open letter to the Chancellor explaining the reasonsfor the deviation.

5.

EAP Update, April 2013, WB, Philippine Economic Update, April 2013, WB, Global Financial Stability report,
April 2013, IMF.

6.

Formally the Bank of Russia will finalize its move to inflation targeting by 2015. Currently, it is still using thecurrency corridor and uses interventions, although recently the Central Bank of Russia has largely refrained fromusing currency interventions allowing the ruble to float.

51

GLOBAL ECONOMIC PROSPECTS | June 2013

GLOBALECONOMICPROSPECTS

June
2013

Finance Annex

Annex

FINANCIAL
MARKETSGLOBAL ECONOMIC PROSPECTS | June 2013

Finance Annex

Recent developments
in financial markets

Fig FIN.1
500

CDS rates for most developing regions remained stable despite the events in March

5-year sovereign CDS rates, basis points
Middle East & N. Africa

400

300

The “risk-off” phase in global financial
markets has continued since thebeginning of the year

Europe & Central Asia

200

Latin America & Caribbean

100
East Asia & Pacific0
Jan '12Global financial markets have been mostly calmsince the beginning of the year following thesubstantial improvements during the second half of2012 (GEP 2012 January). Investor confidence, as
proxied by risk premia and credit default swap
(CDS) rates, has remained relatively strong despite
negative developments in Euro Area (box FIN.1),
including continued economic weakness, political
gridlock in Italy that has stalled reforms, and the
Cyprus crisis that culminated in the imposition ofcapital controls—a first in the Euro Area.
Developing-country CDS rates have in generalremained at low levels (figure FIN.1). Increases in
Egyptian and Argentinean CDS rates were themain exceptions (figure FIN.2). Egyptian spreads
rose due to the rising deficit and debt tied to theeconomic consequences of political turmoil, while
Argentinean rates increased due to the uncertainty
generated by a US court decision concerning therepayment to creditors that did not participate in
the 2005 and 2010 restructuring of Argentinean
debt.1

Apr '12Jul '12

Oct '12Jan '13

Apr '13

Source: World Bank; Bloomberg.

Fig FIN.2
4000

Argentina’s CDS rates surged in Marchfrom already very high levels

5-year sovereign CDS rates, basis points

3500
3000
2500
2000
1500
1000
500
0

Apr '11

Sep '11

Feb '12Jul '12

Dec '12May '13

Source: Bloomberg.

Developed country stock markets
have outperformed developing
countries so far in 2013

Fig FIN.3

Developed country equities are outperforming developing country

MSCI Equity Index (Jan.2011 = 100)
125
120
115

The developed country equity stock market indicesgained value during the five months of 2013 buthave declined since late May as the concerns about
possible tapering of United States quantitativeeasing have increased. The total year to date gain
was 11.1 percent (figure FIN.3). The benchmark
S&P 500 index for the United States reached a newrecord level on May 19th as improving economic
data reports seemed to confirm that the U.S.
economy was gaining momentum (figure FIN.4).

MSCI Emerging Markets

110

MSCI Developed Markets

105
100
95
90
85
80
75
Jan-11

May-11

Sep-11

Source: Bloomberg.

55

Jan-12

May-12

Sep-12

Jan-13May-13

GLOBAL ECONOMIC PROSPECTS | June 2013

Box FIN.1

Finance Annex

Recent developments in the Euro Area.

A wide-range of significant steps taken over the past few years have calmed investors and led to a significant rebound in key
markets. These steps and developments include: ECB President Draghi’s forceful “whatever it takes” speech on July 26 th 2012 The introduction of a new Outright Monetary Transactions (OMT) facility
 Wide-spread fiscal consolidation that has brought Euro Area government deficits down from 6.4 percent of GDP in2009 to an estimated 2.9 percent in 2012 (IMF, 2013), although the deficits of Ireland, Poland, and Spain still exceed 5 percent of GDP
 Euro Area-wide agreements to establish a banking union; to reinforce monitoring and respect of budgetary rules; torequire countries to enter into binding reform contracts; and proposals to increase democratic legitimacy throughdirect election of European Commission President in 2014.
 Early repayment of more than 25 percent of ECB crisis loans by Euro Area banks during the first quarter of 2013
(the loans were not due until 2014 and 2015).
Other developments in 2013 have tested the resilience of this improved climate, including: Inconclusive elections in Italy and weak polls for other leaders that underscore ongoing political risks.
 Uncertainty about government’s willingness to accept conditionality if the OMT were activated.
 Fears that the bailing in of depositors during the Cyprus rescue would lead deposit flight in other European jurisdictions.
While these developments led to some widening of CDS rates and yields on the debt of high-spread Euro Area debt, theincreases were modest compared with earlier declines, and yields for high-spread countries other than Italy are down for the
Italy
Italy
year toIreland
date.
Spain

Italy 1.1
Box Figure
FIN
Spain
Ireland1800

PortugalIreland
Portugal
Ireland
PortugalYields on 10-year sovereign debt, basis points
Portugal60

5-year sovereign CDS rates, basis points

1600
Spain

20

1200

rtugal1000

0

Ireland

800

-20

600

Italy
-40

400
Spain

200
Italy

Spain

0
Jan '10Between January-March
Since March

40

Portugal

1400

Jul '10Jan '11Jul '11-60

Jan '12Jul '12-80

Jan '13

Italy

Portugal

Spain

Italy

Source: World Bank; Bloomberg

IrelandFig FIN.4

Similarly, the Japanese Nikkei stock market
index gained almost 50 percent in value
between January and May reflecting the
expectations related to the monetary easing
program announced by the Bank of Japan(box FIN.2). Nevertheless, the year to dategain for the index was only 23 percent after
the sharp decline since late May. Investor
appetite in Europe has been also positive but
less robust due to the region’s weak economic
outlook. After a similar adjustment sinceMay, the year to date gain for European stock
market index was only 5.4 percent.

155

Performance in selected stock markets

Stock Market Index (Jan. 2011 = 100)
Nikkei

145
135
125
S&P500115
105

Stoxx 600

95
85
75

Apr
'11

Jul
'11

Source: Bloomberg.

56

Oct
'11

Jan
'12

Apr
'12

Jul
'12

Oct
'12

Jan
'13

Apr
'13

GLOBAL ECONOMIC PROSPECTS | June 2013

Finance Annex

Overall, equity markets in Europe and Japan haverecovered more than 80 percent of their 2007
value, versus a more than full recovery in the
United States.

may help explain why yields on developing
country debt are rising (see below).

Developing country bond yields haverisen since January despite thegeneral “risk-off” phase in global
financial markets…

In contrast with the strong performance in highincome markets earlier in the year, the developing
country stock market performance has been
relatively weak since the beginning of the year.
Stock market indeces declined in Brazil (-13.4
percent) and Russia (-10 percent), whereas theyremained more or less stable in China (0.1 percent)and India (0.7 percent). The weakness indeveloping country stock markets partly reflects
weak corporate earnings and country specificfactors. Recent curbs on property markets in
China, for example have contributed to theweakness in share values, while easing incommodity prices have affected stock market
performances in Brazil and Russia. Equity markets
in several East Asian countries—Indonesia, thePhilippines, and Thailand—reached record highs
earlier in the year, helped by strong foreign private
capital inflows.

Indeed, the cost of international bond financing —proxied by 10-year U.S. Treasury bond yield +EMBIG cash bond spread—has gone up this year
after reaching a record low level in early January(figure FIN.5). Unlike previous episodes, the recent
rise in the yields did not occur during a period ofheightened global risk-aversion. Moreover, thewidening in secondary-market bond spreads was
not associated with a decline in benchmark US
yields. US treasury yields tend to fall during theperiods of heightened risk-aversion in global
financial markets as they are considered safe assets.
Over the past few years, developing country bondyields have tended to remain relatively constant,even as benchmark yields (US 10 year treasury
yield) fluctuated—implying that spreads have risen
as benchmark yields fell. During the first half of2013, however, developing-country spreads haveincreased amid rising benchmark US 10-year
Treasury yields (figure FIN.6)—and despite thecontinued trend toward upgrading of developing
country debt by rating agencies.2

The earlier decoupling in the equity market
performance of developed and developing
countries also likely reflects a decline in theinvestors’ perceptions of the riskiness of high-income country financial assets, and growing
concerns about asset prices bubbles andgrowth prospects in some middle-income
countries. Such a revaluation would likely
induce investors to shift their portfolios awayfrom developing to developed markets, andFig FIN.5
FIN.5
Fig

7

These developments could be consistent with the
beginning of a new trend where the price of risk

Cost of bond financing increased in February and MarchFig FIN.6

EMBIG Sovereign Bond Spreads excluding Argentina, basis points

Percent

500

Implicit yield =Yield on US 10 year treasury+ EMBIG bond spread

6.4

Bonds spreads widened despite “the riskoff” phase

450

400

5.8
350

The record low borrowing
cost on Jan 3rd = 4.2%

5.2

Sep 09-May 11
Average

300

4.6

250

2005-07 Average

4

Sep '11Jan '12May '12

Sep '12Jan '13200

May '13

Source: World Bank; JP Morgan.

Jul '11

Oct '11

Source: JP Morgan.

57

Jan '12

Apr '12Jul '12

Oct '12Jan '13

Apr '13

GLOBAL ECONOMIC PROSPECTS | June 2013

Finance Annex

returns to levels that are more normal. The trend
decline in spreads for developing countries overthe last five years has been partly explained by theirimproved credit quality. Much of the improvement
however reflects the very low policy rates andquantitative easing in high-income countries(World Bank, 2010; IMF, 2013), with easy
monetary conditions having suppressed the priceof risk in both developed and developing countries.
Recent increases possibly reflect market
expectations that the pace of quantitative easing in
the United States may ease soon even though
Fed policymakers have reassured the markets
that they will remain accommodative.

Fig FIN.7
75

Gross flows have remained robust since
September 2012$billion

60
45
30
15
0
Jan '12

Apr '12Equity Issuance
Bond Issuance

Despite the weak performance of thestock markets, gross capital flows todeveloping countries remained robust
during the early months of 2013

Jul '12

Oct '12Jan '13

Apr '13

Syndicated Bank Lending

Source: World Bank; Dealogic.

Fig FIN.830

During the first five months of 2013, grosscapital flows (international bond issuance,cross-border syndicated bank loans andequity placements) to developing countries
rose by 63 percent year-on-year and reached ahistoric high at $306 billion (figure FIN.7).
All types of flows posted around 60 percent
increase, with record levels of internationalbond issuance by developing countries. Flows
strengthened in every region except North
Africa and Middle East (box FIN.2). The
sharpest increase was in Europe and Central
Asia, where the flows more than doubled.

Syndicated bank lending has risen since
July 2012 due to less deleveraging

3-month moving average, $ billion

25
20
15
10
5
0
Jan '11Jul '11Jan '12Jul '12Jan '13

Source: World Bank; Dealogic.

Syndicated bank lending to developing countries
totaled $91 billion during the first five months of2013, 69 percent higher compared with a year ago.
Despite the relative weakness in April, banklending has been on a rebound since the second
quarter of 2012 (figure FIN.8). While many factors
were at play, an easing in the deleveraging process
by European banks has been the key. As early as
June 2012, three quarters of European banks hadcomplied with the ECB’s capital ratio
requirements. Moreover, according to the April
ECB Bank Lending Survey, Euro Area banks haveeased the pace of tightening of their credit
standards.3 Euro Area banks have begun repaying
ECB crisis loans and have already started to repay
some of the loans well in advance (box FIN.1).

Fig FIN.9
350

Both the average spread on bank loans and theaverage term of bank loans remained stable

Basis points
Average Term of Loans (RHL)

290

Years

7
6
5

230

4
3

170

110

50

Average spread

102005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: World Bank; Dealogic.

58

2

GLOBAL ECONOMIC PROSPECTS | June 2013

Box FIN.2

Finance Annex

Regional gross capital flows

Gross capital flows to developing countries rebounded in all regions, except North Africa and Middle East. A surge in banklending to firms in the Russia Federation helped to boost flows to the European and Central Asia region to about $105 billion during the first five months of 2013, more than twice their $46 billion level of last year. Bank lending to Russia increased
more than threefold from last year with syndicated loans from European lenders more than doubling.
All types of capital flows increased in the East Asia and Pacific region, where capital flows totaled $92 billion during the first
five months of 2013 compared with $55 billion the same period in 2012. Syndicated bank lending in the region almost doubled, reaching $27 billion compared with $14 billion in 2012. Flows to South Asia strengthened mainly due to strong bondissuance by India. Meanwhile, Sub-Saharan Africa saw a marked strengthening in bank lending (led by South Africa andNigeria) and bond issuance which were more than enough to offset a decline in equity and bond flows. Notably, Rwanda
came to the international bond market for the first time with the $400 million 10-year bonds, benefiting from growing investors’ appetite for riskier developing-country debt.
In contrast, gross capital flows to the Latin America and Caribbean region increased by 23 percent from a year ago, reaching about $79 billion in the first five months of 2013. Equity placement rose by 154 percent due to a strong issuance activity
from Brazilian firms including the largest developing-country corporate bond issuance on the record ($11 billion) by the Brazilian oil company Petrobras. In contrast, bank lending to the region fell by 34 percent.
Capital flows to Middle East and North Africa have been weak so far in 2013, with only one syndicated loan deal for Jordan($288 million) and two bond issues for Lebanon and Morocco ($1.1 billion and $750 million, respectively). For equity issuance, only Tunisia were able to raise $119 million through four transactions.
Box figure FIN 2.1

Regional gross capital flows ($billions)
Europe & Central Asia

East Asia & Pacific30

Equity

Bond

Bank

25
20

15
10
5

35

EquityBond

Latin America & Caribbean

Bank

30

30

25

25

20

20

15

15

10

10

5

0
Jan-12

May-12

Sep-12

Jan-13May-1335

0Jan-12

Middle East & North Africa

5

May-12

Sep-12

Jan-13May-130
Jan-12

7

7

7

6

6

6

5

5

5

4

4

4

3

3

3

2

2

2

1

1

0
Jan-12

May-12

Sep-12

Jan-13May-130
Jan-12

May-12

Sep-12

Jan-13May-13Sub-Sahran Africa

South Asia1
May-12

Sep-12

Jan-13May-130
Jan-12

May-12

Sep-12

Jan-13May-13

Source: World Bank; Dealogic.

Almost 70 percent of the bank lending during thefirst five months of 2013 went to resource-relatedcompanies, mostly for acquisition and tradefinance purposes. The average cost of bankfinancing declined by 18 bps to 3.3 percent as thebenchmark 6 month US libor rate has eased in2013, while average bank spreads have remained
stable (figure FIN.9). The average maturity of thebank loans declined slightly to 5.4 years, with theshare of long-term syndicated bank lending (atleast five years of maturity) falling to 35 percent
from 55 percent in 2012. Syndicated lending for

trade finance declined by 11 percent during thefirst five months of 2013 compared with the same
period last year, while the average maturity of theloans increased for one year.
The increase in equity flows—initial public
offering (IPO) and follow-on issuance—was dueto the strong follow-on issuance from East Asia,
Europe and Central Asia, and Latin America andthe recovery of the overall IPO activity from lastyear’s low level. While China still dominates
overall equity volume, equity issuance also59

GLOBAL ECONOMIC PROSPECTS | June 2013

Finance Annex

increased in other countries, including Indonesia,
Malaysia, Philippines, Thailand, Brazil, Russia,
Chile, and Mexico.

Fig FIN.10

Corporates dominated the bond flows$ billion

45
40

International bond flows to developing countries
have been particularly robust, reaching ahistorically high level at $158 billion for the first
five months of the year with the record monthly
issuance of $45 billion in April. Developing
countries have issued more than 20 billion permonth since September 2012 with the exceptionsof seasonally low December and February when
the Chinese Lunar New Year was this year (figure
FIN.10). The heavy issuance has been supported byinvestors’ robust risk appetite and low borrowing cost.

35
30
25
20
15
10
5
0

Sep
'12

Oct
'12

Nov
'12

Corporate (IG)Sovereign (IG)The strong appetite for higher-yield developingcountry debt has been driven by low yields in highincome countries because of quantitative easing.
This has created an opportunity for several noninvestment-grade (non-IG) companies to tap into
international bond markets. In fact, the share of
non-investment grade corporate issuance rose to
31 percent of the value of bonds issued bydeveloping countries (compared with 18 percent in2012) and 46 percent of the number of bonds (34percent in 2012) (figure FIN.10). In addition, there
has been a long line of first-time sovereign bonds
issuers including Honduras ($500 million) and
Rwanda ($400 million). Even Papua New Guinea isplanning to tap the international debt market soon.

Dec
'12

Jan
'13

Feb
'13

Corporate (non-IG)

Mar
'13

Apr
'13

May
'13

Sovereign (non-IG)

Source: World Bank; Dealogic.

Fig FIN.11

FDI inflows to developing countries$ billion
180

160

140

120

100

80

Foreign direct investment inflows todeveloping countries remained robustin 2012 after the increased
uncertainty in global financial markets
earlier in the year.

60
2009Q1

2009Q4

2010Q3

2011Q2

2012Q1

2012Q4

Source: World Bank; Central banks of selected countries.

Fig FIN.12

Almost half of the global FDI inflows in2012 went to developing countries$ billion
350

After slowing down during the first half of 2012,
foreign direct investment (FDI) inflows todeveloping countries picked up strongly in the final
quarter of the year. Nevertheless, flows totaled$670 billion, 5 percent lower than $701 billion in2011 (figure FIN.11).4 The weakness in the flows
earlier in the year was mostly the result of increased
uncertainty in global financial markets due to EuroArea problems. The impact of the uncertainty wasmuch more profound for high-income economies
where FDI inflows declined by 32 percent (figure
FIN.12). Most developed countries experienced

300

Developing Countries
High-Income OECD

250
200
150

100
50
0
2010Q1

2010Q3

2011Q1

2011Q3

2012Q1

Source: World Bank; Central banks of selected countries.

60

2012Q3

GLOBAL ECONOMIC PROSPECTS | June 2013

Finance Annex

declines compared to 2011. While Finland,
Netherlands and Belgium experienced net
disinvestments in 2012, FDI inflows declined byalmost 90 percent in Denmark and Germany. The
relative resilience of FDI in developing countries
mostly reflects stable re-invested earnings andintra-company loans. The share of developing
countries in global FDI inflows reached its highest
level at 45 percent in 2012.

Several countries in emerging Europe, including Russia
and Serbia, have announced plans to accelerate
privatization efforts this year. FDI flows are expected toincrease by 7 percent reaching $719 billion in 2013.

Hot money flows: a new heat wave
from the East?
The loose monetary policy run by high-income
countries since the 2008/09 crisis has prompted
investors to borrow cheaply and invest in highyielding markets. Investors have been attracted todeveloping country local currency assets (equity
and bonds) because of their stronger growthpotential, and interest rate differentials. This has
led to significant levels of the flows to equity andlocal currency debt securities (also referred as hotmoney flows). Flows to a few large middle-income
countries were particularly strong in 2010 (SeeGEP January 2011). Managing the fluctuations inthese flows, which tend to be quite volatile, can bequite challenging and some countries haveintroduced special measures including capital controls.

FDI inflows were weak in most of the developing
regions. The largest contraction was in South Asia
where flows declined around 20 percent due toslow growth and regulatory uncertainties in India
and Pakistan. FDI inflows to the East Asia region
also declined with China, Malaysia, and Thailand
all experiencing contractions. Despite the 8
percent drop in FDI inflows due to the ongoing
structural changes in its economy, China was the
top FDI recipient in the world in 2012. Similarly, FDI
inflows declined in most Eastern European
economies, reflecting economic weakness in highincome Europe with largest drops in Latvia,
Lithuania, and Serbia.
In contrast, FDI inflows to Latin American
economies rose by 10 percent supported by stillhigh (if weakening) commodity prices andincreased investment from the United States,
especially to Argentina, Chile and Colombia.
Limited high frequency data indicate a mixed
picture so far in 2013: robust flows to Chile, India
and Russia and easing in other developing
countries. Flows to other developing countries will
likely rebound in the second half of the year.

The data for these flows—portfolio investment
with a breakdown of issuance in the country—are
only available for few countries and exhibit amixed picture for 2013 (figure FIN.13). Despite
the current relatively low risk environment andhigh liquidity in the market, flows to local stockand bond markets have moderated for Turkey but
have picked up in Brazil. While flows to Mexico
surged in the last quarter of 2012 and were atrecord high levels in 2012, the data for 2013 are
not available.

Fig FIN.13

Fig FIN.14

Mixed picture for hot money flows

Foreign investment in equity and local currency bond markets (% of GDP)
940

The flows to EM Mutual Funds declined
sharply after January$ billions

8

7
Brazil6

Mexico30

Turkey

20

5
4

10

3

2

0

1
0

-10
Jan '12-1-2
2009Q1

2010Q1

2011Q1

2012 Q1

Apr '12Jul '12EM Fixed-Income Funds

2013 Q1

Source: World Bank; Central banks of selected countries.

Source: World Bank; Haver.

61

Oct '12Jan '13

EM Equity Funds

Apr '13

GLOBAL ECONOMIC PROSPECTS | June 2013

Box FIN.3

Finance Annex

Japan’s monetary easing and developing countries

In November 2012, the Bank of Japan (BoJ) signaled that it would undertake monetary easing measures tofight against deflation. The BoJ announced the actual quantitative and qualitative easing measures on April 4 ththis year. These measures include the monthly purchase of ¥7.5 trillion ($75 billion) of the Japanese government bonds aiming to double its monetary base in two years. It will also expand the average maturity of bondsthat it purchases from three to seven years. More importantly, the BoJ will continue these “as long as necessary”.
The BoJ’s quantitative easing (QE) program is similar to the QE3 program in the US. The $75 billion monthly
purchase of government bonds is similar in size to the Fed’s monthly $85 billion purchase under QE3. Bothprograms seek to depress the return on low-risk assets, in order to push investors into riskier assets.
While the immediate beneficiary of the program is domestic assets, spillover into international capital markets
is inevitable. In the case of the Japanese program, the size of the outflows may be larger, in part because at$8.8 trillion for bonds and $3.3 trillion for equities, the Japanese market is only 22 and 8 percent the size of
U.S. markets. The bulk of these flows are likely to go to other high -income countries, only 2.4 percent of Japanese external holdings are in developing countries. However, Japanese investors have been actively investingin local currency bond and equity markets in some developing countries (box table).
There are already indications that Japanese institutional investors have been recently increasing their exposure to developing countries via Uridashi funds (typically foreign currency bonds) and larger Toshin investment trust funds (predominantly equity). According to the Investment Trusts Association of Japan, Japanese
portfolio investment in local debt securities increased in Mexico (by 34 percent), Turkey (28 percent) and
Thailand (17 percent) during the first two months of 2013. The increase was less pronounced in Philippines(5.9 percent) and South Africa (4.4 percent).
Although the depreciation of yen will make the assets abroad relatively more expensive, the Japanese QE
program might also increase direct investment by lowering the cost of capital for Japanese multinationals.
Developing countries receive a larger 20 percent share of these outflows. Asian developing countries in turn
receive two thirds of these flows. Rising outward FDI flows from Japan in recent years have been particularly
important for Thailand, accounting for 40 percent of that country’s FDI inflows in 2012, up from 28 percent in2009.
Box table FIN 3.1

Japanese outward investment position bydestination, 2011 ($ billion)
FDI
Total

Total

Portfolio Investment
PI: Equity
PI: Debt

935.4

3,279

647

2,632

Developed Countries

742.5

3,203.5

618.6

2,584.9

Developing Countries
P.R.China

192.8

75.6

28.3

47.3

73.5

10.3

9.8

0.5

Thailand

31.0

2.3

1.5

0.9

Indonesia

13.9

5.8

3.3

2.6

Malaysia

9.9

4.3

1.6

2.7

Philippines

9.0

2.7

0.3

2.5

Viet Nam

5.6

0.1

0.1

0.0

India

13.6

5.0

3.4

1.6

Mexico

2.6

11.6

0.5

11.1

Brazil

30.0

28.1

5.6

22.4

Russia

1.5

2.0

1.2

0.8

R.South Africa
ASEAN

2.2

3.2

0.9

2.3

107.6

27.2

13.3

13.9

Source: Bank of Japan.

62

GLOBAL ECONOMIC PROSPECTS | June 2013

Finance Annex

As an alternative measure, high-frequency data onflows to Emerging Market (EM) Mutual Funds—
which only represent a portion of such flows—
indicate a decline in recent months (figure FIN.14).
The fall has been particularly sharp for EM equity
funds with net outflows in March and May. The fallpartly reflects weak corporate earnings and country
specific factors (discussed earlier). In addition,
downside risks for the returns on these assets havealso risen, in particular if US Treasuries were to rise
earlier and higher than expected.

If the current trend gains momentum in coming
months, some developing countries might facechallenges in managing the impact of these flows
on their economy.

Looking forward, Japan’s decision to begin aquantitative easing program may reverse the trend
in these flows (box FIN.3). The Bank of Japan’s(BoJ) commitment to purchase $75 billion of
government bonds a month (just short of the Fed’smonthly purchase of $85 billion) is likely to weaken
returns in Japanese markets, and make developingcountry assets more attractive than otherwise.
While Japanese investors’ tend to have a stronger
home-bias than US investors, the Japanese
domestic market is smaller than the U.S. and as aresult the impact on domestic asset prices is likely
to be larger, and the incentive to invest abroadlarger. How large of an impact on developing
country assets will depend on whether investors
turn to high-income country or developing assets.
Here, Japanese investors tend to allocate a smaller
share of their external assets to developing
countries than American investors do, although
they have been active in many developing country
local currency debt markets. Their portfolio
investment tends to be geographically diverse witha significant presence in Brazil, Mexico andTurkey.

The level of net private capital inflows going todeveloping countries is set to rise in nominal terms
but as a percent of total developing country GDP,net inflows are forecast to ease by 2015. After the
1.4 percent increase in 2012 reaching $1.2 trillion(4.9 percent of developing countries’ aggregateGDP), net capital inflows to the developing world
had a strong start in 2013 (figure FIN.15 and table
FIN.1). They are expected to increase to $1.3
trillion (4.7 percent of GDP) with another record
level of bond flows, rebounding bank lending androbust FDI inflows.

Prospects

While the prospects for capital flows to developing
countries remain positive in the medium-term, some of
the factors that have been in play over the last few years
are expected to weaken. For example, while developing
countries will continue to grow relatively faster thandeveloped countries and their credit quality has improved,
the growth differential is expected to narrow as growth inhigh-income countries picks up. Perceptions of theriskiness of high-income country investments have also
declined, which should lead to a portfolio shift in theirfavor over the medium term.

Expectations of policy actions have alreadybolstered portfolio outflows with an increase inflows to developing countries. For example, theflows to Toshin funds (investing in local andinternational equity and bond markets) and
Uridashi funds (typically foreign currency bonds)
have been very robust since the beginning of theyear. According to the Investment Trusts
Association of Japan, Japanese portfolio
investment in local debt securities increasedin Mexico (by 34 percent), Turkey (28percent) and Thailand (17 percent) during thefirst two months of 2013. The increase wasless pronounced in Philippines (5.9 percent)and South Africa (4.4 percent).

Fig FIN.15
1.4

Net private capital flows are set to risein nominal terms$ trillion

Percent

8

1

7
6

0.8

5

0.6

4

0.4

3

0.2

2

0

1

-0.2

0
2004

2006

As a share of GDP(RHS)
STdebtSource: World Bank.

63

9

1.2

2008

2010

2012

Bank lending
Bond flows

2014

2016

Portfolio Equity
FDI Inflows

GLOBAL ECONOMIC PROSPECTS | June 2013

Table FIN1.

Finance Annex

Net capital flows to developing countries ($ billions)
2008

2009

2010

2011

2012e

2013f

2014f

2015f

Current account balance

409.4

233.0

173.3

129.6

-16.7

-74.9

-108.2-126.3

Capital Inflows

812.7

701.0

1,218.8

1,175.0

1,192.4

1,260.9

1,297.4

1,394.8

Private inflows, net
Equity Inflows, net

782.3
583.4

620.0
541.3

1,145.6
710.5

1,145.1
710.4

1,178.3
758.1

1,250.2
791.1

1,290.7803.5

1,391.7
863.5

Net FDI inflows

637.0

427.1

582.3

701.5

670.0

719.3

715.7

758.2

Net portfolio equity inflows

-53.6

114.2

128.2

8.9

88.1

71.8

87.8

105.3

Private creditors. Net

198.8

78.7

435.1

434.6

420.2

459.1

487.2

528.2

Bonds

-8.6

61.0

129.7

123.8

190.3

187.3

164.4

151.9

Banks

223.3

-11.9

37.2

108.2

82.0

104.7

125.3

146.9

Short-term debt flows

-17.1

17.8

257.6

189.3

141.0

158.5

188.2

221.1

Other private

1.3

11.7

10.7

13.3

7.1

9.2

10.4

9.8

Official inflows, net

30.4

81.0

73.2

30.0

14.1

10.7

6.7

3.1

World Bank

7.2

18.3

22.4

6.6

4.6

IMF
Other official

10.8
12.4

26.8
35.9

13.8
36.9

0.5
22.8

-3.9
13.4

Capital outflows-321.2-175.2-314.1-284.7-365.4-371.3-416.3-464.4-211.8
-32.1
-78.3
1.0

-144.3
-75.9
50.7
-5.7

-213.9
-50.6
-57.3
7.7

-198.0
4.3
-81.0
-10.0

-238.0-12.4-103.0-12.0-275.0
-17.3
-72.0
-7.0

-325.0
-24.3
-61.0
-6.0

-370.0
-29.4
-56.0
-9.0

Net capital flows (inflows + outflows)

491.5

525.8

904.7

890.4

827.1

889.6

881.1

930.4

Net unidentified Flows/a-82.1-292.8-731.3-760.8-843.8-964.5-989.3-1,056.7

FDI outflows
Portfolio equity outflows
Private debt outflows
Other outflows

Source: The World Bank
Note: e = estimate, f = forecast/a Combination of errors and omissions, unidentified capital inflows to and outflows from developing countries

In addition, the uniformly accommodative stanceof monetary policy in high-income countries may
become more diverse as the United States reduces
the extent of quantitative easing and Japan expands
it. A gradual transition toward monetary policy
tightening in the US is likely to increase the cost ofcapital for developing countries and expectationsof such a move may lead to an easing in flows even
earlier. This may be partially offset by thequantitative easing in Japan, if investors there
substantially increase their appetite for developing
country asset. The overall effect is likely to tighter
external financial conditions for developing
countries.

2

The impact of tighter external financial
conditions will be evident for bond flows todeveloping countries—both international
issuance and foreign investment into local
currency bond markets. After reaching record
highs in 2012 and 2013 bond flows are
expected to fall gradually in 2014 and 2015.
Bank lending on the other hand is expected
to rise gradually particularly now that intensedeleveraging pressures have eased—although
the extent of the bounce back may be limited
by a stricter regulatory environment.

64

GLOBAL ECONOMIC PROSPECTS | June 2013

Finance Annex

FDI inflows to developing countries are projected
to increase through the forecast period, reaching$758 billion (2.4 percent of GDP) by 2015.
Despite considerable real-side uncertainties in the
short term, multinational corporations continue tobe attracted to developing countries’ medium-term
growth prospects, large and growing consumer
base, natural resources, and still low labor costs. In
addition, many developing countries are removing
barriers to foreign investment. For example,
following its recent World Trade Organization
accession, Russia has committed to reducing
restrictions on foreign investors in a number ofservice industries. Other countries in Eastern
Europe have been pursuing privatization in theirservices sector. Similarly, India may attract aninflux of investment in the coming years now thatthe cap on foreign ownership in multi-brand retailand aviation businesses has been raised. As long asJapanese monetary easing reduces the cost ofcapital for its multinationals, it should also support
FDI flows to Asian economies, particularly
Thailand and Vietnam in the short-term.

Despite the expectation that private capital flows
to developing countries will increase, the outlook
is subject to significant downside risks. First,
despite the recent progress towards a resolution
for Euro Area debt crisis, considerable
uncertainties remain and as highlighted by the
Cyprus bailout, event risk persists. Any major
setback could lead to a renewed crisis ofconfidence. Similarly, lack of progress in dealing
with fiscal challenges in the United States has asimilar potential to generate confidence issues.
Another factor that might generate volatility in the
global financial markets is the process of
unwinding of monetary easing in the UnitedStates. As discussed earlier, the expectations
related to a possible ease in the pace ofquantitative easing have already led to the recent
increase in US 10-year Treasury yields
accompanied widening in spreads. Hence, any
rapid shift in the expectations related to theprocess might generate sharp adjustments in thefinancial markets and capital flows to developing
countries.

While remaining the main FDI destination amongdeveloping countries, FDI inflows to China are
expected to ease over the medium term. The
Chinese economy has been going throughstructural adjustments with rising wages andproduction costs, which will continue to limit theefficiency-seeking FDI. The fall will be partly
compensated, however, by the market-seeking
FDI flows as multinationals would like to serve its
growing middle-income population.

65

GLOBAL ECONOMIC PROSPECTS | June 2013

Finance Annex

Notes
1.

Argentina defaulted a record $95 billion in sovereign debt in 2001. The country managed to restructure 92 percentof the debt in 2005 and 2010. Since then, Argentina has been in a long legal fight with bondholders who did notentered debt swaps. In the fall of 2012, a U.S. court ruled that Argentina had to repay the unrestructured debt,
which prompted fears that the country would have to default once again on its unrestructured debt. As of yet theissue remains unresolved. According to a recent report published by the International Monetary Fund, ongoing
litigation against Argentina could have pervasive implications for future sovereign debt restructurings by increasing
leverage of holdout creditors. (http://www.imf.org/external/np/pp/eng/2013/042613.pdf)

2.

Since January 2013, the sovereign ratings of 11 developing country borrowers have been up graded versus 5
downgrades.

3.

According to the April ECB report, net tightening of credit standards declined for loans to businesses in the Euro
area. Net tightening for firms is now below its historical average. Credit standards also declined for households,
although they remain higher than the historical average.

4.

Historical FDI data have been revised as several countries have started to report under Balance of Payments andInternational Investment Position Manual (BPM6).

66

GLOBAL ECONOMIC PROSPECTS | June 2013

GLOBALECONOMICPROSPECTS

June
2013

Trade Annex

Annex

TRADE

GLOBAL ECONOMIC PROSPECTS | June 2013

Trade Annex

Recent Developments

to ease. In both Q4 2012 and Q1 2013, this importrebound gained strength in part because of thefirming derived demand it generated in highincome and other developing countries. However,
weaker growth momentum in some large
developing countries (including Brazil, China,
India, Russia and South Africa) is reflected in theslowing down of the aggregate developing country
import demand, even if still remaining robust.
Indeed, in the three months to April 2013,
developing country import demand was expanding
at a 10.9 percent pace (down from the 18.0 percent
pace registered in March). Nonetheless,developments differ across developing regions (seebox TRADE.1).

After a cyclical rebound in global
trade, the pace of trade expansion isdecelerating once again
Following the slump in Q2 2012, global trade
began a cyclical rebound in Q3, led by anacceleration in developing country imports, whichsparked an uptick in both high-income country anddeveloping-country exports.1 As high-income
country activity picked up, so too did their importdemand helping to further boost overall trade in
the fourth quarter and into the first quarter of2013. However, reflecting ongoing fragility in the
global economic recovery, particularly in highincome countries, the pace of trade expansion has
slowed in recent months. Indeed, in the threemonths leading to April 2013, global trade
expansion had decelerated to a below trend pace of
0.8 percent (3m/3m saar) compared with 10.9
percent in March (figure TRADE.1).

Similar to the slowdown observed in developing
countries, high-income country import demandalso weakened in recent months. However, unlike
the still positive import demand growth indeveloping countries (reflecting stronger domestic
demand conditions there), high-income countries
import demand growth contracted in the threemonths leading to April (-3.7%, 3m/3m saar).
Although on aggregate import demand among high-income countries decelerated in April,developments have not been uniform acrossindividual economies (figure TRADE.2).

The deceleration in import demandhas been broad-based, impacting
both developing and high-income
countries

US import demand growth
decelerates, after earlier cyclicalrebound.

The rebound in developing country importdemand began almost as soon as the Euro Area
financial market tensions of May-June 2012 began
Fig TRADE.1
40

The ongoing steady strengthening of US private
sector economic activity, (GDP grew at 2.4 percent
in Q1 2013, q/q saar compared with 0.4 percent in
Q4 2012) was supportive of the rebound in its
import demand. After contracting for four
consecutive months between August 2012 andNovember 2012, US import demand growthstarted expanding once again in December,peaking at 5.9 percent (3m/3m saar) in January
Nonetheless, by March, business sentimentindicators for the US began declining. This decline
in sentiment was reflected in real-side activity as
both US industrial production and trade expansion
slowed. Indeed, in March, US import demand
growth contracted at a 2.5 percent (3m/3m saar)
pace. And although there was an uptick in April(0.3 percent, 3m/3m saar), import demand is still
expanding below trend. A strengthening US

Divergence in import growth among
high-income countries(import volumes, %ch 3m/3m saar)

30

Developing

20

World

10
0
-10
Jan '10High-Income
Jul '10Jan '11Jul '11Jan '12Jul '12Jan '13

Source: World Bank; Datastream.

69

GLOBAL ECONOMIC PROSPECTS | June 2013

Box TRADE.1

Trade Annex

Regional import developments

Import demand in East Asia & the Pacific registered a solid rebound in both Q4 2012 and Q1 2013 (Box fig
TRADE 1.1). The robustness of trade in the region also reflects increasing trade and financial integration, although concerns have been raised about the potential impact on regional trade of the decline in Sino -Japanesetrade and from the sharp depreciation of the yen (see main text). Indeed, declining business sentiment for someof the larger economies in the region suggest a weakening of this expansion in Q2 2013. Available data for Aprilshows that the pace of import momentum decelerated to 13.4 percent (3m/3m saar) from 25.4 percent in March.
In Europe and Central Asia, import demand in the two largest economies in the region, Russia and Turkey,
has rebounded rapidly — rising at a 19.7 percent pace in Russia and at 12.1 percent in Turkey in Q1 2013 —partly reflecting the advanced stage of recovery in these economies. In those developing European countries
with closer ties to the Euro Area, output gaps remain elevated and the recovery in import demand has lagged,
the expansion in import demand has been weaker. On aggregate import demand in the region expanded at 16.8
percent rate in the three months ending March 2013.
Strong domestic demand in Latin America’s largest economy (Brazil), supported by loose monetary policy andhousehold tax incentives, contributed to solid import demand in the region. Indeed in Q1 2013, import demandin Brazil grew at an above trend 21.3 percent pace. However, for the region as an aggregate import demand
was 5.9 percent in Q1 2013. The weaker aggregate regional expansion in Q1 2013 reflects recent decelerationin import demand in both Argentina and Mexico. In April Brazil’s import growth contracted, but strengthening
import demand from other countries in the region supported the acceleration of the region’s import demand to
6.1 percent (3m/3m saar).
In South Asia where India, dominates trade activity, the replenishing of depleted stocks and earlier monetary
policy easing, contributed to the robust expansion in South Asia’s imports. However, India’s export growth has
not kept apace with its import demand, thus contributing to a growing trade balance and current account deficit.
The latest available region wide data for Sub Saharan Africa and the Middle East and North Africa is February 2013 (Box fig Trade 1.2). Fortunes for both regions however, diverge. As was the case for other developing
regions, import demand in Sub Saharan Africa strengthened through February to a robust 17.5 percent pace(slightly higher than the developing country average of 16.6 percent at the time) from 13.1 percent in the previous month. However, in the Middle East and North Africa, the contraction in import demand which commenced
in August 2012 was sustained through February 2013 ( -4.8 percent, 3m/3m saar), even if at a weaker pace. The
weakness in import demand in the region in part reflects the effects of political challenges on demand conditions in some countries in the region.

Box fig TRADE 1.1

Import volume growth among
selected developing regions

Box fig TRADE 1.2

60 (import volumes, %ch 3m/3m saar)

60 (import volumes, %ch 3m/3m)
East Asia & Pacific
40

40
20

20

0

0

Latin America& Caribbean

-20

-20
Jan '10South Asia
-40
Jan '10

Import volume growth among
selected developing regions

Jul '10Jan '11Jul '11Jan '12Jul '12Jul '10Jan '11

Europe & Central Asia
Middle East & N. Africa

Jan '13

Source: World Bank; Datastream.

Source: World Bank; Datastream.

70

Jul '11Jan '12Sub-Saharan Africa

Jul '12Jan '13

GLOBAL ECONOMIC PROSPECTS | June 2013

Fig TRADE.2

Trade Annex

Fig TRADE.3

Import demand in selected high-income
economies(import volumes, %ch 3m/3m saar)

30

External demand is mitigating the weakness in Euro Area domestic demands$ billions

0.80 (quarter-on-quarter GDP growth,

20

0.60
0.40

10

0.20

0

0.00
-0.20

-10

-0.40

-20

-0.60

2010
Japan

2010
Euro Area

2011

2011

2012

2012

2013

Net exports

Domestic Demand

-0.80

GDP

-1.00

United States

2011Q4

Source: World Bank; Eurostat.

2012Q1

2012Q2

2012Q3

2012Q4

Source: World Bank; Eurostat.

economy should be supportive of global trade as the US
still remains the world’s largest importer, accounting forsome 12.5 percent of global imports in 2011.

contraction of 0.6 percent in output (figure
TRADE.3). Since exports tend to have a large
import component, the acceleration in imports in2013 Q1 likely reflects better exports as well as
modest strengthening in the Euro Area economy.

After contracting for several months,
import demand in high-income
Europe begins expanding once
again.

Japanese imports demand has
rebounded in recent months.

Notwithstanding a steady trend decline in its
market share, the European Union still remains theworld’s largest trading bloc and customs union,
hence developments in Europe are of significant
importance in global trade. Euro Area importdemand began expanding once again in February
2013 (3.5 percent, 3m/3m saar) – the first
expansion in ten months— and has continued
expanding through March (3.4 percent, 3m/3msaar). The pick-up in Euro Area imports has
occurred not with standing the weak domestic
demand conditions there: rising and record highunemployment, tight lending conditions, ongoingfiscal uncertainty, and lingering uncertainty
weighing down on investor confidence. The
strengthening of import demand could reflect therebuilding of inventories after several months ofcontracting imports demand, rather thanstrengthening of domestic demand conditions in
the bloc.

Japan accounts for 6.5 percent of global trade,hence developments there remain important,particularly so in the East Asia region where it is an
important final market for several economies.
After several months of contracting importdemand (between August 2012 and February2013), import demand in Japan has begun
accelerating once again, consistent with thestrengthening of economic activity recorded in Q1
2013 (3.5 percent, q/q saar up from 0.3 percent in
Q4 2012) as the effects of strong government
stimulus measures begin to impact real side activity.
Indeed, in the three months to April importdemand accelerated to 6.3 percent compared with a
12.9 percent pace of contraction that occurred in
December 2012.

Exports have lagged imports but are
growing rapidly — with all regions
participating in the trade reboundOverall, net exports demand in the Euro Area iscontributing to mitigating the weakness in EuroArea demand. For instance, in 2012, net exports
contributed 1.6 percentage points to Euro Area
GDP growth, notwithstanding the overall

Supported by the rebound in global economic
activity (as observed by the pick-up in import
71

GLOBAL ECONOMIC PROSPECTS | June 2013

Table TRADE.1

Trade Annex

Export growth in developing regions

Export Volume Growth
2012 (q/q, saar)
Regions
Q2
Q3
Q4
East Asia & Pacific
23.2
-12.2
17.5
Europe & Central Asia
8.3
-10.5
9.2
Latin America & Carribbean -6.1
-4.1
10.6
Middle East & North Africa -21.5
-42.9
38.7
South Asia
-6.4
-11.8
9.6
Sub Saharan Africa
48.4
-34.2
4.9

Q1
26.1
1.8
-7.5

2013 (3m/3m, saar)
April
11
-3
5

25.8

15.3

Source: World Bank; Datastream.

demand), developing country exports strengthened in
Q4 2012 (14.8 percent, q/q saar), and this pick-up
was sustained through Q1 2013 (15.5 percent, q/qsaar), albeit at a different pace across individual
developing regions (table Trade.1). Nonetheless,along with the deceleration in global importdemand, the pace of export growth is showing
signs of deceleration, with developing country
export growth expanding at an annualized pace of
7.8 percent in the three months to April 2013
compared with the 15.4 percent recorded in theprevious month.

Data for both Sub Saharan Africa and the Middle
East lags behind other developing regions. Latest
available for the region is February 2013. In bothregions, export growth had rebounded from thecontracting activity in the months prior to
November 2012. Indeed, in the three months to
February export growth was accelerating at 19.7
percent in Sub Saharan Africa and 12.8 percent in
the Middle East and North Africa.

Medium Term
Prospects for Global
Trade

During Q1 2013 the pace of export expansion wasstrongest in East Asia (26.1 percent, q/q saar) led
by China and also in South Asia (23.2 percent, q/qsaar) led by India. Central and Eastern European
countries are benefitting from the strengthening
import demand in the Euro Area with exports
from the region expanding by a solid 14.5 percent(3m/3m saar) annualized pace in Q1 2013.
However stagnant export growth from Russia andthe sharp decline in Turkey’s export growthweighed down on the overall Europe and Central
Asia exports. Hence in Q1 2013 overall exports in
the region expanded by only 1.8 percent—wellbelow the developing country growth of 15.4
percent. Latin America and the Caribbean region
was the only developing region where export
growth contracted in Q1 2013, mainly due tocontracting export growth in Mexico (-7.4
percent, q/q saar) and Brazil (-4.4 percent,q/q saar). However, a pick-up in Brazil’s
export volumes in supported the reboundobserved for the region in April (5.0
percent , 3m/3m saar)

After its slump in 2012 (2.8 percent growth), global
trade growth is projected to pick-up in 2013 andgradually strengthen through 2015. Underlying
this pick-up in activity is the expected
strengthening of the Euro Area economy (largest
trading bloc) by Q3 2013, and the ongoing steadyrecovery in the US and robust developing country
growth expected to continue through 2015.
Global trade in goods and services is projected toincrease by 4.0 percent in 2013, before
strengthening to 5.0 percent in 2014 and reaching
5.4 percent in 2015. Despite this relatively strong
growth projection, global trade volumes willremain below their pre-crisis trend — potentiallysuggesting a slowing in the long-term trend for72

GLOBAL ECONOMIC PROSPECTS | June 2013

Box TRADE.2

Trade Annex

The Re-orientation of South-South Trading Partners in Recent Years

Though accounting for about a third of global trade, the faster projected trade growth for developing countries (between 6.4
percent to 8.4 percent annual growth over forecast horizon) compared to high-income countries (2.8 percent to 4.3 percent
over forecast horizon) between 2013 and 2015 is expected to be a key driver in the expansion of global trade. As documented in GEP 2013A, over the past decade, the most dynamic segment of global trade is trade among developing countries –so called “South-South” trade. Indeed, over the past decade the USD value of trade between developing countries hasgrown annually by an average of 19.3 percent (17.5 percent if trade with China is excluded) versus about 11 percent fordeveloping country exports to high-income countries.
This trend is expected to continue over the forecast horizon. One significant element that has driven this South-South trade
has been the growing role of East Asia as a major global trading bloc. Together this region, accounts for about half of the reorientation towards South-South trade, with China, being the most dynamic trading partner. Indeed, without exception, every
single developing region has increased its trade with China, while contemporaneously reducing their trade dependency on
high-income markets (Box Figure Trade 2.1). The developing regions to have most re-oriented and increased their trade with
China over the past decade have been those with a comparative advantage in natural resources. Between 1999 to 2011 Sub
Saharan Africa increased their exports to China from 2.23 percent of their total exports to 22.73 percent, Latin America increased theirs from 1.0 percent to 11.5 percent and the Middle East and North Africa from 2.21 percent to 15.29 percent.
Reflecting the strong integration of production networks in East Asia, the share of exports from other East Asian economies
to China has increased from 4.5 percent in 1999 to 18.6 percent in 2011.
Box Fig TRADE 2.1 Cumulative change in share of regions
total exports going to China and highincome countries, 2000—2011 (percent).

30

25%
20%

Box Fig TRADE 2.2 Intra-regional import shares amongdeveloping regions ( percent)

EAP

LAC

MENA

South Asia

Sub-Saharan Africa

ECA

Trade
with
China

15%

25

10%

20

5%
0%

1999-2000
2010-201115
Trade with
US, Japan andEuro Area

-5%
-10%

10

-15%

5

-20%
-25%

0
ECA

-30%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Source: UN COMTRADE.

LAC

SSA

EAP

South
Asia

MENA

Source: UN COMTRADE.

The rapidly growing South-South trade has however not been driven by only China but also other developing regions, inparticular the rest of the East Asia region. However, outside of China and East Asia Pacific region, in general, the diversification of trading partners towards other developing regions, though occurring, has been less dynamic compared to that with
the East Asia region (see Box Table TRADE 2.1).
Indeed, outside of trade with the East Asia region, the most significant re-orientation has been increasing exports from both
the Middle East and North Africa. Excluding this, the re-orientation of trade with other developing regions has been somewhat less dynamic (see Box Table TRADE 2.1). More surprising however is the relatively slow progress towards increased
integration among developing countries in the same region, with the exception of East Asia where regional trade integration(share of intra-regional imports) almost tripled since 1999. Indeed, excluding China which tends to export a greater share tohigh-income countries, the share of the other East Asian countries exports to the East Asia region increased by 20 percentage points (from 7.1 percent to 30.3 percent of their total exports). This is not the case in other developing regions. Although
Europe and Central Asia remains the second most trade-integrated developing region (thanks to many countries benefittingfrom multiple trade agreements in the region, especially those associated with the European Union) part of the progress
made in regional integration appears to have been eroded by the weak demand post crisis, as intra-regional trade having
risen to 27.8 percent by 2008 (from 19.2 percent in 1999), has since declined to 25.5 percent in 2011 (see Box Fig TRADE

73

GLOBAL ECONOMIC PROSPECTS | June 2013

Trade Annex

2.2). For both Latin America regional trade integration has steadied around 16 percent over the past decade. And in Sub
Saharan Africa, after increasing by some 5 percentage points between 1999 and 2002, the share of regional trade has alsosteadied at around 12 percent of total trade, reflecting significant cross border barriers as well as increased external competition due in part to unilateral tariff liberalization. Among developing regions, the Middle East and North Africa and inSouth Asia remain regions with the least intra-regional trade, about 3 and 4 percent of their total trade is carried among
regional neighbors. Not surprising several analytical studies (including those using gravity models) continue to point to theunderperformance of intra-regional trade in the Middle East and North Africa (Dennis, 2006; Devlin and Yee, 2005; Zarrouk,
2003 Al-Atrash and Yousef, 2000), as well as in South Asia (Kumar etal 2009) and in Sub-Saharan Africa (Buys etal.
2010).
While trade in natural resources, in particular ores and metals has been the fastest growing commodity category of imports
among developing countries, the growth in trade in manufactured goods among developing countries has also been solid growing as fast as petroleum imports and faster than agricultural raw material imports. The strength of importance of ores
and metals is however accentuated by the inclusion of China. Excluding China, manufactured goods has been the fastest
component of south-south trade, reflecting increased production chain interlinkages among developing countries, particularly in the East Asian region.
Box table TRADE 2.1

The diversification of trading partners between developing regions has been most dynamic between all developing regions and the East Asia region

EXPORT MARKET(additional increase in exports share going to import market, in percentage points)( e.g. an additional 18.0% of SSA share of its total exports was re-oriented towards the EAP region)

IMPORT MARKET
East Asia excl. China (EAO)
East Asia & Pacific (EAP)
Europe Central Asia (ECA)
Latin America & Carribean (LAC)
Middle East & North Africa (MENA)South Asia (SAS)Sub Saharan Africa (SSA)

EAO
6.3
20.4
1.4
1.3
0.4
2.5
0.4

EAP
4.2
8.0
3.1
4.1
0.6
2.5
1.0

ECA

LAC
0.5
3.6
6.2
0.0
0.5
0.5
0.2

1.0
10.8
1.0
1.3
0.6
1.2
0.7

MENA
-0.2
11.1
1.3
-0.6
0.4
6.6
0.4

SAS

SSA
2.2
8.5
2.9
2.7
1.4
1.5
2.5

0.5
18.0
0.8
0.5
-0.7
0.5
5.2

Source: UN COMTRADE.

rapidly growing developing country market shares.
Nevertheless, trade is expected to continue
reorienting itself toward developing countries (boxTrade.2). Partly as a result of this trend,
increasingly more of developing country trade is
now with other developing countries — bothreflecting increases in inter-regional and intraregional trade, especially the in the East Asian region.

changed over the past six months.
Nonetheless, unlike earlier periods where thebalance of risks were weighted on thedownside, these are now more balanced (seemain text). Downside risks continue toinclude a worsening of conditions in the EuroArea, the possibility that markets react badly
to a failure of either the United States orJapan to map out a credible medium-term
deficit reduction strategy, a rapid decline in
Chinese growth and geopolitical concerns. To
these may be added the possibility that highcommodity prices, which have supported thevalue of global trade — if not the volume —could decline rapidly with deleterious
consequences for incomes and imports ofcommodity exporting countries, but benefits
for importers.

Risks
Fragile global economy. Downside risks to theforecasted uptick in global trade activity have not

74

GLOBAL ECONOMIC PROSPECTS | June 2013

Trade Annex

The resurgence in announced bilateral andregional trade agreements among highincome countries could mitigate theacceleration of developing country trade.

However, outturns in the global economy,
particularly from high-income countries could
surprise on the upside, compared to thesubdued uptick embedded in our current
forecasts (high-income growth of 1.2 percent
in 2013 strengthening to 2.3 percent by 2015
– see main text for details). This could arise
from another of reasons including the pentup demand in high-income countries, lowlevels of inventories, and improved credit
flows to real economy in high-income
countries. If this were to occur, this would
lead to a rapid rise in not only high-income
trade but also that of developing country
trade than currently embedded in our
forecasts.

Notable among these are the US-EU free trade
agreement and the Trans Pacific Partnership (USand nine other economies, including high-income
countries such as Japan, Australia, New Zealand,
Singapore and Chile). While bilateral and regional
preferential trade agreements have proliferated inpast decades, these new accords (if agreed to) aremuch larger in scope. A trade agreement between
the US and the EU alone would be unprecedented
in size - accounting for some 40 percent of global
trade! Hence were the preferences included in a
potential deal between the US and the EU, notextended to other developing countries within themultilateral trading system this could disadvantage
developing countries.

A rise in protectionism. With unemployment

remaining at elevated levels, weak global demandand little progress in multilateral trade talks, theincidence of new restrictive trade measures, whileslowing down compared to a year ago, still reveals
some worrisome trends. The World Trade
Organization reports that in the five months
leading to mid-October 2012, an additional 71 new
trade restricting or potentially distorting measures
were introduced. The most frequent measure used
was the initiation of anti-dumping investigations,followed by stringent customs procedures. This
represents a decline from the 108 new measures
introduced a year ago. Nonetheless, although thepace of imposition of new restrictions dropped,recent experience suggest that, once imposed it isdifficult to remove such restrictions, inevitably due
to the political constituencies that they build. For
instance, only 21 percent of new trade-restricting
measures introduced since October 2008 by G-20
countries have been removed, thereby leading to a
cumulative increase in the stock of trade
restrictions. Indeed on a net basis (i.e. accounting
from removal of restrictions), current existingmeasures imposed by G-20 countries since
October 2008, is estimated to affect some 3.5
percent of global trade (as of October 2012), up
from 2.9 percent in May 2012.

A principle concern with agreements is the extent
to which non-participant third parties will beaffected by trade diversion, potentially leading to a
decline in global welfare, even if the agreement
benefits the parties to it. Given the size of highincome countries, these potential trade-diverting
impacts from preferential trade agreements arefurther magnified and developing countries arelikely to be the loosers from such an agreement,
were it to be trade-diverting. Hence, efforts toclinch a multilateral deal (Doha Round) will overthe long-term maximize global welfare.

75

GLOBAL ECONOMIC PROSPECTS | June 2013

Trade Annex

Notes
1.

The null hypothesis that developing country import volumes do not granger cause high-income export volumes isrejected at 1 percent level, after 3 lags. Similarly the null hypothesis that high-income import volumes do notgranger cause developing country export volumes is rejected at 1 percent level, after 4 lags.

References
Aggarwal, A., (2008). Regional Economic Integration and FDI in South Asia—prospects and problems. Macroeconomics
Working Papers No. 22141, East Asian Bureau of Economic Research.
Al-Atrash, H. and T. Yousef (2000). Intra-Arab Trade: Is it too Little?, IMF Working Paper WP/00/10.
Buys, P., Deichman, U., Wheeler, D (2010). Road Network Upgrading and Overland Trade Expansion in Sub SaharanAfrica, Journal of African Economies, 19(3): 399-432.
Dennis, A (2006). The Impact of Regional Trade Agreements and Trade Facilitation in the Middle East and North Africa,
Policy Research Working Paper, World Bank.
Devlin, Julia and Peter Yee (2005). "Trade Logistics in Developing Countries: The Case of the Middle East and North
Africa". The World Economy, Vol. 28, No. 3, pp. 435-456, March 2005.
Kumar, R., and M. Singh (2009). India’s Role in South Asia Trade and Investment Integration.
World Bank (2012). Light Manufacturing in Africa.
World Trade Organization (2012). Report to the TPRB from the Director General on Trade-Related Developments. WT/
TPR/OV/W/6.
Zarrouk, J (2003). "A Survey of Barriers to Trade and Investment in Arab Countries", in Gala, A. and B. Hoekman (eds),
Arab Economic Integration., Brookings Institution Press, Washington DC.

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GLOBAL ECONOMIC PROSPECTS | June 2013

GLOBALECONOMICPROSPECTS

June
2013

Exchange Rates Annex

Annex

EXCHANGERATESGLOBAL ECONOMIC PROSPECTS | June 2013

Exchange Rates Annex

Recent developments

have contributed to the abovementioned
sharp depreciation of its currency. Somepossible implications of the large yen
depreciation are discussed in box ExR.1.

Real exchange rates in high income
countries since mid-2012 have been
driven mainly by accommodative
monetary policies

The appreciation of the euro in tradeweighted real effective terms since mid-2012(discussed in the January 2013 edition of the
Global Economic Prospects report) continued into
the first half of 2013, partly because of theJapanese depreciation and partly because
financial market tensions remained subdued.
By February 2013, the euro had appreciated 9
percent in REER terms from its trough inJuly 2012. 2 Since February, the continued
economic weakness in the Euro Area anduncertainties surrounding Italian elections(February) and Cyprus’ banking sector
problems (March) tempered the euro’s earlier
appreciation, bringing the total rise since July2012 to 7.1 percent in REER terms by April
2013.

Policy measures in high income countries
designed to restore financial market
confidence and support economic growth
have played a significant role in movementsof trade-weighted real effective exchange
rates (REER) of both high income anddeveloping countries in recent months. 1
Among the major high income currencies, theJapanese yen depreciated by a steep 21
percent in real effective terms between
September 2012 and April 2013 (figure
ExR.1). This depreciation came about as
markets reacted to initial announcements ofmacroeconomic policy changes to raise
inflationary expectations and support Japan’s
growth. These announcements were followed
up by the introduction of an explicit 2
percent inflation target in January 2013, andby a commitment in early April to aggressive
monetary easing—including near-zero interest
rates and an asset purchase program thatwould double Japan’s monetary base by theend of two years—in pursuit of that target.
Although Japan’s expansionary policies were
undertaken primarily for domestic goals, theyFig ExR.1

Despite these large fluctuations, the US dollar
has remained broadly stable in real-effective
terms — holding approximately the samelevel in April as in July 2012. In between
times, it first depreciated during the second
half of 2012, and then rebounded in early2013 as the yen declined. Since January, theUS dollar is up by 2.5 percent in real effective
terms.

But recent swings in G3 currencies mask
important medium term trends
Notwithstanding its steep depreciation since
September 2012, the yen was only 2.3 percent
lower in REER terms in April compared with
its level in mid-2008 prior to the global
financial crisis. And despite its strong
appreciation since mid-2012, the euro is 12.7
percent lower (REER terms) than its prefinancial crisis level. By contrast, the US
dollar has appreciated 3.1 percent in REER
terms since mid-2008. In addition to theeffect of the recent yen depreciation, therelative strength of the dollar over the longer
period partly reflects the status of the US
dollar as a “safe haven” during times ofmarket turmoil and heightened risk aversion,
when investors sought the safety of US
government bonds and other financial assets.

Depreciation of the yen and appreciation ofeuro in trade-weighted real effective (REER)
terms since mid-2012

Real effective exchange rate (January 2011 = 100)

110
105
100

95
90
85
80
75
Jan '11Japan

Jul '11

United States

Jan '12Jul '12Jan '13Euro Area

Source: World Bank; IFS; JP Morgan.

79

GLOBAL ECONOMIC PROSPECTS | June 2013

Box ExR.1
ExR.1
Box

Exchange Rates Annex

Yen depreciation: Some implications

The yen weakened to a four-year low of 103 against the US dollar in May 2013, depreciating 25 percent from its
level in September 2012, mainly in response to announcements of expansionary monetary policies. In trade weighted real effective (REER) terms, the yen depreciated 21 percent between September and April. Together
with gradually strengthening global demand, the weaker yen appears to have halted an earlier slide in Japan’s
exports (Japanese exports fell by 24 percent in US dollar terms between June 2012 and January 2013 due to
weak global growth and a territorial dispute with China, its largest trade partner). Between January and April,
Japanese exports rose 9.5 percent in US dollar terms, while imports contracted 5.8 percent. Japanese GDP
accelerated to a 4.1 percent annualized pace in Q1 2013, from 1.2 percent in Q4 2012. Sentiment improved
among Japanese automobile manufacturers in the first quarter, in part due to improved prospects for exports.
The above trends are broadly consistent with empirical studies which find that large real exchange rate
depreciations tend to stimulate exports, and in turn, economic growth (see, for instance, Hausmann, Pritchettand Rodrik (2005) and Freund and Pierola (2012) for cross-country evidence, and Thorbecke and Kato (2012)
for evidence from Japanese consumption exports). Conversely, Kappler et al. (2012) using a cross -country
dataset find that large exchange rate appreciations result in a reduction in real exports and a deterioration ofcurrent account balances.
The implications of the large yen depreciation for Japan's trade -partner countries need to be considered withsome caveats. The unprecedented monetary easing in the current episode together with fiscal stimulus may
raise Japan’s aggregate demand substantially. As income elasticities are typically larger than price sensitivities,
in this particular instance, developing -country exporters’ gains from increased import demand from Japan might
eventually outweigh the losses associated with the Yen’s (real) depreciation. The effect of the yen depreciation
on exports of trade partner countries would also vary depending on the extent of their complementarities andcompetition with Japanese exports in world markets. For instance, using industry -level data, Li, Liu and Song(2010) find that Japan and China’s export structure tends to be complementary, while Japan and South Korea
compete in exports of technology-intensive products. The study found that a real depreciation of the yen had apositive impact on China’s (relatively more labor -intensive) exports, but a negative impact on South Korea’s(relatively more high tech and capital intensive) exports. 3
Moreover, countries that import capital goods or intermediate products from Japan or those that are part ofJapanese firms’ regional production chains (e.g., Thailand, Philippines, India) could benefit from a weaker yen
through reduced costs of imported inputs. Outward investment flows resulting from Japanese monetary easing
may also benefit developing countries (see GEP Finance Annex). Larger and higher productivity firms in tradepartner countries may be able to absorb some of the exchange rate changes in their markups, reducing thesensitivity of their exports to exchange rate movements (see Berman, Martin and Mayer (2012) for evidence
from French firm-level data).
Over the longer term, however, the benefits for developing countries are contingent on Japan raising its longer term potential growth through structural and policy reforms. In the short -term, Japanese quantitative easing
could add to the looseness of global monetary condition, through lower global interest rates and potentiallystrong and disruptive capital flows to developing countries, and could raise overheating pressures, particularly
in East Asian countries.
For Japan itself, studies suggest that competitiveness gains from REER depreciation may be temporary anddifficult to sustain over time, and may even introduce costly distortions in the real and financial sectors of theeconomy (Haddad and Pancaro (2010)). Indeed, despite a rise in exports following depreciation episodes in thepast, Japan’s share in global trade has declined almost steadily during the last two decades, from over 9
percent in 1991 to 4.6 percent by 2012. Moreover, the eventual adjustment of prices of non -traded goods overtime implies that a shift in the monetary policy stance alone cannot be used to sustain a particular realexchange rate that is misaligned with fundamentals (Eichengreen 2008). Overall, the evidence indicates that areal exchange rate depreciation may provide a temporary boost to exports, but structural reforms that bringabout sustained improvements in productivity and reduce barriers to trade, investment and labor mobility arelikely to play a larger role in a longer-term growth strategy.

80

GLOBAL ECONOMIC PROSPECTS | June 2013

Exchange Rates Annex

Given the protracted debt crisis in the EuroArea during this period and financial market
uncertainties, unconventional monetary
policies undertaken by the US Federal
Reserve in the form of several rounds ofquantitative easing may have possibly
prevented an even stronger appreciation of
the US dollar in REER terms compared with
its pre-financial crisis level. 4

internationally-traded currencies of typically
middle-income emerging market economies
were influenced by: movements in highincome currencies (in particular, the large yen
depreciation); a rebound in private capital
inflows to developing countries; elevatedinternational commodity prices; strengthening
economic activity and exports in the group of
developing countries; and country-specificdifferences in policies and performance.

The trend appreciation of developing
country currencies has picked up
pace since mid-2012

The 21 percent REER depreciation of the yen
since September 2012 appears to haveresulted in significant appreciation pressures
in Japan’s trade partners, particularly among
countries in the East Asia region. Simulations
suggest that in the absence of the steep yen
depreciation, on average trade-weighted realeffective exchange rates in the East Asia andPacific region would have appreciated 3.7
percentage points less quickly during thisseven-month period (compared to the actual
6.1 percent appreciation), and the average
REER for the group of developing-countries
would have appreciated 1.7 percentage points
less than that observed.

Together with easing of financial market
tensions since mid-2012 and the large yen
depreciation, the appreciation of developing
country currencies picked pace in the second
half of 2012 and early 2013. The GDPweighted average of trade-weighted realeffective exchange rates (REER) for
developing countries rose by 4.7 percent
between September 2012 and April 2013—asignificantly faster pace compared with thealmost flat trend (0.7 percent
annualappreciation) during the previous 24 months(figure ExR.2). The steep appreciation during
this recent 7-month period was also fasterthan the 5.4 percent annual REER
appreciation of developing-country currencies
observed prior to the financial crisis, between
January 2005 and August 2008. The earlier
strong appreciation had occurred during aboom in international commodity prices,sustained inflows of foreign capital intodeveloping countries, and a faster pace ofgrowth and higher rate of productivity
increases in developing countries comparedwith high income countries (see Global
Economic Prospects July 2012 edition). Andprior to that, the average REER for
developing-country currencies was broadly
unchanged in 2004 compared with its level in
1995.

In addition to the yen depreciation, arebound in private capital flows since thethird quarter of 2012 and elevated commodity
prices appear to have contributed to
Fig ExR.2

A faster appreciation of developingcountry real effective exchange rates(REERs) since mid-2012

Real effective exchange rates (January 2005=100)
150

140

130

120

110

100

90

Jan '06

Developing Countries
China
East Asia excl. China

Notwithstanding
theoverall
REER
appreciation in the group of developing
countries since the second half of 2012, there
was significant variation in the magnitude of,and factors contributing to, currency
movements in individual countries. The

Jan '08

Jan '10Europe & Central Asia
Latin America & Caribbean

Jan '12South Asia

Note: The four developing regions shown in the chart account for close
to 90 percent of GDP of developing countries. Sub-Saharan Africa(SSA) and the Middle East and North Africa (MENA) regions are notshown in the chart, but are included in the overall Developing Country
aggregate.
Source: World Bank; IFS; JP Morgan.

81

GLOBAL ECONOMIC PROSPECTS | June 2013

Exchange Rates Annex

appreciation pressures in several emerging
market countries. Private capital flows tocountries in Europe and Central Asia, East
Asia and Pacific, and South Asia have risen
robustly since mid-2012 (see GEP FinanceAnnex). Some studies suggest that surges incapital inflows are likely to be associated withappreciation of real effective exchange rates
of recipient countries (see Magud and Sosa
(2010) for developing countries, andJongwanich and Kohpaiboon (2013) for
emergingAsia).
The
average
REER
appreciation of large emerging economies
appears to be positively related with a decline
in their sovereign credit default swap (CDS)
rates, an indicator of financial risk (figure
ExR.3).

may be playing a role in buoying these currencies inrecent months.
Strengthening global trade since the third quarterof 2012 and a recovery in developing-country
exports have also contributed to increased foreign
currency revenues in developing countries.
However, in a few countries, country-specificfactors seem to have been more significant
contributors to movements in real effective
exchange rates. The factors relevant for different
developing countries and regions are discussed
below.

Both yen devaluation and robust capital inflows
contributed to appreciation pressures in East
Asia

International commodity prices strengthened inearly 2013 on an improving global outlook, buthave eased in more recent months following an
improvement in supply conditions (see GEPCommodity Annex). Notwithstanding these shorterterm movements, industrial commodity prices in2012 and early 2013 were elevated compared toboth the immediate post-financial crisis period andthe period prior to 2007. Real effective exchange
rates of commodity exporters have typically moved
together with international commodity prices(figure ExR.4). But they have diverged in the mostrecent period, with real effective exchange rates
appreciating despite the recent easing ofcommodity prices, suggesting that other factors

Fig ExR.3

East Asian currencies faced significant appreciationpressures from both the large depreciation of the
yen as well as from a surge in private capital
inflows since the second half of 2012. In inflationadjusted terms, between September 2012 and April
2013, bilateral real exchange rates of several
countries in East Asia appreciated 25-30 percent
relative to the Japanese yen, while Thailand’s
currency appreciated a larger 34 percent (figure
ExR.5).5
Because of the relatively large weight(compared with other developing regions) ofJapan in their trade, the average GDP-

Real effective exchange rates in emerging
economies tend to appreciate withimprovements
in financial market conditions, and vice-versa

Fig ExR.4

Industrial commodity prices and realeffective exchange rate of commodity
exporters tend to move together, except
in the most recent period

REER of selected emerging markets excl. China (GDP-weighted avg.)
150

CDS spreads of selected emerging market countries excl. China [Right]
130

200

600

180
140

500
120

160

400
110

130

300
200

140
120

120

100
100
90
Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13

REER of commodity exporters

0100

Industrial commodities price index [Right]

110

80

Notes: GDP-weighted averages of CDS spreads and REERs for
Brazil, Chile, Colombia, Indonesia, Mexico, Malaysia, Peru, Russia,
Thailand and Turkey. China is excluded from the chart due its managed exchange rate regime.
Source: World Bank; IFS; JP Morgan.

100
Sep-0860
Aug-09Jul-10Source: World Bank; IFS; JP Morgan.

82

Jun-11

May-12

Apr-13

GLOBAL ECONOMIC PROSPECTS | June 2013

Fig ExR.5

Exchange Rates Annex

Currencies in Latin America & Caribbean
and Eastern Europe & Central Asia were
influenced by capital inflows and internationalcommodity prices

East Asian currencies appreciated in realeffective (REER) terms since September 2012

Percent appreciation September 2012-March 2013
20

40

15

30

10

20

5

10

0

In the Latin America & Caribbean region, despite
an easing of commodity prices in recent months(although prices remain elevated relative to recent
years—see GEP Commodity Annex), several Latin
American currencies have appreciated in REER
terms since early or mid-2012 (figure ExR.6).6 The
Mexican peso rose 8.3 percent since September
2012 together with an upturn in the United States(Mexico’s largest trading partner) and risingdemand for Mexican exports, and strong portfolio
inflows into government bonds.

0
REER
Bilateral RER relative to US dollar
Bilateral RER relative to Yen [Right]

-5

-10

Chile’s currency has risen 6 percent in REER terms
since early 2012 as a result of robust commodity
revenues and private capital inflows. The Brazilian
real rose 7.4 percent in real effective terms since
September 2012—after depreciating 12 percent
during the previous 1½ years following impositionof capital control measures. The financialtransactions tax (IOF) on foreign currency inflows
into Brazil’s domestic debt markets was reduced tozero in early June 2013. The challenges thatdeveloping-country policymakers face whenconfronted with surges in capital inflows that result
in appreciation of real effective exchange rates, andsome of the measures that have been used toalleviate their impacts are discussed in box ExR.2.

Source: IFS, JP Morgan and World Bank.

weighted REER for developing countries inthe East Asia & Pacific region has
appreciated strongly by 6.1 percent since
September 2012, versus 3.7 percent for otherdeveloping
regions.
The
Thai
baht
appreciated 12.5 percent in REER terms inthis period—as strong capital inflows added
to upward pressures from the yen
depreciation—while currencies of China andIndonesia appreciated 5.9 and 5.4 percent,respectively. By contrast, the South Korean
won appreciated a smaller 3.9 percent in
REER terms, in part due to political tensions.

Fig ExR.6

Real effective exchange rates in several emerging economies in Latin America & Caribbean andEurope & Central Asia have appreciated in recent months, building on earlier upward trends

Real effective exchange rate (January 2008=100)

Real effective exchange rate (January 2008=100)

120

118

110

106

100

94

90

82

130

80
Jan '08

BrazilJan '10

Colombia

Mexico130

70
Jan '08

Jan '12

Chile

RussiaPeru

Source: World Bank; IFS; JP Morgan.

83

Jan '10

TurkeyRomania

Jan '12

Bulgaria

GLOBAL ECONOMIC PROSPECTS | June 2013

Exchange Rates Annex

Box ExR.2 How should developing countries react to capital flows-induced real exchange rate appreciation?
The shifts in monetary policy stances in high income countries since the global financial crisis—although designed primarily tosupport their domestic goals of reviving domestic growth and raising inflationary expectations, rather than facilitate depreciationof their currencies or engage in “competitive devaluation”—have still raised concerns among developing country policymakerabout their unintended consequences in the form of surges in private capital flows, real exchange rate appreciation and possible loss of export competitiveness (Eichengreen (2013) and Kappler et al. (2012)). Recent research finds that the direct contribution of quantitative easing measures in the United States on capital flows into emerging market economies was relatively
modest (see Fratzscher, Lo Duca, and Straub (2012) and Morgan (2011)). However, other studies suggest that the indirect
impact of the extended period of unconventional monetary policies in high income countries in terms of reducing global risk
aversion and lowering the cost of capital, together with stronger economic performance of emerging economies, may havebeen important factors behind surges in capital flows into developing countries in recent years (see, for instance, Ghosh et al.
(2012) and Forbes and Warnock (2012)). Cross-country and country-specific studies indicate that these inflows have often
been associated with appreciation of real effective exchange rates in recipient countries (see, for instance, Magud and Sosa
(2010), Combes, Kinda and Plane (2011), Jongwanich and Kohpaiboon (2013), and Ibarra (2011)).
The interrelated goals of maintaining exchange rate and financial stability and open capital accounts in a situation of unconventional monetary policies in high income countries and abundant global liquidity complicates the task of developing country authorities. For instance, lowering interest rates to discourage foreign inflows may exacerbate existing domestic credit and asset
price bubbles and cause overheating in certain sectors. But raising interest rates to curb credit growth can risk attracting evenmore capital inflows and further appreciate the exchange rate (which, in turn, can attract even more short-term speculative inflows)—with potentially destabilizing consequences for sovereign and firm balance sheets if these flows were to reverse suddenly. Moreover, for countries that have relatively less flexible exchange rate regimes, this lack of exchange rate flexibility cancreate incentives for taking on foreign debt and thereby increase the share of foreign currency credit in overall credit (Magud,
Reinhart, and Vesperoni (2012)). The “impossible trinity” of not being able to achieve all three policy objectives of exchang erate stability, free capital mobility, and an independent monetary policy - and a fourth related objective of financial stability - hassometimes been cited as a reason for developing countries to impose some form of controls on capital flows (see Eizenman(2010)).
Emerging economies faced with disruptive short-term foreign capital inflows (“hot money”) have resorted to various measures
to correct the resulting temporary deviation of exchange rates from underlying fundamentals, and to alleviate the impact of these flows on credit markets. These include direct foreign exchange interventions, interest rate policies, prudential regulations(e.g., restrictions on banks’ borrowing from abroad, limits on domestic lending to certain sectors), and various forms of capital
controls—such as taxes and fees on capital inflows, minimum holding periods for government bonds, withholding taxes on capital gains, and minimum waiting periods to repatriate capital, among others (see Ostry et al. (2012)). Brazil’s earlier financ ialtransactions tax (IOF) on foreign currency inflows into domestic debt markets is a well-known example (This tax was reduced tozero in early June). Earlier, Thailand had imposed withholding taxes on foreign holdings of government bonds in 2010, while
Indonesia had imposed a six-month holding period for central bank bonds and limits on short-term foreign borrowing by banks
in 2011 (IMF 2012). Peru’s central bank raised reserve requirements on dollar-denominated deposits several times in 2012 andin the first half of 2013, citing the need to moderate inflows of foreign capital and control credit growth; and intervened in foreignexchange markets in the first half of 2013 to stem appreciation of the sol. Turkey has also used prudential measures, including
allowing banks to hold part of their required reserves in foreign exchange, which can alleviate pressures from the foreign exchange market when capital inflows are strong. Colombia intervened periodically in foreign exchange markets during 2012 tomoderate the rise of its currency against the US dollar.
The evidence on the effectiveness of controls on volumes of capital flows is however mixed (Magud, Reinhart and Rogoff(2011)), although these measures may alter the composition of inflows (Ostry et al. (2012)). Fratzscher (2012) finds that rather
than being motivated by capital flows volatility, capital controls have typically been associated with significantly undervalued
exchange rates, in addition to concerns about signs of overheating, such as high credit growth and rising inflation. Nevertheless, when faced with a surge of capital inflows that threaten to overwhelm domestic financial markets and result in asset pricevolatility and bubbles, credit booms, and real exchange rate appreciation, capital flow management (CFM) measures such as
temporary controls on foreign capital, domestic prudential measures, and interventions in foreign exchange markets may reduce exchange rate volatility and provide space for the domestic economy to adjust to the changed external circumstances(IMF (2012)). But if these result in real exchange rates that are persistently out of line with underlying macroeconomic fundamentals in the medium-term, capital controls can cause distortions and suboptimal investment and production decisions acrosstradable and non-tradable sectors, and impose unnecessary economic costs.

84

GLOBAL ECONOMIC PROSPECTS | June 2013

Exchange Rates Annex

Among developing countries in the Europe &Central Asia region, the Russian ruble appreciated
3.8 percent in REER terms since September 2012
on the back of a surge in syndicated bank lending
and buoyant crude oil revenues (figure ExR.6).
Notwithstanding weakening GDP growth, theTurkish lira rose 7.1 percent in REER terms in thesame period, partly reflecting robust capital inflows
and an improvement in its export performance, as
robust exports to the Middle East offset weakening
demand from the Euro Area. The Turkish lira has
exhibited one of the largest appreciation among
regional currencies, strengthening by 17 percent in
REER terms since January 2012, although it still
remains 3 percent below its level in early 2008 prior
to the global financial crisis. The Romanian leu
appreciated by a strong 10.4 percent in REER
terms between September 2012 and April 2013,
also reflecting robust inflows into local currency
bond markets (see GEP Finance Annex).

Until recently, movements of the rand tended to
track closely South Africa’s terms of trade,adjusting flexibly to international commodity pricemovements (see Global Economic Prospects June 2012
edition), and in turn, facilitating internal economic
adjustment. This historical link appears to havebeen broken in the most recent period, as the rand
weakened in REER terms in the second half of2012 despite a rally in international commodity
prices. The rand’s performance was adversely
affected by mining sector tensions, a downgrade ofSouth Africa’s sovereign rating, and weak growthin 2012; and by further weakening of activity in thefirst quarter of 2013. The Indian rupee has also
been weak due to slower growth and a widening
current account deficit, but stabilized somewhat in
REER terms in the second half of 2012 and early
2013, mostly due to robust portfolio inflows after
announcement of a number of reforms, including
raising limits on foreign direct investment in theretail, broadcasting and aviation sectors.

Commodity exporting developing countries in theEurope & Central Asia region and in Latin
America & Caribbean typically have weaker trade
linkages with Japan compared to that of East Asian
countries, and were therefore less affected by the
yen depreciation.

Current account balances ofdeveloping countries deteriorated andinternational reserves as a share ofimports have fallen

Domestic developments played a moresignificant role in South Africa and India

The weak global economy and decline in the paceof expansion in international trade in 2012,
together with rebalancing of China towards
domestic sources of growth in recent years, have
sharply reduced the overall current account balanceof developing countries (figure ExR.8). Oil
exporters among developing countries gained from

Some notable exceptions to the generalappreciation trend among developing countries
include countries with growth concerns, inparticular, South Africa and India (figure ExR.7).
Fig ExR.7

Fig ExR.8

Domestic factors played a role in weakening of
REERs in India and South Africa

Combined current account surplus of developing countries has disappeared

Current account balance as share of developing-country GDP (Percent)Real effective exchange rate (January 2008=100)

130

5

4

118

5

Oil exporters (Developing)
China
Oil importers excl. China
All Developing

4

3

3

2

2

1

1

0

0

-1

-1

106

94

82

70
Jan '08

Jan '10Jan '12

-2

-2
2002

India

2003

2004

South Africa

Source: World Bank.

Source: World Bank; IFS; JP Morgan.

85

2005

2006

2007

2008

2009

2010

2011

2012

GLOBAL ECONOMIC PROSPECTS | June 2013

Exchange Rates Annex

Capital flow management measures and exchange rate restrictions should ideally be transparent, targeted, temporary and non-discriminatory (IMF (2012)). For instance, prudential measures such as restrictions on bank lending to reduce overheating incertain sectors may be preferable to direct capital controls that discriminate on the basis of residency. Macro-prudential
measures may, however, raise implementation issues and conflict with other domestic policy objectives. Moreover, for countries with weak financial systems and limited capacity to manage volatile capital flows, controls on short-term capital movements may need to be part of their policy toolkit over the medium-term. Overall, such measures should not aim to maintain areal exchange rate that is persistently out of line with underlying macroeconomic fundamentals, and not be seen as a substitute for structural and labor market reforms that are needed for improving productivity and longer-term competitiveness.

sustained high international oil prices during 20112012 and in early 2013, although a modest 2.5
percent decline in crude prices is projected for thewhole year (see GEP Commodity Annex). By
contrast, robust domestic demand and high crude
oil prices in recent years (up until early 2013)
contributed to strains on oil importers’ trade andcurrent accounts balances.

of strong commodity revenues and robust capital
inflows.
Notwithstanding declining import cover acrossdeveloping regions, reserves still stand well above
the critical 3 months of imports in the vast
majority of developing countries, with a few
exceptions. However, the number of developing
countries with reserves equivalent to less than 3months of imports rose to 17 countries as of April
2013 from 11 in January 2010 (figure ExR.10). For
instance, in Egypt and Pakistan, international
reserves have fallen below 3 months of imports.

At the same time, developing countries’ holdingsof international reserves have declined as a shareof imports since 2010 (figure ExR.9). Reserves
have fallen the most among oil importers in the
Middle East and North Africa region (a decline
equivalent to 3.5 months of imports) and in South
Asia (decline equivalent to 3.9 months of imports).
Reserves in Europe and Central Asia declined to
2.3 months of imports as regional trade andinvestment was adversely affected by the weakness
in Western Europe. The decline in average reserve
coverage of imports in other regions is smaller: by
1 month in East Asia and Pacific excluding China,
and by 0.3 month in Sub-Saharan Africa. By
contrast, international reserves in months ofimports remained broadly stable in the Latin
America and Caribbean region in this period(rising by 1 month of imports), mainly on the backSmaller reserves relative to imports may increase
the risk of sudden depreciation of real exchange
rates due to shifts in investor sentiment or otherexternal shocks. It should be noted, however, that
reserves in months of import cover are a relatively
crude measure of reserve adequacy and may need
to be complemented with other measures that take
into account a country’s overall external financing
needs. Moreover, reserve adequacy depends,
among other factors, on the exchange rate regime:
countries with flexible exchange rates and without
the need to defend a particular exchange rate may
require a lower reserve coverage of imports.

Fig ExR.9 Import cover has fallen across developing
regions except in Latin America & Caribbean

Fig ExR.10

International reserves in months of imports

Number of developing countries

16

Number of developing countries with reserves
less than 3 months of imports has risen

40
14

35

12

10

30

Jan. 201025

Apr. 2013 or MRV

20
8

15
10

6

4
Jan '09

5
Jan '10

East Asia excl. China
Europe & Central Asia
Latin America & Caribbean

Jan '11Jan '12Jan '130Less than 3

MENA Oil importers
South Asia
Sub-Saharan Africa

3 to 6

6 to 88 to 1010 to 12International reserves in months of import cover

Source: World Bank; IFS; Datastream.

Source: World Bank; IFS; Datastream.

86

12 or more

GLOBAL ECONOMIC PROSPECTS | June 2013

Exchange Rates Annex

Conclusions

fundamentals) may face destabilizing currencypressures resulting from surges in capital inflows.
In specific circumstances, temporary controls on
capital flows and macro-prudential measures mayhelp in reducing exchange rate volatility caused byexternal events (IMF 2012). But over the longerterm, such controls can cause unnecessary
distortions and suboptimal investment andproduction decisions, especially if they result in realexchange rates that are persistently out of line with
underlying
macroeconomic
fundamentals.
Therefore, exchange rate policies and related
capital flow management measures should not beseen as a substitute for structural and labor market
reforms, and investments in infrastructure andhuman capital that are necessary to raise
productivity and growth over the longer term.

The weaker current account and reserve position ofdeveloping countries can imply increased vulnerability toshifts in investor sentiment. The trade balances andreserve positions of developing countries havestarted to improve in line with a pickup in exports
and easing of international commodity prices. But
as discussed, these indicators remain significantly
weaker compared with the levels in 2010. Althoughbuoyant private capital flows have helped tofinance the larger current account deficits of thegroup of developing countries excluding China andcrude oil exporters, they also render their balanceof payments and real exchange rates vulnerable tosudden shifts in investor sentiment and reversal of
capital inflows. This can happen, for instance, in
response to domestic problems (e.g., weaker than
expected growth, recognition of asset pricebubbles); increased risk aversion resulting fromrenewed fiscal and debt tensions in high income
countries; or from an unanticipated move towards
a tighter monetary policy stance in some highincome countries.
Increased coordination on policies affecting currencies canhelp to mitigate the spillovers of domestic policies acrossborders. Given that domestic policies of large
countries aimed at boosting their own growth canhave significant unintended spillovers on currencies
of other countries, greater international
coordination on policies that affect currencies may
prove mutually beneficial (Eichengreen (2013),
IMF (2012), Ostry, Ghosh and Korinek (2012),
Hoekman (2013); see also the G-7 Statement(2013) and G-20 Communiqué (2013)). For
instance, coordination in monetary policies acrosslarge economies can ensure that spillovers ofdomestic policies on other countries and effects on
exchange rates are minimized (Basu (2013)).
Developing countries should try to adjust to persistent foreign
currency inflows and maintain real exchange rates that areconsistent with macroeconomic fundamentals. Maintaining
flexible market-determined exchange rates canfacilitate adjustment of the domestic economy tochanges in capital inflows, commodity revenues,
and other external shocks. However, in the shorter
term, as discussed earlier, developing countries(including those with sound macroeconomic
87

GLOBAL ECONOMIC PROSPECTS | June 2013

Exchange Rates Annex

Notes
1.

Since the global financial crisis of 2008-09, central banks in the G3 economies (United States, Euro Area, andJapan) have maintained a highly accommodative policy stance—reducing short-term policy interest rates to below 1
percent and implementing unconventional monetary policies, including large-scale financial asset purchases—inorder to restore financial market confidence and support economic growth (see GEP Finance and Inflation Annexes).

2.

In late July 2012, the head of the European Central Bank Mario Draghi promised to stand behind the currency
union after financial market tensions intensified during mid-year. Subsequent measures taken by Euro Area
authorities to restore financial market confidence—including, among others, the Outright Monetary Transactions
bond purchase program announced in September 2012 and extension of Greek debt in November 2012—resulted
in an easing of financial market tensions and reduced the tail risk of exit of periphery countries from the Eurozone.
Despite fiscal contraction, accommodative monetary policies in general appear to have contributed to increased
market confidence in the ability of the Euro Area currency union to weather negative shocks (see GEP FinanceAnnex for more details).

3.

The extent of complementarity, however, may have declined since the 1997-2004 period covered by the study as
China has moved towards production of higher value-added products in recent years. See also Auboin and Ruta
(2013) on other studies on the relationship between exchange rates and trade.

4.

The US Federal Reserve has undertaken three rounds of quantitative easing (QE) since November 2008. Recent
research finds that the dollar weakened significantly in real trade-weighted terms following QE announcements(Glick and Leduc 2013). An unanticipated QE announcement equivalent to a 1 percentage point reduction infederal funds interest rate futures resulted in a 0.5 percentage point depreciation of the dollar in REER terms
following the announcement. Fratzscher, Lo Duca, and Straub (2012), however, find that QE1 and QE2 had
opposite effects on the US dollar. QE1 measures undertaken in the immediate aftermath of the global financial
crisis in late 2008 were associated with inflows into US financial assets, which, in turn, appreciated the US dollar.
But QE2 measures implemented from August 2010 onwards triggered a portfolio rebalancing from US financial
assets toward emerging market equities, resulting in a marked depreciation of the US dollar

5.

South Korea, Singapore, and Hong Kong SAR, China which are part of geographic East Asia, are considered highincome countries according to the World Bank’s income classification, and are therefore not included in the East
Asia and Pacific (EAP) regional aggregates.

6.

The evidence suggests that the effect of capital flows and commodity revenues on real effective exchange rates ofcommodity-exporters tends to be larger in countries that are relatively more integrated with international financial
markets (see January 2013 edition of the Global Economic Prospects).

References
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Auboin, Marc, and Ruta, Michele. 2013. “The Relationship between Exchange Rates and Trade: A Review of the
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Basu, Kaushik. 2013. “Monetary Policy Now Needs Global Teamwork”. Op-Ed, The Age (Australia), April 26th.

88

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IMF Staff Discussion Note, September, Washington, DC: International Monetary Fund.
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90

GLOBAL ECONOMIC PROSPECTS | June 2013

GLOBALECONOMICPROSPECTS

June
2013

Commodity Annex

Annex

COMMODITY
MARKETSGLOBAL ECONOMIC PROSPECTS | June 2013

Commodity Annex

Overview

There are a number of risks to the baseline
forecasts. Downside risks include weak oil
demand if growth prospects deteriorate
sharply, especially in emerging economies
where most of the demand growth is taking
place. Over the longer term, oil demand
could be dampened further if the substitution
between crude oil and other types of energy
accelerates. On the upside, a major oil supply
disruption due to political turmoil in the Middle-East could result in prices spiking by $50
or more. The severity of the outcome would
depend on numerous factors, including theseverity and duration of the cutoff, policy
actions regarding emergency oil reserves, demand curtailment, and OPEC’s response.

After strengthening in early 2013 due to improved
economic outlook, most industrial commodity prices retreated below their end-2012 levels (figure
COMM.1). Food prices have been declining as
well, mainly a reflection of improved supply conditions (figure COMM.2). The price of crude oil(World Bank average) dropped to US$ 99/bbl in
April, 8 percent below its February peak. The metal
price index is down 13 percent since its February
2013 peak. Precious metals are down as well, 15
percent since February and more than 25 percent
since the all time high of August 2011.
In the baseline scenario, which assumes nomajor macroeconomic shocks or supply disruptions, oil prices are expected to average
US$ 102/bbl in 2013, down from US$ 105/bbl in 2012 (table COMM.1). Agricultural
prices are projected to decline almost 6 percent in 2013 (food, beverages, and raw materials down by 5.5, 8.9, and 5.8 percent, respectively), under the assumption of averagecrops. Metal prices will to decline marginally (a little more than 1 percent) and therefore will remain
17 percent lower than their 2011 average. Fertilizer
prices are expected to decline more than 7 percent,mainly reflecting low natural gas prices in the United States. Precious metals prices are expected to
decline more than 10 percent as institutional investors are increasingly considering them less attractive “safe haven” alternatives, which comes on topof weak physical demand.
Fig COMM .1

A key uncertainty in the outlook is how
OPEC (notably, Saudi Arabia) reacts tochanging global demand and non-OPEC supply conditions. Since 2004 when crude oil
prices started rising, OPEC has responded tosubsequent price weakness by cutting supply,
but has not been as willing to intervene when
prices increase. However, as non-OPEC supplies continue to come on stream and demand
moderates in response to higher prices, thesustainability of this approach may come under pressure.
OPEC’s spare capacity has averaged 4.6 mb/d during the first four months of 2013, almost 30 percent higher than a year ago but only marginallyhigher than average of the past decade—it had
dropped below 2 mb/d in the middle of 2008
when oil prices reached US$ 140/bbl. OECD inFig COMM.2

Commodity price indices

Food price indices$US nominal, 2005=100
300$US nominal, 2005=100
250

Metals250

200

Edible Oils
Agriculture
200

150
Energy

150

100

50
Jan '07

Jan '08

Jan '09

Jan '10Jan '11Jan '12100
Jan '07

Jan '13

Metals

Metalsand minerals,
2005=100,(World (all countries))
Agriculture,
2005=100,
current$(World (allcurrent$
countries))
Agriculture

Jan '08

Source: World Bank.

Source: World Bank.
Energy, 2005=100, current$ (World (all countries))

EnergyGrains93

Jan '09

Jan '10Jan '11Jan '12Jan '13

GLOBAL ECONOMIC PROSPECTS | June 2013

Table COMM.1

Commodity Annex

Nominal price indices-actual and forecasts (2005 = 100)ACTUALFORECASTCHANGE (%)

2008

2009

2010

2011

2012

2013

2014

2011/122012/132013/14

Energy

182

114

145

188

187

183

181

-0.4

-2.1

-1.2

Non-Energy
Metals

182
180

142
120

174
180

210
205

190
174

181
172

179
173

-9.5
-15.3

-4.7
-1.3

-1.1
0.8

Agriculture

171

149

170

209

194

182

179

-7.2

-5.9

-1.8

Food

186

156

170

210

212

200

192

0.7

-5.5

-4.0

Grains

223

169

172

239

244

242

226

2.4

-1.0

-6.4

Fats and oils
Other food

209
124

165
131

184
148

223
168

230
158

209
150

202
147

3.3
-5.9

-9.0
-5.0

-3.2
-2.1

Beverages

152

157

182

208

166

151

153

-20.2

-8.9

0.8

Raw Materials

143

129

166

207

165

156

162

-20.0

-5.8

4.1

Fertilizers

399

204

187

267

259

241

229

-2.9

-7.1

-4.8

Precious metals
Memorandum items

197

212

272

372

378

338

328

1.7

-10.7

-3.0

Crude oil ($/bbl)

97

62

79

104

105

102

101

1.0

-2.5

-1.3

Gold ($/toz)

872

973

1,225

1,569

1,670

1,500

1,450

6.4

-10.2

-3.3

Source: World Bank.

ventories averaged 2.7 mbd during the first fivemonths of 2013, remarkably similar to the corresponding period in 2012.

ment released by the US Department of Agriculture in May 2013, the global maize market will bebetter supplied in the coming, 2013/14, season.
However, because stocks are still low by historicalstandards, any adverse weather event could induce
sharp increases in maize prices—as it did in thesummer of 2012 when maize prices rallied almost
40 percent in less than two months. The wheatmarket, which is currently better supplied thanmaize, could also come under pressure either due
to a bad crop or in sympathy with higher maize
prices—as the crops are competing for the sameland. In contrast, price risks for rice are on thedownside, especially in view of the large publicstocks held by Thailand. Edible oil and oilseedmarkets have limited upside price risks as well due
to well supplied oilseed (mostly soybeans in SouthAmerica) and edible oil (primarily palm oil in East
Asia) markets. Global supplies of the major 8 edible oils are expected to reach a record 155 million
tons this season, up from last season’s 152 million
tons. Global oilseed supplies will experience similar
growth.

Price risks on raw materials, especially metals, depend both on the speed at which new supply
comes on stream and on China’s growth prospects.
Metal prices have declined 30 percent since theirearly 2011 highs, and by 8 percent between February and May 2013. The price weakness reflects bothmoderate demand growth and strong supply response, in turn a result of increased investments ofthe past few years, induced by high prices. For
some metals, stocks have increased considerably as
well. For example, combined copper stocks at the
major metals exchanges are up 46 percent since2012. Aluminum stocks, which have been risingsince end-2010, increased 8 during the past 12
months.
The prospects for the metal market depend importantly on Chinese demand, as the country accounts for almost 45 percent of global metal consumption. However, if robust supply trends continue and weaker than anticipated demand growthmaterializes, metal prices could follow a path considerably lower than our baseline, with significant
consequences for metal exporters (see simulations
in main text).

Trade policy risks (similar to 2008 and 2010) appear to be low as evidenced by the virtual absenceof export restrictions since the summer of 2012,
despite sharp increases in grain prices. Finally,
growth in the production of biofuels is slowing as
policy makers increasingly realize that the environmental and energy independence benefits from
biofuels are not as large as initially believed.

In agricultural commodity markets, the key risk isweather. According the global crop outlook assess94

GLOBAL ECONOMIC PROSPECTS | June 2013

Commodity Annex

Crude oilcentage points lower compared to the January 2011
-May 2013 average of 17.7 percent and the lowest
since January 2011 (figure COMM. 4).

Oil prices have fluctuated within a remarkably tightband around US$ 105/bbl (figure COMM.3) overthe past 18 months. Fluctuations have been driven
mainly by the geopolitical concerns in the Middle
East on the supply side and European debt issues
along with changing developing-country growthprospects on the demand side. Price increases earlier in 2013 reflected some geopolitical tensions in
the Middle East and improving global outlook prospects. However, as supply conditions improved
and market concerns over the Euro Area eased
once again, crude prices began weakening. And
they are now 5 percent lower than at the beginningof the year.

Downward pressures on mid-continental prices
have eased, partly in response to some 760 thousand barrels a day in rail shipments in 2013Q1
from oil producing regions to refineries—an 8-foldincrease from 90,000 barrels per day in 2011Q1—
according to the June 2013 assessment by the Association of American Railroads. Downward pressures on West-Texas crude will abate further when
the new pipelines to the U.S. Gulf become operational or reversal of existing pipelines that carry oilfrom the East Coast to Mid-Continent U.S. arecompleted—currently expected some time in late2014 or early 2015.

Although the price of Brent crude (the international marker) topped US$ 117/bbl in February, West
Texas Intermediate (WTI, the U.S. mid-continent
price) averaged US$ 21/bbl less due to the large
built up of stocks at Cushing, Oklahoma, the delivery point of WTI. The Brent-WTI price differential
declined to less than 10 percent in May, nine per-The decline in non-OPEC output growth in2011 appears to have reversed. Non-OPEC
producers added 0.7 mb/d to global supplies
in 2012 and an additional 0.5 mb/d in
2013Q1, mainly reflecting earlier large-scale
investments. In the United States horizontal
drilling and hydraulic fracturing have contributed almost 1.5 mb/d of crude oil production
during the two years since 2011Q1 (figure
COMM.5). Currently, the U.S. States of Texas
and North Dakota, where most of shale oil
production takes place account for almost 45
percent of total U.S. crude oil supplies, up
from 33 percent a year earlier. Indeed, theIEA projects that global crude oil supply will
increase by 8.4 mb/d by 2018 up 5 percent
from the 91 mb/d in 2012. The increase
mainly reflects surging North American crude

Fig COMM.3

Fig COMM.4

Recent Developments
Large supplies of Canadian crude oil (especiallyfrom tar sands) to the United States, combinedwith rapidly rising U.S. shale liquids production
have contributed to a build-up of stocks at a time
when U.S. oil consumption is dropping and natural
gas supplies are increasing rapidly.

Oil prices and OECD oil stocks
million bbl
2900$US per bbl
140
Oil Price, World Bank average (left axis)

Brent/WTI price differential

percent
30
25

120
2800

20

100

January 2011 to
May 2013 Average

15
80

2700
10

60
5

2600
OECD oil inventories (right axis)

40

20
Jan '07

0-5
Jan '102500
Jan '08

Jan '09

Jan '10Jan '11Jan '12Jan '13Jul '10Jan '11

Source: World Bank.

Source: World Bank; International Energy Agency (IEA).

95

Jul '11Jan '12Jul '12Jan '13

GLOBAL ECONOMIC PROSPECTS | June 2013

Commodity Annex

output (2.3 mb/d from US “light tight oil”,
which includes production from shale, and1.3 mb/d from Canada’s oil sands).

Fig COMM.5

US crude oil production

mb/d5

Although shale liquid (also referred to as tight oil)and shale gas techniques have great potential to be
applied worldwide, there are public concerns regarding the ecological impacts of such technologies. In addition, several countries that are believed
to have similar reserves to those in the UnitedStates may be slow to utilize that potential due todifficulties in accessing drilling rights, poor regulatory frameworks, and limited “know-how” in exploring and developing the resources.

4

Other

3

2
Texas & N. Dakota
1

0
Jan '07

Oil production among OPEC member countries
averaged 36.9 mb/d in 2013Q1, down from previous quarter’s 37.2 mb/d. Yet, this is 10 mb/d higher than 2002Q2, the lowest of the Organization’s
recent history but still higher than the official 30
mb/d quota. Iraq—still outside OPEC’s quota—
has reached pre-war levels of production, currently
standing slightly over 3 mb/d. Libya’s oil output isabout 80 percent of pre-war levels of 1.4 mb/d.
Iran’s oil exports were 0.8 mb/d in April, a declineof 60 percent since June 2011 when sanctions tookeffect, and may tumble even further as new sanctions take effect from July 2013.

Jan '08

Jan '09

Jan '10Jan '11Jan '12Jan '13Jan '12Jan '13

Source: U.S. Energy Information Administration.

Fig COMM.6

OPEC spare capacity

mb/d
8

6

4

The post-2010 net growth in OPEC oil production
reduced spare capacity among its member countries from to 6.3 mb/d in 2009Q4 to 3.1 mb/d in2012Q2, a 50 percent decline (figure COMM.6).
However, OPEC’s spare capacity reversed the
downward trend, standing at 4.6 mb/d during thefirst 4 months of 2013, of which nearly two thirds
is in Saudi Arabia. The Saudi government haspromised to keep the global market well supplied(and has the ability to do so), but also deems US$
100/bbl to be a fair price.

20
Jan '07

Jan '08

Jan '09

Jan '10Jan '11

Source: IEA.

Fig COMM.7

World oil demand growthmb/d, year over year growth4

According to IEA, spare capacity in the global oil
market is expected to rise to more than 7 mb/d in
2014, almost three times higher than the 1.5-3.0
mb/d range between 2004 and 2008. It should thenbegin to decline by 2016 as growth in the UnitedStates will slow while demand growth remains firm.

2

0

-2

World oil demand increased modestly, a little
more than 1 percent, or 0.9 mb/d in 2012
(figure COMM.7). Japan is the only OECDeconomy for which crude oil consumption
increased (by 1 mb/d) in 2012. Most of that-42001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Q1 Q1 Q1
Q1 Q1
Q1 Q1
Q1 Q1
Q1 Q1
Q1 Q1

Source: World Bank; IEA.

OILDEMGRO_OECD

96
China

Non-OECD, ex ChinaGLOBAL ECONOMIC PROSPECTS | June 2013

Commodity Annex

increase was to fill the loss of nuclear power
generation capacity as a result of the Tohoku
earthquake. Oil consumption among OECD
countries has fallen by almost 5 mb/d, or 10
percent, from its 2005 peak. Non-OECD demand remains robust. In fact, non-OECD
economies are expected to consume more oilthan OECD economies during 2013Q2, forthe first time in history (44.5 mb/d the former versus 45 mb/d the latter). IEA expects
non-OECD demand to reach 54 percent of
global demand by 2018.

World demand is expected to grow at lessthan 1.5 percent annually over the projection
period, with all the growth coming from nonOECD countries as has been the case in recent years (figure COMM.8). Growth in oil
consumption among OECD countries is expected to continue to be subdued due to low
growth, and efficiency improvements in vehicle transport induced by high prices—
including a gradual switch to hybrid, natural
gas and electrically powered transport. Pressures to reduce emissions due to environmental concerns are expected to further dampen
oil growth demand at global level.

Outlook and Risks in the Oil Market

Growth in oil consumption in developing countries, on the other hand, is expected to remain relatively strong in the near and medium term. In thelonger-term, however, it is expected to moderate as
the share of low-energy using services in these
economies grow, subsidies are phased out, and (asnoted above) other fuels become incorporated into
the energy mix.

Nominal oil prices are expected to average
US$ 102/bbl during 2013 and decline to US$
101/bbl in 2014. Over the longer term, oilprices are projected to fall in real terms, due
to growing supplies of conventional and(especially) unconventional oil, efficiency
gains, and substitution away from oil (box
COMM.1 discusses the substitution possibilities between oil and other types of energy).
The assumptions underpinning these projections reflect the upper-end cost of developing
additional oil capacity, notably from oil sandsin Canada, currently assessed by the industry
at about US$ 80/bbl in constant 2013 dollars.
While it is expected that OPEC will continue
to limit production to keep prices relatively
high, the Organization is also sensitive to letting prices rise too high, for fear of inducing
innovations that would alter fundamentallythe long term path of oil prices.
Fig COMM.8

On the supply side, non-OPEC oil production is expected to continue its upward climb,
as high prices have prompted higher levels of
exploration (including deep water offshoreand shale liquids) and the implementation of
new extractive technologies to increase theoutput from existing wells (figure COMM.9).
Significant production increases are expected
in Brazil, the Caspian, and West Africa, which
together with the United States and Canada
are likely to more than offset declines in mature areas such as the North Sea.
Fig COMM.9

Crude oil consumption

Crude oil production

mb/d
55

mb/d
55

50

50
OECD

Non-OPEC

45

45

40

40
Non-OECD

35

35
OPEC

30

25

30

2003
Q1

2004
Q1

2005
Q1

2006
Q1

2007
Q1

2008
Q1

2009
Q1

2010
Q1

2011 2012
Q1
Q1

2013
Q1

25

Source: IEA.

Jan '01

Jan '03

Jan '05

Jan '07

Source: IEA.

97
OECD
Non-OECD

Jan '09

Jan '11Jan '13

GLOBAL ECONOMIC PROSPECTS | June 2013

Box COMM.1

Commodity Annex

A Global Energy market?
lent terms but they diverged from European natural gas
and Japanese liquefied natural gas (LNG) prices (figure
Box COMM 1.2).

Until the mid-2000s, the prices of the world’s key natural
gas markets (U.S., Europe, and Japan) had been tied tooil prices. Thus, in addition to moving in a synchronous
manner with each other and with oil, both natural gas andoil were priced the similar levels in terms of energy content. In other words, natural gas and crude oil markets
were integrated—though due to administered pricing
mechanisms, not market forces. Coal, which has been
priced independently, was traded about one third the priceof oil, in energy equivalent terms (figure Box COMM. 1.1).

Will natural gas prices converge? There are numerous
market (both demand and supply) and policy constraints,
the removal of which is likely to induce coupling of natural
gas prices in the longer term.

 Supply—Increased unconventional gas supplies
outside the U.S. Unconventional gas production has taken place almost exclusively in the United States. Yet, unconventional natural gas reserves, are plentiful in many
regions, including North America, Latin America, and mostimportantly Asia Pacific. Industry estimates show that
more than 40 percent of known global natural gas reserves recoverable at current prices and technology are
unconventional. Reasons for the slow technology adoption
include poor property rights, limited know-how, and environmental concerns.

The energy price boom of the early 2000s changed allthat. First, it delinked U.S. natural gas prices from oil prices and from European and Japanese natural gas prices.
Second, it generated a gap between WTI (the midContinent US price) and Brent (the international marker).
Third, it linked US natural gas and coal prices. This box
elaborates on the reasons behind such changing patterns
and concludes the following. The WTI-Brent gap will close
soon, perhaps as early as 2014 or 2015 at the latest. The
coupling of U.S. natural gas and coal prices is likely to remain (and, perhaps, strengthen). Natural gas price convergence will depend on various investment and policy
factors, thus it may take some time before it materializes.
Yet, the future relationship between natural gas and oil
prices is more complex to analyze. It will depend onwhether induced innovation takes place—something thatcannot be evaluated or projected.

 Trade—Construction of LNG facilities and gas pipelines. Currently, 31 percent of natural gas crosses international borders—21 percent through pipelines and 10 percent in LNG form (by comparison, nearly two thirds of
crude oil is traded internationally, 46 percent as oil and 20
percent as products.) As more LNG facilities come on
board and new gas pipelines are constructed, trade of natural gas will increase, thus exerting upward (downward)
price pressure in producing (consuming) regions. Nevertheless, it should be noted that regardless of how muchnatural gas trade increases, LNG will be traded at muchhigher prices than gas through pipelines because of thehigh costs of liquefying and transporting.

Induced innovation in the extraction of natural gas throughfracking and horizontal drilling techniques (often referred
to as “unconventional” gas), primarily in the U.S. was followed by supply increases in turn lowering US natural gas
prices. Low gas prices made it an attractive alternative tosome U.S. energy intensive industries, especially electricity generation, which are gradually switching from coal tonatural gas. Indeed, the US has experienced a marked reduction in coal use, 10.5 percent down from 2006-08 to
2009-11, when global consumption increased 9 percent.
As a result, beginning in 2009 US natural gas and coal
have been traded at similar price levels in energy equiva-

 Demand—Relocation of energy intensive industries.
In addition to the substitution from coal to natural gas by
the energy intensive industries in the U.S., there is evidence that industries are moving to the United States totake advantage of the “natural gas dividend”, in a way reversing the long standing trend of U.S. industries moving
to Asia (and elsewhere) in response to the “labor cost dividend.” Four energy-intensive industries that are taking (orBox figure COMM. 1.1 Energy prices

Box figure COMM. 1.2 Natural gas prices$US/mmbtu
25$US/mmbtu
20
Crude Oil

20

15
Japan (LNG)
15

Natural Gas (US)Europe

10
10

US

5

5
Coal
0

Jan '01

Jan '03

Jan '05

Jan '07

Jan '09

Jan '110

Jan '13

Source: World Bank.

Jan '01

Jan '03

Jan '05

Jan '07

Jan '09

Jan '11Jan '13

Source: World Bank.

98
EuropeJapan (LNG)

US
EuropeJapan (LNG)

GLOBAL ECONOMIC PROSPECTS | June 2013

Commodity Annex

will take) advantage of lower energy prices in the U.S. arepaper, aluminum, steel, and chemicals, whose energy
costs as a share of total material costs ranges between 5
and 9 percent (the share for total US manufacturing is 3
percent, 4-5 times more energy intensive than agriculture,
see box COMM.3).

plies along with increasing crude inflows from Canadian oilsands caused decoupling of WTI from Brent with the latterbeing traded 18 percent above the former after January
2011 (figure Box COMM. 1.3). Historically (1983-2005),
WTI was traded with a 6 percent premium over Brent, because the mid-Continent US was a “deficit” region. Following increased imports from Canadian oil sands during
2006-10, WTI and Brent were traded in par. After January
2011, however, Brent has been traded with a premium
over WTI following increased domestic shale oil supplies—
it averaged 18 percent between January 2011 and May
2013. The premium may persist for another two years, until a new pipeline begins transferring surplus oil from Cushing, Oklahoma to the US Gulf (some oil is currently moving
by truck and rail). The WTI discount is likely to stabilize
around 5 percent, (a mirror image of the pre-2006 premium) when the market reaches equilibrium—oil supply inthe mid-Continent US exceeds demand and the surplus
moves to the Gulf at the lowest possible cost.

 Substitute product—Coal. More trade in coal is likely
to take place, thus further facilitating convergence of natural gas prices and also strengthening the convergence ofcoal and natural gas prices, already underway. Indeed,
between 2005 and 2012 global coal exports almost tripled(from 258 to 758 million tons) pushing coal traded as ashare of production to almost 15 percent. Furthermore, anecdotal evidence points to even further increases. For example, a recent article (“Tata Eyes Coal Assets Freed by
Global Fracking Boom”, Bloomberg, April 30, 2013) notedthat Tata Power, India’s second largest electricity producer, is seeking coal supplies from the U.S., Colombia, andCanada (they account for 13.9, 1.5, and 0.9 percent of
global coal production; China’s share is 50 percent).

What about convergence of natural gas and oil prices?
Because more than half of global crude oil supplies go to
the transportation industry, the prospects of substitutability
between crude oil and other types of energy will dependon the degree to which vehicles can switch from crude oilbase fuels to natural gas or electricity. As discussed in theJanuary 2013 edition of Global Economic Prospects: Commodity Market Outlook (p. 7, box 1), contrary to naturalgas, crude oil products have convenient distribution networks and refueling stations that can be reached by cars
virtually everywhere in the world. Thus, in order for thetransport industry to utilize natural gas at a scale large
enough to make a dent in the crude oil market, innovations
must take place such that the distribution and refuelingcosts of natural gas become comparable to those of crude
oil. The second alternative, electricity, has its own drawbacks, namely, storage capacity and refueling time. Consider that a truck with a net weight capacity of 40,000
pounds were to be powered by lithium-sulphur batteries
for a 500-mile range, the batteries would occupy almost 85
percent of the truck’s net capacity, leaving only 6,000
pounds of commercial space. Hence, as was the case innatural gas, for large scale electricity use by vehicles, innovation in battery technology must take place.

 Policies—US energy exports, nuclear energy, property rights. Three types of policies are expected to increase trade in natural gas and, consequently, price convergence. First, the U.S. is gradually removing restrictions on energy exports, most of which were introduced after the oil crisis of the 1970s in response to energy security concerns. Second, several countries are reconsidering nuclear energy policies, especially after the
Tohoku accident; some plan not to replace aging nuclear
power units while others contemplate early decommissioning. Thus, nuclear power’s diminishing contribution to global energy consumption —which has already declined fromits 2001 peak of 6.4 percent to 4.9 percent in 2011—will
be substituted by coal, natural gas, and to a lesser extent
renewables (see table COMM 1.1 for historical and current
energy consumption shares). Third, countries with large
unconventional reserves are likely to introduce policies tostrengthen property rights, a key reason for not developing them.
Subsequent to the natural gas boom, fracking and horizontal drilling were applied to the US oil sector, which, as
expected, induced similar supply response. These oil sup-Box table COMM 1.1 Shares of global primary energy
consumption (percent)Box figure COMM. 1.3 Brent and WTI prices$US per bbl
140

120

Brent

100

WTI

80

60

40

20
Jan '07

Jan '08

Jan '09

Jan '10Jan '11Jan '12

Oil

Gas

Coal

Nuclear

Hydro

Other

1965-69

42.6

16.8

34.7

0.2

5.6

0.0

1970-74

47.3

18.6

27.7

0.9

5.4

0.1

1975-79

46.5

18.9

27.0

2.1

5.5

0.1

1980-84

41.4

20.3

28.3

3.7

6.2

0.1

1985-89

39.0

21.2

28.2

5.3

6.1

0.2

1990-94

38.7

22.3

26.3

6.0

6.3

0.4

1995-99

38.4

22.9

25.5

6.2

6.5

0.5

2000-04

37.3

23.4

26.4

6.1

6.1

0.7

2005-09

34.7

23.4

29.0

5.4

6.3

1.1

2010-11

33.1

23.7

30.3

4.9

6.4

1.6

Source: BP Statistical Review.
Note (1): “Other” includes biofuels, solar, wind, geothermal, and biomass
Note (2): The shares were calculated in oil equivalent terms

Jan '13

Source: World Bank.

99GLOBAL ECONOMIC PROSPECTS | June 2013

Commodity Annex

Metalscontracted in European Union (7.7 percent) andBrazil (5.2 percent) on the back of continued economic weakness. Aluminum consumption continues to benefit from substitution away from copper,
mainly in the wiring and cable sectors (copper prices are now more than four times higher than aluminum prices, whereas the two were similar prior to
the 2005 boom). Substitution is expected to continue for as long as the aluminum prices remain twice
as high as copper prices, according to industry analysts.

Following the post-2008 financial crisis collapse,
metal prices regained strength and increased almost
continuously to reach new highs in February 2011
when the World Bank price index reached 229(2005 = 100), up 164 percent since its December
2008 low (figure COMM.10). This increase (alongwith the sustained increases prior to the financial
crisis) generated large new investments inducing astrong supply response.

Aluminum supply was up marginally by 3.2 percent, down from 7.5 percent growth in 2011. Output was constrained by high energy costs, which
account for nearly 40 percent of total production
costs. Supply growth is coming from countries with
abundant (or, often, subsidized) energy, including
China (up 12 percent), United States (up 4.4 percent), and United Arab Emirates (up 6.2 percent).
Nevertheless, aluminum production has declined
sharply in the European Union (down 19 percent)on environmental pressures and adverse economic
developments, Canada (down 6.9 percent) due tolabor disputes. Brazil and Russia have experienced
marginal declines as well. Aluminum stocks at the
London and Shanghai exchanges (combined) are
up 8 percent for the year (end-May 2013/end-May2012). Stocks have been rising for some time, andare currently (May 2013) 20 percent higher thantheir end-2010 levels. However, significant amountof aluminum inventories are tied up in warehousefinancing deals and unavailable to the market.

Most of the additional metal supply went to meetdemand from China, whose consumption share ofworld refined metals reached 44.2 percent at theend of 2012, up from 42 percent in the previous
year (figure COMM.11). Metal prices, however,
have been weakening since 2011. This decline
along with the drop in energy prices and (an evensharper) decline in precious metal prices has
prompted economists and analysts to argue thatthat the so-called commodity super cycle may be
coming to an end (see box COMM.2 for a discussion on super-cycle and how it relates to global
metals reserves).

Recent Developments
Aluminum demand increased by 6.8 percent in2012 according to World Bureau of Metal Statistics(WBMS), led for the second year by double digit
demand growth in China (15 percent) and a 7.5
percent increase in Indian demand. Consumption
Fig COMM.10

Copper demand expanded by 4.7 percent in
2012, up from 1.4 percent the year before, according to WMBS data with China’s apparent demand
Fig COMM.11

Metal Prices$'000/ton60

Copper (right axis)

Consumption of key metals

millions tons
50$'000/ton10

Nickel (left axis)

China
8

40

6

30

4

20

45
Other

30

OECD
15
2

10

0
Jan '130

Aluminum (right axis)
0
Jan '01

Jan '03

Jan '05

Jan '07

Jan '09

Jan '111990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Source: World Bureau of Metal Statistics.

Source: World Bank.

100
Copper (right axis)
Nickel (left axis)

Aluminum (right axis)

ChinaOECDOtherGLOBAL ECONOMIC PROSPECTS | June 2013

Commodity Annex

increasing 11.7 percent, up from 7.2 in 2011. However, it is unclear how much of this demand increase was due to stock build-up and how much
was actually consumed. Estimates of stock build-up
in Chinese bonded warehouses indicate an increaseof more than 160 percent in 2012 to some 850,000
tons. Elsewhere, demand for copper has recovered,including Brazil (up 8.6 percent) after declining theprevious year, Mexico (up 20 percent), and theUnited States (up 3.3 percent). Demand was especially weak in the European Union (down 7.7 percent) and Japan (down 1.3 percent).

Nickel Pig Iron (NPI) in China, which sources lowgrade nickel ore from Indonesia and the Philippines. China’s production capacity may soon be
constrained, though, given that Indonesia has announced that it will develop its own NPI industry
and has introduced export quotas and may bannickel ore exports by end-2013. Nickel stock werebuilt up during 2012 as supplies exceeded the consumption—LME stocks were 68 percent in May
2013 compared to a year ago.

Outlook and Risks in Metal Markets

Supply of refined copper continued to expand at amodest 2.9 percent pace in 2012, down from 3.2
percent increase in 2011. However, output of
mined copper rose 4.4 percent in 2012, up from 1.2
percent growth during 2009-2011. High copper
prices have induced a wave of new mines and expansions of existing ones that are expected to comeon-stream soon. For example, Escondida in Chile,
the world’s largest copper mine, is on track to increase its production by 20 percent in 2013. Minedcopper output rose 7.1 percent in Africa in 2012,
with several mines coming on stream in Zambia
and the Democratic Republic of Congo. The Oyu
Tolgoi mine in Mongolia began production in 2013
and is expected to be one of the top five producing
copper mines in the World and increase that country’s production capacity four-fold. Copper stocks
at the London, New York and Shanghai exchanges(combined) are up 95 percent in May 2013 compared to the year ago.

Metal prices are expected to experience a modest
decline in 2013, which will come on the top of the
15 percent decline experienced last year. Aluminum
prices are expected to decline marginally in 2013
and following and upward trend thereafter in response to rising power costs and the fact that current prices have pushed some producers at or below production costs. Nickel prices are expected to
decline 3 percent in 2013, and to follow a slightly
upward trend thereafter. Although there are no
physical constraints in these metal markets, there
are a number of factors that could push prices evenhigher over the forecast period, including declining
ore grades, environmental issues, and rising energy
costs. On the contrary, copper prices are expected
to decline almost 7 percent in 2013 with more declines in the subsequent years, mostly due to substitution pressures and slowing demand. Over the
medium term, stainless steel demand is expected toremain robust, growing by more than 6 percent
annually, mainly driven by high-grade consumer
applications, as emerging economies are increasingly mimicking consumption patterns of high income
countries.

Nickel demand expanded 6.1 percent in 2012,

down from 17 percent growth in 2011. The sharpest decline was in China, where apparent demandrose 17.4 percent, versus 46 percent in 2011. China
now accounts for 40 percent of global stainlesssteel production (a major source of nickel demand),up from 4 percent a decade ago. Demand contracted in most high income countries, including theEU (down 8 percent) and Japan (down 8.3 percent)and the US (down 6.2 percent).

Most of the risks on metal prices are on the downside, especially weakening of China. As discussed in
the main text, if metal prices decline sharply (say,20 percent over the course of next year, relative tothe baseline), while it will not have much of an impact of global GDP, the decline will impact metal
exporting countries, especially Sub-Saharan African
metal exporters, whose GDP and fiscal balance
may decline as much as 0.7 and 1 percent, respectively, compared to the baseline.

Nickel supply grew by 13 percent in 2012, a second
year of double digit growth, slightly down from 16
percent growth in 2013. A wave of new nickel mine
capacity is likely to keep nickel prices close to marginal production costs. Several new projects willsoon ramp up production, including Australia, Brazil, Madagascar, New Caledonia, and Papua New
Guinea. Another major global source of nickel is101

GLOBAL ECONOMIC PROSPECTS | June 2013

Box COMM.2

Commodity Annex

Global reserves, demand growth, and the “super-cycle” hypothesis

In 1990, the world consumed less than 43 million tons
metals. In 2012 it consumed 91 million tons. All thisgrowth was driven by China—in 1990 China accounted fora mere 4 percent of global consumption; today it accounts
for almost 45 percent. In 1990, the world consumed 66
million barrels of oil per day (mb/d), 37 percent of which
was consumed by OECD economies. In 2012, it exceeded
90 mb/d, half of which is consumed by non-OECD economies. Despite these strong consumption growth patterns,
this box shows that the assumed resource depletion thathas occupied headlines often is less of an issue now thanit used to be. Nevertheless, problems exist, including environmental concerns, concentration of resources, and thehigh cost of extracting such resources.

in terms of years of current production (the so-called reserves-to-production ratio, R/P), evaluated at two 2-year
periods (2000-01 and 2010-11) spanning the recent priceand consumption boom. (According to the U.S. Geological
Survey, reserves refer to the part of the reserve basewhich could be economically extracted or produced at thetime of determination but does not imply that extraction
facilities are in place and operative).
Numerous stylized facts emerge from the analysis. First,
the R/P ratios for various metals paint a mixed picture
regarding resource scarcity. Specifically, the ratio increased in three of the nine cases: nickel (from 43 to 46
years), copper (from 26 to 41), and silver (from 16 to 22).
It did not experience any appreciable change for gold andzinc but declined marginally for lead (from 21 to 19 years).
Yet, three metals exhibited significant declines: Tin (from34 to 19 years), iron ore (from 136 to 65 years), and bauxite (from 180 to 133). Second, the declines in the R/Pratios reflect increased production, not declining reserves.
In fact, with the single exception of tin (whose reserves
declined nearly 40 percent during the 10-year period under consideration) and gold (where reserves increased
only 4 percent), reserves increased between 16 percent(bauxite) and 94 percent (copper). Third, the two largest
declines in the R/P ratio—iron ore, down by 71 years, andbauxite, down by 47 years—took place in markets where
the respective metals are relatively abundant, hence lessof a need to invest in exploration and development activities. Thus, of the nine metals examined here, tin appears
to be the only reserve-constrained commodity.

Metal consumption by China during the past decade has
been so strong that it reversed the downward trend of
global metal intensity (that is, metal consumption per unitof GDP), a turnaround that continues today. Thus, metal
intensity now is the same as it was the early 1970s—on
the contrary, food and energy intensities have continued
their long term downward trend. On the other hand, despite the strong demand growth of oil by non-OECD economies, they still consume 2.6 barrels per year on a percapita basis, as opposed to 13.7 by OECD economies.
The strong growth in consumption of industrial commodities by emerging economies along with the likelihood thatthey will sustain high growth rates, inevitably raises theissue of resource depletion. The issue of non-adequacy of
resources to sustain projected population and income
growth rates has been debated frequently, especially inperiods of high prices. Examples include the peak oil hypothesis for crude oil reserves and the Club of Rome arguments regarding food supplies (Meadows and others1972).
Based on US Geological Survey data, figure COMM 2.1
reports global reserves for two ores (bauxite, iron ore),five base metals (nickel, copper, zinc, lead, tin), and two
precious metals (gold, silver). The reserves are expressed

What about energy? Figure COMM. 2.2 depicts R/P ratios
for natural gas and crude oil between 1980 and 2011. In
both markets the ratios have been increasing, a significant
3.1 percent per annum for crude oil and a marginal 0.4
percent for natural gas. In fact, the R/P ratio for crude oil
exceeded 54 years in 2011 for the first time. (According
to BP, “[reserves] are generally taken to be those quantities that geological and engineering information indicateswith reasonable certainty can be recovered in the future

Box Fig COMM 2.1 Global metal reserves

Box Fig COMM 2.2 Global oil and gas reserves
years (reserves to production)
70

BauxiteNatural Gas Reserves

Iron Ore
60

NickelCrude Oil Reserves

Copper50

Silver
Zinc

40

Gold
30

Avg 2000-01

Tin

Avg 2010-11
Lead
20

0

20

40

60

80

100

120

140

160

1980

180

1986

1992

Reserve-to-production ratio in years

Source: BP Statistical Review.

Source: US Geological Survey.

102

1998

2004

2010

GLOBAL ECONOMIC PROSPECTS | June 2013

Commodity Annex

from known reservoirs under existing economic and operating conditions.”)

Last, a key issue on resource adequacy and prices will be
the strength of demand. The future of metal markets will
depend on the metal intensity of Chinese economy. Oilconsumption will depend on demand by emerging economies and whether their energy intensities emulate that ofhigh income countries. Consider, for example, that in percapita terms, OECD countries consume 5 times more crude
oil than non-OECD countries or more strikingly, the U.S.
consumes 23 times more oil than India (figure COMM 2.3).

The increases of crude oil reserves during the 1980s isdue to additions by OPEC members. The 1999 uptick
reflects the addition of 120 billion barrels from Canada’s oil
sands (equivalent to 4 years of current global consumption) while during the mid-2000s global reserves increased
due to Venezuela’s Orinoco Belt oil, currently estimated at
220 billion barrels (7 years of global consumption). The R/
P ratios for both crude oil and natural gas are likely toincrease enormously when the unconventional reserves
are added in the economically recoverable resource pool.
Indeed, industry experts have noted that when all global
recoverable reserves are considered, the world may haveas much as 2 centuries worth of natural gas, evaluated atcurrent consumption rates, prices, and technology.

Many observers (see, for example, Heap 2005) looking at
the extremely robust demand for metals, and the rapidly
rising metals intensity of the Chinese economy, as well as
the strong oil demand by emerging economies, argued thatthese commodities go through a super cycle where prices
are likely to stay high for an extended period of time. The
so-called “super cycle hypothesis” has been empiricallyverified for a number of metals (Jerrett and Cuddington2008). Super-cycles of this nature, especially for extractive
commodities, have taken place in the past rather infrequently (for example, during the industrial revolution in the
United Kingdom, and the westward expansion of the late
1800s/early 1900s in the United States). Erten and Ocampo(2012) identified four such super cycles in real prices ofagriculture, metals, and crude oil during 1865-2009; thelength of the cycles ranged between 30-40 years with amplitudes 20-40 percent higher or lower than the long run
trend (similar estimates have been given by Cuddington
and Zellou (2013) for metals.) Furthermore, the mean ofeach super-cycle was lower than for the previous cycle,
thus supporting the view that nominal prices of primarycommodities grow at a lower rate than nominal prices ofmanufacturing commodities (Prebisch-Singer hypothesis).

While adequacy of reserves per se does not seem to be a
problem, at least in the foreseeable future, there are several issues of concern, including environmental issues,concentration of ownership, further demand strengthening,
and increasing extractions costs. First, by their very nature, extraction of these resources may be associated withenvironmental issues, such as contamination of groundwater resources or concerns that excessive fracking may
be linked to increasing frequency of earthquake activity.
Second, as we move forward, the reserves will become
more concentrated. For example, currently OPEC accounts for more than 72 percent of oil reserves, nearly halfof which are located in Saudi Arabia and Venezuela. Natural gas reserves are concentrated as well, with the Russian Federation and Turkmenistan accounting for over one
third and Iran and Qatar accounting for nearly 28 percent.
(The Herfindahl concentration indices for crude oil andnatural gas reserves were 9.8 and 10.7 percent in 2011.)
Third, extracting these resources is becoming increasingly
costly. For example, the marginal cost of oil is currently
estimated at US$80/bbl for Canadian oil sands (this costforms the basis for the World Bank’s long term oil priceassumptions).

Indeed, energy and metal prices (expressed as ratio to
manufacturing prices) experienced the largest and longest
boom since WWII (figure COMM 2.4). While most of theconditions behind the post-2004 price boom are still inplace, there are signs that some conditions may be easing.
Perhaps, the 2008 and 2011 twin peaks of commodity prices marked the beginning of the end of the current supercycle. If so, the current super-cycle will be much shorter
than previous ones. But, it is too early to tell.

Box Fig COMM 2.3 Per capita oil consumption

Box Fig COMM 2.4 Commodity prices, MUV-deflated

25

barrels per person per year
300

Average 1965-66

Index 2005=100, MUV deflated

Average 2010-11

20

250

200

15

Agriculture

150

10

Metals100

550Energy

0
World

OECD

US

EU

NonOECD

China

India

0
1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013

Source: BP Statistical Review; UN; OECD; Eurostat.

Source: World Bank.

103GLOBAL ECONOMIC PROSPECTS | June 2013

Commodity Annex

Precious Metals

Fertilizers

Following 18 months of relative stability, precious
metals prices declined sharply during 2013Q2—theWorld Bank metal price index declined 20 percent
in the past 6 months (figure COMM.12). The decline marked a reversal of eleven straight years ofincreasing prices precious metal prices. The pricedrop reflects changing perceptions of global risk,
given gold’s status as a “safe-haven” investment
asset. Holdings of gold by EFTs are down morethan 18 percent for the year. In contrast, holdingsof silver and platinum are up, 12 and 32 percent
respectively by end-May 2013.

Fertilizers prices, a key input to the production ofmost agricultural commodities especially grains andoilseeds, experienced a 5-fold increase between
2003 and 2008, the largest increase among all key
commodity groups (figure COMM.13). In addition
to strong demand, the price hikes reflected increases in energy prices, especially natural gas—somefertilizers are made directly out of natural gas. Indeed, fertilizer prices are now three time higher
than a decade ago, remarkably similar to the 3-forld
increase in energy prices.
Most recently fertilizer prices have been easing.
The World Bank’s fertilizer index declined 4 percent in 2013Q1 after declining 3 percent in 2012.
The declines were more pronounced in potassium
and phosphate, each 8 percent down. Other typesof fertilizers changed only marginally. Weak demand, especially by India and China has been the
key factor behind the weakness (demand by the US
and Latina America has been strong).

High gold prices have attracted considerable investment in the gold mining industry, for both existingand new mines. China has announced a new production target of 450 tons per year by 2015, up
from 400 tons in 2012 when output grew12 percent. Production in South Africa declined 13 percent in 2012, in what might signal a long-term decline as it was a fourth consecutive annual decline—although it also reflected very serious labor
disputes in late 2012, which disrupted productionof both gold and platinum.

Fertilizer prices are expected to ease considerably in the medium term; more than 7 percent in 2013 and another 5 percent in thenext two years—primarily reflecting lower
production costs due to the projected moderation of natural gas prices as well a numberof projects coming on-stream, especially in
the United Arab Emirates and the Former
Soviet Union, both important natural gas producers.

The precious metal index is expected to decline
almost 11 percent in 2013 (gold, silver, and platinum down by 10, 13, and 3 percent). Most risks areon the downside due to supply improvements,
even as the pace of global recovery improves, including easing of financial tensions in Europe.
Fig COMM.12

Fig COMM.13

Precious metal prices¢/troy oz
5000$/troy oz
2500

DAP

1200
2000

Fertilizer prices

US$/mt
1400

4000
1000

1500

3000

1000

Potassium Chloride

800
600

2000
Platinum (left axis)

400
Silver (right axis)

Gold (left axis)

500

Urea

1000
200

0
Jan '01

Jan '03

Jan '05

Jan '07

Jan '09

Jan '110
Jan '130
Jan '07

Jan '08

Jan '10Jan '11Jan '12Source: World Bank.

Source: World Bank.

104

Aluminum (right axis)

Potassium ChlorideDAP
DAP Urea

Nickel (left axis)

Jan '09

Jan '13

GLOBAL ECONOMIC PROSPECTS | June 2013

Commodity Annex

Agriculture

Recent developments in agricultural
markets
Grain prices have been declining steadily sinceWith the exception of grains, most agricultural prices have been declining almost continuously since their early 2011 peaks (figure
COMM.14). Beverages and raw materials aredown 32 and 35 percent, respectively between
their February 2011 peaks and May 2013.
Non-grain food prices are down as well—edible oils down 16 percent and other foodprices down 17 percent. Initially, grain prices
followed a similar (declining) path, but they reversed course sharply after the heat wave in summer of 2012 caused considerable damage in maizeproducing areas in the Midwestern United States,
while severe drought conditions in Eastern Europe
and Central Asia affected wheat production. The
World Bank food price index gained almost 11 percent in just one month—from June to July 2012.
Since then supply conditions have improved considerably across most food groups. For example,
both the edible oil and oilseed markets are well
supplied, with the global edible oil production expected to reach new record. Grain supplies are improving as well. In its May 2013 assessment (thefirst for next season’s crop), the U.S. Departmentof Agriculture projected a marked improvement inmaize conditions for 2013/14, a comfortable wheat
crop, and a well-supplied rice market. In responseto this outlook most food prices have receded—
the food price index has lost most of its summer2012 gains. Yet, upside risks exists, especially in maize, as
any adverse weather event to upset global markets.
Fig COMM.14

the spike in the summer of 2012 as news for a better supplied 2013/14 season were gradually emerging (figure COMM.15). Between July 2012 and May
2013, maize and wheat prices have declined 11
and 8 percent, respectively, partly eliminating thegains during July and August of 2012. In its May
2013 update (the first for the 2013/14 crop season), the U.S. Department of Agriculture, placed its
global maize production assessment at 966 million
tons, up from 2012/13 season’s 857 million tons,
in turn increasing the stock-to-use ratio from 14.4
percent to 16.6 percent. Similarly, the global wheat
production assessment for 2013/14 stands atslightly over 700 million tons, up from current season’s 655 million tons, inducing a marginal increasing in the stock-to-use ratio as well.
After dropping below the US$ 600/ton mark in
November 2011, rice prices have fluctuated withina very tight band around US$ 540/ton. They exceeded US$ 600/ton only twice: towards the end of
2011 when there were some reports of flood damage to the Thai crop and last year when the Thaigovernment introduced its purchase program—apublic stock-holding mechanism. According to
U.S. Department of Agriculture’s May 2013 assessment, global rice production is expected to reachalmost 480 million tons in 2013/14, 9 million tons
above the 2012/13 record. The stocks-to-use ratio
is expected to reach almost 27 percent, remarkably
similar to that of 2012/13 and well within historical
Fig COMM.15

Agriculture price indices2005=100260

Wheat, maize and rice prices
US$/mt500

US$/mt1000
Rice (left axis)
Food
800

220

400
Wheat (right axis)

180

600

Beverages

300

400

140

200

Maize (right axis)

Raw materials
100
Jan '07

Jan '08

Jan '09

Jan '10Jan '11Jan '12200
Jan '07

Jan '13

Source: World Bank.

100
Jan '08

Jan '09

Jan '10Source: World Bank.

105
Foodmaterials
Raw
Beverages

Maize (right axis) Rice (left axis)
Wheat (right axis)

Jan '11Jan '12Jan '13

GLOBAL ECONOMIC PROSPECTS | June 2013

Commodity Annexnorms. Trade in rice has improved as well reachinga new record of 38.6 million tons during last calendar year, aided in part by a surge in Chinese imports (2.9 million in 2012, up from 0.5 million tons
a year earlier). And, early reports indicate that hisyear may be another record for rice trade, perhaps
as high as 40 million tons.

two to three times higher than food commodities
as well as cotton (key raw material) and coffee,
whose growth is roughly aligned with population
growth. The main exception is maize, which during
2004-12 grew by an annual average of 3.7%, a reflection of biofuel demand. The four periods capture different price regimes, namely, increasing
commodity prices up to the first oil crisis (196073), declining prices (1974-85), stable and low prices (1986-2003), and high prices during the recent
boom (2004-12).

Edible oil prices have declined almost 20 per-cent since their summer 2012 peak, as measured by
the World Bank’s edible oil price index, effectively
eliminating all the gains during the first half of lastyear. The decline reflects an improved SouthAmerican soybean crop as well as a better reassessment of the U.S. soybean crop, for which yields
turned out to be higher than originally thought.
Palm oil supplies from Indonesia and Malaysia
have improved as well—these two countries account for 80 percent of global palm oil supplies.
Soybean prices have weakened as well during thepast 9 months, down almost 28 percent from theirSeptember 2012 highs (figure COMM.16). The
extended soybean price spike during 2012 also reflects the overall tightness in the animal feed industry. Soybean meal and white maize (the latter produced primarily in the United States) are close substitutes as they both are key inputs to the animalindustry.

Edible oils are, perhaps, the only commodity groupwhose income elasticity is high not only for low
and middle income countries but also for high income countries. This reflects the fact that as income increases, people tend to eat more in professional establishments and consume more prepackaged food items, both of which are utilizing
more edible oil than otherwise.

Beverage prices have declined as well. The

Edible oils experienced the fastest production (andconsumption) growth rates of agricultural commodities during recent decades, and this is likely tobe the case for the future. Table COMM.2 reports
production growth rates for 8 commodities andshows that in all four sub-periods since 1960, palm
oil and soybeans exhibited growth rates that areWorld Bank’s beverage price index (comprised ofcoffee, cocoa, and tea) is down 32 percent since its
February 2011 record high. The earlier surge (andrecent decline) in beverages reflects mostly coffee
prices—specifically arabica—which reached a US$
6.00/kg during 2011, the highest nominal level ever(figure COMM.17). The increase in arabica reflected a shortfall in Colombia production (the world’s
second arabica supplier after Brazil). However, as
Colombian production recovered partially, and coffee companies began using more robusta in theirblends, arabica prices declined and they are now
traded at half their early 2011 highs. Global coffee
output reached 145 million bags in 2012, up fromFig COMM.16

Table COMM.2

Edible oil prices

US$/ton
1400

US$/ton700

Soybeans (right axis)

1200

600

1000

500

800

Palm oil600

400
Jan '07

Maize
Rice
Wheat
CoffeeCotton400

Sugar
Palm oilSoybeans

300

200
Jan '08

Jan '09

Jan '10Jan '11Jan '12Jan '13

Source: World Bank.

Production growth of key commodities

1960-73
4.1%
3.3%
3.9%
3.4%
2.7%
2.2%
8.6%
7.5%

1974-85
3.9%
2.9%
2.8%
2.2%
2.8%
2.6%
10.1%
6.8%

Source: U.S. Department of Agriculture.

106

1986-2003
1.8%
1.2%
0.8%
2.5%
1.4%
2.3%
7.8%
4.0%

2004-12
3.7%
2.0%
2.1%
1.8%
2.9%
1.9%
6.8%
4.7%

GLOBAL ECONOMIC PROSPECTS | June 2013

Commodity Annex

137 million bags in 2011. Furthermore, Brazil,
world’s top coffee supplier, is expected to have a
bumper crop in 2013/14 (April-March), currently
estimated at almost 47 million bags. Coffee supplies from Vietnam (world’s largest robusta supplier), Colombia, and Indonesia are also expected tobe large as well. After declining nearly 35 percent
during 2011, cocoa has been traded at around US$
2.35/kg. The weakness of cocoa prices reflects
partly weak demand in Europe, traditionally a key
consumer of cocoa for chocolate manufacturing.
Global cocoa production is expected to reach 3.96
million tons in 2012/13, down from last season’s
4.06 million tons. Declined by Central and SouthAmerica will offset increases by West Africa. Last,sugar prices (not part of World Bank’s beverage
price index) have been weakening as well, down 22
percent since a year ago and 40 percent lower thantheir 2011 peak. The sugar market is faced with alarge surplus. Global sugar production exceeded
182 million tons in 2012, up from 173 million tons
in 2011 while consumption in both years averaged
163 million tons. Good crops in both South America (especially Brazil) and Asia have contributed tothe surplus. Brazil, world’s top sugar supplier, in an
attempt to boost prices, announced a tax credit toethanol producers; yet, the announcement failed tosupport prices.

by historical standards; global production is expected to be 25.1 million tons in 2013/14, and consumption at 24.3 million tons. An estimated 1 million tons will be added to global stocks, pushing
the stocks-to-use ratio to 77 percent, the highest
since the end of World War II. Approximately 9
million tons of cotton have gone to the state reserves of China during the past two seasons, explaining the relative strength of cotton prices(International Cotton Advisory Committee 2013).
Nevertheless, cotton prices increased the least during the post-2004 commodity price boom—up 37
percent between 1997-2004 and 2005-12 as opposed to a 75 percent increase of the overall agricultural price index—primarily because of the increase in yields by China and India following the
adoption of biotechnology (Baffes 2011).

Natural rubber prices have been remarkably sta-

ble during the past two quarters, following their
sharp decline from their early 2011 peak (similar tocotton). The decline in rubber prices reflected bothincreased supplies and fears of demand deterioration, especially from China—most natural rubber
goes towards tire production, and China is the fastest-growing market for tires. Crude oil prices play a
key role in the price of natural rubber as well, because synthetic rubber, a close substitute to natural
rubber, is a crude oil by-product. Global natural
rubber production reached 11.3 million tons during
the 12-month period ending May 2013, 60 percentof which is supplied by Thailand and Indonesia.
Almost 40 percent of global rubber consumption is
accounted by China, which has been growing at
more than 5 percent during the past few years.
That makes the longer term prospects of the rub-Raw material prices have been relatively sta-

ble during the past two quarters after declining
sharply from their early 2011 peaks—down 35 percent from February 2011 to August 2012 (figure
COMM.18). Cotton prices have found somestrength recently—they have gained 8 percent since
January 2013. The cotton market is well supplied
Fig COMM.17

Fig COMM.18

Coffee prices

US$/kg7

US$/kg7

6

6

5

Raw material prices

5
ArabicaNatural Rubber

4

4

3

3

Robusta2

2

1
Jan '07

1
Jan '07

CottonJan '08

Jan '09

Jan '10Jan '11Jan '12Jan '13

Source: World Bank.

Jan '08

Source: World Bank.

107

Jan '09

Jan '10Jan '11Jan '12Jan '13

GLOBAL ECONOMIC PROSPECTS | June 2013

Commodity Annex

ber market sensitive to China’s growth outlook, as
is the case with most metals and mineral commodities. Timber prices have been remarkably stable aswell during the past two quarters. Initial expectation for a boom in timber demand (and prices) for
post-Tohoku earthquake reconstruction did notmaterialize while global demand for timber products has weakened considerably.

Fig COMM.19a

percent
40

Outlook and risks for agriculturalcommodities
Agricultural prices are projected to decline 5.9 percent in 2013 with most of the decline to be accounted by beverages (–8.9 percent), followed by .
Raw material (-5.8 percent), and food commodities(-5.5 percent). Within the food group, edible oils
are expected to decline the most (-9.0 percent),
followed by other food (-5.0 percent), and grains (1.0 percent). The largest declines among key foodcommodities will be experienced by soybeans (-8.7
percent), palm oil (-13.9 percent), followed by other edible oils. Grains will change marginally (maize
and rice down by about 1 percent and wheat marginally up). The decline in beverages will be led byarabica coffee (-18.5 percent) and less so cocoa (5.9 percent), while Malaysian longs and rubber willaccount for most of the weakening in raw materials(-11.2 and -9.7 percent, respectively). A number ofassumptions (along with associated risks) underpin
the outlook for agricultural commodities, namely,
crop conditions, energy prices, biofuels, macroeconomic environment, and trade policies. A detailed
assessment of these risks is given below.

Global Maize Supplies

Stocks-to-use Ratio (left axis)

million t
1000

Production (right axis)

32

900

24

800

16

700

8

600

0
2000

2002

Fig COMM.19b

percent
40

2004

2006

2008

2010

2012

500
2014

Global Wheat Supplies

Stocks-to-use (left axis)

Production
Production(right(rightaxis)
axis)

million t
700

Stocks-to-use Ratio (left axis)
30
600

20

500
10

0
2000

2002

Fig COMM.19c

Crop conditions
It is assumed that crop production in the Southern
Hemisphere will not experience any adverse weather conditions, and next season’s outlook will return
to normal trends. In its May 2013 outlook assessment (the first for next season), the U.S. Department of Agriculture estimated the 2013/14 crop
season’s global grain supplies (production plus
starting stocks) at 2.56 billion tons, up 5.7 percent
from 2012/13, thus replenishing most of the losses
due to the 2012 summer heat wave. If history is
any guide, when markets experience negative supply shocks similar to the 2012 drought, production
comes back within one (or, perhaps two) seasons
through resource shifting, as has been the case inprevious episodes (for example, maize in 2004/05,

percent
40

2004

2006

2008

2010

2012

400
2014

Global Rice Supplies

Production(right(rightaxis)
axis)
Production

Stocks-to-use (left axis)

million t
500

Stocks-to-use (left axis)
30

450

20

400

10

350

0
2000

2002

2004

2006

2008

2010

2012

300
2014

Source: US Department of Agriculture, May 2013 update.

108

Production (right axis)
Stocks-to-use (left axis)

GLOBAL ECONOMIC PROSPECTS | June 2013

Commodity Annex

wheat in 2002/03, and rice in 2001/02, see figure
COMM.19a-c). However, it may take up to threeseasons before stocks are fully replenished—subjecting the maize and (less so) wheat prices to
upside risks. As discussed earlier, the rice market iswell supplied also reflected in the remarkable stability of rice prices.

In the longer-term there is much uncertainty about
biofuel production. If biofuel production increases
at the rates suggested by some forecasts (more than
5 percent annually), as much as 10 percent of global land area allocated to grains and oilseeds could
be producing biofuel crops (evaluated at world average yields) within the next two decades. Suchassumptions are supported by the baselines of thejoint OECD/FAO Agricultural Outlook as well as the
IEA Energy Outlook, published in May 2013. However, policy makers are increasingly realizing thatthe environmental and energy security benefits of
biofuels may not outweigh their costs, thus biofuels
policies are likely to ease. Indeed, biofuels grew
very little during the past two years with similar
expectation for this and next year (figure COMM.20).

Oil prices
The outlook assumes that in 2013 crude oil prices
will ease marginally and fertilizer prices will experience a 7 percent (both fertilizer and crude oil are
key inputs to agriculture, especially grains andoilseeds). However, because of the energy intensive
nature of agriculture—the industry has been estimated to be four to five times more energy intensive than manufacturing—an energy price spike
could trigger proportional food price increases. Theenergy price cross-price elasticity of agriculture
goods ranges from 0.2 to 0.3 (depending on thecommodity), implying that a 10 percent increase inenergy prices will induce a 2-3 percent increase inagricultural prices.

Yet, the likely long-term impact of biofuels onfood prices is complex, as it goes far beyond land
diversion, subsidies, and mandates. The impact islikely to depend more on the following factors: (i)the level at which oil prices make biofuels profitable and (ii) whether technological developments of
biofuel crops (or even new crops) could increase
the energy content of the respective plants, thus,
making them more attractive sources of energy.
Thus, high energy prices along with likely technological innovations could pose large upside risks for
agricultural prices in the longer term (box COMM
3 elaborates further on this issue).

Biofuels
Despite an only marginal increase in global
biofuel production in 2011 and 2012, the outlook assumes biofuels will continue to play a
key role in the behavior of agricultural commodity markets. Currently, biofuels production represents about the equivalent of 1.3
mbd crude oil production and are projected
to grow moderately over the projection period.

Fig COMM.20

Macroeconomic environment
The last assumption is associated with the risk of a
sharp reversal to the loose macroeconomic environment, including low policy rates and quantitaFig COMM.21

Biofuel production

Commodity assets under management

US$ billion
350

mbd of oil equivalent
1.4
1.2

300

1

250

0.8

200
150

0.6

100

0.4

50

0.2

0

0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Source: BP statistical Review of World Energy; OECD.

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1

Source: Barclay Hedge.

109

GLOBAL ECONOMIC PROSPECTS | June 2013

Commodity Annex

tive easing. There are two channels through whichinterest rates affect commodity prices—all commodities, not just agriculture. The first operates
through physical demand and supply: Low interest
rates may affect stock-holding behavior because of
the lower cost of capital, they may induce rightward shift in demand because of expansion in current consumption, and they may increase investment lower borrowing costs and hence a rightward
shift of future supply. Thus, the effect of interest
rates can be either positive, negative, or, even zero,depending on the relative elasticities. The interest
rate elasticity for food commodities appears to benear-zero (see Baffes and Dennis (2013) for elasticity estimates and a literature review). Research at
the World Bank (currently under way) showsthat the interest rate elasticity for metal prices may be positive, implying that the shift ofsupply schedule due to the lower cost of capital overwhelms shifts in demand (the impact
through stockholding is not as important inmetals and minerals).

well-supplied. If the baseline outlook materializes, policy actions are unlikely and, if theytake place, will be isolated with only limited
impact. For example, when the market conditions for rice and cotton were tight (in 2008
and 2010, respectively), export bans induced
price spikes. However, last year’s Thai ricepurchase program and India’s export ban on
cotton did not have any discernable impact
on the respective prices. Interestingly, cotton
prices declined more the day after Indian export ban on cotton was announced (March2012) than they gained the day of the announcement. In fact, there may be a downside price risk for rice if Thailand releases
some (or all) of the stocks it accumulated
through the purchase program, not an unlikely scenario given that the costs of the program account for as much as 1 percent of thecountry’s total GDP (World Bank 2012).

Recent trends in domestic food prices

The second channel operates through investment fund activity, the so-called financialization of commodities—a controversial andhotly-debated topic. Investment fund activity
which has been increasing over the course of
the last ten years, exceeded US$ 330 billion
during 2012, according to BarclayHedge,
which tracks developments in the hedge fundindustry (figure COMM.21). Most of thefunds have been invested in energy and agricultural commodity markets. The relationshipbetween investment fund activity and commodity prices is a highly debated topic. Somehave argued that these funds have sufficiently
large weight to unbalance the market, thus
impairing the price discovery mechanism.
Others have praised these investment vehicles claiming that they inject liquidity in commodity markets. Despite some contrasting
views, the empirical evidence is, at best,
weak. While it is unlikely that these investments affect long term price trends, most
likely they have affected price variability.

The discussion thus far has focused on price movements in U.S. dollar terms. However, what mattersmost to consumers is the price they pay for food intheir home countries. It is not uncommon for prices paid by consumers in an individual country todiffer considerably from international prices, atleast in the short run. Reasons for this include exchange rate movements, trade policies intended toinsulate domestic markets, the long distance of domestic
trading centers from domestic markets (adding considerably to marketing costs), quality differences, and differences in the composition of food baskets acrosscountries.
Table COMM.3 reports changes in domestic
wholesale prices of three commodities(maize, wheat, and rice) for a set of low- andmiddle-income countries—the selection ofcountries was driven, in part, by data availability. These changes are compared to thecorresponding world price changes (reported
in the top row of each panel). The periods
chosenare
2013Q1against
2012Q4(capturing short run responses) and 2013Q1
against 2012Q1 (intended to capture longer
term effects). The table also reports pricechanges between 2006-07 and 2011-12, effectively capturing the entire food price boom
period.

Trade policies
Given the 2008 (and less so 2010) experience,
the outlook assumes that policy responses
will not upset agricultural markets, an assumption that relies on markets remaining
110

GLOBAL ECONOMIC PROSPECTS | June 2013

World prices of all three grains changed little
between 2012Q4 and 2013Q1 (maize andwheat down 3.8 and 9.6 percent, respectively
and rice up 0.7 percent); the US dollar did
not change much either. The corresponding
median domestic price changes were –0.6,
5.8, and 0.2 percent. Focusing at the variability of price changes, however, a different picture emerges. The relative calm in world prices was reflected in the domestic prices ofrice, less so in wheat, but not in maize where
5 countries experienced double digit increases
despite the moderate decline in world price.
A mixed picture emerges as well when
2013Q1 is compared to 2012Q1.
Again, the median domestic price increases
are somewhat similar to those of world prices, but there is high variability around these
medians for maize and wheat (but not forrice). For example, the world and the domestic median price of maize increased 9.8 and2.5 percent, respectively. Yet, six of the 17
countries in the sample experienced price declines while seven countries experienced increases exceeding 20 percent.
The last column reports price changes between 2006-07 and 2011-12, periods longenough not be affected by the presence oflags in any significant way. During these two
2-year periods, the world price of maize,
wheat, and rice went up by 107, 41, and 75
percent. Not surprisingly, all countries experienced large domestic price increases in all
three commodities, with corresponding median increases at 74, 66, and 48 percent. As was
the case with the shorter periods, there isconsiderable variation across countries. For
example, rice prices increased by 130 percent
in East Africa (average of Tanzania andUganda) but only 44 percent in West Africa(average of Niger, Mali, and Burkina Faso).
The tentative conclusion from this brief analysis is that in the short term, domestic prices
move, for the most part, independently ofworld prices. A stronger link is present in thelonger term but large differences across countries are present, implying that domestic factors play a dominant and persistent role in
the food price determination process of local
markets.

Commodity Annex

Table COMM.3

World (US$)
UgandaNicaragua
Tanzania
Honduras
M ozambique
Dominican Republic
Bolivia
UkraineCosta Rica
ThailandRwandaEl Salvador
PanamaPeru
GuatemalaEthiopia
Kenya
MedianWorld (US$)
Bolivia
Sudan
India
UkrainePeru
El Salvador
Ethiopia
BangladeshMedianWorld (US$)
Bangladesh
Tanzania
Dominican Republic
Niger
India
GuatemalaPanamaUgandaM ali
Honduras
Burkina Faso
NicaraguaPhilippines
Peru
ThailandCambodia
El Salvador
Bolivia
RwandaMedianWholesale grain prices in (nominal
local currencies, percent changes)
2013Q1/
2012Q4Maize (17 countries)
-3.8
20.9
18.6
17.7
11.0
10.7
8.4
7.6
4.7
-0.6
-0.8
-1.3
-3.7
-3.8
-4.0
-4.2
-6.6
-15.4
-0.6
Wheat (8 countries)
-9.6
9.9
8.9
7.8
5.8
2.6
2.5
-1.3
n/a
5.8
Rice (19 countries)
0.7
11.8
11.2
7.2
6.7
4.6
2.2
1.4
1.2
0.5
0.2
0.0
-0.3
-0.6
-0.7
-1.8
-1.9
-3.6
-4.8
-12.4
0.2

2013Q1/
2012Q1

2006-07/2011-12

9.8
31.4
20.6
46.6
24.3
23.5
0.9
-6.9
23.1
4.4
1.2
10.4
-23.8
-9.5
-7.5
-8.1
2.5
-2.2
2.5

106.7
153.3
73.8
130.9
26.8
77.4
70.0
49.3
131.9
109.3
42.6
68.4
48.4
94.4
40.9
51.9
196.7
128.2
73.8

15.3
-4.9
31.5
38.3
30.9
2.6
70.5
6.0
20.1
25.5

40.8
88.5
132.1
34.3
124.4
25.3
43.6
154.3
20.7
66.0

3.6
4.2
-1.1
1.5
-1.5
14.9
5.2
2.7
-4.7
-5.8
9.2
2.7
6.7
-2.6
-6.4
4.9
0.0
-8.0
0.9
0.1
0.9

75.2
50.1
120.9
19.5
40.4
67.1
47.8
51.1
140.6
35.2
21.4
57.0
68.7
39.5
32.8
47.4
74.1
33.5
28.6
60.9
47.8

Source: World Bank; FAO (http://www.fao.org/giews/pricetool/).

111

GLOBAL ECONOMIC PROSPECTS | June 2013

Commodity Annex

Box COMM.3 The complex interplay among food, fuels, and biofuels
biofuel use. The first went up to the mid-19th century, when
the chief uses of biofuels were cooking and lighting. The
second period, the early 20th century, saw the expanded
use of biofuels in the internal combustion engines. The
third, covering the mid- to late-20th century, includes mainly the oil crises of the 1970s. The fourth period, the 21st
century, reflects environmental and energy independence
concerns. Indeed, biofuels constituted the largest demand
growth component of grains and oilseeds during the past
decade. Currently, they account for about 2-3 percent ofarea allocated to grains and oilseed and represent theequivalent of 1.2 million barrels of crude oil per day. Mostof biofuel production comes from maize-based ethanol in
the United States (48 percent share), followed by sugarcane-based ethanol from Brazil (22 percent), and edible oil-based biodiesel in Europe (17 percent). Numerous studies have examined the impact of biofuels on food prices,and give a wide range of estimates. Mitchell (2008) foundthat the expansion of biofuels and the policy reactions thathigher prices induced, were responsible for almost threequarters of the food price increases during 2000-08. Gilbert (2010) finds that at most one-quarter to one third of
the rise in food prices over 2006–2008 can be directly
attributed to biofuels. Roberts and Schlenker (2010) conclude that U.S. biofuel mandates increase maize prices
roughly 20 percent.

The interaction between food and energy commodities is
an important, complex, (sometimes) misunderstood, andhotly debated subject. This box identifies some of the key
interaction channels between energy and food markets(figure COMM 3.1). It argues that high energy prices may
affect food prices through four channels, namely, higher
cost of producing food, biofuel policies, profitable biofuels,
and increasing biofuel profitability through induced innovation. The box concludes that, in the longer term, energy
could play an even more important role in the determination of food prices.
The Cost Link (A and B/C). The strong relationship between energy and non-energy prices was established long
before the post-2004 price boom. Gilbert (1989) estimatedtransmission elasticity from energy to non-energy commodities of 0.12 and from energy to food commodities of
0.25. Hanson, Robinson, and Schluter (1993) based on a
General Equilibrium Model found a significant effect of oil
price changes to agricultural producer prices in the UnitedStates. Borensztein and Reinhart (1994) estimated transmission elasticity to non-energy commodities of 0.11. A
strong relationship between energy and non-energy prices
was found by Chaudhuri (2001) as well. Baffes (2007)
estimated transmission elasticities of 0.16 and 0.18 for
non-energy and food commodities, respectively. Moss,
Livanis, and Schmitz (2010) found that U.S. agriculture’s
energy demand is more sensitive to price changes thanany other input. Pindyck and Rotemberg (1990) concluded
that various unrelated primary commodity prices not only
co-move, but also co-moved in excess of what the macroeconomic fundamentals could explain. The strong enerfood price link is also evidenced by the input-output valuesof the GTAP database, which show that the direct energy
component of agriculture is four to five times higher thanmanufacturing sectors (figure COMM 3.2).

More recently, the impact of biofuels on food prices has
been studied through the link between energy and nonenergy prices. Serra (2011) found a long run linkage between ethanol and sugarcane prices in Brazil and also thatcrude oil and sugarcane prices lead ethanol prices but notvice versa. Saghaian (2010) established strong correlation
among oil and other commodity prices (including food) but
the evidence for a causal link from oil to other commodities was mixed. Gilbert (2010) found correlation between
the oil price and food prices both in terms of levels andchanges, but also noted that it is the result of common
causation and not a direct causal link. Zhang and others(2010) found no direct long-run relationship between fueland agricultural commodity prices and only a limited shortrun relationship. Reboredo (2012) concluded that the pric-

The Policy-Driven Biofuel Link (D/F): In addition to being a key cost component, energy plays an important roleon the demand side through the diversion of some foodcommodities to the production of biofuels. The role of biofuels is not new. Kovarick (2012) identified four periods of
Box Fig COMM 3.1 The Energy/Food Price Link

Box Fig COMM 3.2 Energy Intensities
WORLD

EnergypricesManufacture
Agriculture

HIGH INCOME
DEVELOPING

A

SSA
US

BiofuelproductionH

FoodpricesFertilizer
pricesCanada

D
EU-12
China

E

BrazilPolicies

TurkeyIndia

0Source: Baffes (2013).

3

6

Source: World Bank; GTAP database.

112

9

12

15

18

GLOBAL ECONOMIC PROSPECTS | June 2013

Commodity Annex

es of maize, wheat, and soybeans are not driven by oil
price fluctuations.

example. One hectare of land produces 10 tons of maize
generating US$ 2,500 in farmgate revenue either by supplying maize to the food and feed industry at US$ 250/ton
or selling it to ethanol industry at US$ 0.63/liter (assuming
4,000 liters maize-to-ethanol conversion). If an improved
maize variety were to increase the ethanol content by 10
percent, it would generate US$ 2,750/hectare in farmgate
revenue, raising the cost of maize to the food and feedindustries to $275/ton, since this is how much the ethanolindustry would pay. Furthermore, the innovation in theenergy content of maize would induce proportional priceincreases in all crops that could be grown on that land.
While the above example is hypothetical, it does illustrate
how innovations in the energy content (or in the efficiencyof extracting ethanol) of existing or new crops could trigger
food price increases, even in the absence of changes inenergy prices or demand and supply conditions of foodcommodities.

Overall, despite a nearly 6-fold increase in biofuel production during the first decade of the millennium, the price link
between energy and food commodities is not as clear-cut
as some would have expected. This may partly be explained by the non-market influence of mandates, whichcaused biofuel production to rise (and perhaps influence
food prices) independently of what was happening to oil
prices. Consider an exogenous shock which pushes crude
oil prices up, in turn, lowering fuel consumption. Under amandated ethanol/gasoline mixture ethanol and maize
prices will decline, ceteris paribus, leading to a negative
food-oil price relationship (de Gorter and Just 2009).
The Link through Profitable Biofuels (G1): A more important issue is the level at which energy prices provide afloor to food prices. If biofuels are profitable at current
energy prices, the income elasticity of food will rise toward
the higher elasticity of the larger (figure COMM 3.3) energy market, a point highlighted by numerous authors, including Lustig (2008), Heady and Fan (2010), and Baffes
and Dennis (2013). Various rules of thumb to determine
when biofuel production becomes profitable have been
posited. One such rule suggests profitability is reachedwhen the US$ barrel price of crude oil is 50 percent ormore than the US$ price of a ton of maize. Another places
it at US$ 3/gallon of gasoline at the pump (in the U.S.). A
World Bank (2009) report argued that because of thestrong correlation between the maize and crude oil prices
above US$ 50/barrel, crude oil dictate maize prices. The
US Government Accountability Office (2009) noted that oil
above the $80-$120/barrel range may make biofuels profitable (depending on the circumstances). Babcock (2011)
noted that high crude oil prices would have created market-driven investment incentives in the US ethanol industry
even in the absence of policies.

The food-fuel-biofuel link can be summarized within two oil
price scenarios (figure COMM 3.4). Though less likely, the“Low” oil price scenario could materialize if a sharp slowdown in emerging economy growth takes place. It could
also materialize in response to innovation in battery technology and/or large scale utilization of natural gas that
could unleash substitution away from crude oil to electricity and natural gas by the transportation industry. Under
low oil prices, the energy costs to agriculture will decline
leading to lower food prices—scenario I(b). Furthermore,
low oil prices may ease biofuel policies, lowering foodprices even further—scenario I(a). Interestingly, while
scenario I(a) is consistent with a strong link between oil
and food prices (through production costs), scenario I(b)weakens the link (because of the mandated nature of biofuels). Now consider the “High” oil price scenario. As noted above, high oil prices are likely to make biofuels profitable, in which case food and oil prices will move in a synchronous manner—scenario II(a). Moreover, profitablebiofuels may induce innovation in the energy content ofcrops, in which case food prices could increase even further—scenario II(b). Under scenario II(b), the oil-food pricelink may weaken since food prices may increase even if
demand and supply conditions for food and energy markets do not change.

Induced Innovation Link (G2): Profitable biofuels may
induce innovations by increasing the energy content of
biofuel crops hence increasing food prices even further.
To see the likely impact of biofuels-related induced innovation on food prices consider the following illustrative
Box Fig COMM 3.3 Global Energy Shares
Oil

32.6%

Coal

Box Fig COMM 3.4 Oil and Food Price ScenariosWind

OIL PRICES

58.1%

29.8%

Biofuels
Natural gas

I
Low

27.2%

23.9%

Hydro

6.5%

Nuclear

Solar

11.6%

5.2%

Geothermal
Renewables

10%

20%

30%

40%

Biofuel policies easeor are removed(A, B/C)

Biofuel policies are
retained(D/F)

Biofuels become
profitable(G1)

Innovation in
biofuels
G2)

I(a)Very low foodprices and strong
food-oil price linkI(b)Low food prices
and (perhaps) weak
food-oil price link

II(a)High food prices
and strong food-oil
price linkII(b)Very high foodprices and weak
food-oil price link

3.2%

1.8%

0%

II
High

0%

20%

40%

60%

80%

Source: BP Statistical Review and author’s calculations

Source: World Bank; BP Statistical Review.

Source: World Bank

113

GLOBAL ECONOMIC PROSPECTS | June 2013

Commodity Annex

References
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Babcock, Bruce (2011). “The Impact of US Biofuel Policies on Agricultural Price Level and Volatility.” Issue Paper no. 35, International Center for Trade and Sustainable Development, Geneva.
Baffes John (2013). “A Framework for Analyzing the Interplay among Food, Fuels, and Biofuels.” Global Food Security, vol.
2, http://dx.doi.org/10.1016/j.gfs.2013.04.003.
Baffes John (2011). “Cotton Subsidies, the WTO, and the ‘Cotton Problem’.” The World Economy, vol. 34, pp. 1534-1556.
Baffes, John (2009). “More on the Energy/Non-Energy Commodity Price Link.” Applied Economics Letters, vol. 17, pp 15551558.
Baffes, John (2007). “Oil Spills on Other Commodities.” Resources Policy, vol. 32, pp. 126-134.
Baffes, John and Allen Dennis (2013). “Long-Term Drivers of Food Prices.” Policy Research Working Paper 6455, World Bank,
Washington DC.
Chaudhuri, Kausik (2001). “Long-run Prices of Primary Commodities and Oil Prices.” Applied Economics, vol. 33, pp. 531-538.
Cuddington, John T. and Abdel M. Zellou (2013). “A Simple Mineral Market Model: Can it Produce Super Cycles in Prices?”
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De Gorter, Harry and David R. Just (2009). “The Economics of a Blend Mandate for Biofuels.” American Journal of Agricultural
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Gilbert, Christopher L. (2010). “How to Understand High Food Prices.” Journal of Agricultural Economics, vol. 61, pp. 398-425.
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Heady, Derek and Shenggen Fan (2010). “Reflections on the Global Food Crisis: How it Happened? How it Hurt? And, How we
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Lustig, Nora (2008). “Thought for Food: The Challenges of Coping with Soaring Food Prices.” Working Paper no 155, Center for
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Meadows, Donella H., Dennis L. Meadows, Jørgen Randers, and William W. Behrens III, 1972. The Limits to Growth. Rome:Club of Rome.
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115

GLOBAL ECONOMIC PROSPECTS | June 2013

GLOBALECONOMICPROSPECTS

June
2013

East Asia and the Pacific Annex

Annex

EAST ASIA
and the
PACIFICREGION117

GLOBAL ECONOMIC PROSPECTS | June 2013

East Asia and the Pacific Annex

Overview

The depreciation of the Japanese yen in response
to loose monetary policy is likely to affect somedeveloping-country exports and growth in the
short-term. The effects are expected to be balanced
overall due to potential gains through supplies of
inputs, including parts and components as well as
imports of competitive technology, machinery andequipment.

Growth in the East Asia & the Pacific region
slowed to 7.5 percent in 2012, which neverthelessrepresented 40 percent of global growth. The
slowdown was due to slower growth in China,
which has started to shift its economy awayfrom excessive reliance on investment andnet exports.

Japanese quantitative easing is likely to exacerbate
capital inflows, potentially contributing to demand
price pressures, asset price inflation and a further
rise in domestic debt encouraged by low borrowing
costs. Although net capital flows are not expected
to generate sustained pressures on regional
exchange rates, low Japanese interest rates could
increase capital flows and exchange rate volatility.

Growth in the rest of the region accelerated to 6.2
percent, 1.6 percentage points faster than the
average of the preceding decade and comparable to
growth during the boom and bounce-back years of2007 and 2010.
With virtually all countries in the region having
recovered from the 2008 crisis—largely thanks todomestic stimulus—rising debt levels and asset
bubbles are increasingly a source of concern
especially in the context of strong capital flows andweak external demand environment.

The recent decline in global commodity prices may
reflect a turning point as past investments came on
stream. Should this easing accelerate, fiscal andcurrent accounts, and incomes and growth incommodity exporters like Indonesia, Malaysia,
Mongolia, Papua New Guinea (PNG), Timor Lesteand Solomon Islands could come under pressure,even as lower prices would benefit importers. The
negative impact is expected to be muted in
Malaysia and Indonesia where the decline in oil
prices will contribute to an improvement of budgetbalances through a reduction in fuel subsidies.

Economic outlook: GDP growth in theregion is projected to slow to 7.3 percent in 2013reflecting weak global conditions and waning
effects of stimulus measures. China is projected toslow to 7.7 percent rate in 2013 but accelerate toabout 8 percent in 2014 and 2015 as global
conditions improve.

Policy recommendations: With most of
the region having fully recovered from the financial
crisis, and many countries growing at historicallyhigh rates, policies could become lessaccommodative. Should capital flows makeadjusting monetary policy difficult a larger share of
the burden may have to be borne by fiscal
tightening, while macro-prudential measures would
gain in importance to safeguard financial stability.
Fiscal consolidation can perhaps be achieved byrationalizing current spending, which would allow
structural reforms and growth enhancing
infrastructure investment programs to continue.

Growth in the rest of the region is expected toslow to 5.7 percent in 2013 due to fiscal tightening,
capacity constraints and a negative contribution
from net exports reflecting exchange rate
movements and weak external demand. Growth isprojected to firm up to about 6 percent in 2014
and 2015 as external conditions improve.

Risks and vulnerabilities: The risk of aserious crisis emanating from high-income
countries has declined, but the strength and timingof recovery in Europe remains uncertain.

Rebuilding buffers to absorb future shocks,
remains a priority in Cambodia, Lao PDR,
Vietnam, the Pacific islands and Mongolia where
gradual global and regional integration has
benefitted growth, but also made these economies
more vulnerable to global and regional businesscycles and commodity price fluctuations.

Developments throughout the region will remainsensitive to outturns in China and Japan. The main
risk related to China remains the possibility thathigh investment rates prove unsustainable,
provoking a disorderly unwinding and sharp
economic slowdown.

119

GLOBAL ECONOMIC PROSPECTS | June 2013

East Asia and the Pacific Annex

Recent developments

This strong annual performance came despite a
mid-year slowdown, caused by slower growth inChina and the mid-year ramp-up in Euro Area
financial market tensions. After slumping sharply midyear, real-side activity (industrial production, and exports)
picked up pace in the fourth quarter (figure EAP.2).

Although growth in the East Asia andthe Pacific region slowed to 7.5
percent in 2012, its contribution to
global growth was still an impressive
40 percent

Many countries swiftly reacted to the
mid-year slowdown and to the weakexternal demand by loosening
macroeconomic policy
Monetary policy was relaxed, with the majority of
the central banks—Malaysia being a notable
exception—cutting policy rates during 2012.
Vietnam implemented the most aggressive easing,cutting interest rates by 600 basis points,
unwinding a tightening of equal magnitude
implemented the year before.

The growth slowdown was largely due to slower
growth in China as it started to reduce its relianceon net-exports and investment. China’s growth declined to
7.8 percent in 2012—the weakest rate since 1999.
Outside China, regional growth accelerated from
4.6 percent in 2011 to 6.2 percent in 2012. Thiswas 1.6 percentage points faster than the annual
average growth rate attained over the preceding
decade and comparable only to the growth rates
observed during the boom and bounce-back yearsof 2007 and 2010.

Fiscal policy was broadly accommodative withmany countries in the region, including Indonesia,
Malaysia and Thailand accelerating public-sector
investment programs through budget and stateowned enterprise activity, and local government
investments, particularly China. Malaysia steppedup its cash transfers and civil service bonuses,
Thailand enlarged its rice subvention scheme andimplemented the significant car buyer incentive programs.

This acceleration partly reflected Thailand’srecovery from the devastating floods in 2011(figure
EAP. 1). GDP grew 6.5 percent in 2012 versus
only 0.1 percent in 2011. But the acceleration was
more widespread, if less spectacular elsewhere. Sixty
percent of countries in the region grew faster in 2012 thanin 2011, and more than two thirds grew faster than 6
percent.
Fig EAP.1

Partly as a result, real credit growth in the region
accelerated sharply, reaching 20 percent rate inIndonesia, 14.6 percent in China and 10 percent in
Malaysia and Thailand (figure EAP. 3).
Fig EAP.2

Economic rebound of the East Asia andthe Pacific region has been impressive

Industrial production, % change, 3/3m, saar
45

GDP, % change, quarter-over-quarter, saar

18

31

13

17

8

3

3
-2

Diverging trends in industrial output
growth across the region-11

11Q111Q211Q311Q412Q112Q212Q312Q413Q1

-7

-25

ASEAN 4China

Developing excl. EAPWorld excl. EAP

China
Japan

Source: World Bank; Datastream.

Jul '12

Oct '12

Philippines
Indonesia

East Asia (excl. China)

Source: World Bank; Datastream.

120

Jan '13

Apr '13
Malaysia

GLOBAL ECONOMIC PROSPECTS | June 2013

Fig EAP.3

East Asia and the Pacific Annex

The combination of the loose macro
policy and fast growth has
contributed to a significant rise in
private and public-sector debt levelsin the region

Credit growth accelerated across theregion during 2012

Real credit growth, % change, year-over-year
50

40

30

20

10

0
07M03

08M03

09M03

10M03

11M03

12M03

13M3

-10
China
Philippines

Indonesia
Thailand

Malaysia
Vietnam

Non-government debt has also been rising in
China, Malaysia and Thailand and now exceeds
150 percent of GDP in China and Malaysia and isabove 100 percent of GDP in Thailand (figures
EAP. 4 & 5).

Source: World Bank; IFS; IMF.

The stimulus measures coincided with arevival in global capital flows and demand(see capital flow section below), partly
because of the lags involved with macro
policy, and contributing to a sharp
acceleration in economic activity, with
regional quarterly GDP rebounding at a 8.4
percent annualized rate in 4Q2012.

Household debt represents the larger share of that
total, at around 77 percent of GDP in Thailand(consolidated debt to deposit taking corporations
and other financial corporations), and is estimatedat around 80 percent of GDP in Malaysia.
Rapid growth of household debt resulted from a
combined effect of low interest rates and strong
demand. Present levels of household debt areabout 2-3 times higher of their pre-1997 crisis
levels in China, Malaysia and Thailand.

Reflecting the stimuli, central budget deficits
deteriorated across the region exceeding 3
percent of GDP in all countries except
China, Indonesia, PNG and the Philippines.
Consolidated budget deficits, including local
budget financing had exceed 3 percent of
GDP in China.
Fig EAP.4

Government debt remains well below high-income
levels (it exceed 100 percent of GDP in some
European countries, including Greece, Italy andPortugal, the United States and Japan), but havecontinued to rise despite high rates of GDP
growth in Thailand, Malaysia and China.

In China, non-Government sector debt isconcentrated in the corporate sector (about 2/3s
Fig EAP.5

Non-financial corporate debt is thelargest portion of China’s total debt

Household debt in Malaysia andThailand is high and expanding

Share of GDP
90

Share of GDP

80

Indonesia

70
60

Thailand

50
40
30

China

20
10

Malaysia0
Jan-06

0

50

100

150

200

General Government

Non-Financial corporations

HH

Other

Jan-07

Indonesia

Jan-08Jan-09China

Jan-10ThailandJan-11

Jan-12

Malaysia

Note: Decomposition of Malaysia’s debt is an estimate. For Thailand,
deposit taking corporations only.
Source: World Bank; BIS.

Source: World Bank; BIS; IMF.

121

GLOBAL ECONOMIC PROSPECTS | June 2013

East Asia and the Pacific Annexof total non-Government sector debt). The
composition of non-Government debt is morebalanced and corporate debt is lower than its pre1995-1997 crisis levels in Indonesia, Malaysia andThailand.

surge in imports, including for capital goods. At thesame time, the terms of trade of commodity
exporting countries (Indonesia, Malaysia, Mongolia
and Papua New Guinea) deteriorated on weaker
commodity prices (figure EAP. 6).

At the same time, the overall external
position of the key Asian economies has beensignificantly strengthened over the past
decades through build-up of foreign asset andstrengthening of reserve base. The East Asia
economies are also better prepared to copewith external headwinds in the context of theflexible exchange rate regimes that they havebeen increasingly adopting.

Regional exports meanwhile came under pressure
from global weakness. A combined effect of thosedevelopments put further pressure on net-exports(exports-imports) which have been an increasingly
large drag on growth (figure EAP. 7).
Net-exports subtracted 4 percentage points fromoverall GDP growth in Malaysia and about 1.5
percentage points in Indonesia and Thailand in
2012. In the Philippines, on the other hand the netexport contribution to growth was positive partly
reflecting the post-Tokohu earthquake reconstruction
related exports to Japan.

While fast growing Asian economies still havefiscal room to counter-act a possible financial
crisis, the rapid build-up of debt during the
low-interest rate period increased theexposure of the major regional developing
economies and raises certain concerns. It is
recommended that favorable growth period
could be used to strengthen buffers tocounteract future external shocks and reduce
vulnerabilities.

The bulk of developing countries in
East Asia & the Pacific region havecompleted their recovery from thecrisisRobust, policy-fueled demandconditions boosted import demandacross the region while exports
remained weakThis increased demand for imports was primarily
driven by high rates of investment, which led to a

The relatively small hit to regional output in theimmediate wake of the crisis and the strong growthsince, means that the output gaps (the difference
between demand levels and underlying supply
potential) either only slightly negative or positive inthree quarters of countries in the region in 2012.
Less than 1/5th of the countries in the region havebeen operating at or above their potential since2011.

Fig EAP.6

Fig EAP.7

Imports expanded at double digit
rates across the region

Import volume, % change, 3m/3m, saar
60

Exporter landscape changes partly reflecting the REER moves, but China retains its
lead exporter position despite renminbi
appreciation

Export volume, % change, 3m/3m, saar

50

36

40
30

12

20
10

-12

0
-10
-20

-36

-30
-40

-60

Jul '12China
ThailandJapan
Philippines

Oct '12Jan '13

Apr '13-50

Indonesia
East Asia (excl. China)

China
Japan

Source: World Bank; Datastream.

Jul '12

Oct '12Jan '13

Philippines

Indonesia

East Asia (excl. China)

Source: World Bank; Datastream.

122

Apr '13

GLOBAL ECONOMIC PROSPECTS | June 2013

East Asia and the Pacific Annex

Strong growth in the last part of 2012
has contributed to some overheatingpressures in a number of countries in
the region

with the earlier sharp adjustments from a peak levelof 10.1 percent of GDP in 2007.
Along the region’s smaller economies,
Mongolia’s current account deficit expanded
further reaching about 1/3rd of the country's
GDP reflecting both weaker commodity
prices and increased investment (with highimport content) in the mining sector. Lao andCambodia continued to record large current
account deficits (16 percent and 11.5 percent
of GDP respectively).

The overheating pressures manifested themselvesin growing current account deficits (as domestic
supply was unable to meet rapidly rising demand),in rising inflation, asset price pressures and highproperty prices depending on specific country
circumstances and policy context.

Inflation in the region as a whole
picked up in the first quarter of 2013,
but at a 3.1 percent annualized paceremains relatively modest

Strong domestic demand, partly due
to high investment rates has
contributed to a deterioration inregional current account positions

This aggregate situation masks significant
intra-regional variation and mainly reflects
relatively modest inflation of 2.7 percent in
China (3m/3m saar) versus the rest of theregion where it has climbed to 5.1 percent(3m/3m saar) in the three months to April(figure EAP. 9).

This deterioration happened despite fallingcommodity prices, which should have worked in
the other direction for the majority of countries in
the region. For the ASEAN-4 countries, thedeterioration was particularly marked (2.2 percent
of GDP), although the group’s current accountremained in surplus.

In China, the current account surplus seem to havestabilized at around 2.6 percent of GDP, consistent

In Indonesia, the quarterly inflation rate accelerated
to 9 percent (3m/3m saar) rate in the first quarterreflecting capacity constraints, but also currency
depreciation and a rise in food prices due to trade
restrictions. Inflation has also accelerated strongly
in Lao, PDR and core inflation remains high andthe headline inflation extremely volatile in Vietnam
despite a slowing of growth.

Fig EAP.8

Fig EAP.9

Most of this decline was due to an $26 billion, or
3.0 percent of GDP adjustment in Indonesia’s
current account position reflecting a record trade
deficit of $1.7 billion (figure EAP. 8).

Current account positions have generally deteriorated especially for the commodity exporters

CPI, % change, 3m/3m, saar
14

USD billions
500

USD billions
50
40

Selected countries in the region experience price pressures

12

400

10

300

8

200

6

30
20

10
0
2007

2008

2009

2010

2011

2012

4

100

-10

2
0

-20

0

-30

Jan '11-100
Malaysia

ThailandPhilippines

China (RHS)

May '11

Sep '11Jan '12May '12

Sep '12Jan '13

May '13

Indonesia

EAP (excluding China)
China

Source: World Bank; Datastream.

Indonesia

Source: World Bank; IMF; IFS; Datastream.

123

Lao, PDR

Malaysia

GLOBAL ECONOMIC PROSPECTS | June 2013

East Asia and the Pacific Annex

In China, where growth has been slowing, inflationpressures are less of a concern and the headline
inflation rate remains anchored around the central
bank’s revised 3.5 percent inflation target. However
price pressures are present in certain rapidly
growing segments of the economy, including
real estate.

Chinese stocks and record highs reached bysome ASEAN country stocks. ASEAN
markets boomed with some markets(Indonesia, Thailand, Lao, PDR and The
Philippines) advancing by 30-50 percent sincelast May (table EAP. 1).
The rapid increase in stock prices combinedwith high price-earnings ratios (between 17
and 22 still below those in high-income
countries) are raising concerns about
overvaluation of stocks. In fact, the top
performing East Asian developing market
stocks (Indonesia, the Philippines andThailand) have seen about a 7-8 percent
decline in past few weeks from this year —around mid-May—picks.

Excess demand pressures and loose
monetary conditions may also becontributing to asset price bubbles in
the region
Overall, the region’s stock market performancehas been mixed. The regional stock market
composite, the MSCI EMF Asia Index, up
only about 10 percent since June 2012 anddropped by about 2 percent in the first fourmonthsof2013.
Nevertheless,itoutperformed the global emerging market
benchmark indicator which registered an
overall 4 percent loss so far this year.

Property prices continued to increase withthe average square meter prime property
price about two times more than the average
per capita income in Cambodia 1, 1.3 times—of that in China and about 60 percent of theaverage per capita income in Indonesia andThailand (compared with about 10 to 30
percent of the average per capita income inhigh income and developing countries).

The modest performance of the regional index
masks diverging trends i.e. underperformance ofTable EAP.1

Asian stock performance

as of June 10, 2013
Year To
Value
Date:
1-Year:MSCI EMF Asia

651.267-1.91%

9.70%

as of May 16, 2013
Year To
Value
Date: 1-Year:
0.84%
10.00%
679.07

Philippines Stock Exchange PSEi Index

6,875.60

19.95%

38.43%

7,310.94

27.35%

53.84%

Vietnam Ho Chi Minh Stock Index / VN-Index

524.5628.92%

25.81%

490.3420.05%

13.21%

Jakarta Stock Exchange Composite Index

4,777.37

12.00%

26.28%

5,078.68

18.40%

30.62%

Stock Exchange of Thailand SET Index

1,528.55

11.81%

36.18%

1,617.89

18.32%

42.52%

Laos Securities Exchange Composite Index

1,338.82

10.21%

31.87%

1,376.45

13.31%

33.35%FTSE Bursa Malaysia KLCI Index

1,787.80

7.71%

17.43%

1,766.72

5.94%

19.23%

Hong Kong Hang Seng Index

21,615.09-3.01%

17.67%

23,082.68

2.43%

24.08%

Korea Stock Exchange KOSPI Index

1,932.70-3.11%

4.75%

1,986.81-0.51%

7.97%

Shanghai Stock Exchange Composite Index

2,210.90-2.03%-1.83%

2,251.81-0.69%-1.57%

Mongolia Stock Exchange Top 20 Index

14,998.14-14.83%-20.45%

13,543.99-23.09%-33.32%

Tokyo Stock Exchange Tokyo Price Index TOPIX

1,111.97

30.64%

55.80%

1,245.23

46.16%

72.01%

S&P 500 Index

1,642.81

16.30%

26.86%

1,654.90

16.96%

27.73%

NASDAQ Composite Index

3,473.77

15.68%

23.49%

3,479.36

15.84%

23.11%Dow Jones Industrial Average

15,238.59

17.67%

24.69%

15,260.43

17.71%

24.45%

Source: Bloomberg.

124

GLOBAL ECONOMIC PROSPECTS | June 2013

Fig EAP.10

East Asia and the Pacific Annex

Capital flows

Net capital flows recovered to their2011 levels in nominal terms, but fell
short of average levels as share of GDP
observed over the past decadeShare of GDP
600

The improvement in global financial market
conditions during the second half of 2012 (seeGEP January 2013) combined with the strong
growth in the East Asia and the Pacific region attracted
increased capital flows to the region towards year-end.
Overall net flows reached $457.8 billion—
about 10 percent lower than in 2011 or about
4.6 percent of regional GDP (figure EAP.
10). The composition of the net capital flows
to the region has changed reflecting local
conditions. Equity flows, reached about 74
percent of the total inflows to the region
reflecting a US$54.8 billion (about 38 percent
y/y reduction) decline of short-term debt
flows due to lower trade financing (table
EAP.2).

Billions of US Dollars
8
7

500

6
400

Decade avarage (% of GDP)

5

300

4
3

200

2
100

1

0

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
USD billions

Share of GDP (RHS)

Source: World Bank; Datastream.

Gross rental yields increased to 9 percent inIndonesia 2 and 6-7 percent in the Philippines
and Thailand, which is
two-three times
higher than high income and developing
country average.

Table EAP.2

FDI inflows, which represent the bulk (morethan 90 percent) of total equity inflows
declined by 8.3 percent (by US$ 27.9 billion
in nominal terms), while net portfolio equity
inflows quadrupled (from US$ 8.4 billion in2011 to US$31 billion in 2012) recovering totheir pre-2011 level in nominal terms. The
Bond issuance in the region, rose

Net capital flows to East Asia and the Pacific ($ billions)

2008

2009

2010

2011

2012e

2013f

2014f

2015f

Capital Inflows

206.9

255.1

516.5

510.1

457.8

471.8

481.9

515.3

Private inflows, net
Equity Inflows, net
Net FDI inflows
Net portfolio equity inflows
Private creditors. Net
Bonds
Banks
Short-term debt flows
Other private
Official inflows, net
World Bank
IMF
Other official

207.3
203.8
211.3
-7.6
3.6
1.2
17.9
-13.3
-2.3
-0.4
1.2
-0.05
-1.5

251.2
183.9
153.7
30.2
67.3
8.4
-6.1
65.0
0.03
3.9
2.2
0.1
1.6

513.5
329.5
289.7
39.8
184.0
20.8
13.2
148.9
1.1
3.0
2.7
-0.02
0.3

508.7
343.2
334.9
8.4
165.4
18.9
1.8
144.9
-0.2
1.4
0.9
-0.03
0.6

457.6
337.9
306.9
31.0
119.7
35.4
-2.4
90.1
-3.4
0.2
0.3
-0.2
0.1

471.9
325.6
302.9
22.7
146.3
39.6
8.1
98.3
0.3
-0.1

483.2
327.7
300.3
27.4
155.5
33.7
10.3
111.3
0.2
-1.3

517.2
331.6
298.2
33.4
185.6
29.6
12.3
143.2
0.5
-1.9

Source: The World Bank
Note : e = estimate, f = forecast

125

GLOBAL ECONOMIC PROSPECTS | June 2013

East Asia and the Pacific Annex

insignificantly to $35.4 billion in 2012 (a 16.5
percent increase) from what was a robust
pace of issuance ($18.9 billion) in 2011.

over-quarter saar, from 8.7 percent in2012Q4. In Indonesia, GDP expanded at an
estimated 5.3 percent (q/q saar) in the firstquarter of 2013, after a brisk 6.9 percent
increase in 2012Q4 (figure EAP. 11).

Economic outlook

Regional industrial production activity also slowed
to 6.0 percent (q/q, saar) in the first quarter,
reflecting modest slowdown in China and a muchsharper correction among ASEAN economies.

While signs of overheating appearedin several economies in 2012, thepace of expansion has eased in
2013Q1 reflecting fiscal tightening,and slow recovery of external
demandProspects for the region going
forward point to a modest
acceleration in activity during the restof 2013, but annual growth isprojected to be lower than in 2012
Forward looking indicators suggest positive andbroadly-based, if somewhat weaker, growth going
forward. For instance, Purchasing Managers’
Indexes (PMI) for all countries in the region
recovered above the 50 threshold in April, but
remain volatile showing some recent strengthening
for Indonesia and weakening for Vietnam (figure
EAP. 12).

Output growth slowed in China and in the otherfast growing ASEAN-4 economies, particularly in
Malaysia and Thailand following a sharp
acceleration in the second half of 2012. In
Malaysia, first quarter GDP growth came at anegative 2.5 percent saar, slowing from 8 percent
rate in 2012Q4 mainly reflecting fiscal
consolidation but also negative contribution fromnet-exports. Thailand’s output has contracted
sharply in Q12013 following a revised 11.7 percent
quarter-on-quarter saar growth in 2012Q4.

The projected pick up in activity will neverthelessdeliver somewhat slower growth in the region with
China estimated to growth at 7.7 percent in 2013
slightly below a 7.8 percent rate of 2012.

In China and Indonesia, the slowing was lesspronounced. China’s first quarter GDP
growth declined to a 6.6 percent quarterFig EAP.11

This will be combined with some quite
significant easing in ASEAN economies (5.7
FigEAP.12

Quarterly growth eased in Malaysia andThailandEast Asia & Pacific PMIs signal economic expansion

Difusion index, greater than 50 indicates expansion
60

GDP growth, q/q , saar
55
45

55

35

25
50

15

5
-5 08Q1

-15

09Q1

10Q1

11Q1

12Q1

50

45

13Q1

-25

40

-35
-45

May '10

Malaysia
Indonesia

Thailand
China

China

Sep '10Jan '11 May '11 Sep '11

Japan

Vietnam

Source: World Bank; Datastream.

Source: World Bank; Datastream.

126

Jan '12 May '12

Sep '12South Korea

Jan '13 May '13

Indonesia

GLOBAL ECONOMIC PROSPECTS | June 2013

East Asia and the Pacific Annex

policy in response to inflationary and asset pricepressures and growing debt levels, but also weak
recovery of global demand, including a projected
decline in demand for imports from Japan due toyen depreciation.

percent in 2013 versus 6.2 percent in 2012)(table EAP.3). Output growth pattern in
ASEAN reflects a combination of continued
strong growth in Indonesia and certain easingin Malaysia, Thailand and the Philippinesfrom record high levels achieved in 2012.

Monetary conditions remain relatively loose withthe majority of the central banks on hold or easing,including recent rate cuts in Mongolia, Vietnam
and Thailand.

Regional growth is projected torecover to 7.5 percent in 2014 and2015 on improved external
conditions, but the dramatic change
in Japanese policy introduces
significant uncertainty into theforecast for developing East Asianand the Pacific region

Cambodia, Lao, Mongolia and Myanmar are
projected to continue to deliver strong growth
benefiting from a dynamic economic transformation,although the prospects for the region’s small(er)economies are mixed.
Output gains from the completion of a newgold mine in Lao PDR have already beenrealized and so growth is projected to slow.
In Cambodia, a rebound in global trade
should support further improvements ingarment production and exports.

The projected slowdown of economic growth inthese three countries is reflecting capacity
constraints and an expected fiscal tightening of
Table EAP.3

East Asia and Pacific forecast summary(annual percent change unless indicated otherwise)00-09aGDP at market prices b

8.1

2010

2011

9.6

8.3

Est. Forecast
2012
2013
2014
7.5

7.3

7.5

2015
7.5

(Sub -region totals-- countries with full NIA + BOP data) c

GDP at market prices c
GDP per capita (units in US$)PPP GDPPrivate consumption
Public consumption
Fixed investment
Exports, GNFS d
Imports, GNFS d
Net exports, contribution to growth
Current account bal/GDP (%)
GDP deflator (median, LCU)
Fiscal balance/GDP (%)

8.1
7.3
8.0
6.0
7.4
10.8
10.3
9.6
0.8
4.6
5.4
-1.8

9.7
8.9
9.6
7.3
9.7
11.4
23.7
19.5
2.7
3.8
5.3
-1.6

8.4
7.6
8.3
8.0
9.0
8.8
8.6
6.2
1.5
2.7
5.6
-1.4

7.5
6.8
7.5
8.2
8.4
8.2
4.4
5.4
0.0
2.2
4.4
-1.9

7.3
6.7
7.3
8.0
8.2
6.8
8.7
8.4
0.8
2.0
3.9
-2.3

7.6
6.9
7.5
8.0
8.1
6.4
9.5
8.9
1.0
1.9
5.1
-2.5

7.5
6.9
7.5
7.9
7.5
5.6
10.1
9.3
1.1
1.9
4.0
-2.4

Memo items: GDP
East Asia excluding China
4.4
6.9
4.6
6.2
5.7
5.9
6.0
China
9.4
10.4
9.3
7.8
7.7
8.0
7.9
Indonesia
4.6
6.2
6.5
6.2
6.2
6.5
6.2
Thailand
3.5
7.8
0.1
6.5
5.0
5.0
5.5
Source : World Bank.
a. Growth rates over intervals are compound weighted averages; average growth contributions, ratiosand deflators are calculated as simple averages of the annual weighted averages for the region.
b. GDP at market prices and expenditure components are measured in constant 2005 U.S. dollars.
c. Sub-region aggregate excludes Fiji, Myanmar and Timor-Leste, for which data limitations prevent theforecasting of GDP components or Balance of Payments details.
d. Exports and imports of goods and non-factor services (GNFS).

127

GLOBAL ECONOMIC PROSPECTS | June 2013

Table EAP.4

East Asia and the Pacific Annex

East Asia and Pacific country forecasts

00-09a2010

2011

Est. Forecast
2012
2013
2014

2015

Cambodia
GDP at market prices (% annual growth) b
7.2
6.0
7.1
7.3
7.0
7.0
6.2
Current account bal/GDP (%)
-10.7
-10.1
-8.7
-11.5
-10.1
-9.3
-9.0
China
GDP at market prices (% annual growth) b
9.4
10.4
9.3
7.8
7.7
8.0
7.9
Current account bal/GDP (%)
5.0
4.1
2.8
2.6
2.5
2.5
2.4
Fiji
GDP at market prices (% annual growth) b
1.3
0.1
1.9
2.1
2.2
2.3
2.3
Current account bal/GDP (%)
-7.7
-7.7
-7.8
-7.5
-22.5
-7.8
-7.5
Indonesia
GDP at market prices (% annual growth) b
4.6
6.2
6.5
6.2
6.2
6.5
6.2
Current account bal/GDP (%)
2.5
0.7
0.2
-2.4
-2.5
-1.9
-1.9
Lao PDR
GDP at market prices (% annual growth) b
6.2
8.5
8.0
8.3
8.0
7.7
8.3
Current account bal/GDP (%)
-2.5
-6.4
-10.6
-16.0
-21.8
-20.9
-20.2
Malaysia
GDP at market prices (% annual growth) b
3.9
7.2
5.1
5.6
5.1
5.1
5.3
Current account bal/GDP (%)
12.6
11.1
11.1
7.7
4.6
3.1
2.4
Mongolia
GDP at market prices (% annual growth) b
5.8
6.4
17.5
12.3
13.0
11.5
9.9
Current account bal/GDP (%)
-6.3
-14.3
-30.3
-30.5
-22.8
-19.4
-19.4
Myanmar
GDP at market prices (% annual growth) b
9.7
5.3
5.5
6.3
6.5
6.6
6.7
Current account bal/GDP (%)
-0.7
-1.3
-2.6
-4.1
-4.2
-4.8
-5.1
Papua New Guinea c
GDP at market prices (% annual growth) b
3.0
7.6
9.0
9.0
4.0
7.4
20.0
Current account bal/GDP (%)
-0.1
-25.6
-36.4
-28.4
-20.2
-13.0
9.0
Philippines
GDP at market prices (% annual growth) b
4.0
7.6
3.6
6.8
6.2
6.4
6.4
Current account bal/GDP (%)
1.5
4.5
3.1
2.8
2.8
2.7
2.6
Solomon Islands
GDP at market prices (% annual growth) b
4.3
7.8
10.5
4.8
4.0
4.0
5.1
Current account bal/GDP (%)
-19.8
-30.8
-6.0
-5.8
-10.6
-8.7
-8.5
Thailand
GDP at market prices (% annual growth) b
3.5
7.8
0.1
6.5
5.0
5.0
5.5
Current account bal/GDP (%)
3.3
3.1
1.7
0.7
0.0
0.0
0.1
Timor-Leste
GDP at market prices (% annual growth) b
3.3
9.5
10.6
10.6
10.4
10.2
9.0
Current account bal/GDP (%)
18.4
48.1
55.0
43.5
36.2
25.0
24.0
Vietnam
GDP at market prices (% annual growth) b
6.6
6.4
6.2
5.2
5.3
5.4
5.4
Current account bal/GDP (%)
-8.8
-3.8
0.2
5.9
5.6
3.3
1.0
Source : World Bank.
World Bank forecasts are frequently updated based on new information and changing (global)
circumstances. Consequently, projections presented here may differ from those contained in other
Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any
given moment in time.
Samoa; Tuvalu; Kiribati; Democratic People's Republic of Korea; Marshall Islands; Micronesia,
Federated States; N. Mariana Islands; Palau; and Tonga are not forecast owing to data limitations.
a. GDP growth rates over intervals are compound average; current account balance shares are simple
averages over the period.
b. GDP measured in constant 2005 U.S. dollars.
c. The start of production at Papua-New-Guinea-Liquefied Natural Gas (PNG-LNG) is expected toboost PNG's GDP growth to 20 percent and shift the current account to a 9 percent surplus in 2015.

Source: World Bank.

128GLOBAL ECONOMIC PROSPECTS | June 2013

East Asia and the Pacific Annex

Projections for Mongolia have been revised
downwards, due to delays in major mining projects
and lower commodity prices. In Myanmar, thereform momentum and continued improvementsin the international environment are projected todrive growth gradually toward 6.5 percent in2013/14 and 6.6 percent in 2014/15.
The outlook for the Pacific Islands is positive, but
given the small size of many economies, theprecise shape of the forecast will depend on thetiming with which ongoing and planned investment
projects in the extractive sector come on stream(table EAP.4).

economies through supply chains, especiallyin generally weak demand environment.
Those negative impacts are expected to bebalanced by potential gains through supplies
of parts and components. The economies,
such as the Philippines, and Thailand that areimportant suppliers of parts and components
to Japan in regional production networks,
could benefit from gains by Japanese
exporters in global markets. In addition,
increased demand for a number of key
regional export commodities (e.g. gas from
Malaysia) despite the overall deceleration ofJapan’s import demand, are also expected tobenefit the region. Additional benefits are
expected through competitive imports, which
would allow the regional firms and businesses
to benefit from the ability to import Japanesetechnology, machinery and equipment at
lower costs.

Countries in East Asia and the Pacificregion which have close direct tradeties with Japan have seen theircurrencies hit harder by yen’s
depreciation than other developing
economies

If sustained over time, the depreciation of theyen could eventually alter the dynamics oftrade in the region. It would help cut theregion‘s trade deficits even further, especiallybetween the EAP region and Japan, as Japan
is EAP‘s largest source of imports and fourthlargest export destination. In the mediumterm and assuming that Japan’s growth
accelerates and imports eventually pick-up,
trade partners in the region would benefit
from an increase in Japan‘s demand forregional imports.

Thailand experienced a sharp 13.4 percent
real-effective appreciation of its currency
since July 2012 as the yen depreciated in realeffective terms by over 22 percent (figure
EAP. 13). In the short-term, exchange rate
depreciation is likely to hurt the exports ofcountries that compete in the same kinds ofmarkets as Japan (South Korea, Singapore,
Taiwan, China) and those linked to thoseFig EAP.13

In general, Japan’s recovery as well as
recovery of its exports will depend on depthof the structural reforms and its ability toboost productivity (figure EAP. 14). Overall,as competitive pressures increase, thedeveloping economies in the East Asia andthe Pacific region should continue to focus
on financial stability and accelerate structuralreforms to alter their productivity andcompetitiveness.

East Asia & Pacific regional REER
moves

Real Effective exchange rate index, July 2011=100
120
115
110
105
100
95
90
85

Less certain is the likely impact of Japanesequantitative easing on Japanese capital flows
toward regional economies. For countries
already operating at close to full capacity,
additional capital inflows can be expected toincrease upward pressure on currencies, or ifmonetary authorities intervene upward

80
75
70

Jul '12China

Sep '12Japan

Nov '12ThailandJan '13
Malaysia

Mar '13

May '13

Indonesia

Source: World Bank; Datastream.

129

GLOBAL ECONOMIC PROSPECTS | June 2013

Fig EAP.14

East Asia and the Pacific Annex

may encourage further risk taking and credit
growth. Rising debt levels and asset prices in theemerging East Asia & Pacific economies are
already the growing source of vulnerability (seediscussion on page 4-5). Should these trends
intensify, a disorderly unwinding of these pressures,
including perhaps a domestic banking-sector crisis,
cannot be ruled out, potentially. In ordered toreduce the likelihood of such an outturn fiscal
policy likely needs to be tightened already in 2013and monetary policy focus should be shifted tofinancial stability and tail risk considerations. In themedium-term, if Japan manages to escape its
deflation and rekindle growth with the measurestaken, all developing economies in the region
would benefit through various channels, including
through an increase in Japan’s demand for imports(see also EAP Economic Update and Main text).

Selected country shares of global
exports over the past two decades

Export market share
14
12
10

8
6
4
2
1991M01

1998M05

2005M09

South Korea
USA

2013M01Japan
Germany

Source: World Bank; Datastream.

pressure on money supply, credit andinflation. How large these effects may be will
depend on the extent to which outward flows
increase and the extent to which developing
countries are destinations for these flows (seediscussion in main text and for more detail inthe exchange rate annex).

A strong supply increase in extractive commodity
markets following a quintupling in capital
expenditures globally has already put downward
pressure on prices. If these were to intensify,
commodity exporting countries, includingIndonesia, Malaysia, Mongolia, PNG could see
government revenues and current accountbalances, which are in some cases already very high(e.g. more than 30 percent of GDP in Mongolia)
come under significant pressure — even as lower
prices would benefit importers. In such a lower
price scenario, if investment projects are cancelledandanticipated increases in output notmaterialized, countries could find themselves infinancial difficulty. External debt is especially highin Mongolia (more than 130 percent of GDP), andin Papua New Guinea (about 100 percent ofGDP).

Risks andvulnerabilities
Uncertainties related to economic recovery in highincome countries have subsided, but are stillpresent. Regional risks have gained importance.

Policyrecommendations

The regional outlook remains sensitive to outturns
in China, with the main risk stemming from thepossibility of an abrupt decline in China’s highinvestment rates (see World Bank, 2013a for more).
In addition, as discussed above, there areconsiderable uncertainties surrounding the impact
of Japan’s shift in macroeconomic policy. Overall,
weak yen could affect the dynamics of trade in
manufactures in the region in the short-term. By
extending periods of low interest rates andboosting capital flows, Japanese QE could also
contribute to further pressures on asset prices andEnsuring strong and stable consumption throughraising household incomes to sustain growth is apriority in China along with the reorientation of
investments toward agriculture, human capital andservices and increased efficiency of investment.
The process of rebalancing also involves a gradual130

GLOBAL ECONOMIC PROSPECTS | June 2013

East Asia and the Pacific Annex

shift in the structure of China’s debt toward a
reduction of corporate sector debt, including
through reduction of non-performing assets
accumulated during the years of investment-led
growth.

Over the medium-term, the East Asia & Pacificeconomies will benefit from continued efforts todeepen structural reforms and to keep their global
competitive edge in the context of intensifying
global and regional competition. Countries need toplace greater emphasis on ensuring that market
forces are given sway to incite investment flows
into the most productive assets, including humancapital which will over time boost potential output.

Policymakers in fast-growing-close to (or above)full capacity ASEAN economies where policies
have been relaxed in recent years, includingIndonesia, Malaysia, Thailand and the Philippines
should be focusing their actions on avoiding
overheating and rebuilding fiscal and monetary
buffers which will be challenging in a continued
weak external demand environment. Slower growthin conditions of overheating may be desirable.

Rebuilding buffers to deal with future shocks,
including with commodity shocks remains apriority in Lao PDR, Vietnam, the Pacific islands
and Mongolia where gradual global and regional
integration has benefitted growth, but also madethese economies more vulnerable to global andregional business cycles and commodity pricefluctuations. The effectiveness of the on-going
economic transformation in Myanmar, establishinga track record of reforms under the WTO
accession framework by Lao, and progress in
implementing market oriented reforms in
Cambodia and Vietnam are also importantelements of ensuring sustainable growth.

However, while there are clear costs associatedwith overheating, especially when fast growth has
been accompanied by rapid credit expansion, there
are equally clear opportunity costs associated withprematurely slowing an economy and potentiallyforgoing fast growth and rising incomes. Countries
that are too quick to respond to changes in the
global environment, risk the of inadvertently
running pro-cyclical policies. A balanced approachin implementing policy tightening is recommended.
Macroeconomic policy needs to be more closely
driven by local economic conditions, including thelevel of activity, building on the previous efforts
toward de-coupling the economies from external
demand.

131

GLOBAL ECONOMIC PROSPECTS | June 2013

East Asia and the Pacific Annex

Notes:
1

Footnote 1 (Price per square meter / GDP per capita)*100

2.

The gross annual rental income, expressed as a percentage of property purchase price. This is what a landlord can
expect as return on his investment before taxes, maintenance fees and other costs.

References_____World Bank, 2013a, January 2013 Global Economic Prospects_____World Bank East Asia and the Pacific regional Economic Update, April 2013_____World Bank, China 2030 study, 2012_____World Bank, Regional Economic Updates for Indonesia and for The Philippines), 2013_____IMF, World Economic Outlook, April, 2013132

GLOBAL ECONOMIC PROSPECTS | June 2013

GLOBALECONOMICPROSPECTS

June
2013

Europe and Central Asia Annex

Annex

EUROPEandCENTRALASIAREGION133

GLOBAL ECONOMIC PROSPECTS | June 2013

Europe and Central Asia Annex

Overview

unemployment in several countries, particularly indeveloping Europe. Growth in the two biggest
economies in the region—Russia and Turkey—has
been held back by supply bottlenecks. While
growth in Russia is projected to slow to 2.3 percent
in 2013, from 3.4 percent in 2012, growth inTurkey is expected to increase to 3.6 percent from
2.2 percent, supported by relatively loose
macroeconomic policies. As a result, Turkey’s
current account deficit is expected to widen further
to 6.9 percent in 2013.

The Europe and Central Asia region suffered asignificant economic slowdown in 2012 as theregion faced significant headwinds, including weakexternal demand, deleveraging by European banks,poor harvest and inflationary pressures. As a result,
growth fell to 2.7 percent in 2012, compared with
5.6 percent in 2011 with a sharp slowdown indeveloping Europe and less severe adjustments
among Commonwealth of Independent States.

Going forward, growth in the region should firm
to 3.8 percent in 2014 and 4.2 percent in 2015 as
the fiscal and financial restructuring that has been adrag on growth within the region and in the EuroArea loses intensity. Several domestic factors,
including fiscal and monetary policies and policies
addressing structural issues, are expected togenerate differentiation in economic performance
among countries in the region.

External conditions have significantly improved in2013 with calmer financial markets and therecovery in global trade. As a result, capital flows to
the region have increased with the sharpest
improvement in cross-border syndicated banklending. The pick-up in bank-lending partly reflects
the moderation in the pace of Euro Area bankdeleveraging and going forward, this should easethe supply-side credit constraints. In addition,
several sovereigns and corporates successfully
tapped international bond markets. Similarly,
following the sharp decline in 2012, FDI in theregion is expected to rebound this year. Despite therecovery in global trade, the region’s export
performance has been mixed. Export growth has
been weak in Russia and Latvia but considerablystrong in Romania, Lithuania and Turkey. Several
countries have benefited from the increased
diversification in terms of export destination inrecent years.

Risks and vulnerabilities: While overallrisks are less pronounced than a year ago, theregion’s economic outlook is still subject tovarious challenges. First, although the risk ofa serious Euro Area crisis has diminished,outturns in developing Europe will remainsensitive to the speed of the recovery in theregion’s high-income neighbors. Another risk
is related with commodity prices. The growing
supply and demand substitution brought on byhigh prices have recently weakened commodity
prices. A sharper decline in commodity prices
would have potentially important adverse
consequences for commodity exporting countries
in the region.

Outlook for 2013-2015: GDP growth inEurope and Central Asia is projected to rise
only slightly in 2013 to 2.8 percent. While
growth in the region will be supported by better
harvest and improved external conditions, therebound will be constrained by the weak carry-overfrom last year, ongoing fiscal adjustments, and highBox ECA.1

Developments in the global financial markets
remain important for the region. A sudden
reversal of global financial conditions—due
to unexpected developments in Euro-area orin the United States—might affect significantly
those countries with high external financing
needs (current account deficits andamortization of external debt). In the longer
term, the cost of capital is likely to rise as
high-income countries step back fromquantitative easing. Initially this could expose
vulnerabilities in the region that have built up
during periods of sustained low borrowing
costs. In the long-term, it will reduce growth,
capital flows and FDI to the region.

Country coverage

For the purpose of this note, the Europe and Central Asia
region includes 21 low– and middle-income countries
with income of less than $12,276 GNI per capita in2010. These countries are listed in the table ECA.3 at theend of this note. This classification excludes Croatia, theCzech Republic, Estonia, Hungary, Poland, Slovakia,
and Slovenia. The list of countries for the region may differ from those contained in other World Bank documents.

135

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Europe and Central Asia Annex

Recent Developments

Bulgaria and Serbia, following the contraction
during the second half of 2012. The acceleration ineconomic activity in these countries was more thanoffsetting a 10.6 percent decline in Ukraine.

After the significant headwinds of thepast two years, there are signs of arebound during the first quarter of thisyear

The USD value of imports in the region
accelerated sharply during the first quarter, rising at
a 25.2 percent annualized pace (3m/3m saar) in
March suggesting significant firming of domestic
demand. The rebound was particularly evident inRomania where the USD value of imports grew at a
3 percent pace (3m/3m saar) after a strong contractions in
2012Q4. That said there has been some easing in importvalue growth in Latvia during the same time.

Hit hard by the weakness in high-income Europe,
the Europe and Central Asia region suffered asignificant economic slowdown in 2012 (boxECA.1). The region’s growth fell to 2.7 percent in2012 compared with 5.6 percent the year before.
The slowdown was particularly severe in Eastern
European countries, whose GDP grew less than 1
percent and actually declined in the case of Serbia.
While the adjustment among Commonwealth of
Independent States (CIS) countries was less severe,
they also grew less quickly in 2012 than in 2011.

While remaining above the expansion/ contractionlevel of 50, business confidence indicators such as
Markit’s Purchasing Manager Index (PMI) suggest
a slight easing in economic activity for Russia andTurkey in April.

Despite the recent pick-up in global
trade, the region’s exports havecontracted so far in 2013

The early months of 2013 suggest that economic
activity may have bottomed out for the Eastern
European countries. While first quarter GDP data
is available for only a few countries, they point to arebound in economic activity. In Lithuania, forexample, the real GDP grew 3.5 percent (y/y saar)in 2013Q1, up from 3 percent in the 2012Q4. The
acceleration was boosted by strong export growthat 14.9 percent (3m/3m saar), which helped offset
slowing retail sales. In Serbia, GDP growth
rebounded strongly to about 1.7 percent (y/y saar)in the first quarter, mainly due to Fiat production,
exports and base effects. Ukraine’s growth
remained negative at -0.7 percent (y/y saar), but thepace of decline was significantly slower than the 2.5
percent (y/y saar) fall in the final quarter of 2012,suggesting that output picked up in the fourth quarter.

As discussed in the main text, much of volatility
that characterized the period from 2008 until June2012 appears to have eased, and after declining
sharply in mid-2012 global trade is recovering,
driven by developing countries import demand (seetrade annex). Even in the Euro Area, import demand
growth has turned positive during the first few
months of 2013.
Fig ECA.1

30

Rebound in economic activity in mosteconomies

IP volume growth (3m/3m saar)

20

Higher frequency data for industrial production
also point to strengthening activity in the region,
with annualized growth of 2.4 percent rate in
2013Q1 (figure ECA.1). Industrial output grewparticularly strongly in Serbia (rising at a 19 percent
annualized pace). Other countries also reported
positive growth including Romania (8.1 percent,
3m/3m saar), Turkey (3.8 percent), Kazakhstan(3.4 percent), Bulgaria (3 percent), Lithuania (1.8
percent) and Russia (1.4 percent). The strong
rebound mostly reflects base effects, especially for

SerbiaTurkey10
RussiaECA

0-10
UkraineKazakhstan
-20

-30

Jan '12

Apr '12Jul '12

Oct '12Source: World Bank; Datastream; Haver.

136

Jan '13

Apr '13

GLOBAL ECONOMIC PROSPECTS | June 2013

Europe and Central Asia Annex

The recovery in import demand, particularly
developing-country import demand has led arecovery in high-income and developing-country
exports (see main text), but these benefits have notbeen shared by developing countries in Europe &Central Asia (figure ECA.2). In contrast, the USD
value of their export contracted at a 0.4 percent(3m/3m saar) annualized rate in the three-months
ending in March, with weak foreign sales in Russia
and Latvia the main explanation. A 11.3 percent
annualized decline in the value of Russian exports
mainly reflected weaker commodities sales,
particularly natural gas, which were hit by a slump
in the European market where Russian natural gas
is facing newfound competition.

Iran (as payment for natural gas import) resumed in
February but at a much slower pace than in 2012.1
All three countries benefited from their rising sales
to countries outside high-income Europe. In fact,many countries in the region have managed todiversify their export destinations in recent years,
which should benefit the export performance ofthe region in coming months (see box ECA.2).

Improved access to international debt
markets…
Global financial markets have been significantly
calmer since July 2012, including during the first
four months of 2013 (see the Finance Annex for
details). Market risk perceptions have remained
relatively stable, despite continued economic
weakness in the Euro Area, political gridlock in
Italy that has stalled reforms, and the Cyprus crisis
that culminated in the imposition of capital
controls—a first in the Euro Area.

For several other countries, the USD value ofexports did surge, by an annualized 14.5 percent in
the case of Romania and 9.4 percent in the case of
Lithuania. The growth in Romania's exports
reflected steady improvement in the share of the
car parts industry and transport equipment in total
foreign sales. Lithuania’s exports were supported
by robust oil exports—the country's biggest tradedcommodity, while exports in manufacturing also
picked up due to improved competitivenessfollowing a large devaluation.
Similarly, Turkey’s exports bounced back in Marchby 4.8 percent annualized rate after declining
sharply earlier in the year. The earlier sharp
contraction was because of a decline in gold
exports (and prices) with no sale to Iran in January
and weakening exports to Europe—mainly toGermany, UK and Italy. That said gold exports to

In this improved environment, gross crossborder capital flows (international bondissuance, cross-border syndicated bank loans
and equity issuance) to the Europe andCentral Asia region strengthened in thesecond half of 2012 and into 2013, withinflows in during the first four months of2013 reaching $88.5 billion, more than double
their year earlier levels of $37.4 billion (figure
ECA.3). While equity issuance remained
subdued, both bank lending and bond issuanceFig ECA.2

Fig ECA.3

80

Export from the region slowed exports

Value growth (3m/3m saar)
30

60

Improved access to international debt
markets$ Billions

25
ECA exports

40

20

Bank lending
Equity issuance
Bond issuance

Developing country imports

20

15
0

10
High-income country imports-20
High-income Europe imports

5-40
Jan '11Jul '11Jan '12Jul '12Jan '130

Jan '12

Apr '12Jul '12Source: World Bank; Dealogic.

Source: World Bank; Datastream; Haver.

137

Oct '12Jan '13

Apr '13

GLOBAL ECONOMIC PROSPECTS | June 2013

Box ECA.2

Europe and Central Asia Annex

Increased diversification of exports

Trade has been a central mechanism through which the high-income country debt crisis has affected developing countries inthe Europe and Central Asia region. High-income European countries are particularly important export destinations for Romania, Lithuania and Latvia, with Albania, Macedonia FYR, and Bulgaria having close trade ties with some of the hardest-hit
high-spread Euro Area economies.
Several countries in the region have managed to diversify their export destinations in recent years. As discussed in the main
text, South-South trade has grown rapidly since 2000, although Europe and Central Asia region exports to other developing
regions has grown at 16 percent per annum on average slightly less rapidly than the 19 percent for all developing countries.
As a result, the share of exports to other developing-countries in total exports of the region rose to 39.8 percent in 2011 from
31 percent in 2000 (box figure).
Today China is the second largest export destination for Russia after the European Union. Turkey has successfully diversified its export markets over the last two years, exporting more to Middle Eastern economies including Iran, Iraq and the United Arab Emirates, with Iraq share in Turkey’s exports having increased to 9 percent so far in 2013 from 2 percent in 2004.
Similarly, according to estimates in 2013, Romanian exports to other developing countries including to Mexico (mostly tires,
carpets, steel products, optical instruments, accessories), Brazil (cars and car parts, rolling stock, oil equipment) and Turkey
has been growing rapidly. Romania’s exports to Russia increased at a 42.8 percent annualized pace and to Ukraine by morethan 10 percent in the first two months of the year. Similarly, both Latvia and Lithuania have been increasing is exports to
Russia and other CIS economies. Turkey continues to be a major destination for exports from the South Caucus region as is
China for countries in Central Asia.
Box figure ECA 1.1
Share of exports (%)

30

1996

2003

2011

25
20
15

10
5
0
Within ECAOther developing countries

Source: World Bank; Comtrade.

rebounded. Despite these improvements, inflows into
the region remain low relative to pre-crisis flows.

Bond flows to the region were also robust. Several
sovereigns and corporates successfully tappedinternational bond markets taking advantage ofstrong appetite for higher-yield developing-country
debt, encouraged by low yields in high-income
countries because of quantitative easing. For
example, despite the downgrading of Ukraine’s
sovereign credit rating by Moody’s and S&P in
December 2012, the government and several
companies issued $5.7 billion of combinedinternational bonds. Regular regional emitters
included Russia ($26 billion), Turkey ($8.7 billion),
Kazakhstan ($3.5 billion) and Romania ($1.5
billion), while infrequent issuers such as Azerbaijan($1 billion), and Serbia ($1.5 billion) also took
advantage of conditions. Improved access tointernational bond markets is particularly important

Syndicated bank lending to the region, at $37
billion, showed the sharpest improvement,
increasing three folds from its level a yearago. Even excluding the mega loans to theRussian company Rosnefte Gaz for theirlarge acquisition in 2012, bank lending to theregion was still more than twice as high as induring the first four months of 2012. The
rebound in syndicated bank lending reflected
a global phenomenon as the acute phase ofEuro Area deleveraging appears to havepassed 2 . The moderation in its pace has been
easing lending conditions in the region (seethe discussion later).
138

GLOBAL ECONOMIC PROSPECTS | June 2013

Europe and Central Asia Annex

for countries with large external financing needs(current account deficit and amortization of debt).
This year, this includes Ukraine with financing
needs totaling 42.6 percent of GDP, Bulgaria (39.5
percent of GDP), Turkey (30.8 percent of GDP)and Romania (27.1 percent of GDP).

investment flows from high-income European
economies— traditionally the region’s main sourceof FDI. In a process somewhat akin to the earlier
episode of banking-sector deleveraging,
multinationals from Greece, and the Netherlands
repatriated substantial sums from their foreign
holdings, including investments in the region. In
addition, in contrast to other years, reinvested
earnings were limited due to weak profitability andintercompany loans slowed down sharply.

…with portfolio investments comingwith their challenges
Several countries in the region also received large
portfolio investment flows (foreign investment inlocal stock markets and local currency debt
securities). During the first three months of thisyear, flows to local bond markets were particularly
strong in Turkey ($7.3 billion), Romania ($4.7
billion), and Serbia ($1.9 billion) putting upward
pressure on their currencies. As these flows tend tobe volatile, managing the fluctuations can be quite
challenging, and to the extent that countries rely onthese flows to finance current account deficits they
constitute a source of vulnerability.

Serbia experienced the sharpest (86 percent)decline in FDI inflows, followed by Macedonia,
FYR (71 percent), Moldova (43 percent), Lithuania(32 percent) and Turkey (22 percent). In contrast,
FDI increased in oil-exporting economies
Azerbaijan (18.5 percent) and remained high at its
2011 level in Kazakhstan.
Limited high frequency data suggest a mixed
picture so far in 2013. While FDI inflows to Russia
surged in the first quarter because of a special
acquisition deal (for $15 billion) andmethodological changes, flows to other countries
have been weak.3 Nevertheless, FDI inflows areprojected to rebound in the second half of the year
for other economies as well. Several countries
including Romania, and Serbia might accelerate
privatization efforts this year. With the sharp
increase in FDI to Russia, FDI inflows to theregion are forecast to increase by 20 percent—reaching $132 billion in 2013. In 2014, FDI flows
to the region is expected to slow down mainly on
the account of Russia following an adjustment forthe 2013 mega deal. Excluding Russia, FDI flows
are expected to rebound by 6 percent in the regionin 2014. The recovery in FDI, may be particularly
important for countries such as Georgia andAlbania, where FDI accounts more than 30 percent
of gross domestic capital formation.

After the sharp decline in 2012, FDI
inflows to Europe and Central Asia
are expected to rebound this year
Foreign direct investment (FDI) inflows to Europe& Central Asia region totaled only $109 billion in2012, a 9 percent decline compared with 2011
(figure ECA.4). The sharp fall in FDI mostly
reflects a 25 percent contraction in direct
Fig ECA.4

35

FDI inflows are estimated to have risen
in 2013Q1

Quarterly inflows ($ billions)30

With strong bond flows, rebounds in bank lending
and FDI flows, net private capital flows (debt flows
net of disbursements and equity flows net of
disinvestments) to the Europe and Central Asia
region are forecast to rebound to $255 billion (6.5
percent of the region’s GDP) in 2013 from anestimated $208 billion (5.7 percent) in 2012 (table
ECA.1). Going forward, assuming there is no
major set-back in financial markets confidence, net
capital flows to the region are expected tostrengthen along with global growth to reach $279
billion in 2015—around 5.9 percent of region’s

25
20
15
10
5
0

2010

2011

2012

2013

Source: World Bank; Haver.

139

GLOBAL ECONOMIC PROSPECTS | June 2013

Europe and Central Asia Annex

GDP. By 2015, all flows are expected to increase,with bond issuance expected to level off slightly asbank-lending picks up the pace, with the latter
supported by increased South-South flows.

developing Europe and Central Asia. Remittanceflows to the region are estimated to have fallen by
3.9 percent in US dollar terms to about $40 billion(1.1 percent of GDP) in 2012 (table ECA.1). The
fall partly reflects the Euro depreciation against the
dollar as remittances declined by a smaller 2
percent in Euro terms. Remittances flows declined
in most countries in the region in USD terms(Migration and Development Brief 20). The
exceptions were Tajikistan, Kyrgyz Republic,
Moldova and Armenia, where flows increased by
28 percent, 14 percent, 10 percent and 8.5 percent,respectively as flows were supported by strong
growth in Russia and high oil prices (Migration andDevelopment Brief 17).

Supply-side credit constraints in theregion have eased along withimproved global financial conditions
As discussed in the January edition of GEP 2013,
credit growth in the region was very weak during
the second half of 2012. Real domestic credit
growth has been negative for Latvia and Lithuania
since early 2009, and sharply declined in Albania,
Bulgaria, Macedonia FYR, and Romania. The
intense deleveraging by European banks over thelast two years has contributed to the tight credit
conditions and weak credit growth, especially incountries with strong European bank presence(BIS December 2012). The recent pick up ininternational bank flows to the region, likely signals
the end to the most intense phase of Euro Areadeleveraging. While expected to continue, theslower pace of deleveraging should ease the supply
side constraints when demand for loans picks up
with the economic activity.

The weakness of the flows in the rest of the region
mainly reflects that the preponderance of theirmigrants are in Western Europe, where economic
growth has been weak and unemployment rising.
Remittances to Romania have gyrated in recent
years. They surged after accession into the EU in
2004 but dropped significantly after the crisis in
2008, partly due to increasing numbers of migrants
returning home. Still, migrants are showing
resilience in the face of these dampening effects,
and are nearly sustaining remittances in euro terms.
As economic conditions improve in the European
Union, officially recorded remittances to the region
are expected to keep up with the region’s nominal
GDP growth in 2013-2015, reaching $52 billion(1.1 percent of GDP) in 2015. Despite theprojected slowdown in Russia (see the discussion
later), still high oil price should continue to support
remittance outflows.

Recent data show a modest increase in real credit in
Bulgaria (0.5 percent year-over-year in February)
and Macedonia (2.2 percent) after contacting in
2012, and less rapid declines in Latvia and
Lithuania. The rebound has been more robust for
Turkey, where after slowing due to domestic
monetary policy tightening, real credit growth rose
7.8 percent in the 12 months ending February. A
large part of the increase was funded by foreignloans, with Turkish banks aggressively seeking
wholesale financing abroad. Although the credit
growth (nominal annualized growth of 20 percent)is much higher than its central bank’s official target
at 15 percent, the central bank has not yet acted torestrain it as inflation pressures have subsided.

Output gaps and unemployment
represent persistent problems inmany countries with limited policy
space

Remittances flows to Europe andCentral Asia are also expected tobounce back this year

Since the 2008/09 and European crises, several
countries in the region—particularly developing
Europe, had to deal with declining exports,
European bank deleveraging, and high levels of
external debt. As growth rates sharply declined,
unemployment soared to record levels, as banksdeleveraged and households and firms cut into
spending in an effort to repair damaged balance

Remittances are an importance source of foreign
currency and income for several countries in140

GLOBAL ECONOMIC PROSPECTS | June 2013

Table ECA.1

Europe and Central Asia Annex

Net capital and workers’ remittances flows to Europe and Central Asia*
2008

2009

2010

2011

2012e

2013f

2014f

2015f

Capital Inflows (official+private)

288.0

98.5

180.9

200.1

206.2

253.9

255.0

277.6

Private inflows, net

276.0

62.9

157.3

194.6

207.9

255.2

257.2

278.8

Equity inflows, net

153.8

96.7

87.2

108.6

113.3

139.0

130.7

143.0

Net FDI inflows

169.0

90.4

88.0

118.7

108.8

132.8

121.3

131.3

Net portfolio equity inflows

-15.3

6.4

-0.8

-10.1

4.5

6.2

9.4

11.7

122.2

-33.9

70.1

86.0

94.6

116.2

126.5

135.8

Private creditors, net
Bonds

-18.0

2.9

21.3

13.6

34.4

46.4

38.2

30.4

Banks

151.6

-14.3

-5.8

33.2

26.7

37.2

49.4

59.7

Short-term debt flows

-16.9

-34.9

45.9

24.5

23.1

25.2

29.7

40.0

Other private

5.5

12.4

8.8

14.7

10.4

7.4

9.2

5.7

Official inflows, net

12.0

35.6

23.5

5.5

-1.7

-1.3

-2.2

-1.2

World Bank

0.7

3.0

3.5

2.4

-0.1

IMF

7.0

20.5

9.4

-1.0

-5.0

Other official

4.3

12.1

10.7

4.1

3.4

43.0

47.0

52.0

Memo item:
Migrant remittance inflows

37.0

38.0

39.0

40.0

Central and Eastern Europe & Turkey

19.8

18.9

16.1

16.7

Commonwealth of Independent States

17.2

19.1

22.9

23.3

Source: The World Bank
Note: e = estimate, f = forecast.
*The regional FDI numb ers have b een revised historically since some countries including Russia have started to reporttheir b alance of payment data under BMP6 methodology.

sheets. Fiscal conditions deteriorated throughout
the region, with severe consequences in a few
countries where public debt levels had risen during theboom years.

sector balance sheets have constrained the scope ofmonetary policies to stimulate growth.
On the contrary, Russia, Turkey and Kazakhstan
remain among the exceptions in the region as their
output gaps are relatively small (or positive). Russia

The good news is that growth rate for many of thehardest-hit countries have recovered to levels close
to their underlying potential output. Unfortunately,
growth so far has not been strong enough to makesignificant inroads into existing unemployment andspare capacity in many countries (figure ECA.5).
Several countries including Romania, Ukraine andBulgaria have still large economy-wide output gaps
(3 to 4 percent of their GDP). Several economies
continue to suffer from high levels of
unemployment. The unemployment rate is still inexcess of 10 percent in Albania, Bulgaria, Latvia
and Lithuania. More than 20 percent of the labor
force remain unemployed in Serbia, Kosovo, andMacedonia FYR. Arguably, these economies havebeen caught in a high unemployment equilibrium.
In the short run, policy options have been limited.
Many of these economies are already constrainedby high fiscal deficits. Inflationary pressures of lastyear’s bad crop and necessity of restoring banking-Fig ECA.5
12
10
8
6

Developing Europe grows at potential rate but
output gap remains

Annual growth of potential and actual GDP (%),
Output Gap % of GDP
Output Gap

GDP growth42

Potential Output growth

0

-2
-4
-6
-8
-10
2000

2002

2004

2006

Source: World Bank; Datastream; Haver.

141

2008

2010

2012

GLOBAL ECONOMIC PROSPECTS | June 2013

Europe and Central Asia Annex

has been growing at or above its potential growthrate indicated by its tight labor market and highcapacity utilization. Similarly, Turkey’s current
acceleration in growth has been generating
inflationary pressures, and increasing current
account deficits. For these economies, efforts toincrease growth through monetary and fiscal
stimulus risk being ineffective while adding to debt
or inflationary pressures without any sustained
progress in terms of increased output.

importer) or any local food prices as it did last year,
inflation is expected to rise beyond the central
bank’s target of around 5 percent. Inflation in
Romania remained at 5.7 percent year over year in
February (5.8 percent in January) driven mainly by
foods and services (due to regulatory tariff hikes),
but is expected to go down toward the central
bank’s target rate in the second half of the year.
Inflationary pressures have eased slightly in
Belarus, but inflation remains in double-digits.

Inflationary pressures have recently
moderated in most economies

In contrast, consumer prices fell in Azerbaijan andGeorgia towards the end of 2012 due to weakdomestic demand; decline in food prices; and dueto the earlier nominal appreciation of Georgian lariagainst currencies of its main trading partners.
While inflation has picked up in Azerbaijan,
Georgia's deflation continued in April, the sixth
month in a row with falling prices, with prices
down by 1.7 percent due to the weak economic
activity.

Inflation has moderated in most economies due todeclines in food prices following last summer’s
poor crop, and the passing through of earlier
administrative tariff and tax increases (figure
ECA.6).4.Further inflation declines are expectedamong countries that suffered the biggest food priceshocks.

…allowed central banks cut theirpolicy rates

That said inflation remains at high levels in several
middle-income countries. In Russia, inflation
although down was 7.2 percent year-over-year in
April, well above the central bank’s target of 5-6
percent. However, inflation is expected to decline
to within this range as the adverse base effect fromlast year’s drought disappears and a better crop
could even cause food prices to decline. In Turkey,
despite the recent easing, pressures are likely tobuild in the later part of the year due to robust
domestic demand and supply-side capacity
constraints. In the absence of any significant relief
from global commodity prices (Turkey is an energy
Fig ECA.6

Against the backdrop of easing inflation, sparecapacity, high unemployment and moderate
growth, several central banks in the region
including Albania, Azerbaijan, Belarus, and Georgia
have cut their policy rates (figure ECA.7). Turkey’s
central bank has been narrowing its interest rate
corridor since last year and recently cut its main
policy rate in April. The rate was cut despite a small
output gap, the acceleration in credit growth, andpersistent inflation in part to support growth and
Fig ECA.7

The regional inflation momentum has
subsided in recent months*

912

Several countries cut their policy rates

Rate at end of period

Rate of inflation (%)

810
CPI (3m/3m saar)

78

CPI (y-o-y)

6
6

5

4

4
Jan '102

Jul '11Jan '12Jul '12Jan '11

Georgia (monetary policy)
Kazakhstan (refinancing)
Romania (monetary policy)0
Jan '11Jul '10Jan '13*Excluding Belarus
Source: World Bank; Datastream; Haver.

Source: World Bank; Haver.

142

Jul '11Jan '12

Russia (refinancing)
Turkey (1-wk repo)

Jul '12Jan '13

GLOBAL ECONOMIC PROSPECTS | June 2013

Europe and Central Asia Annex

discourage the inflow of portfolio investment (seethe discussion earlier).

from 2012 is generally low in many economies
in the region, it is negative for Ukraine andGeorgia, and weak for Turkey and Bulgaria.
On the plus side, agricultural production is
expected to be better this year in several countries.
The summer and winter droughts in 2012 cut thegrowth rates significantly and generated inflationarypressures in several countries. Countries including
Albania, Georgia, Kazakhstan, Romania, Russia,
Serbia, and Ukraine will benefit from a higher
contribution of agriculture this year.

In contrast, the Russian central bank has kept its
main policy rates unchanged since December 2012
despite weakening growth. Similarly, the monetary
policy in Ukraine remains restricted by its de-facto
currency peg to the dollar. Maintaining the peg
might be increasingly challenging with economic
contraction.

Outlook: A rebound withincreasing differentiation
among countries

Growth in developing Central and Eastern Europe is
expected increase only slightly to 1.9 percent in2013 from 1.5 percent as most of the factors thatweighed down the growth last year continue tohinder the economic growth this year, but lessintensively in some countries (see the table ECA.2
for the list of countries; table ECA.3 for individual
country forecast). Monetary policy remains
accommodative in most countries, while the paceof fiscal consolidation has eased in Romania, Latvia
and Lithuania, reducing the drag on overall
growth6. However, major fiscal adjustments are stillneeded in several others, including Serbia andMontenegro. In addition, although there are signsof improvement, economic growth in high-income
Europe still remains weak and is expected to pickup only gradually toward the end of the year. Thus
although developing European economies will
benefit from a gradual improvement in highincome countries and are therefore expected to see
a firming in quarterly growth rates, this will have
only a modest impact on whole-year growth in2013. As a result, growth is expected slightly
increase in almost all Central and Eastern

Despite the improved global
environment, growth in the region is
expected to rebound only slightly in2013
Although the global environment has becomeless volatile and growth appears to bestrengthening, GDP growth in Europe andCentral Asia is projected to rise only
gradually in 2013 to 2.8 percent from 2.7
percent in 2012 (table ECA.2). Growth
should firm further to 3.8 percent in 2014
and 4.2 percent in 2015 as the fiscal andfinancial restructuring that has been a drag on
growth within the region and in the EuroArea loses intensity. Several domestic factors
including fiscal and monetary policies andstructural issues will generate differentiationin economic performance among countries.

Fig ECA.8

Growth was weak in 2012Q4

GDP growth (q-o-q, saar)
43

2012Q1

2012Q2

2012Q3

2012Q4

2

The apparently anemic acceleration in 2013
mainly reflects the weakness of growth at theend of 2012. The quarterly profile of growthduring 2013 is stronger than the annual growth rate
because growth in the final quarters of 2012 wasso weak (figure ECA.8). This low base effectreduces carryover 5 into 2013, resulting in
weak annual growth even if quarterly growth
rates are relatively strong. While carry-over

1
0
-1

-2
-3
Georgia Lithuania

LatviaTurkeySource: World Bank; Datastream; Haver.

143

UkraineBulgaria

GLOBAL ECONOMIC PROSPECTS | June 2013

Table ECA.2

Europe and Central Asia Annex

Europe and Central Asia forecast summary(annual percent change unless indicated otherwise)
GDP at market prices b

Est.

Forecast

00-09a

2010

2011

2012

2013

2014

2015

4.2

5.3

5.7

2.7

2.8

3.8

4.2

(Sub -region totals-- countries with full NIA + BOP data)c

GDP at market prices c

4.1

5.4

5.7

2.8

2.8

3.8

4.1

GDP per capita (units in US$)

4.0

4.9

5.2

2.3

2.4

3.4

3.7

PPP GDP

4.3

5.1

5.4

2.8

2.7

3.8

4.1

Private consumption

5.9

4.7

6.9

4.3

4.9

4.5

4.9

Public consumption

2.3

-0.1

2.6

2.3

3.0

2.4

2.2

Fixed investment

6.5

13.6

9.0

2.2

3.0

6.8

6.5

Exports, GNFS d

5.2

7.5

4.7

3.9

2.8

4.6

5.5

Imports, GNFS d

7.0

17.3

15.0

4.7

5.5

6.2

6.6

Net exports, contribution to growth

-0.3

-2.7

-3.4

-0.4

-1.0

-0.8

-0.7

Current account bal/GDP (%)

2.3

0.6

0.7

0.6

-0.3

-1.1

-1.7

GDP deflator (median, LCU)

9.2

10.0

8.4

3.9

5.1

5.1

5.3

Fiscal balance/GDP (%)

-0.6

-3.0

0.9

-0.3

-1.1

-0.1

-0.7

Memo items: GDP
Transition countries e

4.6

3.9

4.4

3.0

2.5

3.5

3.9

Central and Eastern Europe f

4.1

-0.4

3.1

1.5

1.9

2.5

3.1

Commonwealth of Independent States g

4.7

4.7

4.6

3.2

2.6

3.7

4.0

Russia

4.4

4.3

4.3

3.4

2.3

3.5

3.9

Turkey

3.0

9.2

8.8

2.2

3.6

4.5

4.7

Romania
4.2
-1.6
2.5
0.7
1.7
2.2
2.7
Source: World Bank.
a. Growth rates over intervals are compound weighted averages; average growth contributions, ratios anddeflators are calculated as simple averages of the annual weighted averages for the region.
b. GDP at market prices and expenditure components are measured in constant 2005 U.S. dollars.
c. Sub-region aggregate excludes Bosnia and Herzegovina, Kosovo, Montenegro, Serbia, Tajikistan andTurkmenistan. Data limitations prevent the forecasting of GDP components or Balance of Payments details
for these countries.
d. Exports and imports of goods and non-factor services (GNFS).
e. Transition countries: CEE and CIS (f + g below).
f. Central and Eastern Europe: Albania, Bosnia and Herzegovina, Bulgaria, Georgia, Kosovo, Lithuania,
Macedonia, FYR, Montenegro, Romania, Serbia.
g. Commonwealth of Independent States: Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyz Republic,
Moldova, Russian Federation, Tajikistan, Turkmenistan, Ukraine, Uzbekistan.

European countries. The only exceptions are Latvia
and Lithuania where economic growth is expectedto ease in Latvia after more than 5 percent growthover the last two years, and in Lithuania mainly due
to the base effect from 2012’s exceptionally good
harvest and projected weak growth in main trading
partners including Russia and Latvia.

rates and spare capacity. Prospects for the region
critically depend on the progress in addressing
external (large current account deficits) anddomestic (large fiscal deficit, unemployment, andinflation) imbalances. Serbia has the widest twin
deficits in the region. While spare capacity remains
in the region, countries must focus on redressing
structural weaknesses if they wish to return to therelatively robust growth rates of the pre-crisis
period. Areas of focus should include increasing
labor market flexibility, strengthening the businessenvironment and financial market efficiency.

Going forward, growth in developing Europe is
expected to rise in the medium-term to 3.1 percent
by 2015 but will remain below their 2000-2009
average (table ECA.2). As discussed earlier, several
economies still suffer from high unemployment
144

GLOBAL ECONOMIC PROSPECTS | June 2013

Europe and Central Asia Annex

quarter growth. Government consumption is
expected to compensate for moderating private
consumption and the economic slowdown in
Russia. While expected to pick up by 2014 after a
new oilfield becomes operational, medium-term
growth in Kazakhstan will be held back by supplyside constraints.

After the sharper than expected slowdown in 2012,
growth is likely to pick up in Turkey on risingdomestic demand, supported by robust domestic
credit growth and relatively loose macroeconomic
policies. Nevertheless, the growth in 2013 will be
constrained by the weak carryover from 2012. The
growth rate is expected to rebound to 3.6 percent
from 2.2 percent in 2012. With the economy
operating very close to its potential output growth,
the rising domestic demand and declining tourism
receipts will widen the current account deficit to
6.9 percent of GDP in 2013 from 6 percent in2012. While access to external financing has been
comfortable so far 2013 with the recent upgradeof its credit rating to investment grade, the heavy
reliance on portfolio and short-term debt flows is
an important vulnerability. Monetary policy is
expected to remain active in balancing external anddomestic demand while growth picks up with theforecasted global recovery, reaching 4.7 percent by2015.

Growth in Ukraine is forecast to remain weak at 1.0
percent in 2013, up from 0.2 percent in 2012. The
increase will be supported by robust consumer
demand with increasing retail sales, while industry
continues to contract and global steel prices remain
weak. The overall outlook remains challenging,with a high fiscal deficit, persistent current accountdeficit, high external debt, and the currencies defacto peg to the dollar and declining foreign
reserves all sources of concern. Reforms that may
stem from ongoing discussions with the EU/IMF
and Russia will be crucial factors determining theshape of growth going forward.

Growth in Russia is expected to slow down to 2.3
percent in 2013 from 3.4 percent in 2012 after
continuously weakening over the last five quarters(on a year-over-year basis). In addition todisappointing export growth, domestic demand has
been weak—partly due to increasing prices andeasing in oil prices, which has constrained incomes,
corporate profits and investment. At the sametime, despite the increased capital flows,investment has not picked considerably. Similar toTurkey, Russia’s economy is operating close to its
potential and faces high inflation, a tight labormarket, and capacity constraints. But unlike
Turkey, the Russian central bank has pursued a lessaccommodative stance keeping its main policy rates
unchanged. However, this stance might change if
inflationary pressures start to ease in the second
half of the year with adverse base effectdisappearing. In addition, starting this year fiscal
policy will be constrained by a newly acceptedbudget rule. The rule implies that spending cannot
exceed revenues more 1 percent of GDP, while
revenues are calculated as a function of past longterm average oil price. Growth is expected topick up together with the global economy
only modestly to 3.9 percent by 2015 as thepace of expansion will be held back bypotential output growth.

Growth rates in Azerbaijan and Kyrgyzstan are
forecast to be higher in 2013 as high public
investment spending boosts domestic demand anda recovery in Kyrgyzstan’s gold production. On theother hand, Armenia’s growth is expected tomoderate after the strong growth in 2012, asprudent fiscal and monetary policies permit theeconomy to avoid overheating.

Risks andvulnerabilities
While risks are less pronounced, the region’s
economic outlook is still subject to various challenges.
Although the risk of a serious Euro Area crisis has
diminished, outturns in developing Europe willremain sensitive to the speed of the recovery in its
high-income neighbor. Both a significantly stronger
and weaker recovery in high-income Europe would
have significant knock on effects for the region,
including through the financial channel.
The recent easing in commodity prices in response
to growing supply and demand substitution

Growth in Kazakhstan is expected to remain stable
at 5 percent in 2013 following the weak first145

GLOBAL ECONOMIC PROSPECTS | June 2013

Europe and Central Asia Annexbrought on by high prices, is a further source of
uncertainty as to the pace of decline toward longterm equilibrium prices. As discussed in the main
text and the Commodity Annex, if prices ease more
quickly than the baseline, government revenues,
incomes and current account positions in exporting
countries could come under pressure, even as
lower prices benefitted importing nations.
According to the simulations highlighted in table 5in the main text, a rapid decline in oil prices might
reduce the growth rate by 0.8 percentage points,
the current account balance by 2.3 percentage
points, and the fiscal balance by 1.8 percentage
points in 2014 from the baseline scenario for oilexporters in the region. The impact will be positive
for oil-importers with increasing growth by 0.4
percentage points and improving both the current
account and fiscal balance by 0.8 and 0.2
percentage points, respectively from the baseline
scenario. The scenario for the metal price declines
show smaller impact for the region.

flows and FDI (see World Bank, 2010 for an in
depth discussion of channels)
Aside from these global risks for the region’s
economies, banking systems in several countries
have been under pressure by sharp slowdown ineconomic activity, weak credit demand andincrease cost of foreign funding have increased
pressures on profits. Non-performing loans (NPL)
remain higher than 10 percent in several countries
including Kazakhstan, Albania, Ukraine, andSerbia. The high levels of NPL in region’s banking
system may constrain credit growth going forward,
which has already been weak. Nevertheless, there issome level of resilience in most banks in the region
with their capital adequacy ratios in excess of 10
percent by the end of 2012.

Several countries have accessed international
capital markets this year as cost of bond financing
fell. Nevertheless, a sharp drop in confidence infinancial markets—due to unexpecteddevelopments in Euro Area debt resolution and US
fiscal situation—can lead to a sudden reversal of
global financial conditions and adversely affectsignificantly the countries with high externalfinancing needs (current account deficits andamortization of external debt).
In the longer term, developing country financial
conditions may become more difficult as highincome countries step back from quantitativeeasing and base interest rates and spreads rise. The
cost of capital in developing countries is likely torise amid rising long-term yields in high-income
countries. Initially this could expose vulnerabilities
that have built up during periods of sustained low
borrowing costs, intensifying financial market
pressures in the region and even in a worst casescenario provoking local crises. Longer-term,
higher borrowing costs would raise the cost ofcapital and cause firms and foreign investors to
reduce investment levels with negative
consequences for growth (see main text), capital146

GLOBAL ECONOMIC PROSPECTS | June 2013

Table ECA.3

Europe and Central Asia Annex

Europe and Central Asia Country forecasts
Est.
00-09a

2010

2011

2012

Fore ca st
2013

2014

2015

Alba nia
GDP at market prices (% annual growth) b

4.9

3.5

3.0

1.6

1.8

2.0

3.0

Current account bal/GDP (%)

-8.6

-11.4

-12.0

-10.7

-9.5

-8.3

-7.1

Arme nia
GDP at market prices (% annual growth) b

7.7

2.2

4.7

7.2

5.0

5.0

5.0

Current account bal/GDP (%)

-7.4

-14.8

-10.9

-10.6

-9.6

-9.4

-9.4

Aze rba ija n
GDP at market prices (% annual growth) b
Current account bal/GDP (%)

14.4

5.0

0.1

2.2

4.8

4.8

2.9

2.9

28.4

26.5

21.7

13.6

11.9

9.4

Be la rus
GDP at market prices (% annual growth) b

6.6

7.7

5.5

1.5

2.5

2.8

3.0

Current account bal/GDP (%)

-4.6

-15.0

-8.5

-2.9

-4.7

-5.6

-6.1

4.0

0.4

1.8

0.8

1.2

2.1

3.0

-11.3

-1.5

0.1

-1.0

-1.6

-1.6

-2.5

Bulga ria
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Ge orgia
GDP at market prices (% annual growth) b

5.6

6.3

7.2

6.1

4.0

6.3

6.0

-12.6

-10.2

-12.8

-11.5

-9.0

-7.8

-7.4

GDP at market prices (% annual growth) b

7.5

7.3

7.5

5.0

5.0

5.3

5.5

Current account bal/GDP (%)

-2.0

0.9

6.5

3.8

3.2

3.2

3.1

Current account bal/GDP (%)
Ka za khsta n

Kosovo
GDP at market prices (% annual growth) b

5.8

3.9

5.0

2.3

3.1

4.0

4.2

-18.2

-25.9

-26.2

-21.3

-21.0

-18.8

-16.0

GDP at market prices (% annual growth) b

4.8

-0.5

6.0

-0.9

7.4

7.5

5.3

Current account bal/GDP (%)

-6.0

-6.4

-6.5

-15.3

-8.0

-6.0

-5.6

Current account bal/GDP (%)
Kyrgyz Re public

La tvia
GDP at market prices (% annual growth) b

3.7

-0.3

5.5

5.6

3.6

4.1

3.7

-10.2

3.0

-2.1

-1.7

-2.8

-2.8

-3.6

GDP at market prices (% annual growth) b

4.2

1.3

5.9

3.7

3.0

3.5

4.2

Current account bal/GDP (%)

-7.1

1.6

-1.8

-0.9

-1.4

-1.7

-2.0

Current account bal/GDP (%)
Lithua nia

Moldova
GDP at market prices (% annual growth) b

4.4

7.1

6.8

-0.8

3.0

4.0

5.0

Current account bal/GDP (%)

-8.4

-7.7

-11.3

-7.0

-7.4

-7.9

-8.9

Ma ce donia , FYR
GDP at market prices (% annual growth) b

2.3

1.8

3.0

-0.3

1.4

2.5

3.5

Current account bal/GDP (%)

-6.1

-2.2

-3.0

-3.9

-5.0

-5.5

-5.2

Monte ne gro
GDP at market prices (2005 US$) b

-

2.5

3.2

-0.5

0.8

1.8

2.0

-11.4

-22.9

-17.7

-17.9

-19.0

-18.3

-17.0

GDP at market prices (% annual growth) b

4.2

-1.6

2.5

0.7

1.7

2.2

2.7

Current account bal/GDP (%)

-7.6

-4.5

-4.6

-3.8

-3.7

-3.6

-3.6

GDP at market prices (% annual growth) b

4.4

4.3

4.3

3.4

2.3

3.5

3.9

Current account bal/GDP (%)

9.3

4.8

5.3

3.9

3.0

1.6

0.6

Current account bal/GDP (%)
Roma nia

Russia n Fe de ra tion

Se rbia
GDP at market prices (% annual growth) b

3.6

1.0

1.6

-1.7

2.0

3.1

3.6

Current account bal/GDP (%)

-9.7

-6.7

-9.2

-10.9

-9.9

-9.0

-8.8

Ta jikista n
GDP at market prices (% annual growth) b

7.7

6.5

7.4

7.5

7.0

6.0

6.0

Current account bal/GDP (%)

-4.8

-1.2

-4.7

-1.9

-2.2

-2.4

-2.5

Turke yGDP at market prices (% annual growth) b

3.0

9.2

8.8

2.2

3.6

4.5

4.7

Current account bal/GDP (%)

-3.3

-6.4

-9.7

-6.0

-6.9

-7.1

-7.2

Ukra ine
GDP at market prices (% annual growth) b

3.9

4.2

5.2

0.2

1.0

3.0

4.0

Current account bal/GDP (%)

2.2

-2.2

-5.5

-8.4

-7.4

-6.8

-6.2

6.1

8.5

8.3

8.2

7.4

7.1

6.7

Uzbe kista n
GDP at market prices (% annual growth) b

Current account bal/GDP (%)
7.5
6.2
5.8
1.0
1.1
1.3
Source: W orld Bank.
W orld Bank forecasts are frequently updated b ased on new information and changing (glob al)
circumstances. Consequently, projections presented here may differ from those contained in other Bank
documents, even if b asic assessments of countries’ prospects do not significantly differ at any given
moment in time.
Bosnia and Herzegovina, Turkmenistan are not forecast owing to data limitations.
a. GDP growth rates over intervals are compound average; current account balance shares are simple
averages over the period.
b. GDP measured in constant 2005 U.S. dollars.

147

2.2

GLOBAL ECONOMIC PROSPECTS | June 2013

Europe and Central Asia Annex

Notes
1.

Turkey did not sell any gold to Iran in January as banks and dealers waited until early February for the
implementation of U.S. sanctions that tightened control over precious metal sales. The trade has resumed in
February as the United States has given Turkey a six-month waiver exempting it from sanctions on trade with Iran,which is now due to expire in July2.

By June 2012, three quarters of European banks had complied with the ECB’s capital ratio requirements.
Moreover, according to the April ECB Bank Lending Survey, Euro Area banks are beginning to loosen credit
standards. Euro Area banks have begun repaying ECB crisis loans and have already started to repay some of theloans well in advance (See Finance Annex).

3.

The regional FDI numbers have been revised up historically since several countries including Russia have started
to report their balance of payment data under BMP6 methodology. FDI flows to Russia surged in the first quarterof 2013 as the deal between Rosneft and BP around the TNK-BP sale that eventually resulted in the acquisition of
18.5 percent of Rosneft, worth almost $15 billon. Adjusted for this one-off deal, the FDI remained fairly stable
during the first quarter of 2013.

4.

The figure excludes Belarus because of its outlier status in terms of 2011 inflation, which reached 108.7 percent,after almost threefold devaluation of the national currency.

5.

Carry over (or statistical overhang) is defined as the rate of growth that would be observed if quarterly GDP inyear t remained unchanged from the level of the fourth quarter of the previous year. It therefore measures thecontribution to annual growth in year t, of the quarterly expansion during the previous year (GEP 2012 June).

6.

The EU required adjustment has been completed in Romania, Latvia and Lithuania to reach the 3 percent deficit
target.

148

GLOBAL ECONOMIC PROSPECTS | June 2013

GLOBALECONOMICPROSPECTS

June
2013

Latin America and the Caribbean Annex

Annex

LATIN
AMERICAand theCARIBBEAN
REGION
149

GLOBAL ECONOMIC PROSPECTS | June 2013

Latin America and the Caribbean Annex

Overview

Risks and vulnerabilities: The severe
downside risks to the global economy haveeased significantly compared to last year,
reflecting progress in Euro-area economies
towards reducing fiscal and banking solvency
risks and an easing in fiscal-cliff related risks
in the United States. However, little progresshas been made in setting the US fiscal policy
on a sustainable path and by Japan to reduce
its large general government debt tosustainable levels, and these continue torepresent sources of risk for the global
economy.

After a sharp recovery from the global
economic crisis in 2010, when regional output
expanded by 6 percent, growth in the Latin
America and the Caribbean decelerated
markedly, to an estimated 3 percent by 2012.
Supply side constraints have become apparent
in some of the larger economies, where
output was near or above potential during therecovery phase, and which contributed torelatively high inflation and deterioration ofcurrent account balances. Despite a sharp
deceleration in growth, regional output isonly now in line with potential GDP. Cyclicalfactors such as lower commodity prices andgenerally subdued global activity, in particularin high-income countries, have also weighedon growth. Private consumption remained
relatively robust, while the contribution to
growth from investment and exports
weakened considerably.

For the Latin America and the Caribbean therisks stem in part from the challenges offinding the optimal balance between
macroeconomic policies to stimulatedomestic demand in the short term andstructural reforms to enable faster growthover the longer run. In addition ample global
liquidity and higher and more volatile capital
flows are complicating the task of conducting
monetary policy and could, if interest rates
are low, lead to rapid credit expansion andgoods and asset price inflation.
Forcommodity exporters, large fluctuations ofexport prices represent a major risk to theoutlook.

Outlook for 2013-2015: The factors thathave contributed to the deceleration in
growth in the post-recovery period willcontinue to weigh on economic activity overthe short-to-medium term. Growth in theregion is expected to accelerate only modestly
to 3.3 percent in 2013, and to about 3.9
percent over the medium terms. Growth isexpected to firm somewhat from a very weak
pace in Brazil and Argentina, while slowing
down in most of the commodity exporters,
largely on account of weaker commodity
prices. Growth in Venezuela is expected todecelerate markedly as highly expansionary
policies are reversed. Meanwhile Paraguay
will see one of the sharpest accelerations ingrowth this year, on account of normalizationin agriculture output. Growth in Central
America will benefit over the medium termfrom firmer growth in the United States andimprovements in terms of trade. Growth in
the Caribbean will be held back by large fiscal
adjustments necessary to bring fiscal deficits
to sustainable levels and help reduce public
debt burdens.

Over the longer term as external financial
conditions are likely to become tighter,higher financing costs could result in reduced
investment spending and growth in the
countries in the region and may also expose
unsustainable positions. If greater progress ismade to implement a wide range of structuralreforms and address supply-side constraints
to growth, economic expansion over the
medium term could be more robust.

151

GLOBAL ECONOMIC PROSPECTS | June 2013

Latin America and the Caribbean Annex

Recent economic
developments

due to the impact of a severe drought, and slower
growth in its major trading partners. Mexico
continued to outperform the regional average for asecond consecutive year, expanding close to 4
percent and contributing 1.1 percentage points to theregional growth, compared to a 0.3 percentage point
contribution by Brazil and Chile. Mexico’s growthcontinued to be well balanced, with positive
contributions from all demand components.

With growth decelerating to slightly
below potential, the positive output
gap nearly closed in 2012…

In Central America output expanded at a robust
pace of close to 5 percent in 2012, the second
consecutive year of above trend growth. Growth
accelerated in Costa Rica to above 5 percent
boosted by exports and private consumption andremained very robust in Panama, where exports
and investment have made significant contributions
to growth (in excess of 4 percentage points),
supported by the Panama Canal expansion andseveral other large investment projects.

Growth in the Latin America and the Caribbean region
decelerated an estimated 1.4 percentage points to 3 percent
in 2012 (table LAC.1). In per capita terms growth has
fallen below 2 percent for the first time since theglobal crisis. The growth slowdown was partly due tobottlenecks that constrained growth in some of the larger
economies in the region, partly because of softening in
global activity mid-year due to Euro Area
uncertainty, and partly because of a decline in nonoil commodity prices. Even with GDP growth
below potential in 2012, the positive output gapsthat opened during the recovery from the 2009
crisis still persist or have only now closed. GDP in
Brazil expanded only 0.9 percent, despite accommodative
monetary and fiscal policies, held back by increasingly
apparent supply side bottlenecks. Despite slow growth,
unemployment remains low and inflation high.
World Bank estimates suggest that the slowdown
has only now opened up a negative output gap of
0.8 percent of potential GDP. Although potential
growth has slowed due to a decline in investment
and slower growth in total factor productivity, at
3.2 percent potential growth was still much higher
than actual GDP.1

Growth in the Caribbean continued to disappoint,
decelerating to 3 percent in 2012 as growth
decelerated in the Dominican Republic and in
Haiti, while Jamaica’s economy fell into recession.
In most other economies in the region growth fell
below 1 percent, with the notable exception of
Belize’s economy, which expanded more than 5 percent.

Data from the first quarter of 2013
suggests that growth is easing
Growth had decelerated from 3.2 percent
seasonally adjusted annualized (or saar) in the firstquarter of 2012 to 1.6 percent by the third quarter,
before reaccelerating markedly in the last quarter toa 3.5 pace in line with potential growth, as growthin the largest economies in the region accelerated
into the year’s end. On an annualized basis fourth
quarter GDP expanded 2.6 percent in Brazil, 4.5
percent in Peru, 2.7 percent in Mexico, more than
7.0 percent in Chile and Colombia. Among thecountries that bucked the regional acceleration
trend in the final quarter of 2012 were Paraguay,
Peru, with GDP contracting in the former anddecelerating in the latter. With relatively strong growthin the second half of 2012 and/or the fourth quarter of
2012, Chile, Peru, Colombia have strong carryovers for
2013, in excess of 1.3 percentage points, while Brazil’s
carry over is relatively weak at 0.65 percentage points. For
the region the carryover for 2013 growth is about 1
percentage points.

In other South American commodity exporting
countries growth remained robust, including
Bolivia, Chile, Colombia, Peru, and Venezuela. In
these economies, growth in private consumption
contributed half or more of the total GDP
expansion supported by still high commodity
revenues. In Venezuela very expansionary policies
contributed to a marked acceleration in growth to
5.6 percent and a wide positive output gap withrespect to potential. Growth decelerated markedly only inArgentina to 1.9 percent from 8.9 percent, as exports
underperformed and investment plunged, subtracting 0.01
and 1.2 percentage points from growth, respectively.
Paraguay is one of only a couple of countries in
Latin America to have recorded a decline in GDP,152

GLOBAL ECONOMIC PROSPECTS | June 2013

Latin America and the Caribbean Annex

Regional growth in the first quarter as
approximated by industrial production softened,with industrial production remaining relatively flat,
after a slight contraction in the fourth quarter(figure LAC.1). Slower domestic consumption in
conjunction with weak external demand caused
economic activity to slow in many countries in theregion. In Mexico GDP growth eased to a 1.8
percent seasonally adjusted annualized pace as
domestic consumption and external demand
showed signs of weakness. In addition government
spending eased in line with past trends at the
beginning of a new presidential administration.
Similarly in Brazil growth eased to a 2.2 percent
annualized pace in the first quarter of 2013, as
exports contracted and both private and public
consumption showed signs of weakening anddespite an acceleration in investment growth.
Growth decelerated markedly in Chile in the firstquarter, to 2.1 percent quarter-on-quarter
annualized pace, down from 8 percent in the fourth
quarter of 2012 on account of a slowdown ininvestment, consumption, and sluggish exports.
Meanwhile economic activity in Venezuela
contracted 2.5 percent quarter-on-quarter (or 9.7
percent annualized pace) as private consumption
slowed dramatically, while exports contracted, andinventories tumbled.

decline comes even as world imports continued to
expand at a solid pace over this period (10 percent).
The quarterly decline was particularly pronounced
in commodity exporters like Argentina, Brazil,
Chile, Colombia, and Peru. Export revenues also
declined in manufactures exporters like Mexico(10.7 percent saar).
Meanwhile imports expanded at slower pace of 8.4
percent annualized pace in the first quarter of 2013,
after a strong recovery in the fourth quarter (31.6
percent), pointing to a possible moderation indomestic demand and rapidly deteriorating tradebalances. Imports continued to rise at a rapid pacein Argentina, Brazil, and bounced back in
Colombia, while import growth eased in Mexico inline with weaker exports.

Inflation remains contained
Inflation rates in the region have remained
relatively anchored for the most part, especiallycore inflation, although they have remained
stubbornly high or even accelerated in countries
where economic output is at or near potential (e.g.
Brazil, Uruguay). Currency devaluation has
exacerbated local price pressures in Venezuela,
while import restrictions and loose policies
contribute to stubborn inflation in Argentina that
continues to erode real incomes. Inflation
decelerated in Chile, Colombia, and Peru on
account of deceleration in food and energy
inflation, but in some cases also on account ofmoderation in domestic demand. Lower food andenergy inflation also contributed to the decline ininflation in Central American economies, while
inflation in some of the Caribbean economies was
low on account of weak domestic demand.

Similarly, export performance has weakened in thefirst months of 2013, with export revenues
declining close to 12 percent annualized rate in thefirst quarter of 2013, after a robust performance inthe fourth quarter of 2012 (14.8 percent). The
Industrial production below trend levels
since the second half of 2012

Fig LAC.1

Index, August 2008=100

120

Monetary policy guided by both
domestic conditions as well as global
liquidity

108

96

84

Conducting monetary policy during the post-crisis
period has been complicated by the very loose
monetary policies pursued by several high-income
countries, most recently Japan.

72

60
Jan '95

Jan '98

Industrial production

Jan '01

Jan '04

Jan '07

Jan '10Jan '13

The benign inflation environment and very easy
policy stances in high-income countries haveTrend (HP filter)

Source: Datastream and the World Bank staff calculations

153

GLOBAL ECONOMIC PROSPECTS | June 2013

Latin America and the Caribbean Annex

prompted some central banks in the region to cut
policy rates. The Bank of Colombia cut its policy
rate 200 basis points, as growth slowed since mid2012, while Banxico, Mexico’s central bank cut theovernight rate 50 basis points in March 2013, thefirst cut since July 2009. In contrast Brazil’s central
bank raised the Selic rate a cumulative 75 basis
points to 8 percent embarking on what is expected
to be a gradual normalization in its monetary policy(figure LAC.2).

Foreign currency earnings from remittances
increased slightly to an estimated $62 billion, still
below the 2008 peak of $64.5 billion. Remittances
to Mexico (which accounts for 55 per cent ofregional inflows) and Ecuador declined in absoluteterms, while they rose relatively quickly in Brazil,
Guatemala, El Salvador, and Peru.
Expressed as a share of recipient countries’ GDP
they remained flat at 5.3 percent of GDP2 in 2012.
The weak performance reflected still weak labormarkets in the United States, and unemployment in
Spain (another major destination for regionalmigrants) in excess of 25 percent of the labor force.
Indeed, the very high unemployment rate in Spainand improved growth prospects in home countries
forced many migrants to return home.

Sluggish growth in some of the larger economies
h a s p r om p t ed m o r e a c c o m m o d a t i v emacroeconomic policies despite becoming
increasingly apparent that supply potential is lower
than during the recovery from the global crisis inthese economies.
Strong domestic demand in many countries in
the region and in some cases small or positive
output gaps have resulted in a worsening incurrent account positions in 2012. For
commodity exporters the decline in non-oil
commodity prices in 2012 has also played arole, with this group of countries recordingsome of the largest deteriorations in current
account positions. One notable exception isArgentina, where compression in imports due
to tough import controls, made possible an
improvement in the current account balance.
For the region as a whole the current accountdeficit deteriorated 0.4 percentage points,
with a median deterioration of 0.1 percentage
points of GDP.

Capital flows

Fig LAC.2

Fig LAC.3

Very loose monetary policies pursued by several
high-income countries, most recently Japan havecontributed to ample global liquidity. With
dramatic shifts in perceptions of risk in highincome countries there have been episodes ofstrong inflows and outflows of capital todeveloping countries, putting currencies underpressure (figure LAC.3). While data for annual
flows do not suggest that capital flows have been
unusually high, several countries have taken
unusual measures – including lowering interest
rates to dissuade foreign capital inflows.

Monetary policy rates

Percentage Points

June 2008=100

14

120

12

100

Real effective exchange rates

10

80
8

60
6

40
4

20

2

0
Jan '08
BrazilJan '10
Colombia

Chile

Mexico0

Jan '12
Peru

BrazilJan '04
Chile

Jan '06
Colombia

Source: National central banks and Datastream
Source: World Bank.

154

MexicoJan '08
Peru

Jan '10Jan '12GLOBAL ECONOMIC PROSPECTS | June 2013

Table LAC.1

Latin America and the Caribbean Annex

Net capital flows to Latin America

USD, billions
2008

2009

2010

2011

2012e

2013f

2014f

2015f

Capital Inflows

186.0

179.6

328.5

303.9

362.6

358.5

364.1

379.2

Private inflows, net
Equity Inflows, net
Net FDI inflows
Net portfolio equity inflows
Private creditors. Net
Bonds
Banks
Short-term debt flows
Other private
Official inflows, net
World Bank
IMF
Other official

179.3
127.5
137.2
-9.7
51.8
8.9
40.8
2.6
-0.5
6.7
2.4
0.0
4.3

161.6
126.5
84.9
41.6
35.1
45.9
-1.7
-8.6
-0.5
18.0
6.6
0.4
11.0

306.1
166.6
125.3
41.3
139.5
72.9
21.7
43.8
1.1
22.5
8.3
1.3
12.9

299.1
165.6
158.3
7.4
133.4
85.2
51.7
-3.0
-0.4
4.8
-2.9
0.2
7.5

360.7
199.8
175.6
24.2
160.9
112.0
41.4
7.3
0.2
1.9
0.4
0.1
1.4

359.4
209.8
192.2
17.6
149.6
89.3
43.6
15.2
1.5
-0.9

364.8
212.4
191.0
21.4
152.4
83.1
45.2
23.4
0.7
-0.7

381.6
232.0
206.4
25.6
149.6
79.6
51.4
16.5
2.1
-2.4

Source: The World Bank
Note : e = estimate, f = forecast

Net capital inflows rose 19.3 percent in 2012
to about 6.5 percent of GDP, up from 5.5
percent of GDP in 2011, on stronger equity
inflows. Net FDI flows increased by$17.3billion and net portfolio inflows were up$16.8 billion in 2012 (table LAC.1). Together
the equity inflows accounted for more thanhalf of the increase in net capital flows to the
Fig LAC.4

Latin America and the Caribbean region. Net
bond flows increased by an estimated $26.8
billion in 2012, while bank lending declined$10.3 billion.
Gross capital flows to countries in Latin
America and the Caribbean region were 23
percent higher year-on-year in the first fivemonths of 2013 (see Finance Annex andfigure LAC.4). Equity placements jumped 154
percent on account of strong issuance by
Brazilian firms, including a record developing
country bond issuance of $11 billion by
Petrobras. Meanwhile bank lending fell morethan 30 percent year-on-year.

Gross capital flows to Latin America
and the Caribbean

million USD
50000

40000

Reflecting ample global liquidity and despite
increased costs, frontier-market sovereigns in
the region like Honduras ($500 million) wereable to successfully issue bonds. Bolivia ($500
million), Dominican Republic, El Salvador($800 million), and Guatemala ($700 million)
also came to the market last year to takeadvantage of investors’ search for higher
yields. Costa Rica has managed to issue a$500-million 12-year bond and a $500-million
30-year bond while Panama issued a $750

30000

20000

10000

0
Jan '09

Jan '10Equity issuance

Jan '11
Bond issuance

Jan '12Jan '13
Bank loans

Source: World Bank.

155GLOBAL ECONOMIC PROSPECTS | June 2013

Latin America and the Caribbean Annex

Economic outlook

million 40-year bond. The long-term dated bonds
issued at surprisingly low rates seem to indicatethat investors’ are comfortable with longer-dated
issuance. Many countries in the region are engaging
in more active debt management to take advantage
of investors’ willingness to buy longer-dated paper
increasing the maturity of their debt, by pre-paying
shorter-term debt. Furthermore the decline in costof financing could help some countries in theregion reduce the cost of debt servicing over the
short to medium term.
Table LAC.2

Growth is expected to firm gradually
A gradual firming in the global economy, and still
very easy external financing conditions will support
a modest step-up in growth in the region to 3.3

Latin America and the Caribbean forecast summary(annual percent change unless indicated otherwise)
GDP at market prices b

00-09a

2010

2011

2.6

5.9

4.4

Est. Forecast
2012 2013 2014
3.0

3.3

2015

3.9

3.8

(Sub -region totals-- countries with full NIA + BOP data)c

GDP at market prices c
GDP per capita
PPP GDPPrivate consumption
Public consumption
Fixed investment
Exports, GNFS d
Imports, GNFS d
Net exports, contribution to growth
Current account bal/GDP (%)
GDP deflator (median, LCU)
Fiscal balance/GDP (%)

2.6
1.4
2.7
2.9
2.6
3.6
2.8
3.7
-0.2
-0.3
6.3
-2.4

6.0
4.8
6.1
5.9
4.2
10.5
11.7
22.0
-2.6
-1.3
5.2
-3.0

4.4
3.2
4.6
5.1
3.2
8.9
6.4
10.4
-1.3
-1.3
7.0
-2.4

3.0
1.8
3.0
3.8
3.7
2.9
2.6
3.9
-0.5
-1.7
5.7
-2.8

3.3
2.2
3.4
3.3
2.8
5.4
4.5
5.3
-0.5
-1.9
5.7
-2.2

3.9
2.8
3.9
3.7
3.1
5.9
5.4
5.6
-0.4
-2.1
5.1
-2.2

3.8
2.7
3.8
3.8
3.4
5.1
5.8
6.1
-0.4
-2.1
5.2
-2.4

Memo items: GDP
LAC excluding Argentina
Developing Central & North America e
Caribbean fBrazilMexico

2.5
1.5
3.4
2.9
1.2

5.7
5.2
4.7
7.5
5.3

4.0
4.1
3.8
2.7
3.9

3.1
4.0
3.0
0.9
3.9

3.3
3.5
2.2
2.9
3.3

4.0
4.0
3.3
4.0
3.9

3.9
3.9
3.9
3.8
3.8

Argentina
3.4
9.2
8.9
1.9
3.1
3.0
3.0
Source : World Bank.
a. Growth rates over intervals are compound weighted averages; average growth contributions, ratios and deflators arecalculated as simple averages of the annual weighted averages for the region.
b. GDP at market prices and expenditure components are measured in constant 2005 U.S. dollars.
c. Sub-region aggregate excludes Cuba and Grenada, for which data limitations prevent the forecasting of GDP
components or Balance of Payments details.
d. Exports and imports of goods and non-factor services (GNFS).
e. Developing Central & North America: Costa Rica, Guatemala, Honduras, Mexico, Nicaragua, Panama, El Salvador.
f. Caribbean: Antigua and Barbuda, Belize, Dominica, Dominican Republic, Haiti, Jamaica, St. Lucia, St. Vincent and
the Grenadines, and Suriname.

156

GLOBAL ECONOMIC PROSPECTS | June 2013

Latin America and the Caribbean Annex

percent (slightly down from our January 2013
projection) from 3.0 percent in 2012 (table LAC.2).
Growth in selected resource exporting countries
will be weaker due to recent declines in commodity
prices. For commodity exporters, further declines
in commodity prices will both reduce government
revenues and foreign exchange revenues, placingpressure on currencies and government spending in
those countries such as Argentina and Venezuela,
where deficits are already high.

robust domestic demand in conjunction withrelatively soft external demand and lower
commodity prices will keep the current accountbalance in deficit at close to 3 percent of GDP by
2015. Over the medium-to-long term efforts by thegovernment to address the supply side constraints
and reduce the custo Brasil are expected to lift
potential output gradually.
Growth in Argentina is also expected to accelerate
to 3.1 percent in 2013, bolstered by a record
harvest expected this season and by moderately
stronger external demand from Brazil. However,growth is expected to underperform over the
medium term remaining below potential growth, as
distortions introduced by various policies aimed atholding back inflation cut into investment and totalfactor productivity growth.3 Fiscal policy is expected
to tighten due to financing difficulties and softer
commodity prices, which will further weaken growth.

The output gap for the region as a whole more orless closed in 2012, and with the expected uptick,
GDP in 2013 is projected to expand at roughly thesame rate as potential so there should be no
significant exacerbation of overheating pressures(figure LAC.5 and 6). However, with growth
expected to accelerate even further in 2014 and2015, partly due to relatively loose monetary andfiscal policies, inflationary pressures are expected tobuild and current account deficits to rise.

Paraguay will have the fastest growing economy in
the region in 2013, due to appropriately
accommodative monetary and fiscal policies andthe normalization of agricultural output, following
last year’s drought. In contrast, Venezuela will see
one of the most pronounced decelerations ingrowth in the region (more than 4 percentage
points to 1.4 percent) due to expected post-election
cuts to government spending, and weak realincome growth due to high inflation. Similarly
growth in Ecuador is expected to decelerate byclose to 1 percentage point to 3.8 percent.

Growth in Brazil is expected to accelerate to 2.9
percent in 2013 and further to close to 4 percent
over the 2014-2015 period, bolstered by spending
on infrastructure and supportive private
consumption. Monetary and fiscal policy are
projected to remain expansionary (the public sector
primary surplus declined below 2 percent of GDP
in Q1 on a 12 months rolling basis). With theeconomy arguably operating at potential, theacceleration in growth will keep inflation near theupper limit of the targeted inflation range, while

Fig LAC.5

8

Fig LAC.6

Growth in Latin America and the Caribbean is expected to accelerate only
marginally through 2015

Output gaps to narrow in Latin America
and the Caribbean in 2013
Overheating

Gap closing from below

GDP growth, percent

Size of output
gap (2012)

Haiti
Antigua and Barbuda

4.5

3.5

2.5

6

1.5

MexicoSt. Vincent andGuyanaChile
Grenadines
GuatemalaSuriname Bolivia
El Salvador Honduras
Nicaragua
Colombia
Costa Rica
BrazilPeru
St. Lucia Dominica
Ecuador
Uruguay
PanamaBelizeVenezuela
Argentina
Dominican Rep.

Jamaica

4

2

0

0.5

-0.5

-1.5

-2.5

2010

2012

2014

2016
-3.5

Latin America and the Caribbean
Developing Central and North
America

The Caribbean

South America

Gap closing from above

Crashing

-4.5
-4.5

-3.5

-2.5

-1.5

-0.5

0.5

1.5

2.5

Speed of gap closure in 2013, percentage points

Source: World Bank
Note: 2009 data represents the average for the 2003-2007 period.

Source: World Bank

157

3.5

4.5

GLOBAL ECONOMIC PROSPECTS | June 2013

Latin America and the Caribbean Annex

In Mexico growth momentum will ease only
marginally to 3.3 percent in 2013, before
reaccelerating to close to 4 percent over the 20142015 period. Recent labor and telecommunication
reforms are expected to lift growth in by increasing
total factor productivity and by attracting moreinvestment to the country. Over the 2014-2015
period the economic recovery in the United States,
and in particular firmer private demand, will also
support stronger Mexican export and remittances
growth.

Although some (IMF, 2013) argue that inflation
expectations have become more anchored -inflation in the region remains and is projected toremain at or above the higher end of the target
range in several of the inflation targeting countries
that are once again running against capacity
constraints. In countries with high inflation andexchange rate pressures the scope for monetary
policy is very limited.
Exchange rates are projected to appreciate only
slightly in some of the financially integrated
economies in the region, given very easy monetary
policy in the major high-income economies andbetter fundamentals in the developing countries
relative to high-income countries. There could also
be an increase in volatility in exchange rates, as in
the shorter term more volatile portfolio inflows arelikely to affect exchange rates in these economies,
as policy makers will be only partially successful insterilizing these inflows. Macro prudential measures
and/or capital controls will prove once again
helpful in preserving healthy banking systems in
the context of excessive global liquidity.

Growth in Central America is projected to easeslightly to 4.3 percent as growth decelerates inalmost all the countries in the region, despite termsof trade gains, as commodity prices, and oil prices
in particular are expected to decline. Costa Rica
remains one of the most competitive economies in
the region, reflected in the strong export
contribution to growth. Similarly export growth
will remain robust in Panama.
The Central American countries, which wereamong the most affected in the region by the
2008/2009 global economic crisis, will continue tostruggle to bring down fiscal deficits and public
debt. Over the 2014-2015 period a more upbeat
U.S. economy should help support growth in theregion, boosting external demand for goods andservices as well as remittances.

Risks and
Vulnerabilities

Growth in the Caribbean will ease slightly to 2.2
percent (table LAC.3), as growth in the Dominican
Republic softens. Elsewhere growth is projected toremain restrained at around 1.5 percent due to very
high debt levels, and relatively soft remittances andtourism revenues. Over the medium term large
fiscal adjustments will be necessary to cut fiscal
deficits to more sustainable levels and help reduce
the public debt burden. These adjustments arelikely to have negative consequences for growth in
the short run.

The global economic environment has stabilized
significantly since July of last year, and thelikelihood and likely magnitude of external risks
have declined and become more balanced, withupside risks more pronounced than even six
months ago.
A larger-than-expected deceleration in China’s
economic growth, and in particular in investment,
above and beyond the soft landing envisaged in ourbase line would undercut growth in the region as
external demand would be much softer with bothprice and quantity effects, in particular for SouthAmerican commodity exporters. Similarly a steeper
than envisaged fiscal tightening in the United States
would have negative spillovers for the economies
in the region that have strong economic ties with
the United States. The reverse of these situations
represent the upside risks for the region.

Monetary policies in the inflation targeting
countries are projected to gradually move to amore neutral stance. The pace of adjustment may
be slower than it would have been in the absenceof very easy monetary conditions in high-income
countries, (in particular in the United States andJapan) even if inflation rates remain close to theupper bound of the target range, as some of thecountries in the region may be wary of attracting
excessive capital flows and of appreciating currencies.
158

GLOBAL ECONOMIC PROSPECTS | June 2013

Table LAC.3

Latin America and the Caribbean Annex

Latin America and the Caribbean country forecasts

Argentina
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Antigua and Barbuda
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
BelizeGDP at market prices (% annual growth) b
Current account bal/GDP (%)
Bolivia
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Brazil
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Chile
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Colombia
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Costa Rica
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Dominica
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Dominican Republic
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
EcuadorGDP at market prices (% annual growth) b
Current account bal/GDP (%)
El Salvador
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
GuatemalaGDP at market prices (% annual growth) b
Current account bal/GDP (%)
GuyanaGDP at market prices (% annual growth) b
Current account bal/GDP (%)
Honduras
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Haiti
GDP at market prices (% annual growth) b
Current account bal/GDP (%)

159

Est. Forecast
2012
2013
2014

00-09a

2010

2011

3.4
2.7

9.2
0.6

8.9
-0.4

1.9
0.1

3.1
-0.2

3.0
-0.3

3.0
-0.3

3.4
-14.8

-8.5
-14.8

-3.0
-10.8

1.6
-12.1

1.9
-12.1

2.9
-12.9

3.1
-13.0

5.0
-12.9

2.7
-2.8

2.0
-1.1

5.3
-2.6

2.6
-3.5

3.0
-3.8

3.1
-3.7

3.4
3.9

4.1
3.9

5.2
1.4

5.2
7.4

4.7
6.4

4.3
5.6

4.1
5.0

2.9
-0.7

7.5
-2.2

2.7
-2.1

0.9
-2.3

2.9
-2.7

4.0
-3.1

3.8
-3.3

3.2
0.8

5.8
1.5

5.9
-1.3

5.6
-3.4

4.9
-3.8

4.5
-3.8

4.7
-4.1

3.7
-1.4

4.0
-3.1

6.6
-2.9

4.0
-3.0

3.9
-3.4

4.2
-3.2

4.3
-2.9

3.8
-5.0

5.0
-3.6

4.4
-5.4

5.1
-5.2

4.0
-4.4

4.1
-4.0

4.2
-3.7

2.4
-18.2

1.2
-16.2

1.0
-12.9

0.4
-13.5

1.4
-12.4

1.6
-11.7

2.0
-11.1

4.5
-2.6

7.8
-8.4

4.5
-7.9

3.9
-7.0

2.5
-5.5

3.7
-4.5

4.4
-3.7

4.2
1.0

3.3
-2.8

8.0
-0.2

4.7
-0.5

3.8
-1.3

3.9
-1.5

3.8
-1.7

2.0
-3.8

1.4
-2.7

2.0
-4.7

1.6
-5.2

1.9
-5.3

2.1
-5.1

2.5
-4.8

3.4
-4.8

2.9
-1.6

4.1
-3.3

3.0
-2.9

3.5
-2.9

3.6
-3.2

3.8
-3.4

2.1
-9.0

3.6
-7.2

5.2
-8.6

3.9
-14.1

4.7
-14.3

4.5
-15.0

4.3
-15.2

3.8
-6.7

3.7
-5.4

3.7
-8.5

3.3
-9.5

3.5
-11.2

3.3
-8.5

3.2
-8.4

0.6
-6.8

-5.4
-9.5

5.6
-3.7

2.8
-4.0

3.4
-3.7

4.2
-4.0

3.9
-4.3

2015

GLOBAL ECONOMIC PROSPECTS | June 2013

Latin America and the Caribbean Annex

00-09a2010

2011

Est. Forecast
2012 2013 2014

Jamaica
GDP at market prices (% annual growth) b
1.0
-1.5
1.3
-0.8
0.5
Current account bal/GDP (%)-10.2-6.7 -13.5 -11.7 -11.1
Mexico
GDP at market prices (% annual growth) b
1.2
5.3
3.9
3.9
3.3
Current account bal/GDP (%)
-1.5
-0.2
-0.8
-0.8
-0.9
Nicaragua
GDP at market prices (% annual growth) b
2.8
3.6
5.5
5.2
4.2
Current account bal/GDP (%)-17.3 -10.0 -13.2 -12.8 -13.6
PanamaGDP at market prices (% annual growth) b
5.6
7.5
10.6
10.0
7.5
Current account bal/GDP (%)-4.8-9.9 -10.5
-9.2
-9.5
Peru
GDP at market prices (% annual growth) b
4.8
8.8
6.9
6.3
6.0
Current account bal/GDP (%)
-0.7
-2.5
-1.9
-3.6
-2.9
Paraguay
GDP at market prices (% annual growth) b c
2.3
15.0
4.0
-2.1
10.2
Current account bal/GDP (%)
0.1
-3.7
-1.3
-2.6
-1.4
St. Lucia
GDP at market prices (% annual growth) b
2.1
3.2
0.6
-0.2
1.2
Current account bal/GDP (%)-19.6 -17.1 -19.0 -18.1 -15.7
St. Vincent and the Grenadines
GDP at market prices (% annual growth) b
2.8
1.0
1.5
3.1
1.9
Current account bal/GDP (%)-18.8 -30.6 -28.7 -27.8 -26.7
Suriname
GDP at market prices (% annual growth) b
4.4
4.1
4.7
4.5
4.5
Current account bal/GDP (%)
9.8
6.5
5.6
6.2
5.2
Uruguay
GDP at market prices (% annual growth) b
2.1
8.9
6.5
3.9
3.8
Current account bal/GDP (%)
-1.3
-1.9
-2.8
-5.3
-4.2
Venezuela, RB
GDP at market prices (% annual growth) b
3.3
-1.5
4.2
5.5
1.4
Current account bal/GDP (%)
10.0
2.9
7.9
3.0
4.1
Source : World Bank.
World Bank forecasts are frequently updated based on new information and changing (global)
circumstances. Consequently, projections presented here may differ from those contained in other
Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any
given moment in time.
Cuba, Grenada, St. Kitts and Nevis, are not forecast owing to data limitations.
a. GDP growth rates over intervals are compound average; current account balance shares are simple
averages over the period.
b. GDP measured in constant 2005 U.S. dollars.
c. GDP excluding binational corporations.

160

2015

1.5
-9.1

1.7
-6.7

3.9
-1.1

3.8
-1.2

4.2
-13.2

4.4
-12.3

7.0
-9.2

6.5
-8.8

5.9
-3.4

5.8
-3.6

1.7
-2.2

3.1
-2.8

1.7
-13.5

2.0
-11.6

2.5
-25.9

3.0
-25.0

4.5
3.8

5.0
2.1

4.1
-4.5

4.3
-4.1

2.4
4.0

2.2
3.8

GLOBAL ECONOMIC PROSPECTS | June 2013

Latin America and the Caribbean Annex

Increasingly risks are domestic in nature, and stemin part from the challenges of getting the correctbalance between macroeconomic policies tostimulate demand in the short-term and structuralreforms to spur faster growth over the longer run.

A further risk stemming from the current
environment of easy external financing conditions
and increased search for yield by international
investors is that countries and private agents in theregion may take on too much debt or have large
currency or maturity mismatches. Real credit
growth has expanded rapidly in several countries in
the region, including in Brazil, Mexico, and Peru,
while several Caribbean countries are alreadyburdened by very high debt levels.

For those larger economies in the region where
growth has slowed in the post-crisis period despite
prolonged efforts at demand stimulus, the evidence
seems to be accumulating that policies to boost
domestic demand will not lead to higher growth if
not accompanied by growth-enhancing policies
that deal with supply side inefficiencies. Failure ordelays in implementing such reforms could holdgrowth hostage over the medium term.

Over the longer term external financial conditions
are likely to become tighter as high-income
countries unwind their long-term positions and asbase rates and spreads start to rise. Higher
financing costs will likely reduce investment
spending and growth in developing countries andmay also expose unsustainable positions madepossible by very easy external financing. Assetprices that have grown rapidly in the current
environment may reverse course precipitously,
stressing banking systems in the region.

Ample global liquidity and higher capital flows hascomplicated the task of conducting monetary
policy and there is a risk that relatively low interest
rates in some of the financially integrated
economies might fuel rapid credit growth andcontribute to inflation pressures. In some cases
temporary and transparent capital controls may be
warranted to help manage capital flows and prevent
build up of vulnerabilities in financial systems.
In so far as the overall international environment isless volatile countries may wish to give greater
weight to the domestic inflationary pressures thatthese policies may be generating.

161

GLOBAL ECONOMIC PROSPECTS | June 2013

Latin America and the Caribbean Annex

Notes
1.

Potential output is estimated by the World Bank, based on a production function methodology, using an estimateof total factor product growth based on the average TFP growth between 1995 and 2005, and an estimate of thecapital stock constructed using investment data, the perpetual inventory method and assumed depreciation rate of
7 per cent, and the working-age population as the labor input (consistent with a constant labor force participationand natural unemployment rates). See Nehru and Dhareshwar (1993) for an earlier attempt at using a similar methodology.

2.

Weighted average of remittances as a share of recipient country’s GDP.

3.

Price controls in Argentina have helped contain inflation.

References
De la Torre, Augusto, Eduardo Levy Yeyati, Samuel Pienknagura. 2013. “Latin America and the Caribbean as Tailwinds Recede: In Search of Higher Growth.” LAC Semiannual Report, World Bank, Washington, DC..
International Monetary Fund. 2013a. “World Economic Outlook: Hopes, Realities, Risks.” World Economic and Financial
Surveys. Washington, DC: IMF.
Nehru, Vikram and Ashok Dhareshwar. 1993. “A New Database on Physical Capital Stock: Source Methodology and
Results”. Revista de Analisis Economico, Vol 8. No 1., pp. 37-69. June
World Bank. 2013. “Migration and Development Brief 20”. 2013 April.

162

GLOBAL ECONOMIC PROSPECTS | June 2013

GLOBALECONOMICPROSPECTS

June
2013

Middle East and North Africa Annex

Annex

MIDDLEEAST
and NORTH
AFRICAREGION163

GLOBAL ECONOMIC PROSPECTS | June 2013

Middle East and North Africa Annex

Overview

help lift growth towards potential in Morocco andTunisia. Jordan’s and Lebanon’s GDP growth isexpected to remain subdued in 2013 reflecting
spillovers from Syria.

More than two years after the Arab Spring began,economic activity remains weighed down by
elevated political tensions and continued civil strife
in the region. Regional growth accelerated to 3.5
percent in 2012 from minus 2.2 percent in 2011reflecting mainly a rebound in Libya’s crude oil
production to pre-war levels that doubled real
GDP and a weak growth recovery in Egypt (to 2.2
percent in FY2012 from 1.8 percent in FY2011).
Iran, the region’s largest economy, slipped into
recession, with GDP falling by an estimated 1.9
percent due to international sanctions and lower oil
output while Algeria’s growth remained subdued at
2.5 percent, supported by expansionary fiscal
policy. Domestic demand and exports in Syria
collapsed last year as the civil war intensified, withspillovers affecting activity in Jordan and Lebanon.
Drought in Morocco reduced growth to 2.7
percent from 5.0 percent in 2011.

Risks and vulnerabilities: Politicaluncertainty,
polarization
andconflict. Prolonged political crises andOutlook for 2013-15: Regional prospects

fund difficult-to-reform food and fuel subsidies are
generating serious fiscal and current accountimbalances among oil importers – a situation
exacerbated by rising borrowing costs andexchange rate depreciation, although the recent
moderation in global food prices could provide
some respite in the near term.

conflicts—elections are upcoming in several
economies and conflicts are gaining intensity in
Iraq and Syria—pose risks to near term recovery,
and to long term potential growth rates bydepressing investment and increasing the likelihoodthat urgent structural reforms are delayed. Moregenerally the long term structural challenges facing
the region – which are a source of current volatility– remain the same as before the Arab Spring. A
failure of political consensus needed to tackle thesestructural weaknesses will mean that they will likely
contribute to low growth rates even when calm
returns to the region.

We a k e n i n g m a c r o e c o n o m i cfundamentals and rising fiscal
sustainability risks. Rising fiscal outlays todepend critically on the evolution of domestic andcross-border political tensions. Aggregate regional
growth is forecast to slow to 2.5 percent in 2013
mainly due to weakness in the region’s three largest
economies, before recovering to 4.2 percent in2015 as tensions ebb and the Euro Area, theregion’s main trading partner, recovers.

Euro Area and US recovery. Protracted

Within the region, Egypt’s GDP growth is forecast
to slow to 1.6 percent in FY2013 on elevatedpolitical tensions and worsening macroeconomic
imbalances, before recovering to about 4.8 percent
in FY2015 as political tensions recede and reforms
are undertaken, although there remain considerable
downside risks to this forecast. GDP in Iran isforecast to contract for the second straight year by
1.1 percent due to sanctions and soaring inflation
before recovering to about 1.9 percent in 2015.
Growth in Algeria is expected to rise modestly to
2.8 percent due in part to temporary disruptions tooil production, before firming to about 3.5 percent
in 2015. Elsewhere, growth in Iraq and Libya is
expected to remain relatively buoyant driven by
their mineral sectors, although rising violence posesa risk to near term stability in Iraq. Meanwhilerising farm output in Morocco and strengthening
external demand over the medium term should

weakness in the Euro zone would hurt economies
with close trade, investment and financial ties to it.
Any increase in global risk aversion would also
reduce already depressed capital inflows into theregion. On the upside, better-than-expectedeconomic outcomes in the US and Euro Areashould support growth, particularly ineconomies where political tensions are
relatively muted.

Commodity price and geo-politicaldevelopments: Oil exporters in the region
could be very vulnerable if the projected gradualdecline in commodity prices occurs more sharply
than in the baseline. While benefitting importers, itwould cut into incomes, government revenues andforeign currency earnings of oil exporters – forcing
potentially significant adjustments.

165

GLOBAL ECONOMIC PROSPECTS | June 2013

Middle East and North Africa Annex

Recent Developments

spending. However, private consumption in both
Jordan and Lebanon benefited from added demandassociated with a rising influx of Syrian refugees.
Although Morocco has remained relatively freefrom political and social tensions, drought hurt
agricultural output, while weak demand among
Euro zone trading partners hit manufacturing andtourism, with growth slowing to just 2.7 percent
from 5.0 percent in 2011 and the lowest since 2000.

Aggregate regional growth picked up in 2012 in thedeveloping Middle-East & North Africa region to
3.5 percent in 2012, mainly reflecting a recovery
from a 2.2 percent contraction in 2011 due tosocial and political unrest in Egypt, and armed
conflict in Libya. Political (domestic andinternational) tensions continue to weigh on
economic activity and investment across the region.
International sanctions are contributing to rising
inflation and negative growth in Iran, while
spillovers from the intensifying civil conflict in
Syria, including the disruption of land trading
routes, have cut into economic activity in Lebanon
and Jordan with the latter also affected by energy
shortfalls in Egypt. At the same time, weakeconomic conditions in European trading partners
have acted as a drag on non-oil exports andtourism receipts.

Among oil exporters, growth experiences havebeen mixed. Thanks to a post-conflict recovery in
oil production, Libya’s GDP expanded by 105
percent in 2012. Growth in Algeria was subdued atabout 2.5 percent in 2012, supported mainly byrising government spending financed by relatively
buoyant global energy prices. Post-war increases incrude oil production helped sustain an 8.4 percent
increase in Iraqi GDP. Output in Iran, however,shrank an estimated 1.9 percent and inflation
reached over 40 percent this year due tointernational sanctions and currency depreciations.
Growth is showing signs of recovering in Yemen,but remains fragile with GDP barely expanding 0.1
percent in 2012 after contracting 10.5 percent in2011. Although fraught with uncertainty,
indications are that Syria’s conflict has caused
GDP to shrink by nearly a third – reflecting acollapse in both domestic demand and exports.

Among oil importers, growth remained subdued
during 2012 reflecting spillovers from conflictwithin the region and weak external demand fromEuro Area trading partners. The main exception tothis trend was Tunisia, where GDP growth
accelerated to 3.6 percent in 2012 from just below
2 percent in 2011, supported by a recovery intourism and increased domestic demand following
an earlier relaxation of fiscal policy. Egypt’s
economy grew by just 2.2 percent in 2012 in fiscal
year terms, a modest recovery from the 1.8 percent
outturn in 2011, supported by higher government
spending and record remittance inflows. In
calendar terms, the rebound was more substantial –4.6 percent versus 0.5 percent in 2011 – butreflected a recovery from a low base.

Nascent economic recoveries among
oil importers have suffered repeatedsetbacks over the past year
Periodic eruptions of political and social tensions
or renewed weakness in the Euro Area haverepeatedly set back nascent recoveries amongdeveloping oil importing economies in the MiddleEast & North Africa region, with growth turning
increasingly volatile in Egypt and Tunisia. For
instance, since 2011 Egypt has experienced three
separate episodes of a sharp deceleration orcontraction in activity as political and social
tensions erupted, punctuating rebounds in activity.
In Tunisia, a recovery in early 2012 led by tourism
and service sector growth was interrupted by social
unrest in the second quarter and lower demand in
the Euro Area, the country’s main trading partner.

Elsewhere, Lebanon’s GDP growth is estimated tohave remained flat at 1.5 percent in 2012 aselevated domestic political uncertainty andspillovers from the conflict in Syria undermined
tourism and scarce public resources came underpressure from growing numbers of refugees(estimated at 1 million plus in a total population of
about 4.3 million). At an estimated 2.8 percent,Jordan’s growth was only slightly better than the
2.6 percent outturn in 2011, as slower
manufacturing growth reflecting a domestic energy
crisis offset higher public and private sector

Recent high frequency data up till March show arecovery in industrial output in Egypt from last
166

GLOBAL ECONOMIC PROSPECTS | June 2013

Fig MENA.1

Middle East and North Africa Annex

producers due to rising domestic uncertainty, andincreasing reliance by Egypt on exports of crude oil tocover imports and debts, leaving less for refineries toprocess for domestic use. Egypt’s natural gas exports to
Jordan have suffered, at first because of sabotagethat targeted the Arab Gas Pipeline in 2011, thenby a temporary suspension of exports last Octoberin an effort to cover a spike in domestic energy
demand; and most recently in January this year
because of rising social unrest in Egypt.

A recovery in industrial output at theend of 2012 lost momentum in Tunisia and Morocco in Q1% 3m/3m saar
80

% 3m/3m saar
1560

Egypt, Arab Rep. (LHS)

10

40
5

20
0

0

-20

Export momentum weakened amongsome oil importers in the first quarter-5
Oil importers ex Egypt (RHS)

-40

-10

-60
-80

Recent seasonally adjusted export earnings datafrom Q1 (figure MENA.2) indicate that exports arestabilizing in Egypt and Lebanon after reboundingat the end of last year, but contracting sharply once
again in Morocco in Q1. Jordan meanwhile has
been hurt by the closure of land trading routes
through Syria: exports to other countries in theregion – some 50 percent of total exports in 2012
(figure MENA.3) – fell by an annualized 21.7
percent seasonally adjusted pace in the threemonths through February. Tunisia’s exports
remained buoyant in Q1 helped by a recovery inagricultural, textile and some manufacturing exports.

-15
Jan '11Jul '11Jan '12Jul '12Jan '13

Source: World Bank; Datastream.

years trough, led by manufacturing and construction,although PMI surveys up till May indicate weakbusiness conditions. Among other oil importers,
momentum has held up in Jordan, but weakened inimportersex Egypt (RHS)
MoroccoOiland
Tunisia(figure MENA.1).
Egypt, Arab Rep.

Egypt and by extension Jordan, which has relied oncheap natural gas imports from the former to produce
electricity, have faced severe energy shortfalls over the past
year. In both countries – and indeed elsewhere in theregion – energy demand has soared in recent years
partly due to large subsidies in place. Energy
shortages in Egypt, which is the second largest
natural gas producer in North Africa after Algeria,reflect a longer term decline in supply, moreconservative drilling plans by some major

Fig MENA.2

Production in developing MENA oil
exporters continues to contract
Industrial output in the MENA region resumed its
downward trend in the second half of last year as

The recovery in exports among oil
importers has lost momentum in Morocco and Jordan

Fig MENA.3

3-month moving average, 2011=100, LCU, sa
140
Tunisia

Jordan, which trades heavily with other MENA economies, has been hurt by
the closure of land trading routes
through Syria

Exports by destination (% of total, 2012)
100

130

90
Egypt, Arab Rep.

80
70

120

60
50
40

110

Morocco

30
20

10

100

0

Jordan90
Jan '11Jul '11Jan '12Jul '12

JordanIranOther Developing

Jan '13

Lebanon

China

Iraq

MENA

Egypt Algeria Morocco Tunisia

Other Adv

USA

Source: World Bank; IMF Direction of Trade Statistics.

Source: World Bank; Datastream.

167
JordanTunisia
EGYIDX3M

Syria

MoroccoEgypt, Arab Rep.
JordanMoroccoTunisiaEMU

GLOBAL ECONOMIC PROSPECTS | June 2013

Middle East and North Africa Annex

the boost from Libya faded. Aggregate regional
production volumes fell by 27.2 percent annualizedin Q4 last year, led by sharp drops of close to 16
percent in both Iran and Algeria.

start of this year reflecting disputes between
Baghdad and the semi- autonomous region of
Kurdistan that led to a halt in exports from theKirkuk Ceyhan pipeline and weather-related
disruptions in southern Iraq. Libya’s production
has also fallen in recent months—most recently by
60,000 bpd in March— with reportssuggesting that an ageing infrastructure isaffecting output.

More recently, aggregate regional production
volumes excluding Libya (figure MENA.4) picked
up in Q1. However this reflected a stabilization inin output in Iran following sharp declines over the
past year due to crippling US and EU sanctions
that had led to oil production falling to 2.63 mbd in
September - the lowest in 23 years according to
the International Energy Agency (IEA). As perlatest IEA estimates, Iran’s production was about
2.65mbd in May, with the country likely to cut
output going ahead as exports to Asian buyers
dwindle due to a tightening of internationalsanctions. Japan for example bought only 8000bdof Iranian oil in April, down 97 percent from April
2012. Prior to the sanctions, Iran used to produce
about 3.5mbd and export about 2.5mbd of oil.

Activity in Syria has collapsed as the conflict
has intensified, and it is likely that the economy
contracted by nearly a third during 2012, possibly
even more. As of December 2012 industrial
production volumes were half their level at end2011. Although difficult to gauge the true extent of
economic damage from the conflict, mirror
statistics from trading partners indicate that exports
and imports fell by an unprecedented 85 and 79
percent respectively in 2012.

Current plans by developing oil
exporters to significantly raise
investment may prove optimistic

There have been production setbacks in othercountries too, notably Algeria in the aftermath ofthe militant attacks in mid-January on the Amenas
gas plants which account for about 10 percent of
the country’s total gas output. Along with a slow
recovery from these attacks, heightened security
after the attacks also hurt crude oil production
which temporarily fell to 1.14 million bpd in Marchfrom 1.16 mbd in February according to the IEA,
although levels have since recovered.

Given stagnating or declining production levels andsharply increasing domestic demand, oil exporters
will need to invest heavily in infrastructure,
exploration and production to raise productionlevels. However private capital and FDI inflows
may fail to materialize because of security risks,poor legal environments for investment andpolitical uncertainty, and, in the case of Iran,international sanctions.

Iraq surpassed Iran as the second largest oil
producer in OPEC at the end of 2012. However
crude oil production and exports fell slightly at
Fig MENA.4

In Iraq, government estimates count on capital
expenditures of $30 billion per year in energy
infrastructure to meet its production targets. But
progress on this front is likely to be slow due topayment disputes with the Kurdish Regional
Government, and delays in the passage of a lawthat would govern the development of Iraq's oil
and gas wealth (the law was first announced in
2008, but has yet to be passed). Algeria is alsoplanning to invest significantly in hydrocarbon
exploration, notably in shale gas, and in refineries.
However raising private investment may provechallenging given political uncertainty generated byupcoming presidential elections in spring 2014 andearlier reversals in investor-friendly provisions ininvestment laws that may deter investors.

Oil exporters ouput contracted for most of
2011 and 2012, led by declines in Iran, andrecently Algeria
Jan 2011=100%3mma, saar
10150

Libya (RHS)

140
130

5

120
110

0

100
90
80

-5

70
60

-10

50
40

Oil importers ex Libya (LHS)

30

-15

20
10

-20
Jan '09 Jul '09

0

Jan '10 Jul '10

Jan '11 Jul '11 Jan '12 Jul '12

Jan '13

Source: World Bank.
Algeria
Libya
Libya (RHS)
Oil exporters ex Libya
Libya
Oil exporters ex Libya
Libya (RHS)
Iraq MOX_LBY_IRN3MM
IRN3MM
Libya, RHS
Libya
Oil
Exporters ex Libya
Middle East and North Africa Oil exporters
MOX_LBY3MM
Libya (RHS)168

GLOBAL ECONOMIC PROSPECTS | June 2013

Middle East and North Africa Annex

Inflation pressures built up in 2012,and persist

since the start of the year, inflation touched40.7 percent (y/y) in March.
However inflation pressures remain subdued
in several economies, including Morocco andIraq, helped by generous food and fuelsubsidies. Inflation in Yemen fell into singledigits in 2012 to about 7 percent (but has
since accelerated), from a peak of 24.6
percent in October 2011, as improving
security eased supply bottlenecks after theformation of transition government in early
2012. Inflation in Algeria decelerated to 3.1
percent in April on slower growth in (mostly
imported) food prices.

The latest CPI data show that price pressures
have remained strong, with annual inflation
rising close to or over 7 percent (y/y) in
Egypt, Tunisia and Jordan and, to over 10
percent (y/y) in Lebanon in the first few
months of 2013 (figure MENA.5). In part
this reflects partial fuel and energy tariffreforms in some economies (Jordan, Tunisia,
Egypt) to contain soaring fiscal burdens fromsubsidies. In Jordan and Egypt, shortfalls inenergy provision slowed production in othersectors and contributed to inflation pressures,with the latter also affected by a 13 percent
depreciation of the currency since December.
Growing inflation pressures in Egypt also
likely reflect the negative impact of
prolonged political and social tensions on
absorptive capacity and potential output inthe face of continued sharp increase ingovernment expenditures (up 30 percent y/yin the first half of FY 2013).

Tourism-related revenues and jobs
improved slightly in 2012,

Similar supply side constraints, combinedwith sanctions and a sharp fall in the value ofthe Iranian Rial have contributed to rising
inflation in Iran, which (per official
estimates) touched 38.5 percent in December.
The market value of the Iranian currency
dropped to 37,000 Rial per US Dollar in
October from 25,000 in September compared
to an official exchange rate of about 12,000
Rial. With the currency dropping further

Tourism inflows, a key source of foreignexchange and jobs (figure MENA.6) in theregion, are recovering. According to theUnited Nations World Tourism Organization(UNWTO), aggregate tourist arrivals in North
African economies rose 8.7 percent to 18.5
million in 2012, only slightly below the peakof 18.8 million visitors in 2010. In Tunisia,
tourism revenues in 2012 reached $2.1
billion, up 30 percent from the previous year,
supporting a strong recovery in the service
sector. In Egypt, tourism revenues stabilized
at around $10bn during 2012, although well
below the $12.5 billion earned in 2010. As aresult, the sector, which employs roughly one
in every eight Egyptian workers (directly andFig MENA.5

Fig MENA.6

Inflation remains persistently high inmany economies

% y/y
45

% y/y

40

A significant share of the workforce is
employed by the tourism industry

1000's
3,500

45

%
30

40

35

Latest Inflation

3,000

35

Inflation Peak 2012

30

30

2,500

25

25

2,000

20

20

15

15

10

10

5

5

500

0

0

0
IRQ

MAR

ALG

JOR

Source: World Bank; Datastream.

TUN

EGY

LBN

YEM

Indirect Employment (LHS)
Direct Employment (LHS)% of total employment

25
20
15

1,500
10

1,000

5

0
LBY

IRN

IRN

YMN

ALG

SYR

EGY

TUN MOR

JOR

LBN

Source: World Bank; UNWTO; World Travel and Tourism Council.

169

GLOBAL ECONOMIC PROSPECTS | June 2013

Fig MENA.7

200

Middle East and North Africa Annex

A modest recovery in tourism during
2012 has yet to reverse sharp job
losses in the sector during 2011

Change in Employment in Tourism Sector

Unemployment rates have declinedmodestly in some countries, but
generally remain highFig MENA.8

Unemployment rate, %
20

20

18

100

16

10

0

14

0

-100

-400

12
10

-10

-200
-300

2009
2011- peaklatest8

Indirect Employment, 2010-12 (change, 1000's)

Direct employment, 2010-12 (change, 1000's)
Change in direct employment, 2012 (% y/y, RHS)

-20

6
4

-30

2

-500
-600
-700

na

0

-40

Egypt

Iran

Morocco Tunisia

Jordan Yemen*

na

Iraq

Source: World Bank.
* range for Yemen-50

YMN World
LBN Travel
JOR MORLBY ALG
IRN
Source: EGY
WorldSYR
Bank;TUNUNWTO;and Tourism
Council.

indirectly), only shed 14,000 jobs per industry
estimates, versus half a million or so tourism
related losses during 2011 (figure MENA.7).

percent in 2011 to 16.7 percent in 2012 helped by arecovery in tourism. Growing tourism inflows havealso supported a decline in official unemployment
rates in Jordan, Morocco and Iran.

The number of tourists to the Middle East
economies (including high-income economies
in the region) fell at a slightly slower pace in2012 (-4.9 percent vs -6.7 percent in 2011) to52.6 million. Jordan, which reported a 15.3
percent increase in earnings in 2012, Morocco
and Iran have benefited from instability inneighboring countries, attracting visitorsfrom the GCC economies and Central andSouth Asia that otherwise would have headed
to traditional tourist hotspots such as Egypt
and Lebanon.

Nonetheless, unemployment remains extremely
high (figure MENA.8), particularly among theyouth and in urban areas. In oil exporting
economies, strong growth in capital-intensivehydrocarbon sectors has boosted overall growth,
but failed to generate many jobs. For instance, in
Iraq, the oil sector accounts for only 1 percent of
total employment versus a contribution to GDP of
about two-thirds. In addition, large commodity
export inflows contribute to Dutch Diseasepressures, undermining the development of non-oil
sectors that could potentially provide jobs. Moregenerally, job creation across the region is being
held back by a difficult business climate (figure
MENA.9), and further hampered by political andeconomic uncertainty among oil importing
economies.

Recent data however suggest that tourism
related gains in Tunisia and Egypt are likely
to have been lost in the wake of recent social
unrest. Revenues from tourism fell 7.5
percent from a year earlier in Q1 in Tunisia,
hit by security concerns after a politicalassassination in February, although the unrest
has since eased. Reports from Egypt indicate
sharp drops in hotel occupancy.

Remittance inflows rose during 2012
With remittance inflows estimated at $49 billion in2012, the Middle East and North Africa region
experienced the fastest expansion of remittances in
the world, growing by 14.3 percent in 2012
compared with 2011 (World Bank, 2013). Egypt
received a record US$19 billion (8 percent ofGDP), up from $14.3 billion in 2011, making it thesixth largest receiver of official remittances in theworld. Although Egypt has a large stock of highly

Unemployment rates have easedslightly, but remain highHigh levels of unemployment, one of the catalysts
for the Arab Spring uprisings, have shown modest
signs of improvement in some economies. In
Tunisia, the official jobless rate fell from 18.9
170

GLOBAL ECONOMIC PROSPECTS | June 2013

Middle East and North Africa Annex…In part reflecting a difficult business climate made worse by politicaluncertainty and social unrest

Fig MENA .9

Fiscal Bal (% of GDP 2011, RHS)

160

180
160

Fiscal balances have deteriorated in
the region as have debt levels

Fig MENA.10

Ranking in Doing Business Indicators, 2012

140

25

Fiscal Bal (% of GDP 2012, RHS)

Public Debt (% of GDP, 2012)

140

20
15

120

120
100

100

80

80

10

5
0

60

60

40
20

-5

40

-10

Libya

Iraq

Iran

Algeria

Tunisia

Yemen

Morocco-20

Jordan-15

0

Lebanon

20

Egypt

Iraq

Djibouti

IranAlgeria

Syria

Sub-Saharan Af.

Yemen

West Bank &Gaza

Egypt

LebanonJordanMoroccoMiddle East & NA

East Asia & Pac

Latin Am. & Car.

Tunisia

Europe & C. Asia

0

Source: World Bank; Datastream; IMF.

Source: World Bank.

skilled expatriates in the US, the UK and otherOECD countries, about two-thirds of its migrants
are working in oil rich countries within the MENA
region, which benefitted from relatively buoyant oil
prices last year. Inflows were up by 10 percent in
Tunisia and 6 percent in Jordan but remained
broadly stable at about US$7.4 billion in Lebanon.

Broad structural public finance reforms are needed
in developing MENA economies, to ensure fiscal
sustainability, and to limit vulnerability to adverse
economic shocks. Public expenditures as a share of
GDP tend to be large, and dominated by relatively
rigid wages and entrenched subsidies, with anarrow revenue base heavily dependent onrevenues from a few key sectors.

Rising fiscal deficits and public sector debt haveadded to growing fiscal sustainability concerns,
notably in Lebanon and Egypt where spending
pressures exacerbated by rising borrowing costs
have pushed interest expenditures to about 40
percent and 25 percent of total revenues
respectively in these economies. To finance its
revenue shortfalls Egypt has relied heavily on
borrowing from the domestic banking sector, andgrant aid from the Gulf economies. Rising publicsector borrowing is crowding out private sector
borrowing and increasing the exposure of thebanking sector to sovereign risk. Meanwhile, delays
in tax reforms have delayed the approval of a
US$4.8billion loan from the IMF, and in turn,assistance from other multilateral and bilateral
partners despite indications that the fiscal deficit
will reach over 12 percent of GDP in FY2013.
Among oil exporters, fiscal surpluses haveshrunk as revenues, despite strong growth,
have failed to keep pace with surging public
expenditures.

Deteriorating public finances during 2012 (figure
MENA.10) in the region reflected a number offactors. These include: slippage in revenues due tounderlying economic weakness; rising costs ofimported but heavily subsidized food and fuelcommodities; and expansionary fiscal policies
to shore up flagging economies and tocontain social discontent. Government
outlays were up 15 percent and 11 percent(y/y) in Algeria and Morocco during 2012and by 30 percent (y/y) in the first half of thecurrent fiscal year in Egypt.

A number of economies are attempting fiscal
consolidation in order to manage funding pressuresand risks, with a focus on fuel and food subsidies
given their significantly large share of total
spending. Jordan liberalized fuel prices last year aspart of an IMF $2billion loan program, and a
gradual reform of electricity tariffs is planned thissummer to curb contingent liabilities associatedwith rising indebtedness of the state owned
electricity company (which has been forced to sell
power at below cost). Tunisia raised fuel prices bynearly 7 percent in March, the second hike in six

Public finances have deteriorated
sharply raising fiscal sustainability
concerns

171

GLOBAL ECONOMIC PROSPECTS | June 2013

Middle East and North Africa Annex

month, despite strong domestic opposition as
inflation has increased. Algeria’s 2013 budget plans
support fiscal consolidation of about 2 percent of
GDP in the overall balance led by a decline inpublic sector wage expenditures, but worryingly
also predicated on continued buoyancy incommodity prices and strong external demand
which may not materialize. Lebanon, which posted
a modest primary deficit of 0.4 percent in 2012, its
first in several years, on rising public sector wage
costs and weak revenue growth, is planning 3
percent worth of GDP expenditure cuts during
2013.

led by a sharp drop in merchandise exports andsurging imports.
Trade deficits have shown signs of modest
improvement entering 2013 in Jordan, Lebanon,
Egypt and Tunisia. Foreign exchange reserves havealso been partly bolstered in recent months
reflecting external support from the IMF (Jordan),support from other regional economies (Jordan,
Morocco and Tunisia), a rebound in foreign direct
investment in Tunisia (up 85 percent during 2012)and short term private capital inflows in Lebanon.
That said, excepting Lebanon, reserves are down
by roughly a quarter in Tunisia, Jordan and
Morocco compared to January 2011, amounting to
only slightly higher than the critical 3 monthimport cover threshold in Tunisia and Jordan.

However, fiscal reforms have slowed in Morocco,
and Iran. Following a small hike in fuel prices inJune and a cut in the subsidy of imported wheatlast year, Morocco has shifted consolidation efforts
towards cuts in public investment spending (ofabout 2 percent of GDP for 2013) despite asubsidy bill estimated at 6 percent of the GDP.
Although subsidy reforms have been proposed
they remain highly politically contentious. Iran’s
parliament has blocked the second phase of fuelsubsidy reforms, with budget proposals for 2013
projecting about a one-third increase in overall
spending over 2012 levels. Recently Egypt has
taken some tentative steps towards liberalizing fueland energy subsidies and tax reforms are also in theworks as the fiscal situation has deteriorated, but
reforms remain difficult given lack of politicalconsensus and elevated social tensions.

In Egypt, reserves are down by two-thirds fromJanuary 2011 (figure MENA.11), amounting to lessthan 2 months of import cover and the currency
has fallen some 12 percent since late December.
Dwindling reserves have forced the central bank tohold weekly foreign exchange auctions since
December, and to raise its benchmark rate to 10.25
percent (up 75bp) in March to support thecurrency and combat inflation. Reflecting Egypt’s
precarious fiscal and external position, CDS
spreads have widened substantially to close to 700
basis points and the country has received
substantial financing assistance from Qatar and
Libya.

External vulnerability has increased
among oil importers

Current account positions among oil importers
improved last year, but are likely to face pressuresthis year reflecting lower oil prices, and growing

Rising current account deficits and balance of
payments pressures combined with managed or
fixed exchange rates have resulted in externalfinancing difficulties, falling foreign exchange
reserves (figure MENA.11), and repeated sovereign
credit rating downgrades in several oil importing
economies in the region. Higher current accountdeficits reflected an increasing cost of food imports
compounded by weak European demand forNorth African exporters, reaching over 16 percent
of GDP in Jordan and Lebanon (despite
remittances estimated at 18 percent of GDP in thelatter), and 9.6 percent in Morocco and 8.1 percent
in Tunisia. Egypt posted a 3.1 percent of GDP
deficit, with the trade deficit rising to 10.4 percent

Fig MENA.11

Foreign exchange reserves have fallen sharply in some oil importing
economies

Jan 2011=100
120
Lebanon100
Tunisia80
Morocco60

Jordan40
Egypt, Arab Rep.
20

0
2011

2011

2012

Source: World Bank, Datastream.

172

2012

2013

GLOBAL ECONOMIC PROSPECTS | June 2013

Middle East and North Africa Annex

Outlookimport needs as they invest in production andrefining capacities.
Libya’s current accountposition has improved, buoyed by recovery incrude oil production and continued elevatedinternational prices, but current account positions
have deteriorated in Syria and Iran, with the latterfacing difficulty in securing buyers for its oil in Asia
as international sanctions have tightened.

The outlook for the region as a whole remains
dominated by domestic political developments,
with added risks from external demand,commodity price and geo-political developments.
Output for the region as a whole is projected torise by 2.5 percent in 2013 (table MENA.2), andgradually firm to 3.5 percent and 4.2 percent in2014 and 2015, buoyed on the one hand bystronger demand in the Euro Area and an assumed
easing of regional political tensions, but held backon the other hand by declining oil prices and anassumed tightening of macroeconomic policies thatbegins to alleviate growing fiscal and inflation
tensions.

Financial flows to the region
recovered slightly in 2012 but remainmuch lower than in 2010
Capital flows to the developing MENA
region recovered modestly in 2012 to an
estimated $17.5 billion after almost halving to$15.8 billion in 2011. The improvement
reflected an increase in net FDI flows (up 22
percent) to Egypt, Morocco and Tunisia,
although overall levels remain well below preArab Spring inflows (table MENA.1).
Morocco and Lebanon have also successfully
issued sovereign debt over the last year worth$1.5billion (in December) and $1.1 billion (inApril, 20 percent of which was bought byoverseas investors) respectively.
Other
sovereigns including Jordan and Egypt areconsidering debuting sukuk bonds later thisyear in international capital markets tofinance fiscal deficits.
Table MENA.1

In Egypt, the near term outlook remains
difficult reflecting weak investor andconsumer confidence on account ofupcoming elections in the fall, widening fiscal
and current account imbalances and delays innegotiating an IMF program. Egypt is
expected to import natural gas for the firsttime in decades which will further add toexternal
financingpressures.
Official
estimates project a bumper wheat harvest thisyear in Egypt, which could reduce foodimports, but these are regarded as too

Net Capital Flows to Middle East and North Africa

173

GLOBAL ECONOMIC PROSPECTS | June 2013

Middle East and North Africa Annex

optimistic by some observers. Absent any
major fiscal or balance of payments crisis,
growth is expected to slow to 1.6 percent in
the current fiscal year from 2.2 percent lastyear. Conditional upon a subsiding in politicaltensions and reforms being undertaken,
growth should firm to about 3.0 percent next
year and to about 4.8 percent in 2015,
although this forecast remains subject tosubstantial downside risks (table MENA.3).

signs of recovery in Q1, but a slow pace ofrecovery in Euro zone, its main trading partner,should temper gains in external demand andtourism inflows in 2013. Accordingly, growth isexpected to rise to about 3.8 percent, only slightly
higher than 3.6 percent in 2012, and to gradually
pick up further to about 5 percent in 2015 as
the external and internal environment
improves.
Growth in Jordan is forecast to pick up somewhat
to 3.3 percent in 2013 (from 2.8 percent), as
confidence in the economy improves due toreforms taken as part of the IMF program, and also
reflecting the boost to sentiment and activity from

Growth is expected to pick up slowly in Tunisia.
Although civil unrest experienced in February has
receded, there remain tensions between
conservative and secular forces. Exports showed
Table MENA.2

Middle East and North Africa forecast summary(annual percent change unless indicated otherwise)00-09aGDP at market prices

b

3.9

2010

2011

4.6

-2.2

Est. Forecast
2012
2013
2014
3.5

2.5

3.5

2015
4.2

(Sub -region totals-- countries with full NIA + BOP data) c

GDP at market prices c
GDP per capita (units in US$)PPP GDP d
Private consumption
Public consumption
Fixed investment
Exports, GNFS e
Imports, GNFS e
Net exports, contribution to growth
Current account bal/GDP (%)
GDP deflator (median, LCU)
Fiscal balance/GDP (%)

4.3
2.8
4.3
4.1
3.7
6.9
4.3
7.5
-0.6
5.2
5.9
-0.5

4.9
3.3
5.2
4.2
3.6
3.0
5.5
4.8
0.2
1.6
8.4
-2.4

1.2
-0.4
1.0
2.8
3.8
2.7
-3.5
0.2
-1.3
1.5
6.4
-3.7

-0.3
-1.8
-0.4
0.7
2.9
-0.6
-8.1
0.6
-3.0
-1.9
4.2
-6.5

1.2
-0.3
0.9
2.2
3.5
1.3
0.9
4.8
-1.4
-3.3
4.2
-6.4

2.6
1.1
2.4
3.0
3.1
2.5
3.5
6.2
-1.2
-3.4
3.7
-5.3

3.5
2.1
3.4
3.9
3.2
3.3
5.0
5.4
-0.5
-3.1
3.3
-4.7

Memo items: GDP
MENA Geographic Region f
4.1
4.8
3.6
2.5
2.6
3.2
3.8
Selected GCC Countries g
3.8
4.6
6.1
5.3
3.8
3.8
4.0
Developing Oil Exporters
3.6
4.5
-4.4
3.5
2.1
3.1
3.8
Developing Oil Importers
4.5
4.8
1.6
3.5
3.1
4.1
4.7
Egypt
4.4
6.0
0.5
4.6
2.3
3.9
4.9
Fiscal Year Basis
4.3
5.3
1.8
2.2
1.6
3.0
4.8
Iran
4.6
5.9
1.7
-1.9
-1.1
0.7
1.9
Algeria
3.4
3.3
2.4
2.5
2.8
3.2
3.5
Source : World Bank.
a. Growth rates over intervals are compound weighted averages; average growth contributions, ratiosand deflators are calculated as simple averages of the annual weighted averages for the region.
b. GDP at market prices and expenditure components are measured in constant 2005 U.S. dollars.
c. Sub-region aggregate excludes Iraq and Libya, for which data limitations prevent the forecasting of
GDP components or Balance of Payments details.
d. GDP measured at PPP exchange rates.
e. Exports and imports of goods and non-factor services (GNFS).
f. Geographic region includes high-income countries: Bahrain, Kuwait, Oman, United Arab Emirates
and Saudi Arabia.
g. Selected GCC Countries: Bahrain, Kuwait, United Arab Emirates, Oman and Saudi Arabia.

174

GLOBAL ECONOMIC PROSPECTS | June 2013

Table MENA.3

Middle East and North Africa Annex

Middle East and North Africa forecast summary

00-09a2010

2011

Est. Forecast
2012 2013 2014

2015

Algeria
GDP at market prices (% annual growth) b
3.4
3.3
2.4
2.5
2.8
3.2
3.5
Current account bal/GDP (%)
22.3
7.3
10.5
7.7
5.4
4.5
3.9
Egypt, Arab Rep.
GDP at market prices (% annual growth) b
4.4
6.0
0.5
4.6
2.3
3.9
4.9
Fiscal Year Basis
4.3
5.3
1.8
2.2
1.6
3.0
4.8
Current account bal/GDP (%)
1.1
-2.0
-2.3
-3.1
-3.5
-2.8
-2.1
Iran, Islamic Rep.
GDP at market prices (% annual growth) b
4.6
5.9
1.7
-1.9
-1.1
0.7
1.9
Current account bal/GDP (%)
6.4
7.1
5.9
-0.1
-2.5
-3.3
-3.0
Iraq
GDP at market prices (% annual growth) b
-1.0
0.8
8.5
8.4
9.0
8.0
8.0
Current account bal/GDP (%)
3.0
12.5
7.0
3.8
3.0
4.0
JordanGDP at market prices (% annual growth) b
6.1
2.3
2.6
2.8
3.3
3.4
4.5
Current account bal/GDP (%)-4.4-7.1 -12.0 -17.3 -15.4 -14.2 -12.7
LebanonGDP at market prices (% annual growth) b
4.4
7.0
1.5
1.5
2.0
2.3
4.0
Current account bal/GDP (%)-16.8 -20.4 -12.5 -13.8 -14.7 -13.6 -13.2
Libya
GDP at market prices (% annual growth) b
3.8
3.5 -53.9 104.5
15.0
10.0
8.0
Current account bal/GDP (%)
19.5
9.1
35.8
24.0
18.0
9.0
Morocco
GDP at market prices (% annual growth) b
4.6
3.7
5.0
2.7
4.5
4.8
4.7
Current account bal/GDP (%)
0.2
-4.5
-7.9
-9.5
-9.7
-8.8
-8.0
Syrian Arab Republic
GDP at market prices (% annual growth) b,c
4.6
3.2-3.2 -30.0 -10.0-2.0
3.0
Current account bal/GDP (%)
2.7
-0.6
-1.7
-8.2
-8.8
-7.5
-6.7
Tunisia
GDP at market prices (% annual growth) b
4.1
3.0
-1.8
3.6
3.8
4.8
5.1
Current account bal/GDP (%)
-2.7
-4.8
-7.4
-8.1
-8.4
-7.4
-6.4
Yemen, Rep.
GDP at market prices (% annual growth) b
3.5
7.7 -10.5
0.1
4.3
4.5
4.6
Current account bal/GDP (%)
1.2
-3.7
-4.0
-1.4
-2.3
-2.8
-2.1
Source : World Bank.
World Bank forecasts are frequently updated based on new information and changing (global)
circumstances. Consequently, projections presented here may differ from those contained in other
Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any
given moment in time.
Djibouti, West Bank and Gaza are not forecast owing to data limitations.
a. GDP growth rates over intervals are compound average; current account balance shares are simple
averages over the period.
b. GDP measured in constant 2005 U.S. dollars.
c. The estimate for GDP decline in Syria in 2012 is subject to significant uncertainty.

175

GLOBAL ECONOMIC PROSPECTS | June 2013

Middle East and North Africa Annex

the signing of an $18bn deal with Iraq to build an
oil pipeline from southern Iraq to Aqaba. The
pipeline which is expected to be completed by 2017
should help spur FDI and domestic activity andhelp lift growth to over 4 percent by 2015.
However there remain downside risks from theconflict in Syria. Morocco’s economy should
benefit from the recovery in agricultural sector
output, which should lift growth to about 4.5
percent in 2013 from 2.7 percent in 2012 and toremain buoyant at just under 5 percent in themedium term supported by the recovery in theEuro Area.

up, including inflows from GCC economies
into construction and tourism sectors whichhave been diverted elsewhere into the region.
For the region, equity inflows are also
expected to recover but should remainmodest compared to the pick up in bondinflows.

Risks and Challenges

Aggregate growth among oil exporters should slow
in the near term reflecting a stabilization of
production to a more sustainable pace in Libya,
recession in Iran and production and export
setbacks in Algeria and Iraq. Algeria’s growth isexpected to pick up modestly to about 2.8 percent
in 2013 (from 2.5 percent) in 2013 and graduallyfirm thereafter. Iran’s economy is expected toremain weak until some sort of resolution with
Western governments over its nuclear issues can bereached. Until then domestic investment andprivate consumption should remain subdued withgrowth projected at about 1.9 percent in 2015, well
below its average growth of 4.5 percent between
2000 and 2009.

The main risks and challenges facing the region are
domestic. While a weaker outturn in the EuroArea would certainly impact the region, its likely
influence pales compared with the potential impact
of increased social and political tensions, orcompared with the likely impact of a failure toaddress growing macroeconomic imbalances,including fiscal deficits bloated to unsustainablelevels by fuel and food subsidies that amount toover a fifth of government revenues in several
economies (figure MENA.12) and rising debt levels thatthreaten long-term fiscal sustainability, and for oil
exporters the potential impact of a more pronounced
than projected decline in commodity prices.

Political tensions and security risks

Although a tentative agreement on oil payments
between the Iraqi government and the Kurdish
semi-autonomous region was reached in early May,
longer term plans to raise Iraq's oil output to about
3.3 million bpd (from nearly 3 million bpd
currently) may prove challenging given the recent
history of tensions between the two and also given
the scale of infrastructure investment needed torealize the higher output. Accordingly medium
term growth is projected to remain at close to lastyear’s outturns of about 8.5 percent. Nearterm risks have increased, however, given theescalation in conflict in recent months.

remain elevated and there are growing signsof domestic political polarization in several
economies. Elections are due in a number ofcountries this year or early next year, making
for a challenging reform environment at a time ofdomestic unrest and persistently high levels of
Fig MENA .12

Subsidy reforms are crucially needed
to improve fiscal sustainability% of total revenues
60% of total GDP
14
12

50

Capital inflows are expected to recover gradually inthe region, rising to about US$30 billion in 2015,
led mainly by growing FDI inflows as politicaltensions ease and reflecting infrastructure
investment opportunities in both oil importing andexporting economies, including Algeria, Iraq and
Jordan. Private capital flows to Egypt are likely toremain weak in the near term due to continued
uncertainty there. However inflows should pick

40
30

Natural Gas Subsidy (LHS)Electricity Subsidy ( LHS)
Petroleum Subsidy (LHS)
Total Fuel subsides as % of GDP, RHS

10
8
6

20

4

10

2

0

0
DJI MAR MRT TUN IRQ LBN JOR LBY YMN ALG EGY IRN

Source: World Bank, IMF (2013).

176

GLOBAL ECONOMIC PROSPECTS | June 2013

Middle East and North Africa Annex

Commodity price and demand/
supply risks: The economies of oil exporters

unemployment. Already heightened tensions in
Iraq and Lebanon could be further worsened byspillovers from Syria, with potentially destabilizing
effects for these economies.

are particularly vulnerable to a shift in the price ofoil. As discussed in the main text, global supply has
responded to the higher prices of the past 10 years,
and as a result large gaps have been generated
between hydrocarbons in North America and therest of the world. As existing bottlenecks
increasingly allow this new supply (and that comingfrom Sub-Saharan Africa and elsewhere) to reachglobal markets, prices could decline much more
quickly than in the baseline. In such an instancegovernment revenues and current account balances
would come under pressure.

Over the longer term, the structural challenges
facing the region—and which are currently asource of ongoing social and political tensions—remain much the same as before the onset of the
Arab Spring. Consequently, unless progress is madeon building political and social consensus needed
to undertake the necessary structural reforms, thenit is very likely that the developing Middle East andNorth Africa region will continue to lag otherdeveloping regions and that growth rates willremain relatively low even when calm is eventually
restored to the region.

Simulations discussed in the main text show theeffects of a fall in real oil prices to $80 per barrel by
mid-2014. They suggest that developing oil
exporters in the Middle East and North Africa
region (along with exporters in sub-Saharan Africa)
would be hardest hit by such a decline, with GDP
declining by 1.4 percent relative to the baseline,
government balances deteriorating by as much as
2.1 percent of GDP and current account balancesby 3.5 percent in 2014. For countries, like Algeria
or Iran, where fiscal balances are already underpressure this could force sharp adjustments indemand, policy and exchange rates. Conversely, oil
importers with stressed fiscal and balance of
payments positions would benefit from such a
decline, with GDP 0.5 percent higher relative tothe baseline on average, and current accounts andfiscal balances improving by 0.5 and 0.2 percent of
GDP respectively in 2014.

of the region faces very real
challenges on the fiscal front, due inMuchpart to increased social spending to assuage
tensions that have arisen in the context of the ArabSpring, but also because of high fuel and foodprices that have sharply increased the cost of
subsidy programs (figure MENA.12). Dealing withthis would be difficult enough at the best of times,
but is particularly challenging in the current slow
growth and socially volatile period. Still, with such
expenditures at some 6 percent of GDP in many
countries, inaction does not appear to be an option.
Experience from other countries suggests that
explicitly combining a reduction in subsidies with areinforcement of targeted assistance of the very
poor can make such a reform more politically
acceptable and minimize the negative poverty
effects – while still reducing fiscal deficits.

In the current environment, regional oil exporters
will no longer be able to rely on high and rising
prices, but will increasingly need to rely on
increased output. This in turn necessitates reforms
that would allow them to invest heavily ininfrastructure, and exploration to raise current
production levels which have stagnated or beensteadily declining in recent years. However, private
capital and FDI inflows may fail to materialize
because of security risks, poor legal environments
for investment and political uncertainty to varying
degrees in Algeria, Iraq, Libya and Yemen andinternational sanctions in the case of Iran.

Inaction risks a fiscal crisis, where markets
refuse to finance additional deficits forcing amuch sharper, less acceptable and moredamaging cut in government spending. This isparticularly the case for economies running
low on foreign exchange reserves, withslowing of domestic reform efforts further
undermining fiscal solvency and investor
confidence, both domestic and overseas. In
Egypt, a delay or halt in future aid
disbursements could spiral into serious
balance of payments difficulties given its
already low level of reserves and undermine
confidence in the banking sector which has
high levels of exposure to sovereign debt.

Economic developments in theEurozone: The Eurozone (and to a lesser
extent the US) account for the bulk of the region’s
manufacturing, service and hydrocarbon exports.
177

GLOBAL ECONOMIC PROSPECTS | June 2013

Middle East and North Africa Annex

Any setback to the ongoing recovery there could
undermine exports and tourism in oil importing
economies and export and fiscal revenues inAlgeria and Iraq. Heightened risk aversion could
also reduce already depressed capital inflows into
the region and dent confidence, particularly incountries with large macroeconomic imbalances,high levels of debt and severely depleted fiscal andreserve buffers. On the upside, a faster than
expected recovery in the Euro Area could provide
positive tailwinds to these economies, reducingbalance of payment and exchange rate pressures.

178

GLOBAL ECONOMIC PROSPECTS | June 2013

Middle East and North Africa Annex

References
World Bank. 2013. “Migration and Development Brief 20”, April 2013.
IMF. 2013. “Energy Subsidy Reform: Lessons and Implications”, January 2013.
http://www.imf.org/external/np/pp/eng/2013/012813.pdf

179

GLOBAL ECONOMIC PROSPECTS | June 2013

GLOBALECONOMICPROSPECTS

June
2013

South Asia Annex

Annex

SOUTH
ASIA
REGION181

GLOBAL ECONOMIC PROSPECTS | June 2013

South Asia Annex

Overview

Outlook for 2013-15
Economic activity in South Asia is projected tostrengthen during the course of 2013, buoyed by agradual strengthening of external demand; a lessvolatile external environment; lower crude oil
prices; reduced fiscal pressures due to lower fuelprices and lower subsidies; an improved crop(following last year’s weak monsoons); andcontinued remittance inflows. However, even as
quarterly GDP accelerates, the sharp decelerationof growth in 2012 implies that whole year growthin 2013 will be a relatively weak 5.2 percent.
Looking further ahead, the stronger underlying
momentum in 2013, coupled with firming external
demand and improvement in investment spending(assuming policy and fiscal reforms are sustained),should help to accelerate the region’s growth to 6.0
percent in 2014 and then 6.4 percent in 2015.
Growth in India is projected to rise to 5.7 percent
in the 2013 fiscal year, and accelerate to 6.5 percent
and 6.7 percent in FY2014 and FY2015.

South Asia’s regional GDP growth slipped to 4.8
percent in 2012, following a robust recovery in theyears after the 2008 global financial crisis. A
weakening global economy, coupled with domestic
difficulties (including policy uncertainties, structural
capacity constraints, and a poor harvest)
contributed to weaker regional growth in 2012. The
bulk of this regional slowdown reflects a continued
deceleration in India (to 5 percent in the 2012 fiscal
year ending in March 2013), but growth also
slowed in other regional economies. Sri Lanka’s
growth slowed sharply, by nearly 2 percentage
points in 2012. Bangladesh, Pakistan, and Nepal are
expected to experience less marked slowdowns intheir respective 2012-13 fiscal years, although
actual growth rates in Pakistan and Nepal are much
lower than in other countries in the region. In
contrast, Afghanistan experienced double digit
growth in 2012.

Risks and vulnerabilities

The regional trade balance deteriorated in 2012 due
to weakening exports and rising demand for crude
oil and other imports. India’s current accountdeficit widened sharply, but robust remittanceinflows bolstered current account positions in
Nepal, Bangladesh, and Pakistan.

Risks to the outlook for the region are broadly
balanced.

External risks are diminishing but remain

External risks from the Euro Area and of fiscal
sustainability in the United States have diminished.
But the region’s vulnerability to a deterioration in
financial flows has picked up due to rising current
account deficits, notably in India. A more rapid
than expected decline in commodity prices would
help outturns by reducing current account andfiscal deficits, and by easing inflationary pressuresand boosting domestic incomes.

More recently, activity in South Asia has picked up
from its mid-2012 slump, with industrial output
rising at different paces in India, Pakistan and
Bangladesh in the second half of 2012 and in thefirst quarter of 2013 - while in Sri Lanka industrial
production stabilized in the fourth quarter of 2012.
South Asia’s exports (and imports) are also increasing, inline with strengthening global trade and output.

Domestic challenges are gaining prominence

Inflation has moderated in several countries,
helped in part by the easing of internationalcommodity prices. But in general, consumer priceinflation in the region remains higher than the
average for the group of middle-income developing
countries, and inflation expectations are still very
high in India. In addition, some countries have
stepped up the reform agenda, seeking to containfiscal deficits (including reduction of subsidies, by
raising end-user fuel and electricity prices), and in
the case of India, opening the economy further tointernational investment.

Domestic issues, including continued progress infiscal consolidation; the quality of this year’s ricecrop; and success in reversing the earlier increase ininflationary expectations will contribute todetermining the pace of recovery going forward.
Perhaps most importantly, will be continued
progress in implementing reforms that relieve
supply-side constraints, such as reducing energy
supply bottlenecks, labor market reforms,
improving the business climate, and investing in
education, health and infrastructure.

183

GLOBAL ECONOMIC PROSPECTS | June 2013

South Asia Annex

Recent economic
developments

A worsening external environment amid
intensification of Euro Area debt tensions in mid2012 caused a severe weakening of exports acrossthe region. Regional exports fell by 4 percent (y/y)
in US dollar terms in 2012 (-4.1 percent y/y
excluding India), after two consecutive years ofmore than 30 percent increases. The Euro Area
economy, South Asia’s largest export market,
contracted by 0.5 percent in 2012, and althoughpolicy actions in high income countries stabilized
financial markets, global trade only began firmingin the fourth quarter. South Asia’s US dollar
imports continued to rise in 2012, but at a muchslower pace (4 percent y/y) compared with a 32
percent increase the previous year.

GDP in South Asia decelerated sharply during 2012,extending a slowing trend following the rapid recovery
from the financial crisis in 2008. Regional growthslowed from 10 percent in 2010 to 7.3 percent in2011, and further to 4.8 percent in 2012 (figure SAR.1).
The slowdown in 2012 mainly reflects a continuing
steep deceleration in India, which represents aboutfour-fifth of the region’s GDP, to 5.0 percent in
the 2012 fiscal year (April 2012-March 2013) from
6.2 percent in FY2011 and 9.3 percent in FY2010.
But growth also slowed in other regional
economies. Growth in Sri Lanka slowed sharply, by
almost 2 percentage points in 2012. Fiscal year
growth in Bangladesh, Pakistan, and Nepal isestimated to have slowed less markedly in theirrespective 2012-13 fiscal years, although actual
growth rates in Pakistan and Nepal are much lower
than in other countries in the region. Afghanistan
was unique among the larger economies in theregion, recording double digit growth in 2012.
Fig SAR.1

GDP growth

In consequence, trade balances as a share of GDP
either deteriorated or trade deficits remained highin the region (figure SAR.2). India’s worsening
trade deficit was reflected in a sharp widening of its
current account deficit, which reached 6.7 percent
of GDP in the fourth quarter of 2012. Sri Lanka’scurrent account deficit had widened even more
earlier (to 7.8 percent of GDP in 2011) together
with an overheating economy. Policy tightening
measures curbed import demand, but weak exports
meant that Sri Lanka’s trade deficit remained high,and its current account deficit declined only
modestly to 6.6 percent of GDP in 2012. In
Bangladesh, although exports declined in 2012 inline with the regional trend, imports fell evenfaster—in part due to a 10 percent depreciation of
the taka relative to the US dollar, compared withthe previous year—causing its trade deficit tonarrow during the 2012 calendar year. Together

A sharp slowdown in post-financial crisis
GDP growth in South Asia, led by India
South Asia
India
Nepal

Pakistan
Bangladesh
Sri Lanka

10
9

Fig SAR.2

87

Trade deficits as share of GDP havewidened in India, Pakistan and Sri Lanka

Trade balance/GDP (Percent)

6
5

0

4

-2

3

-4

2

-6

1

-8

0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013f

-10
-12

Note: Fiscal years for Bangladesh, Nepal and Pakistan span almost
equally across two calendar years, with data for FY2011-12 shown in2012 in the chart. For India, where the fiscal year runs from April to
March, data for FY2012-13 is shown in 2012. GDP growth rates areshown in factor cost terms for India and Pakistan, and in market priceterms for other countries. South Asia’s GDP growth rate for calendar
years are based on country-level averages of fiscal year GDP growth
rates (see Table.SAR.2).
Source: World Bank; Datastream, Haver.

-14

India

-16

Pakistan
Bangladesh-18

Sri Lanka

-20
2005

2006

2007

2008

Source: World Bank; Datastream.

184

2009

2010

2011

2012

GLOBAL ECONOMIC PROSPECTS | June 2013

South Asia Annex

with increased remittances, this resulted in an
improved current account position. Despite
growing trade deficits in Pakistan and Nepal in the2012 calendar year, their current account positions
were bolstered by robust migrant remittances
inflows (see box SAR.1), and also by officialtransfers in the case of Pakistan.

Fig SAR.3

New investment project announcements
in India declined and resources tied up installed projects rose sharply since 2011

Investment projects in India(2-quarter moving average, billions of constant 2006 rupees)
6,000

New investment projects announced

1200

Stalled projects [Right]

Below-average monsoon rains and a poor regional
harvest in 2012 (agriculture constitutes about a fifthof South Asia’s GDP and over half of employment) also
contributed to weaker growth across the region. In
addition, structural capacity constraints and domestic
policy uncertainties, as well as security concerns and social
unrest in some countries, played a significant role in theslowing of regional GDP growth.

5,000

1000

4,000

800

3,000

600

2,000

400

1,000

200

0
0
Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013

Source: Center for Monitoring Indian Economy.

India’s GDP measured in factor-cost terms grew at
a decade-low 5.0 percent in FY2012 (figure SAR.1).
The aforementioned weakening of external
demand and below-average monsoons exacerbateda domestic slowdown that was already underway, asbuilding capacity constraints and bottlenecks kept
growth in check despite sustained fiscal stimulus.
This stimulus had helped the economy recoverquickly after the financial crisis in 2008, and was
gradually withdrawn in subsequent years.
Uncertainty about the reform agenda, along with
monetary policy tightening in 2010 and 2011 in
response to rising inflationary pressures, led to a
sharp slowing of investment growth and anincrease in stalled projects (figure SAR.3). Weaker
investment activity added to existing supply-side
constraints and negatively impacted overall growth.1

GDP growth in Bangladesh and Sri Lanka has beenaround 6 percent or higher in recent years (figure
SAR.1). Bangladesh’s exports have benefited inpart from preferential access to European Unionand US markets, while domestic demand and its
current account position were partly cushioned byremittances (see Box SAR.1). However, weakening
external demand, domestic supply constraints(including unreliable electricity provision), andsocial unrest resulted in growth slowing to 6.2
percent in FY2011-12 from 6.7 percent theprevious fiscal year, with a further slowdown
expected for FY2012-13. Bangladesh’s relatively
fast growth during 2010-12, together withinternational commodity price increases andexpansionary macroeconomic policies, resulted in
FigureSAR.3 pressures.
Industrial production
is picking
up, alinflationary
Subsequent
macroeconomic
beit
at
different
paces
in
South
Asian
countries
tightening and intensified domestic constraints,
Source: World Bank.
combined with disruptions caused by political unrest,
Industrial production, 3m/3m seasonally-adjusted annualized rate (Percent)contributed to the projected slowdown in FY2012-13.

Figure SAR.2 Trade balances in India, Bangladesh
and Sri
Lanka deteriorated
in 2012
exports
GDP
growthin Pakistan sharply
and Nepal
hasas
remainedslowedwell below the regional average in recent years.
Source: World Bank.
Pakistan,South Asia’s second-largest economy,
Trade balance/GDP (%)
appears to have settled into a relatively low-growth0
pathof about 3-4 percent in recent years mainly-2
due to unfavorable domestic factors, including-4
security
uncertainties, unreliable delivery of naturalgas-6 and electricity to firms, and weak investment
rates.
In Nepal, political uncertainties in recent-8years,
and an adverse investment climate, played a-10role
in its relatively poor economic performance.
-12
Nepal’s GDP growth had risen to 4.9 percent in
India
-14
the 2011-12 fiscal
year (ending in mid-July 2012) on
Pakistan-16
the back ofBangladesh
a good harvest. However, a poor
-18
harvestin 2012,high inflation, weakening external
Sri Lanka-20
demand,andslowing
growthin 2010
India 2011(its largest
2005
2006
2007
2008
2009
2012
trade partner) weighed negatively on economic
activity in Nepal during the 2012-13 fiscal year.

50

Sri Lanka’s economy enjoyed a post-conflictrebound, growing at 8 or more percent in both302010 and 2011. Growth has since slowed to a moresustainable 6.4 percent in 2012, in response to20
policy efforts to reduce overheating (amid rising10
domestic supply constraints), a drought, and weakerglobaldemand for Sri Lanka’s exports.
040

India percent GDP growth inAfghanistan’s robust 11.8
Pakistan2012, the highest in theBangladesh
region, was mainly due to-20
Sri Lanka and continued strong
an exceptionally good harvest
excl. South Asia
-30
foreign aid inflows. InDeveloping
addition,mining activity
Feb-11
Jun-11
Oct-11
Feb-12
Jun-12Oct-12
Feb-13also picked up. However, governanceissuesandanuncertain security situation present persistent challenges

-10

185

GLOBAL ECONOMIC PROSPECTS | June 2013

Box SAR.1
SAR.1
Box

South Asia Annex

Migrant remittances shielded current account positions in several South Asian countries

Remittances to the South Asia region are estimated to have increased by 12.3 percent in 2012 (the second-highest growthamong developing regions) to reach $109 billion. This follows growth averaging 14 percent in the previous two years. India isthe largest recipient among developing countries ($69 billion), while Bangladesh, and Pakistan ($14 billion each) are among
the top ten developing-country recipients of remittances. Remittance flows to Bangladesh and Pakistan have been particularlyrobust in US dollar terms, although Nepal and Sri Lanka recorded the largest increases as a share of GDP in 2012 (Box figure
SAR.1a), helped in part by strong income growth in the Gulf Cooperation Council (GCC) countries. A steady increase in US
dollar remittance inflows in recent years has helped to offset trade deficits in Nepal, Bangladesh and Pakistan, and to a smaller extent in Sri Lanka and India (Box figure SAR.1b).
have
risen
asas
a shareBox figure SAR.1a Remittances
Remittances
have
risen
a shareof GDP in South Asian
countries
of GDPin South Asian countries
Remittances as a share of GDP
0.25

BoxfigurefigureSAR.1b
SAR.1b Remittances
Box
Remittance inflows mostly offset
trade deficits in Nepal,
Bangladesh
Pakistantrade
deficits inand
Nepal,
Bangladesh and Pakistan
Percent of GDP

Nepal

Remittances as a share of GDP
0.25

Percent of GDP
30

30

Nepal

0.2

20

20

0.2

10

0.15

0.15

Sri Lanka

Bangladesh

10
0

0.1

Bangladesh
0.1

0

Sri Lanka-10

Pakistan

0.05

0.05

0

-20

2000

2002

2004

2006

2008

2010

2012

-20

-30
India

India
0

Trade balance
Remittances
Trade accountbalance balance/GDP
Current-10
Pakistan
India

Remittances
Current
accountBangladeshbalancePakistan

Sri Lanka

Nepal

Sri Lanka

Nepal

-30
2000

2002

2004

2006

2008

2010

India

2012

Pakistan

Bangladesh

Source: World Bank, Migration and Development Brief 20.

Regional industrial production growth
picked up in late 2012 and early
2013, but business sentiment
weakened in India

for the economy. Bhutan’s economy grew strongly inrecent years mainly due to hydropower generation andelectricity sales to India—these revenues together withbudgetary grants allowed it to finance a current accountdeficit exceeding a fifth of GDP. High credit growthand supply constraints resulted in an overheatedeconomy and inflation rates rising to over 10
percent (in line with cost of imports from India).
But policy tightening in 2012 moderated credit growth,
while delays in new projects coming on-stream caused
GDP growth to slow to an estimated 7.6 percent in the
2012-13 fiscal year from 9 percent in FY2011-12.

Industrial activity has begun picking up from a mid-2012 slump at different paces across South Asian
countries. India dominates the regional trend, withindustrial production expanding at a 4.1 percent
annualized pace during the three months ending inMarch (3m/3m, saar) (figure SAR.4). Available data
show industrial production rose even moredecidedly in Pakistan and Bangladesh—at a 22.6
percent annualized pace during the three months
ending in March 2013 (3m/3m, saar) in Pakistan
and at a 21.3 percent annualized pace in the threemonths ending in January in Bangladesh.
Industrial production momentum in Sri
Lanka stabilized by the end of 2012 after
registering steep declines during the second
half of the year (figure SAR.4).

The Maldives, however, experienced politicaluncertainty, double-digit fiscal deficits (the highest
in the region - see below), current account deficitof over a quarter of GDP, falling reserves (wellbelow the critical 3 months of imports), and ahalving of GDP growth to 3.4 percent in 2012.
Tourism, a mainstay of the economy, was also
adversely affected by slower growth in high income
countries, and was only partly compensated for by
an increase in Asian tourist arrivals.
186

GLOBAL ECONOMIC PROSPECTS | June 2013

Fig SAR.4

South Asia Annex

Industrial production growth momentum has picked up at different paces inSouth Asian countries

Fig SAR.5

Momentum of export volume growth isrising across South Asia

Export volumes, 3m/3m seasonally-adjusted annualized rate (Percent)Industrial production, 3m/3m seasonally-adjusted annualized rate (Percent)

80

50

60
40

40
30

20
20

0
10

-20
0

-40
-10

India
Pakistan
Bangladesh
Sri Lanka
Developing excl. South Asia

-20
-30
Mar-11

Jul-11

Nov-11Mar-12

Jul-12

Nov-12-60

Jul '11
India
Pakistan

Mar-13Jan '12
Bangladesh
Sri Lanka

Jul '12Jan '13Developing excl. South Asia

Source: World Bank.

Source: World Bank.

Business sentiment in India, however, weakened
markedly between March and May, with thePurchasing Managers’ Index for manufacturing
recording its lowest reading in four years in May although still slightly above the 50 mark, indicating
expansion. This in part reflects still difficult
domestic and external demand conditions (despite
recent strengthening) and persistent electricity
shortages. In contrast, the services sector index
picked up in May on stronger demand, withincreased optimism about the future among
services firms.

volume growth weakened in Q1 2013, in part asnatural gas and electricity shortages cut into
activity. The pace of decline, however, appears tohave slowed in March and April. Available datasuggest that the pace of earlier decline in Sri
Lanka’s exports slowed in the second half of 2012and momentum of export volume growth
improved in recent months (figure SAR.5),
although on a year-on-year basis, exports in US
dollar terms were still 2.8 percent lower in March
compared to the same month in 2012.

Inflation in South Asia shows signs ofmoderating, but price pressures remain

South Asian exports have also
started to recover from their 2012
slump

Regional consumer price inflation accelerated in
the three months to February partly due to a surge
in food prices and upward adjustments to regulated
fuel prices. However, inflation shows signs ofmoderating, helped in part by easing ofinternational commodity prices. India’s benchmark
wholesale price index (WPI) inflation fell to a 3year low of 4.9 percent (y/y) in April 2013—
although consumer price index (CPI) inflation andcore inflation (CPI excluding food and energy)
were both above 8 percent (y/y) in April. In Sri
Lanka, inflation moderated to 6.4 percent (y/y) in
April, its lowest in almost a year, but rose to 7.3
percent in May.

South Asia’s exports have also started to recoverfrom their mid-2012 slump. Regional export
volume growth picked up to a 12 percent
annualized pace in the fourth quarter of 2012 from
6.5 percent (annualized) in the third quarter, andfurther to a robust 15.7 percent annualized pace inthe three months to April (3m/3m, saar) (figure
SAR.5). While India dominates the regional trend,
Bangladesh’s export volume growth accelerated asa result of strengthening demand for its garment
exports (although recent factory accidents could
moderate the pace of increase going forward).

Year-on-year inflation rates can however be
influenced by base effects. Quarterly inflation
provides a better measure of recent movements

In Pakistan, following a relatively strong pickup in
the second half of 2012, the momentum of export
187

GLOBAL ECONOMIC PROSPECTS | June 2013

South Asia Annex

Inflation momentum is moderating
across South Asia, but still strong inIndia and Bangladesh

Fig SAR.6

Fig SAR.7

Inflation, 3m/3m seasonally adjusted annualized rate (Percent)Inflation expectations in India are still
very highMean inflation rates in India for given survey quarter (Percent)

20

16
14

15

12
10

10
8

5

6
0

Current perceived
1-year Ahead
ActualLinear (Current perceived)
Linear (1-year Ahead)
Linear (Actual)

4
2

-5

Jul '11
India

Pakistan

Jan '12
Bangladesh

Jul '12
Sri Lanka

Jan '130
Q4-2006

Nepal

Source: World Bank.

Q1-2008

Q2-2009

Q3-2010

Q4-2011

Q1-2013

Source: World Bank; RBI.

Private capital flows to South Asia
have picked up since mid-2012(figure SAR.6). According to this measure, themomentum of CPI inflation remains strong in
Bangladesh and India—although moderatingslightly in Bangladesh—suggesting that pricepressures continue to remain high in thesecountries. However, inflation has moderated
markedly in Pakistan. Inflation momentum had
been weakening earlier in Sri Lanka, but increase inregulated electricity prices caused inflation to rise inMay.

Private capital flows to South Asia have increased
robustly since mid-2012 (figure SAR.8). Overall,
net private capital inflows to the South Asia regionrose from $73 billion in 2011 to $87 billion in 2012(table SAR.1).
Following reform efforts in India since September
2012, private capital flows to India grew robustly
led by portfolio equity inflows and bank lending.
The increase in private inflows since mid-2012 wasalso a consequence of abundant global liquiditythat resulted from financial market stabilization andaccommodative monetary policies in high income

The generally high CPI inflation rates in South
Asian countries compared with the average for
middle-income developing countries reflect supplyside production constraints, entrenched inflationary
expectations, and the persistence of food inflation.
Households’ inflation expectations in India remain
stubbornly high, partly because of a steady upward
trend in inflation over the past 7 years (figure
SAR.7). Food inflation has remained persistently
high in the region, partly reflecting agricultural
production constraints and logistics bottlenecks.
Despite the moderation in overall consumer priceinflation, food inflation in India was over 10
percent (y/y) in April, and in Bangladesh and Sri
Lanka was 8.4 percent and 7.9 percent,respectively, in May. In Pakistan, despite amoderation in headline inflation to 5.1 percent (y/y) in May, food inflation was a higher 6.5 percent.
Moreover, core inflation (CPI excluding food andenergy) in Pakistan remains above 8 percent, inpart because of escalating costs due to energy
bottlenecks and security concerns.

Fig SAR.8 Gross capital flows to South Asia rebounded in the second half of 2012
US$ millions
5000

Bank lending
Bond issuance
Equity issuance

4000

3000

2000

1000

0

Jan '12

Apr '12Jul '12Source: World Bank; Datastream.

188

Oct '12Jan '13

Apr '13

GLOBAL ECONOMIC PROSPECTS | June 2013

Table
TableSAR.1
SAR.1

South Asia Annex

Net capital flows to South Asia

2008

2009

2010

2011

2012e

2013f

2014f

2015f

Capital Inflows

64.7

89.8

100.4

78.3

89.5

92.4

100.5

110.1

Private inflows, net
Equity Inflows, net
Net FDI inflows
Net portfolio equity inflows
Private creditors. Net
Bonds
Banks
Short-term debt flows
Other private
Official inflows, net
World Bank
IMF
Other official

55.9
35.0
50.8
-15.8
20.8
1.7
11.2
8.0
0.0
8.8
1.4
3.2
4.2

78.9
63.4
39.3
24.1
15.5
1.9
10.9
2.7
-0.1
11.0
2.4
3.6
4.9

90.7
60.3
30.4
29.9
30.4
10.1
8.6
11.8
0.0
9.6
3.3
2.0
4.4

72.5
30.9
35.7
-4.8
41.6
0.7
18.4
22.5
0.0
5.8
2.0
0.0
3.7

86.9
47.8
27.7
20.1
39.1
2.8
17.4
19.1
-0.2
2.6
0.9
-0.2
1.9

90.6
52.8
36.7
16.1
37.8
4.3
15.4
18.2
-0.1
1.8
..
..
..

99.3
57.2
40.0
17.2
42.1
2.5
17.8
21.7
0.1
1.2
..
..
..

109.5
67.5
48.2
19.3
42.0
3.4
19.2
19.3
0.1
0.6
..
..
..

Source: World Bank.

Medium-Term Outlook

countries. Foreign direct investment (FDI) received
by India, however, declined by 22 percent (y/y)
during the 2012 calendar year. As part of reform
efforts (and given the need to finance a larger
current account deficit), India undertook several
measures to boost private capital inflows. These
included raising limits on FDI in retail,broadcasting and aviation sectors; reducing
withholding taxes on interest earnings on foreign
investment in domestic bonds; faster clearances forlarge investment projects (including those withforeign participation); and in general, efforts toclarify tax and other regulations relevant for foreign
investors. Gross capital inflows, however,moderated in recent months, in part due to growthconcerns and further deterioration of India’s
current account position in the fourth quarter of2012.

Following a steep deceleration in South Asia’s
GDP growth to 4.8 percent in 2012, regional
growth is projected to improve during 2013-15(Table SAR.2). This recovery in regional growth
will be helped by gradual improvements in both
external and domestic conditions.
A stabilization of the global economic environment
and a gradual recovery in global demand will
provide something of a tailwind for South Asia’s
GDP growth. However, output in the Euro Area
economy, South Asia’s largest export market, isforecast to contract for the second year in a row in
2013, and growth will remain subdued in 2014 and2015 (see GEP June 2013 main text). Economic
activity in the United States, however, is morerobust and projected to strengthen further. Muchof the additional external demand for South Asia is
projected to come from other developing countries, whichhave become increasingly important destinations ofSouth Asian exports. South Asia’s exports to developing
countries, including within the region, have risen from 19
percent of overall exports in 2000 to 35 percent in2011 (14 percent and 26 percent for South Asia
excluding India—see figure SAR.9).

In Sri Lanka, private debt inflows have risen as thegovernment successfully issued several sovereign
bonds in international markets. By contrast, inPakistan, foreign investment inflows have been on
a declining trend in recent years due to domestic
uncertainties, an adverse investment climate, andenergy shortages. This decline, together withrepayment of official debt to the IMF, have added
to pressures on Pakistan’s balance of payments
position, with international reserves falling below 2
months of imports.
189

GLOBAL ECONOMIC PROSPECTS | June 2013

South Asia Annex

An expected normal agricultural season andincrease in rural disposable incomes, together withlower crude oil prices and moderation in inflation,and continued remittance inflows (in countries
where they are important relative to GDP), will
support an improvement in activity in theSouth Asia region from mid-2013 onwards.

projected to accelerate to 6.0 percent in 2014
and 6.4 in 2015, as a result of strengthening
external demand and with gradual success inalleviating some of the domestic structural
constraints that have held back growth.
Regional growth will be driven mainly by aprojected pickup in India, whose GDP in factor
cost terms is projected to grow 5.7 percent in the2013 fiscal year (ending in March 2014), and thenaccelerate to 6.5 percent and 6.7 percent in FY2014
and FY2015, respectively. Exports and private
investment, which slowed sharply in 2012, areprojected to strengthen during 2013-15 andprovide a boost to growth. However, how robust

Although quarterly GDP is expected to pickup over the course of 2013, the sharp
deceleration of growth in the previous year
implies that whole year growth for the South
Asia region in 2013 will be a relatively weak
5.2 percent. In the subsequent two years,
South Asia’s regional GDP growth isTable SAR.2

South Asia regional forecasts(annual percent change unless indicated otherwise)00-09ab,f

GDP at market prices
GDP per capita (units in US$)PPP GDP d
Private consumption
Public consumption
Fixed investment
Exports, GNFS e
Imports, GNFS e
Net exports, contribution to growth
Current account bal/GDP (%)
GDP deflator (median, LCU)
Fiscal balance/GDP (%)

4.4
5.9
5.4
5.7
8.9
11.5
9.6
-0.3
-0.6
6.5
-7.5

2010

2011

Est. Forecast
2012
2013
2014

2015

10.0
8.5
10.1
7.4
9.9
16.6
14.5
16.0
-1.3
-2.6
9.2
-8.4

7.3
5.8
7.3
7.3
7.6
5.9
15.9
17.0
-1.4
-3.1
8.0
-7.6

4.8
3.3
4.7
6.6
6.5
2.7
1.4
7.3
-2.0
-4.5
6.1
-7.0

6.4
5.0
6.4
6.2
6.0
6.8
9.8
8.4
-0.5
-2.8
6.7
-6.8

5.2
3.8
5.2
5.7
5.7
4.2
5.6
6.2
-0.7
-3.5
7.2
-7.1

6.0
4.6
6.1
6.0
5.9
6.0
8.6
7.3
-0.4
-3.1
6.9
-6.9

Memo items: GDP at market prices fSouth Asia excluding India
4.6
4.9
5.2
4.9
4.7
4.9
5.0
India at factor cost
7.6
9.3
6.2
5.0
5.7
6.5
6.7
Pakistan at factor cost
4.9
3.1
3.0
3.7
3.4
3.5
3.7
Bangladesh
5.2
6.1
6.7
6.2
5.8
6.1
6.3
Source: World Bank.
a. Growth rates over intervals are compound weighted averages; average growth contributions, ratiosand deflators are calculated as simple averages of the annual weighted averages for the region.
b. GDP at market prices and expenditure components are measured in constant 2005 U.S. dollars.
c. GDP figures presented in calendar years (CY) terms for Bangladesh, Bhutan, Nepal, India andPakistan are calculated taking the average growth over the two fiscal year periods to provide anapproximation of CY activity.
d. GDP measured at PPP exchange rates.
e. Exports and imports of goods and non-factor services (GNFS).
f. National income and product account data refer to fiscal years (FY) for the South Asian countries,
while aggregates are presented in calendar year (CY) terms. The fiscal year runs from July 1 throughJune 30 in Bangladesh, Bhutan, and Pakistan, from July 16 through July 15 in Nepal, and April 1
through March 31 in India. Due to reporting practices, Bangladesh, Bhutan, Nepal, and Pakistan
report FY2010/11 data in CY2011, while India reports FY2010/11 in CY2010.

190

GLOBAL ECONOMIC PROSPECTS | June 2013

South Asia Annex

Fig SAR.9 South Asia’s exports benefited from stronger developing-country growth, with exports to developing
countries outpacing overall exports during 2000-2011
Share of Indian exports (Percent)Share of South Asia excluding India exports (Percent)

100

100

80

80

60

60

40

40

20

20

0

0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Other high income
EU27
Other developing regions
China

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

USA
Within South Asia
East Asia and Pacific

Other high income
EU27
Other developing regions
China

USA
Within South Asia
East Asia and PacificNote: Export shares calculated using trade partner data on imports from South Asian countries.
Source: World Bank; UN COMTRADE.

that recovery will be, will depend on the pace ofpolicy and fiscal reforms, and remains subject tosignificant uncertainty and downside risks. Some
upside risks to the outlook include a faster thanprojected pickup in global demand and a larger
than expected decline in commodity prices (seeRisks and Vulnerabilities section below).

pressures have risen with reserves falling below 2
months of imports, notwithstanding robust
remittance inflows. Policy actions to address theunderlying adverse structural factors are critical toraising Pakistan’s longer-term growth potential.
Bangladesh’s growth slowed to an estimated 5.8
percent in the 2012-13 fiscal year ending in June.
But growth is projected to pick up modestly to 6.1
percent in FY2013-14 and 6.3 percent in FY201415, as external demand strengthens gradually, andagricultural output returns to more normal levels.
Several domestic weaknesses, including
infrastructure gaps (electricity, roads) and social
unrest are expected to hold back a firmer recovery.

GDP growth in Pakistan is projected to only slowly
accelerate from an estimated 3.4 percent in FY2012-13 to 3.7 percent in FY2014-15, with output
being held back by a wide range of structuralproblems, including: weak investment (down athird since 2008 when expressed as a percent of
GDP—see figure SAR.10), security uncertainties,
unreliable energy inputs, and monetization of large
fiscal deficits, among others. Balance of payments

In Sri Lanka, growth is expected to pick up to 6.5
percent in 2013 and 6.7 percent in 2014, aided bynormal agricultural harvests, strengthening demandfor exports, robust capital inflows, increase in
infrastructure and other investments, and a revivalof tourism (Table SAR.3). The relatively modest
pickup in growth represents a return to underlying
potential growth rates after rapid demand-fueled
growth in 2010-11 opened up positive output gaps
and resulted in inflation and current accountpressures.

Fig
Fig SAR.10
SAR.10 A sharp decline in investment-to-GDP
ratio in Pakistan
Fixed investment as pecent of GDP

40
35

Pakistan

India

Bangladesh

Nepal

Sri Lanka

30
25

Some domestic uncertainties in Nepal appear to beeasing and the political situation normalizing after
formation of an interim government in March.
This political normalization, expected timely
monsoon rains, and continued increase inremittances should be favorable for economic
activity in 2013 and beyond. However, private

20
15

2012

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

10

Source: World Bank; Datastream; Haver.

191

GLOBAL ECONOMIC PROSPECTS | June 2013

Table SAR.3

South Asia Annex

South Asia country forecasts

Calendar year basis b
Afghanistan
GDP at market prices (% annual growth) c
Current account bal/GDP (%)
Bangladesh
GDP at market prices (% annual growth) c
Current account bal/GDP (%)
BhutanGDP at market prices (% annual growth) c
Current account bal/GDP (%)
India
GDP at factor cost (% annual growth) c
Current account bal/GDP (%)
Maldives
GDP at market prices (% annual growth) c
Current account bal/GDP (%)
Nepal
GDP at market prices (% annual growth) c
Current account bal/GDP (%)
Pakistan
GDP at factor cost (% annual growth) c
Current account bal/GDP (%)
Sri Lanka
GDP at market prices (% annual growth) c
Current account bal/GDP (%)

Est. Forecast
2012
2013
2014

2015

7.0
2.2

11.8
3.9

3.1
1.6

4.9
0.5

6.3
-0.3

6.4
1.8

6.5
0.2

6.0
1.3

6.0
1.1

6.2
1.0

6.3
0.9

7.7
-0.1

9.6
-19.1

9.5
-25.5

8.3
-20.7

7.9
-20.9

8.4
-19.2

8.6
-18.4

7.4
-0.5

9.1
-3.2

7.0
-3.5

5.3
-5.4

5.5
-4.2

6.3
-3.7

6.6
-3.3

6.3
-1.1

7.1
-9.2

7.0
-21.4

3.4
-26.5

3.7
-28.0

3.9
-26.0

4.0
-25.0

3.4
-0.9

4.1
-2.5

4.2
0.2

4.3
0.1

3.8
-0.1

3.9
-0.3

4.1
-0.5

4.9
-1.4

3.1
-0.7

3.4
-1.0

3.5
-0.9

3.4
-0.4

3.6
-0.3

3.7
-0.3

4.4
-3.7

8.0
-2.2

8.2
-7.8

6.4
-6.6

6.5
-5.9

6.7
-5.4

6.5
-4.8

00-09a

2010

2011

-0.3

8.4
2.8

5.2
0.6

Fiscal year basis b
Bangladesh
GDP at market prices (% annual growth) c
5.2
6.1
6.7
6.2
5.8
6.1
6.3
BhutanGDP at market prices (% annual growth) c
7.7
9.3
10.0
9.0
7.6
8.1
8.6
India
GDP at factor cost (% annual growth) c
7.6
9.3
6.2
5.0
5.7
6.5
6.7
Nepal
GDP at market prices (% annual growth) c
3.4
4.8
3.4
4.9
3.7
3.8
4.1
Pakistan
GDP at factor cost (% annual growth) c
4.9
3.1
3.0
3.7
3.4
3.5
3.7
Source: World Bank.
World Bank forecasts are frequently updated based on new information and changing (global)
circumstances. Consequently, projections presented here may differ from those contained in other
Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any
given moment in time.
a. GDP growth rates over intervals are compound average; current account balance shares are simple
averages over the period.
b. National income and product account data refer to fiscal years (FY) for the South Asian countries
with the exception of Sri Lanka, which reports in calendar year (CY). The fiscal year runs from July 1
through June 30 in Bangladesh, Bhutan, and Pakistan, from July 16 through July 15 in Nepal, andApril 1 through March 31 in India. Due to reporting practices, Bangladesh, Bhutan, Nepal, andPakistan report FY2010/11 data in CY2011, while India reports FY2010/11 in CY2010. GDP figures
presented in calendar years (CY) terms for Bangladesh, Bhutan, Nepal, India and Pakistan arecalculated taking the average growth over the two fiscal year periods to provide an approximation of
CY activity.
c. GDP measured in constant 2005 U.S. dollars.

192

GLOBAL ECONOMIC PROSPECTS | June 2013

South Asia Annex

sector industrial activity is likely to continue toremain lackluster. Overall, following an estimated
3.7 percent GDP growth in FY2012-13, Nepal’s
growth is projected to remain broadly stable at 3.8
percent in FY2013-14 and improve modestly to 4.1
percent in FY2014-15. To do better, thegovernment will need to make energy provision
more reliable, invest further in the skills and qualityof Nepal’s workforce, enhance the predictability
and transparency of the regulatory and tax regimes,
while also strengthening the overall businessenvironment.

growth. In Maldives, in addition to deteriorating
macroeconomic fundamentals discussed earlier, thecountry faces severe challenges in diversifying its
economy beyond tourism. The economic outlook
remains clouded by political uncertainty leading up
elections in 2013/14 and by limited success incontrolling fiscal outcomes.
An easing in global fuel prices (Brent crude oil
prices fell 15 percent between mid-February andearly-June - see figure SAR.11), together withexpected normal monsoon rains, will help to curb
price pressures. Modestly lower crude prices in2013 and 2014 will also provide some relief tocurrent account and fiscal positions. Lower crude
oil prices will help regional governments innarrowing existing gaps between international
prices and domestic administered prices, and lower
the subsidy burden and reduce overall fiscalpressures.

Afghanistan’s economy remains dependent on
agricultural performance and external aid.
Moderate rainfall is projected to reduce growth toaround 3 percent in 2013. The withdrawal of
coalition forces, which have been a major source ofdemand, is likely to create challenges for sustaining
growth. To assist in this transition, donors havepledged significant aid in the coming years.
Although the security situation remains difficult,services and natural resource extraction are starting
to contribute to economic activity. Growth will
also be helped by continued rebuilding of
infrastructure and essential services, foreignassistance, and foreign investment in natural
resource sectors. Afghanistan’s GDP growth isforecast to accelerate to about 6 percent by 2015.

But inflation pressures will still remain in theregion. Ongoing and planned increases inadministered fuel and electricity prices will add toheadline price pressures in the near term, but aslong as the higher inflation does not get ingrained
into expectations, this should not result in apermanent increase in inflation. More importantly,
supply side constraints in agricultural, energy andother sectors will continue to exert upward pricepressures.

In Bhutan, hydropower projects coming on steam
in coming years are likely to keep overall GDP
growth high at about 8-9 percent annually in 201315. But lack of economic diversification poseschallenges to generating employment and inclusive
Fig SAR.11

Risks andvulnerabilities

Sharp crude oil price declines have often
corrected in the past, but on average,
prices are forecast to be 2.5 percent
lower in 2013 than in 2012

USD per barrel

130

Global uncertainties have receded since mid-2012
and both the severity and likelihood of downside
risks from high income countries has diminished(see June 2013 GEP main text). Domestic policy
and weather risks have now gained in importancefor the South Asia region.

120
Brent
110

100

Dubai

A key risk to the gradual acceleration in growthenvisaged in the baseline scenario, is the successwith which planned and announced reform policies
are actually implemented during 2013-15. Based on
backward looking indicators, growth could well be

90

80
Jan '12

Apr '12Jul '12

Oct '12Jan '13

Apr '13

Source: World Bank; Datastream.

193

GLOBAL ECONOMIC PROSPECTS | June 2013

South Asia Annex

between 0.3 and 0.5 percentage points slower thanin the baseline.

Revival of business sentiment remains a key
element for South Asia’s regional growth. As
discussed earlier, business sentiment in the
manufacturing sector in India weakened to a fouryear low in May (although the services sector index
picked up). If business sentiment were to remain
weak in coming months, this could adversely
impact investment and growth.

Political obstacles to passing and implementing
reform legislation pose downside risks to theoutlook. Reforms to the process of land acquisition
for industrial projects and labor market reforms
could prove contentious. In countries either exiting(Pakistan) or entering electoral cycles (Bangladesh,
India, Nepal), spending pressures associated withelections could boost fiscal expenditure, adding to
inflationary pressures and both internal andexternal imbalances. Risks in the post-election
period include the possibility that past reforms arereversed or implementation delayed.

An upside risk to South Asia’s growth outlook
includes a significant decline in commodity prices
compared to the baseline. If crude oil prices were
to fall to an average level of $80 per barrel by mid2014 due to additional supplies coming on stream
in international markets, South Asia’s GDP would
be 0.9 percent higher than in the baseline by 2014,
current account deficit would be 1.4 percent of
GDP lower, and fiscal deficit 0.7 percent of GDP
lower (see table 5 in June 2013 GEP main text).
Other upside risks include a more rapid resolutionof structural constraints to growth than envisaged
in the baseline, and faster than projected global
growth during the forecast period.

Weaker than expected monsoon rains present
another downside risk for South Asia. A second
poor monsoon in a row would adversely affectrural incomes and employment, contribute topersistence of food inflation (and in turn, overall
inflation) and could reduce overall GDP growth.
by 0.5 percentage points or more. Moreover,
weaker rural income growth would put
greater demands on public spending (throughautomatic stabilizers and social welfare programs),
which could make it difficult to achieve fiscal targets.

Despite recent efforts at fiscal
consolidation, relaxation of monetary
policies and still large fiscal deficits
pose risks

A weakening of reserve coverage of imports inPakistan and the Maldives to below 2 months ofimports suggests that their balance of payments
positions could come under stress fromunanticipated shocks. However, the reserve
position of Bangladesh has improved in the mostrecent period, from robust remittance inflows anda recent improvement in trade. Sri Lanka’s reserves
have also risen in line with an increase in private
capital inflows.

Central banks in South Asia cut interest rates
sharply during the global financial crisis of
2008/09, but rates were appropriately raised
subsequently as inflationary pressures rose (figure
SAR.12). With the slowing of growth in 2012 andthe recent moderation in year-on-year inflation,monetary policy in the region shifted toward amore accommodative stance. Policy rates inPakistan were cut by 250 basis points in the second
half of 2012, while Bangladesh, India and Sri Lanka
cut policy rates in the first half of 2013. Sri Lanka’scentral bank cut its policy rate by 25 basis points inlate 2012 and again by 50 basis points in May after
inflation moderated in the previous two months.
The Reserve Bank of India reduced its key policy
interest rate by a cumulative 75 basis points
between January and May of 2013 as its benchmark
wholesale price inflation declined, notwithstanding
high CPI inflation.

A greater dependence on foreign investment
inflows to finance India’s significantly larger
current account deficit compared to the past has
increased its vulnerability to a sudden reversal ofinvestor sentiment. Several factors could result in a
slowing or reversal of investment inflows—anunanticipated monetary tightening in some highincome countries; resurgence of debt tensions;escalation of geopolitical conflict; and evendisenchantment with the pace or nature ofdomestic reforms. Moreover, the sharply relaxedmonetary policy in Japan could result in strong anddisruptive private capital flows.

Although inflation rates have moderated acrossseveral countries in the region, consumer price194

GLOBAL ECONOMIC PROSPECTS | June 2013

South Asia Annex

inflation still remains high compared to the averagefor middle-income developing countries. India’s
steep growth deceleration mostly closed a large
positive output gap that had opened up in the postfinancial crisis period. And notwithstanding either
slower or weak growth in 2012, several other South
Asian countries also appear to be operating either
close to or above full capacity. Given lags inmonetary policy transmission, an easing ofmonetary policies (together with still large fiscal
deficits) could add to strengthening activity alreadyunderway in the countries operating at full capacity,
resulting in additional inflationary and current
account pressures, without much payoff inadditional GDP growth.

recent consolidation, India’s general government
deficit (including state government fiscal deficits) ismore than 7 percent of GDP. Pakistan’s general
government deficit is estimated to have risen
sharply in recent years to above 7 percent of GDP(figure SAR.13). Maldives’ fiscal deficit issignificantly higher than the regional average, androse further in 2012.
Several South Asian countries undertook fiscal
reforms during the last year, particularly to theirsubsidy regimes. Fuel and food subsidies typicallyaccount for the bulk of subsidies, with subsidies inIndia and Sri Lanka at more than 2 percent ofGDP, and over 3.5 percent of GDP in Bangladesh.
Reforms to subsidy regimes have involved
introducing more frequent adjustments toadministered fuel and electricity prices, andmeasures to improve targeting of government
benefits to the poorest beneficiaries. For instance,
administered diesel prices in India are being raised
at close to monthly frequency to gradually narrow
the gap between international and domestic prices,while quotas have been imposed on subsidized
provision of liquefied petroleum gas (LPG) for
domestic use. Sri Lanka raised electricity prices in
April 2013 in order to curb the (quasi-fiscal) lossesof the state electricity company. India has also
undertaken an ambitious direct cash transfer
program (based on Aadhar digital unique
national identification numbers, alreadyprovided to nearly 400 million Indians) inorder to better target government benefits
and services, and to reduce leakages from thepublic distribution system.

The high fiscal deficits in the region also pose risks
to the outlook, despite recent efforts at
consolidation (see below). Large government
borrowing programs can result in crowding out ofprivate investment, and importantly, reduce
available policy buffers to counter external ordomestic shocks. Moreover, when underlying
inflationary pressures are already high, theadditional spending can further exacerbate
inflation.
General government deficits exceeded 6 percent of
GDP on average in 2012 in the region (figure
SAR.12). India’s central government's fiscal deficit
fell to 4.9 percent of GDP in the 2012 fiscal year,
below the 5.2 percent initially estimated, and downfrom 5.8 percent in FY2011.2 The government has
pledged to further reduce it to 4.8 percent in
FY2013 and 4.2 percent in FY2014. Despite theFig SAR.12

South Asian central banks (with exceptionof Nepal) cut policy interest rates
following a mid-2012 slump in activity
and moderation of inflation

Fig SAR.13

Fiscal deficits remain higher than prefinancial crisis levels in general inSouth Asia

General government deficit (Percent of GDP)
25

Policy interest rate (Percent)
16

2007
2009

20

14

2011

12

2012
15

2013f

10
10

8
6

5

4
2

Bangladesh
India
Nepal
Pakistan
Sri Lanka

0Maldives

0
Jan-08 Sep-08 May-09 Jan-10 Sep-10 May-11 Jan-12 Sep-12 May-13

India

Pakistan

Sri Lanka Bangladesh

Nepal

Note: Only deficits shown in chart. f = forecasts for 2013.

Source: World Bank; Datastream.

Source: IMF (2013a and 2013b).

195

Afghanistan

GLOBAL ECONOMIC PROSPECTS | June 2013

Fig SAR.14

South Asia Annex

Development Goals by 2015 – halving extreme
poverty, reducing maternal mortality, and providing
access to safe water), South Asia will still be home
to almost 400 million of the developing world’s
970 million poor in 2015, according to the WorldBank’s Global Monitoring Report (see also Chen
and Ravallion (2012) and Ravallion (2013)).

Tax revenues are in general a smaller
share of GDP than the average for
middle- and low-income countries

Tax revenue (Percent of GDP)
20
18
16
14

The sharp economic slowdown experienced in the
post-financial crisis period exposed structuralvulnerabilities and has made the task of reviving
growth in a sustainable manner even more urgent.
But with India’s positive output gap mostly closed
after its steep growth deceleration, and given
capacity constraints in most South Asian countries,
policymakers need to remain vigilant against relying
on short-term demand stimulus in order to avoid
overheating (inflation and current account)pressures. South Asian countries should continue
to rebuild their fiscal buffers to be able to deal with
future crises.

12
10
8
6

4
2
0

India

Nepal

Bangladesh Sri Lanka

Pakistan Afghanistan

Middle Low income
incomecountries
countries

Source: World Bank; IMF.

Despite progress made in recent months, there arestill challenges to moving towards market-based
pricing of fuel and electricity tariffs in the region.
Regulated fuel and electricity prices are often
insufficient for energy producers to fully recover
costs. These not only add to quasi-fiscal losses ofpublic sector firms, but can also deter private
investment in the critical energy sector.

Deepening supply-side reforms is critical to
improving the efficiency of investment and raising
the longer-term growth potential of the region.
These include eliminating bottlenecks in project
implementation and easing energy input constraints
for firms, as well as labor market reforms, clarity in
tax and business regulations for both foreign anddomestic investors, and improving the overallbusiness climate. Raising the quality of humancapital through appropriate investments in
education and health can boost productivity inSouth Asian countries over the longer term.
Investment in infrastructure will help the formal
private sector by reducing transportation andlogistics costs, and also the poor in gaining accessto markets and opportunities.

Mobilizing sufficient tax revenues to fund social
development and infrastructure investment remains
a major challenge for the region. Tax revenues as ashare of GDP are in general lower in South Asian
countries when compared with the average for
middle and low income developing countries(figure SAR.14). For sustained deficit reduction,
expenditure restraint and better targeting ofsubsidies has to be combined with revenue
mobilization (including measures to simplify thetax code, broaden the tax base, and improve
compliance), so that necessary expenditure on
education, health, and infrastructure do not suffer
and impair future growth.

Conclusions
The South Asia region faces a number of longerterm economic challenges. Despite impressive
gains in development outcomes in recent years (theregion is on track to achieve three Millennium
196

GLOBAL ECONOMIC PROSPECTS | June 2013

South Asia Annex

Notes
1

See GOI (2013), Rajan (2013), and Subbarao (2013) for some of the reasons behind India’s growth slowdown andthe macroeconomic and structural challenges that the country faces in reviving growth.

2

The World Bank’s estimates of India’s central government fiscal deficit are slightly higher at 6.0 percent in FY2011
and 5.1 percent in FY2012. The difference is mostly accounted for by receipts from disinvestment in public sector
enterprises. World Bank estimates excludes these (and any other one time receipts) from the government's revenue.

References
Chen, Shaohua, and Martin Ravallion. 2012. “More Relatively-Poor People in a Less Absolutely-Poor World.” Policy
Research Working Paper 6114, World Bank: Washington, DC.
GOI (Government of India). 2013. “Review of the Indian Economy 2012/13.” Report of the Economic Advisory Council to
the Prime Minister of India, April. (http://eac.gov.in)
IMF (International Monetary Fund). 2013a. Fiscal Monitor, April. Washington DC.
_____. 2013b. World Economic Outlook, April. Washington DC.
Rajan, Raghuram. 2013. “Why India Slowed.” Project Syndicate, April 30.
Ravallion, Martin. 2013. “How Long Will It Take to Lift One Billion People Out of Poverty?” Policy Research Working Paper
6325, World Bank: Washington, DC.
Subbarao, Duvvuri. 2013. “India’s Macroeconomic Challenges: Some Reserve Bank Perspectives.” 5 th I.G. Patel Lecture,
London School of Economics, March 13.
World Bank. 2013a. Global Monitoring Report 2013: Rural-Urban Dynamics and the Millennium Development Goals. South
Asia Regional Brief.
World Bank. 2013b. South Asia Economic Focus: Regaining Momentum. April 2013.

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GLOBAL ECONOMIC PROSPECTS | June 2013

GLOBALECONOMICPROSPECTS

June
2013

Sub-Saharan Africa Annex

Annex

SUBSAHARAN
AFRICAREGION199

GLOBAL ECONOMIC PROSPECTS | June 2013

Sub-Saharan Africa Annex

Overview(South Africa) sharp fiscal adjustments (Swaziland)
and those impacted by severe adverse weather
conditions .

Medium-Term Outlook. Going forward,

Strong domestic demand allowed Sub SaharanAfrican economies to continue their robust growthtrajectory in 2012, despite subdued global demandconditions. On aggregate the region grew at 4.4 percent in 2012 (this includes South Sudan whose
GDP recorded a double digit contraction).1
Excluding South Africa, the region’s largest
economy, the rest of the region grew 5.4 percent,with close to a third of economies growing fasterthan 6 percent (figure SSA.1).

the robust domestic demand factors that haveunderpinned Sub-Saharan Africa’s growth
performance in recent years and the projected
strengthening of global demand are expected tosupport the region’s medium term growthtrajectory. Regional GDP is projected to pick up to
4.9 percent in 2013, 5.2 percent in 2014, and 5.4
percent in 2015. Excluding, the region’s largest
economy, South Africa, GDP growth for the restof the region is expected to increase by 6.2 percent
in 2013 and 2014, and further strengthen to 6.4
percent in 2015. Net private capital inflows areprojected to reach $77.5 billion in 2015 from $48.3
billion in 2012. Household spending will besupported by rising incomes, increased remittanceflows, and a stable macroeconomic environment.
Although the gradual strengthening of the global
economy and increased capacity in mineral exports
will support export growth over the medium term,
the net exports contribution to growth is expected
to be modest or even negative, on account ofstrong import demand (especially capital
equipment).

Much of this growth was supported by investments
in both the resource and non-resource sectors. Net
foreign direct investment inflows to the region are
expected to reach about $40 billion in 2013, up
from $32.1 billion in 2012. Still high commodity
prices (even if easing) is supporting investments inthe natural resource sectors in several economies in
the region. But the growth dynamism has not comeonly from the resource sector as investments (bothdomestic and foreign) have also flowed to the nonresource sector, in particular the service sub-sectors
such as finance and banking, telecommunication,transportation and retail trade. Indeed, in several
economies growth in the non-resource sector wasstronger than the resource sector.

Risks to growth prospects. Nonetheless,there exist downside risks that could derail the
projected robust growth outlook. While externalrisks to the outlook from the Euro Area crisis, or
fiscal sustainability in the United States and Japan
have diminished, new domestic and external risks
and challenges have gained in prominence. Notable
among these is the possibility that the recent easing
in international commodity prices intensifies. Our
simulations suggest that, while a 25 percent decline
in oil prices will be beneficial to the oil importers in
the region, oil exporters would experience a cut ingrowth by some 1.4 percentage points, with similar
impacts for metal exporters in the event of a sharp
decline in industrial metal prices. Domestic risks
include the possibility of overheating in economies
operating close to capacity; adverse weather
shocks; and political unrest. On the upside growth
could be stronger if high-income countries recover
more quickly than envisaged or if ongoing
infrastructural investments improve competitivenessand help unlock new sources of growth.

Better weather conditions and associated improved
harvests, decelerating inflation, relaxation of earlierinterest rate hikes and increased remittance inflows($33 billion in 2013, up from $32 billion in 2012)broadly supported the resilience in householdspending, albeit with differences across countries in
the region. Fiscal policy for most economies in theregion remains expansive with several governments
rightly emphasizing the need to addressinfrastructural weaknesses. Debt levels also remain
low. However, compared to 2008 levels, fiscal
buffers in the region are yet to be restored, and in a
number of countries the expansionary fiscal policy
may actually be hitting against capacity constraints.
While the overall growth story for the region has
been robust, not all countries are enjoying thisrobust growth. Indeed, growth in 2012 was weakerin countries that encountered conflict or politicalinstability (e.g. South Sudan, Central Africa
Republic, Mali, Guinea Bissau), major labor unrests
201

GLOBAL ECONOMIC PROSPECTS | June 2013

Fig SSA.1

Sub-Saharan Africa Annex

Fastest Growing Economies in Sub
Saharan Africa (2012)

Fig SSA.2

Capital equipment imports picked up in
Q4 following weakness in Q3

100
Sierra Leone
Niger
Cote D'Ivoire
Ghana
Burkina Faso
China
RwandaMozambiqueEritrea
Ethiopia
AngolaTanzania
ZambiaDem. Rep. of Congo
Nigeria
India
RussiaBrazil

18.2%

80
60

Capital equipment

20
0

-20
-40
-60
0

2

4

6

8

10

12

14

Jun-12

16

Jul-12

Aug-12

Sep-12Oct-12

Nov-12

Dec-12

Source: World Bank; ITC.

Source: World Bank.

Recent Developments

fourth quarter of 2012, although this follows asharp slump (-38.2%) in Q3 2012, when global
economic activity was weaker (figure SSA.2). 2
Fourth quarter capital goods imports wereparticularly strong in Angola, Cote D’Ivoire,
Ethiopia, Ghana, Nigeria, Tanzania andZambia - all economies where real GDP grewby an estimated 6.5 per cent or more in 2012.

Investment flows continue tounderpin growth in Sub SaharanAfrica. Gross fixed capital formation in Sub

Saharan Africa has steadily increased from about
16.4 per cent of GDP in 2000 to about 20.4 percent in 2011. The pick up in investment has not
only contributed to growth directly, but it has also
helped boost potential output in the region byraising the amount of capital with whichlabor has to work, albeit concentrated in
specific sectors.

High commodity prices havesupported investment flows tominerals sector. With the region’s vastpotential of unexplored mineral and hydrocarbon
reserves and still high commodity prices(notwithstanding recent declines) foreign direct
investment continues to flow to the natural
resource sectors across the breadth and length of
the region’s economies (see table SSA.1). Net
foreign direct investment inflows to the region
reached an estimated $33.4 billion in 2012, and areprojected to rise a further 21% in 2013 (table SSA. 2)

Data for 2012, suggest that this capital deepening
process has continued. Imports of capital
equipment, used as a proxy for domestic
investment activity, have expanded at a robust
33.6% annualized pace in value terms during theTable SSA.1

All imports

40

The non-minerals sector has also

Selected major ongoing explorations in the natural resource sector in Sub Saharan African economies

S ub- re gio n

O il a nd G a s

M e t a l a nd M ine ra l

We s t A f ric a

Ghana, Co te d’ Ivo ire, Sierra Leo ne,
Sierra Leo ne (iro n o re), Guinea (iro n o re)
Liberia, ChadE a s t A f ric a

Tanzania, Uganda, Kenya

Eritrea (go ld), Ethio pia (go ld) Tanzania (go ld, uranium)

S o ut he rn A f ric a

A ngo laM o zambique (co al, iro n o re), Zambia (co pper), B o tswana (co pper),M adagascar (nickel), M alawi (uranium)

C e nt ra l A f ric a

Camero o nGabo n (manganese), Camero o n (iro n o re), Demo cratic Republic o f
Co ngo (co pper, co balt, go ld)

Source: Africa Mining

202

GLOBAL ECONOMIC PROSPECTS | June 2013

Table SSA.2

Sub-Saharan Africa Annex

Net capital flows to Sub-Saharan Africa ($ billions)

2008

2009

2010

2011

2012e

2013f

2014f

2015f

Capital Inflows

43.4

47.0

61.1

66.9

58.8

67.5

73.8

82.6

Private inflows, net
Equity Inflows, net
Net FDI inflows
Net portfolio equity inflows
Private creditors. Net
Bonds
Banks
Short-term debt flows
Other private
Official inflows, net
World Bank
IMF
Other official

38.4
33.4
39.1
-5.7
5.0
-1.6
2.3
4.4
-0.1
5.0
1.9
0.7
2.4

37.1
43.2
32.5
10.7
-6.2
2.0
0.5
-9.5
0.8
9.9
3.1
2.2
4.6

47.8
42.7
26.7
16.0
5.1
1.4
0.5
2.8
0.5
13.3
4.0
1.2
8.2

55.4
46.8
38.5
8.4
8.6
6.0
3.1
-0.5
-0.05
11.4
3.2
1.4
6.8

48.3
41.4
32.1
9.3
6.9
6.8
0.9
-0.9
0.1
10.5
3.3
1.3
5.9

58.0
49.5
39.8
9.7
8.5
8.4
1.2
-1.2
0.1
9.5

66.5
57.5
46.2
11.3
9.0
6.4
1.8
0.6
0.2
7.3

77.5
65.4
52.0
13.4
12.1
7.1
2.9
1.2
0.9
5.1

Source: The World Bank
Note : e = estimate, f = forecast

benefitted from increased investment
flows, thereby supporting the
dynamic growth of that sector.

grew 14.4 per cent in 2012 (higher than thedeveloping country average of 8.1%). Indeed,in the region services sector growth wellexceeds that of resource sector growth, evenin long-standing resource rich economies (seebox SSA.1).

Although the natural resources sector is thepre-eminent destination for foreign direct
investment inflows, increasingly non-minerals
sectors, notably the services sector, isattracting the interest of foreign investors.
Sectoral breakdown of cross-border merger’s
and acquisition for the Africa region showsthat over the 2010-2011 period the services andmanufacturing sectors attracted an average of 53.4
per cent and 33.5 per cent respectively of all M&A
purchases in the region.3 The primary sector
accounted for only 13.2%. Similarly, the services
and manufacturing sector attracted some 33.6 percent and 41.2 per cent of all green field FDI into
Africa.

The mining sector tends to require higher capitaloutlays and specialized technology than othersectors and therefore attracts a higher percentageof foreign investors. Domestic capital, on the other
hand, plays a more significant role in service-sector
growth. Thus, despite the increasing contributionof foreign direct investment flows to capital
deepening in the region, FDI accounts for about
only a fifth of the regions gross fixed capitalformation (19.6 percent in 2010). Domestic credit
growth figures attest to the rising importance ofdomestic intermediation. Year-over-year realcredit grew 23.4 percent in Botswana(February 2013); 31.4 percent in Ghana(September 2012); 16.6 percent in Kenya(January 2013); 12.9% in Uganda (February2013); 8.1 percent in Nigeria (March 2013);
and 9.7 percent in South Africa (April 2013).

Rising disposable incomes, an increasing
work force, and the fact that many economies
are growing from a low base have spurred oninvestments in telecommunications, retail andbanking. For instance, the International
Telecommunications Union estimates thatmobile subscriptions in Sub-Saharan Africa

But not all economies are benefitting203

GLOBAL ECONOMIC PROSPECTS | June 2013

Box SSA.1

Sub-Saharan Africa Annex

Growth in the non-resource sector in several Sub Saharan African countries, including resourcerich ones, was higher than that of the resource sector in 2012.

In Botswana, where GDP expanded by 3.7 per cent in 2012, mining output contracted 8.1 per cent, whereas non-mining
GDP growth was positive, with notable contributions from construction (14.4), financial and business services (9.7 per cent)and transport and communications (9.1 per cent).
Ghana, one of the new oil exporting economies in the region, grew at an estimated 7.9 percent in 2012, with the mining
and quarrying sector (including crude oil) growing at 5.0 percent, whereas the services sector grew at 10.2 per cent. The
fastest growing sectors were the information and communication sector (23.4 per cent), financial and insurance activities(23.0 per cent), real estate and other professional services (13.1 percent) and hotel and restaurants (13.0 percent).
In Kenya, where economic activity picked up to 4.7 per cent in Q3 2012, mining and quarrying picked up by 1.8 per cent,with much of the pick-up coming from a 6.9% expansion in the agriculture sector, a 6.8 percent increase in financial intermediation, a 13.7 percent increase in electricity and water output and a 5.2 percent rise in transport and communication
services.
In Nigeria Q1 2013 GDP growth was 6.7 per cent with crude petroleum and natural gas contracting at 0.5 percent, while
non-oil growth was at 7.9 percent. The lead growth sectors were telecommunications (24.5 percent), hotel and restaurants(13.6 percent) construction (15.7 percent) and real estate (13.6 per cent).
In Rwanda, where GDP grew by 8.7 percent in Q4 2012, the agriculture sector grew by 3 percent and contributed 1.1 percentage points to the overall GDP growth; the industrial sector grew by 11 percent and contributed 1.7 percentage points to
the GDP growth; and the services sector increased by 12 percent and contributed 5.4 percentage points to the GDP
growth.
In South Africa, where GDP increased by 1.9 per cent in Q1 2013 the mining and quarrying industry, finance and realestate and business services each contributed 0.7 percentage points (ppt). The growth in mining followed two quarters ofnegative growth. Wholesale, retail & motor trade, and transport, storage & communication each contributed 0.2 percentage
points to GDP growth.
In Tanzania, where output expanded by an estimated 6.8 percent in 2012, the mining and quarrying sector expanded by
1.2 per cent in the first three quarters of the year, whereas there was double digit expansion in the real estate (10.1 percent), transport and communications (16.5 percent) and wholesale and retail sectors (16.1 percent).

from the investment flows.

Whilestrong on average, investment growth (bothforeign and domestic) has been weaker inseveral other countries. Political instability is
hurting investment, thereby curtailing
economic growth in Central African
Republic, Guinea Bissau, Madagascar, andMali. Madagascar’s crisis for instance, isestimated to have cost it some $6.3 billion inlost growth over the 2009-2012 period,
according to World Bank estimates. This
contrasts with post-conflict economies suchas Cote D’Ivoire and Comoros which are
witnessing increased investment flows and arebound in economic activity.

GDP in the post-crisis period — about one
percentage point higher than in 2008. Revenues,
however, have not kept pace, and as a result,overall fiscal balances have deteriorated by about
2.6 percent of GDP since 2008.
For the region as a whole, fiscal policy appears tohave eased in 2012, with cyclically adjusted
balances having deteriorated by about 0.3
percentage points overall, with the largest
deterioration occurring among oil exporters (figure
SSA.3). Nevertheless, average structural (cyclicallyadjusted) deficits remain low. Moreover, although
the region’s government gross debt to GDP ratio isrising it remains relatively low at 33.4 percent of
GDP in 2012 (versus 29% of GDP in 2008).
Nonetheless, there remain significant differencesamong countries in the region, hence while debt
profiles remain sustainable for most countries in
the region, it is a rising concern for a few
economies.
Most government spending plans for countries in

Fiscal deficits deteriorated in 2012
and fiscal policy is generally
expansive in the region. In general,

government expenditures in Sub Saharan Africa
have been growing at par with GDP since 2009,and have stayed steady at about 30 per cent of204

GLOBAL ECONOMIC PROSPECTS | June 2013

Fig SSA.3

Sub-Saharan Africa Annex

Fiscal deficits deteriorated in 2012

Fig SSA.4

A number of Sub Saharan African countries
are operating with an output gap above
1 percent of GDP(Structural budget balances as share of GDP, %)
0.30
0.20

4

0.10

Output gap

3

0.00

BDI

2

GHA

-0.10

1

-0.20

0
-10

-0.30

-5

0

-1

-0.40

2011

5

10

15

Inflation (3m/3m, saar)

-2

2012

-0.50

-3
-4

-0.60
Sub Saharan Africa

Oil Importers

Oil exporters-5

Source: World Bank.

Source: World Bank.

the region (e.g. Uganda, Ethiopia, Zambia, Niger,
Namibia, Tanzania, South Africa, Ghana, Nigeria)
are rightly targeting infrastructure spending(particularly power generation, transportationroutes and port facilities), which remains a criticalbinding constraint to improving thecompetitiveness of economies in the region.
Increasingly such infrastructure projects are being
financed from new funding sources including fromsome large developing countries (in particular
China but also India, Brazil and Russia) and frominternational capital markets.

or even positive (implying demand in excess of
supply, figure SSA.4). For these countries, an expansionof fiscal policy could be counterproductive as it could
induce macro instability, with negative impacts on
the investment environment and growth.
The challenge will be for policymakers to ensurethat the hard earned gains of the past 15 years interms of macroeconomic and fiscal stability arepreserved, while at the same time continuing to lay
the foundation for long-term growth by investingin areas of structural weakness, including
infrastructure, education and health. A number ofcountries show signs of overheating, including
rising inflationary pressures, increased current
account deficits, suggesting that aggregate demand
was pushing up against capacity constraints. For
these economies, some tightening of policy may beneeded. In many countries, where overall tax rates
are low and structural deficiencies high this might
be most efficiently achieved by raising revenues,
while maintaining growth enhancing investments in
education, health and infrastructure.

Indeed, over the past several years countries in theregion have taken advantage of low interest rates
and investor interest in the high-income world to
tap international bond markets, sometimes for the
first time. For example Rwanda raised $400 million
in April 2013 in it’s maiden Eurobond issuance.4
And, other Sub Saharan African sovereigns(Angola, Kenya, Ghana, Nigeria, Tanzania) haveplans to borrow from international capital markets
in coming months. A Bloomberg report estimatesthat excluding South Africa, sub Saharan African
sovereigns will issue some $7 billion ininternational debt in 2013 – the highest level since
2007.

Consumer spending has in generalbeen supportive of growth, thoughdifferences exist among countries.
Consumer spending accounts for some 60% of
GDP in Sub Saharan Africa, and a major
contributor to overall demand growth. With real
per capita incomes increasing by 2.3 per cent per
annum over the past decade, rising householdincomes have supported consumer demand in theregion and contributed to its resilient and robust
growth in recent years.
More recent developments point to much

Large positive output gaps in a
number of economies suggest
further expansionary fiscal policy
could actually be counterproductive.

Nonetheless, with demand in many Sub SaharanAfrican countries closing in on their supply
potential, output gaps (an estimate of thedifference between demand and supply) are small
205

GLOBAL ECONOMIC PROSPECTS | June 2013

Sub-Saharan Africa Annex

heterogeneity in the strength of consumer demandacross countries in the region. Where quarterly
national accounts data exist, sectors with strong
participation of consumers grew strong in Nigeria(9.6 per cent in retail sector in Q3 2012), Tanzania(16.1 per cent retail sector growth in first threequarters of 2012) and in Ghana (real estate sector
expanded at 13.1 per cent in 2012). However where
growth was weaker whole sale and retail sales
growth decelerated in South Africa to 1.9 per centin Q1 2013 (from 3.2 per cent in Q1 2012) and in
Kenya due to a credit squeeze at the time, thewholesale and retail sector expanded by 4.9 percent in Q3 from 5.6 per cent the previous quarter).
Affected by ongoing fiscal consolidation, in
Botswana, household consumption grew at a below
trend rate of 2.7 per cent in 2012. However, for thevast majority of countries in the region this data
does not exist. Nonetheless, indirect measurespoint to steady outturns in private consumption,
including: favorable weather conditions anddecelerating inflation. In general weather
conditions were particularly more favorable in theWest African (Burkina Faso, Benin, Chad, Gambia,
and Togo) and East African sub-regions (Kenya,
Uganda) relative to a year earlier, thus supporting
agricultural household incomes there. Nonetheless,flooding in selected parts of Nigeria andMozambique impacted agricultural householdincomes there. Although there was an up-tick in
February, inflation for the region (on a GDPweighted basis) fell to 6.9 per cent in February
2013 from 9.4 per cent (y/y) in January 2012
(figure SSA.5). Further, remittance inflows to theregion increased by $1 billion to $31 billion in 2012
and are projected increase to $33 billion in 2013.

impacted the various commodity
exporter types in the region
differently. Among oil exporters, export

Fig SSA.5 Inflation has decelerated in recent months

Fig SSA.6

Recentglobal12.0

volumes for 2012 were some 3.2% higher
than in 2011, mostly due to an increase inexports from Angola, as export volumes in
Nigeria and Sudan contracted. Reflecting thecoming on stream of past investments inexisting and new mines in several countries in
the region, including Sierra Leone,
Mozambique, Niger, and Zambia, export
volumes from the predominantly metal
exporters in the region expanded by 5.2%,
notwithstanding subdued demand in the
global economy and a 15% decline in theWorld Bank metal prices index. Export
volumes of agricultural exporters expanded
the most in the region (12.8%), due to weakbase effects, improved rains in East Africa
compared to a year earlier, and the lower
cyclical sensitivity of agriculturalcommodities to global business cycles.

However, in line with developments in the
global economy, exports from Sub SaharanAfrica have been volatile, in particularindustrial metals and oil exporters, which are
more sensitive to global business cycles.
Indeed, in the Q3 2012, as global imports
plunged, so did export volumes in the region,in particular that of the region’s metal (-43
percent, 3m/3m saar) and oil (-36.8 percent,
3m/3m saar) exporters (figure SSA.6).
However, along with the recovery in global
import demand by the Q4 2012 Sub SaharanAfrican export volumes rebounded, with the
expansion in exports being sustained throughdevelopments(inflation, y/y)

100

11.0

(volumes, seasonally adjusted and annualized 3m/3m growth)

80

10.0

60

9.0

40

8.0

20

7.0

0

6.0

-20

Oil Importers

5.0
4.0

Growth in Sub Saharan African exporters by predominant export group

Oil Exporters

Sub Saharan Africa-40All

Jan-11

May-11

Sep-11

Jan-12

May-12

Sep-12Agriculture

Metal

Oil

-60

Jan-13Jan-11

Apr-11

Jul-11

Source: World Bank.

Source: World Bank; International Financial Statistics; IMF.

206

Oct-11

Jan-12

Apr-12

Jul-12Oct-12

Jan-13

GLOBAL ECONOMIC PROSPECTS | June 2013

Fig
Fig SSA.7
SSA.7

Sub-Saharan Africa Annex

Medium Term Growth
Prospects

Growth in tourist arrivals in SSA has
been above average in recent years,
albeit from a low base

Percent
12.0
10.0
8.0

Medium term GDP growth prospects for Sub
Saharan Africa remain strong, with robust
investment, resilient consumer demand, public
investment in infrastructure and increased exports
expected to continue to underpin the region’s
growth performance, albeit with variations acrosscountries. Regional GDP is projected to expand by
5.2 percent per year on average during 2013
through 2015, 4.9, 5.2, and 5.4 percent for 2013,2014 and 2015 respectively (table SSA.3).
Excluding, the region’s largest economy, South
Africa, GDP growth for the rest of the region will
be stronger at 6.2 percent in 2013 and 2014 andfurther strengthening to 6.4 percent in 2015. Thisstrong growth will not be uniform, with countries facing
political instability and serious labor unrests expected tosignificantly underperform. (see table SSA.4 for detailed
country forecasts).

6.0
4.0
2.0
0.0

-2.0

World

High-income-4.0

Developing

Sub Saharan Africa

-6.0
2009

2010

2011

2012

Source: UN World Tourism Organization.

Q1 2013. Indeed, for the first two months of2013, export volumes are up 8.8 percent
compared with the same period a year ago.
Trends in services trade, particularly tourism,are an increasingly important driver ofgrowth in several Sub Saharan Africancountries (including traditional destinations
such as Cape-Verde, Kenya, Mauritius,
Seychelles and newer destinations such as
Rwanda). Data from the UN World Tourism
Organization shows that the growth in tourist
arrivals to the region picked up by some 5
percent (y/y) in 2012, compared with a global
average of 3.8 percent (figure SSA.7). Sub
Saharan African countries that recorded
strong growth in tourist arrivals included
South Africa, Sierra Leone, Madagascar andCape Verde.

Domestic demand will be the major
driver of growth. Investments to the natural

resources sector in the region will continue toremain an important growth driver, with FDI in
the natural resource sector increasingly being
buttressed by investment in other sectors,
particularly, rapidly growing, and underserved,
domestic market especially in those economies witha rising middle-class, relatively larger populations andpolitical stability (Nigeria, Kenya, Ghana, Tanzania etc).

The growth of tourist arrivals to destinationsin the region notwithstanding the economic
weakness in Europe is encouraging andreflects a diversification of source countries.
For instance, in Mauritius, arrivals from
Europe in 2012 (largest source market) fell by
2.6 percent, but arrivals from China rose 38.0
percent, and those from Russia by 58.9
percent. Further arrivals were up from
elsewhere in Africa (13.2 percent), Australia(13.5 percent), Canada (18 percent) and SouthAmerica (55.3 percent). Other countries faredless well, for instance the conflict in Mali led
to a sharp decline in tourist arrivals there.

Overall foreign direct investment flows to theregion are projected to increase to $53.6 billion by
2015, from $33.4 billion in 2012. However not all
economies in the region will benefit from rising
investment inflows. Lingering political uncertainty(Madagascar, Central African Republic, Guinea,
Guinea Bissau), persistent labor unrests (South
Africa) and macroeconomic instability will sour theinvestment climate in a number of countries.
Domestic demand (both domestic investment andconsumption) is expected to continue to benefit
from the low interest rate and inflation
environment, while household incomes should
benefit from an expected increase in remittance207

GLOBAL ECONOMIC PROSPECTS | June 2013

Sub-Saharan Africa Annex

Table SSA.3 Sub-Saharan Africa forecast summary(annual percent change unless indicated otherwise)00-09aGDP at market prices b

4.3

2010 2011
5.0

4.7

Est. Forecast
2012 2013
2014
4.4

4.9

5.2

2015
5.4

(Sub -region totals-- countries with full NIA + BOP data) c

GDP at market prices c
GDP per capita (units in US$)PPP GDP c
Private consumption
Public consumption
Fixed investment
Exports, GNFS d
Imports, GNFS d
Net exports, contribution to growth
Current account bal/GDP (%)
GDP deflator (median, LCU)
Fiscal balance/GDP (%)

4.3
2.0
4.6
4.9
5.3
8.9
4.4
5.0
-0.5
0.0
6.7
-0.5

5.0
2.5
5.3
8.3
5.2
-1.3
7.1
8.7
-0.7
-2.5
7.3
-3.7

4.7
2.1
4.9
5.1
4.9
12.1
8.2
11.3
-1.3
-1.7
9.2
-1.6

4.4
1.8
3.8
5.0
9.3
8.2
1.3
6.4
-2.1
-3.8
5.0
-2.7

4.9
2.4
5.7
4.3
3.6
7.0
6.6
6.4
-0.2
-4.3
5.9
-2.9

5.2
2.7
5.5
5.0
2.4
7.6
7.9
7.1
-0.1
-4.2
5.4
-2.7

5.4
2.8
5.7
5.6
4.5
5.9
7.6
7.1
-0.1
-4.2
5.3
-2.4

Memo items: GDP
SSA excluding South Africa
Oil exporters e
CFA countries fSouth Africa
Nigeria

5.0
5.6
3.8
3.2
5.6

6.2
6.2
4.5
2.9
8.0

5.5
5.2
2.8
3.1
7.4

5.4
5.3
4.9
2.5
6.5

6.2
6.4
5.9
2.5
6.7

6.2
6.3
5.5
3.2
6.7

6.4
6.5
5.4
3.3
7.0

Angola

10.7

3.4

3.4

8.1

7.2

7.5

7.8

Source : World Bank.
a. Growth rates over intervals are compound weighted averages; average growth contributions, ratios and deflators
are calculated as simple averages of the annual weighted averages for the region.
b. GDP at market prices and expenditure components are measured in constant 2005 U.S. dollars.
c. Sub-region aggregate excludes Liberia, Chad, Somalia and São Tomé and Principe. Data limitations prevent theforecasting of GDP components or Balance of Payments details for these countries.
d. Exports and imports of goods and non-factor services (GNFS).
e. Oil Exporters: Angola, Cote d Ivoire, Cameroon, Congo, Rep., Gabon, Nigeria, Sudan, Chad, Congo, Dem. Rep.
f. CFA Countries: Benin, Burkina Faso, Central African Republic, Cote d Ivoire, Cameroon, Congo, Rep., Gabon,
Equatorial Guinea, Mali, Niger, Senegal, Chad, Togo.

flows from $31 billion in 2012 to $39 billion in2015.

Cameroon - oil, Sierra Leone – iron –ore etc.).
Improving global conditions also bodes well for
tourism to the particular benefit of the region’s
main tourist markets (Gambia, Mauritius, Kenya,
Tanzania, South Africa, Seychelles etc).

Though exports are expected to riseover the forecast horizon, thecontribution to growth from net
exports will be marginal, on accountof strong import demand. Exports from

Despite the strong projected export growth, thecontribution of net exports (exports less imports)
to growth is expected to be modest or evennegative, due to strong demand for foreign capital
goods to meet infrastructure and other investment
needs, as well as consumer durables and importedoil.

Sub Saharan Africa, are expected to strengthen
over the forecast horizon. The pickup is a result ofstrengthening global demand, particularly from theEuro Area (it’s largest trading partner), and astructural re-orientation of trade toward fastergrowing regions, notably Asia, and rising intraregional trade. Export volumes in the extractive
industries sector are expected to rise due tosignificant investments in productive capacity inrecent years that are expected ( Burkina Faso gold, Mozambique - coal, Niger - uranium,

Overall, the regional current account deficit isprojected to increase to about 2.8 percent ofregional GDP in 2014 from 2.4 percent in 2012
before improving to 2.5 percent in 2015, and net
exports are expected to be a modest drag.
208

GLOBAL ECONOMIC PROSPECTS | June 2013

Sub-Saharan Africa Annex

New or more prominent risks include

However, for some oil exporters (Angola, Congo),
net exports will continue to make a positive
contribution to growth.

overheating in some countries in the region, a more
rapid easing in commodity prices than outlined in
the baseline.

Notwithstanding the robust growth
outlook, significant development
challenges remain. Though Sub Saharan

End of commodity price supercycle.

The significant decline in global metals prices, in
response to increased supply and substation on the
demand side, raises the specter of an even more
pronounced easing of prices over the projection
period as market expectations about future demandand supply adjust.5 Commodity prices are cyclicalby nature (Global Economic Prospects, World
Bank, 2009, pg 55), and while specifying the timingof turning points is extremely difficult, it would be
imprudent to assume that current high prices willremain indefinitely or that only a smoothadjustment to long-term prices as in the baseline isthe only likely outturn.

Africa has made progress in alleviating poverty(poverty levels in the region are forecast to fall to42.3 per cent of the population by 2015 from 56.5
per cent in 1990), it still remains the only
developing region not on track to attain themillennium development goal of halving extreme
poverty by 2015 (Global Monitoring Report, WorldBank 2013).
Part of the reason is because, most of theinvestment activity has created value in capitalintensive sectors with limited backward linkages(e.g. mining), while labor intensive sectors havenot been able to attract sufficient capital
investment to increase productivity andemployment. Hence the relatively limited flow ofinvestment to existing labor-intensive sectors suchas the agriculture sector and or low-skilled
manufacturing sectors serves as a limitation totranslating the robust growth the region isbenefitting from to rapid job creation. This is all
the more important given that the region has the
youngest and fastest growing working age population.

A more rapid adjustment which would see crudeoil prices decline to their estimated long-term
equilibrium level of 80 (2012 dollars) within a twoyear horizon and a 25 per cent decline in metal
prices would have significant consequences for Sub
Saharan African commodity exporters, most ofwhom have undoubtedly benefitted from therecent high commodity price levels.
In the oil price decline simulation, Sub SaharanAfrican would be the hardest hit of developing
regions, with oil exporters in the region
experiencing a deterioration of their current
account balances by 4.5 per cent of GDP and fiscal
balances by 2.9 percent of GDP by 2014 and real
GDP growth would also be cut by some 1.4
percentage points compared to the baseline

Risks
Risks to the forecast are more balanced than in the
recent past, and are increasingly local rather than
external in nature.

Fig SSA.8 Impact on Selected Sub Saharan African
Countries of an oil price shock

External risks(cumulative percentage point decline in GDP growth relative tobaseline projections)
RwandaFragile global economy. External risks to

Mauritius

the outlook (Euro Area, fiscal sustainability in the
United States and Japan) are familiar, but thelikelihood of them materializing has diminished as
has the likely severity of the impacts. Moreover,upside risks — potentially stemming from a firmer
than projected recovery in the United States, areversal or easing of the currently pervasive
pessimism in Europe — are more pronounced.

Ethiopia

Kenya
Ghana
Nigeria
Sudan
Angola-6.0

Source: World Bank.

209

-4.0

-2.0

0.0

2.0

4.0

GLOBAL ECONOMIC PROSPECTS | June 2013

FigSSA.7
SSA.9
Fig

Sub-Saharan Africa Annex

raising domestic debt could be expensive (i.e. if
inflation goes up on account of weaker currencies
and higher costs of imports) and with theunlikelihood of increased aid inflows given fiscal
challenges in high-income countries, governmentsin the region with limited fiscal space could beforced to cut spending in a procyclical fashion,
thereby reducing short-term growth prospects.

Impact of metal price shock on selected
Sub Saharan Africa countries(cumulative percentage point decline in GDP growth relative tobaseline projections)GambiaKenya
Cape verde
Mauritius
Malawi
Seychelles
SenegalLesothoSwaziland
Namibia
Botswana
UgandaMozambique
Mauritania
South Africa
Mali
Ghana
-6.0

Domestic risks
-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

Source: World Bank.

With the steady strengthening of the global
economy expected over the forecast horizon, therisks to Sub Saharan Africa’s growth being derailed
are increasingly shifting from global to domestic
sources.

forecasts. Similarly, under the metal price scenario,
where metal prices gradually decline by acumulative 20% by June 2014, GDP growth forthe regions metal exporters deteriorates by 0.7
percentage points in 2014 and an additional 0.5
percentage points in 2015. Nonetheless there will
be differentiated effects across countries in theregion as non-exporters of these commodities in
the region could stand to benefit from positive
terms of trade (especially the oil importers, when
the price of oil declines, see figures SSA.8 and SSA.9).

Macroinstability. As noted in the recent

development section, with rising inflation rates anddeteriorating current account balances in a numberof countries in the region, fiscal and monetarystimulus measures may fuel inflationary pressures,
and add to debt levels without adding to output.
The resulting macroinstability will inevitably bedeleterious to long-term growth prospects.

For those economies that would be adversely
impacted from the negative terms of trade impacts,
the weaker commodity prices could lead to rapid
depreciation of currencies, higher inflation outturns
and weaker growth in less diversified economies
with weaker domestic policy and external buffers.
With the appropriate policy space anddiversification of economies a sharp adjustment
needn’t occur. Indeed, as observed in the 2009
period when commodity prices plunged, real GDP
growth in sub Saharan Africa (excluding South
Africa) expanded at a healthy 4.1 per cent, with themore economically diversified economies being hit
less harder.

Nonetheless, a prudent line needs to be drawn
between fiscal austerity (which, under certain
circumstances could also prove to be
counterproductive) and governments carrying out
the needed investments (education, health andinfrastructure) that lay the foundation for medium
to long-term sustainable growth. To sustain arobust durable growth trajectory over the medium
to long term, economies operating close to capacity(as characterized by high and rising inflation andtwin deficits) would benefit from building theirexternal and domestic policy buffers.

However unlike in 2008 when fiscal balances in theregion were in a relatively stronger position, fiscal
buffers for several countries in the region have yet
to be fully rebuilt, thus limiting the ability of
governments in the region to respond in acountercyclical way were a sharp decline incommodity prices to lead to weakening of private
demand (investment and consumption). Indeed,
under this scenario, access to international capital
markets would likely become more restricted, andThis is all the more important given the possibilityof exogenous shocks to government revenues frompossible declines in commodity prices or even aid
cuts (for more fragile economies in the region).
Although of a different nature, the sharp fiscal
consolidation in Swaziland (due to lower SACU
revenue transfers) contributed to the contraction inthat economy in 2012 (-1.5 per cent) and serves asa reminder of the importance of building policy
buffers and diversifying economies.
210

GLOBAL ECONOMIC PROSPECTS | June 2013

Sub-Saharan Africa Annex

Other downside risks include weather-related andpolitical risks. With the agricultural sector being
the largest employer in most economies in theregion, even if not the largest contributor to GDP,and with most of the sector remaining rain
dependent, output and incomes in the sector
remain vulnerable to drought, floods and otherforms of inclement weather. Poor harvests also
threaten macroeconomic stability as food accounts
for over 40% of the consumer price index basket
for many economies in the region. Thus far
weather long-term projections suggest a “normal”
crop year in 2013, but weather conditions are moreof an unknown in the outer years of the forecast.

Nonetheless, isolated examples of this kind ofdevelopment exist. For instance, in 2012, HuajianGroup, a Chinese foot wear manufacturer set up
shop in Ethiopia producing shoes for exports andwith plans to foster a new global shoe making hub,with an investment plan of $2 billion over the next
decade. Further, in February 2013, Toyota
announced that it would start assembling trucks
and buses in Kenya. These examples appear to be
the exception rather than the norm. For theseexamples to become more widespread and aregional source of growth, significant additional
efforts are needed to reduce existing impediments
to investment in light manufacturing including:
improving weak or absent infrastructure (especiallypower and transportation), unburdening
cumbersome regulations that contribute to a hightransactions cost environment, and eliminating
trade barriers, in particular those stifling intraregional integration.

While significant progress has been made onpolitical stability over the past decade, there still
remain elements of fragility in a few countries in
the region that could compromise investment andgrowth, if not contained. These include the conflictin Mali as well as terrorist activity in certain parts ofNigeria; political paralysis in Madagascar; andpolitical uncertainty in Guinea- Bissau. These andpotentially new conflicts could hinder investment
flows and derail growth prospects in thesecountries and their neighbors.

Entering manufacturing global value
chains. On the upside, however, the rising wage

costs in China is providing opportunities for otherdeveloping countries (e.g. Vietnam) to become
more competitive in the global light manufacturing
production chains. Sub Saharan Africa may also
have an opportunity to increase its involvement inthese chains. Doing so would contribute to
structural transformation, helping create higher
productivity jobs, improving incomes
andreducing poverty. Hindered by ongoing high costof doing business relative to other developing
countries, we do not include this possibility in our
medium-term projections.

211

GLOBAL ECONOMIC PROSPECTS | June 2013

Sub-Saharan Africa Annex

Table SSA.4 Sub-Saharan Africa Country forecasts

00-09aAngolaGDP at market prices (% annual growth) b
Current account bal/GDP (%)
Benin
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Botswana
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Burkina Faso
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
BurundiGDP at market prices (% annual growth) b
Current account bal/GDP (%)
Cape Verde
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Cameroon
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Central African Republic
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Comoros
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Congo, Dem. Rep.
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Congo, Rep.
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Cote d Ivoire
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Equatorial Guinea
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Eritrea
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Ethiopia
GDP at market prices (% annual growth) b
Current account bal/GDP (%)

212

2010 2011

Est. Forecast
2012 2013
2014

2015

10.7
3.9

3.4
9.3

3.4
11.2

8.1
6.7

7.2
5.1

7.5
4.9

7.8
2.4

3.7
-8.4

3.0
-9.4

3.1
-9.2

4.0
-9.4

4.2
-9.7

4.1
-8.8

4.3
-7.9

3.4
8.3

7.0
0.3

8.1
8.6

6.1
4.8

5.0
4.9

5.1
3.8

5.2
3.9

5.2
-13.1

7.9
-7.4

4.2
-8.2

9.0
-8.6

7.0
-6.3

7.0
-4.2

7.0
-2.0

2.9
-17.8

3.8
4.2
-15.9 -14.2

4.1
-16.0

4.3
-15.4

4.6
-14.5

4.9
-13.5

5.5
-11.3

5.2
5.0
-13.0 -15.2

4.3
-14.2

4.0
-11.5

5.0
-9.6

5.4
-10.6

3.0
-2.4

2.9
-3.8

4.2
-3.6

4.7
-3.6

4.8
-3.1

5.0
-3.4

5.1
-3.5

0.7
-8.6

3.0
-10.5

3.3
-7.8

3.8
-6.8

3.0
-6.4

3.5
-4.7

3.7
-4.1

1.8
-11.8

2.1
2.2
-27.9 -16.7

2.5
-6.9

3.5
-7.5

4.0
-7.4

4.0
-6.8

4.2
0.6

7.2
-16.6

6.9
-4.7

6.6
-2.9

8.2
-3.6

6.4
0.6

7.5
36.1

3.8
-2.0

8.8
-28.0

3.4
0.5

4.9
2.5

5.6
2.1

5.4
1.3

5.0
0.9

0.8
1.9

2.4
2.0

-4.7
-5.6

9.8
-3.3

8.0
-3.0

8.0
-2.9

8.1
-3.4

17.0
13.5

-0.5
-22.0

7.8
6.9

-2.1
2.4

6.6
9.1

3.6
9.9

3.4
14.1

1.8
-21.5

2.2
-5.5

8.7
-0.6

7.5
-0.6

6.0
0.8

3.5
2.5

3.0
4.2

7.4
-5.8

9.9
-4.0

7.3
0.5

8.5
-5.9

7.0
-7.5

6.9
-6.5

7.4
-6.2

GLOBAL ECONOMIC PROSPECTS | June 2013

Sub-Saharan Africa Annex

a

00-09
Gabon
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Gambia, The
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Ghana
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
GuineaGDP at market prices (% annual growth) b
Current account bal/GDP (%)
Guinea-Bissau
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Kenya
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Lesotho
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Madagascar
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
MalawiGDP at market prices (% annual growth) b
Current account bal/GDP (%)
Mali
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Mauritania
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Mauritius
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Mozambique
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Namibia
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Niger
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Nigeria
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
RwandaGDP at market prices (% annual growth) b
Current account bal/GDP (%)

213

2010 2011

Est. Forecast
2012 2013 2014 2015

1.6
14.8

6.6
4.2

7.0
8.3

6.1
12.2

5.5
3.3

5.1
2.3

4.8
1.3

3.2
-3.6

6.5
2.2

-4.3
-1.9

-3.9
-16.7

10.7
-18.4

5.5
-14.0

5.3
-12.1

5.0
-6.5

8.0
-8.2

14.4
-8.5

8.1
-12.3

7.8
-13.0

7.4
-9.8

7.3
-6.6

2.4
-7.2

1.9
3.9
-7.0 -19.5

3.9
-37.6

4.5
-28.9

5.2
-40.9

5.3
-41.5

0.9
-9.0

3.5
-12.0

5.3
-6.2

-1.5
-6.0

5.0
-7.1

4.6
-6.2

5.1
-6.0

3.6
-2.4

5.6
4.3
-7.5 -10.0

4.6
-11.3

5.7
-10.0

5.9
-10.2

5.5
-9.8

3.2
2.9

5.6
5.8
-20.2 -21.4

4.0
-23.0

5.2
-6.8

5.3
-5.8

5.0
-4.6

2.5
-12.4

1.6
-10.7

1.0
-6.3

2.7
-7.3

4.1
-5.0

4.8
-4.3

5.4
-3.5

3.8
-10.8

6.5
4.3
-17.3 -13.0

1.9
-13.1

4.4
-11.7

4.8
-11.2

5.5
-10.4

5.1
-8.1

5.8
-12.6

2.7
-6.2

-1.2
-4.4

4.8
-5.4

5.9
-7.6

6.0
-8.7

4.5
-10.9

5.2
2.3

3.9
-6.5

6.4
-12.2

5.2
-9.3

4.9
-5.9

4.8
-7.0

3.4
-2.7

4.1
3.8
-10.4 -12.6

3.2
-10.6

3.4
-10.9

4.0
-10.4

4.2
-9.6

7.1
-14.0

6.8
7.3
-17.2 -24.3

7.4
-36.9

7.0
-39.8

8.5
-41.1

8.5
-41.5

4.0
3.5

6.0
-1.6

4.9
-2.5

5.0
-0.5

4.3
-4.7

4.4
-4.7

4.9
-4.1

3.7
-9.7

8.0
2.3
-21.0 -18.9

11.2
-25.3

6.2
-23.5

6.1
-20.7

5.0
-21.1

5.6
14.4

8.0
1.5

7.4
5.8

6.5
3.5

6.7
2.0

6.7
1.6

7.0
1.4

7.2
-6.0

7.2
-7.5

8.3
-7.4

8.0
-11.4

7.0
-8.5

7.5
-8.4

7.2
-8.7

GLOBAL ECONOMIC PROSPECTS | June 2013

Sub-Saharan Africa Annex

2010 2011

Est. Forecast
2012 2013 2014 2015

3.6
-8.0

4.1
-4.7

2.6
-7.6

3.7
-9.3

4.0
-8.0

4.6
-7.1

4.7
-7.4

1.5
-14.1

6.7
5.0
-19.7 -22.4

2.7
-22.8

3.5
-22.9

3.9
-21.1

4.2
-19.2

9.0
-14.1

4.9
6.0
-34.2 -57.3

18.2
-20.2

17.1
-8.6

14.1
-8.4

12.1
-5.9

3.2
-3.0

2.9
-2.8

3.1
-3.4

2.5
-6.2

2.5
-6.6

3.2
-6.7

3.3
-6.4

4.1
11.8

3.9
30.1

5.0
17.4

-20.0
-4.7

24.0
4.3

7.0
7.6

8.0
11.2

6.4
-5.9

5.1
-0.5

4.7
-1.0

-1.0
-7.8

1.0
-8.6

3.0
-7.9

2.5
-8.4

2.1
-2.6

2.0
-10.5

1.3
-8.5

-1.5
-2.1

0.8
6.5

0.1
3.3

0.5
1.0

6.2
-9.1

7.0
6.4
-12.8 -19.7

6.7
-19.6

7.0
-19.8

7.1
-19.9

7.4
-20.1

1.8
-9.2

4.0
-6.3

5.6
-8.0

5.5
-10.2

5.1
-8.1

5.0
-6.7

a

00-09
SenegalGDP at market prices (% annual growth) b
Current account bal/GDP (%)
Seychelles
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Sierra Leone
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
South Africa
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
South Sudan
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Sudan
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Swaziland
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Tanzania
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Togo
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Uganda4.9-4.6

GDP at market prices (% annual growth) b
6.8
5.9
6.7
3.4
4.8
6.2
7.0
Current account bal/GDP (%)-5.2 -10.8 -12.4 -12.0 -12.4-13.3 -13.7
ZambiaGDP at market prices (% annual growth) b
4.8
7.6
6.8
7.3
7.0
7.2
6.8
Current account bal/GDP (%)
-10.9
5.7
0.3
0.9
1.0
0.6
0.5
Zimbabwe
GDP at market prices (% annual growth) b
-5.9
9.6
9.4
4.4
2.5
3.5
3.7
Current account bal/GDP (%)-12.2 -23.0 -39.7 -29.9 -24.8-19.0 -15.8
Source : World Bank.
World Bank forecasts are frequently updated based on new information and changing (global) circumstances.
Consequently, projections presented here may differ from those contained in other Bank documents, even if basic
assessments of countries’ prospects do not significantly differ at any given moment in time .
Liberia, Somalia, Sao Tome and Principe are not forecast owing to data limitations.
a. GDP growth rates over intervals are compound average; current account balance shares are simple averages
over the period.
b. GDP measured in constant 2005 U.S. dollars.

214

GLOBAL ECONOMIC PROSPECTS | June 2013

Sub-Saharan Africa Annex

Notes:
1.

South Sudan’s contraction in GDP was due to the stoppage of oil exports arising from its dispute with Sudan.
Previous editions of the Global Economic Prospects did not include South Sudan. Excluding South Sudan, GDP
growth in 2012 was 4.6 percent, and excluding South Africa as well as South Sudan, GDP growth was 5.8 percent
for the rest of the region.

2.

The measure of capital equipment used is the aggregation of machinery and transport equipment imports .

3.

This includes North Africa hence distorts the picture. FDI flows to North Africa are about a-third of the total to
the Africa region.

4.

The bond was over subscribed some seven times, in part reflecting the loose monetary policy in high-income
countries in search of higher yielding securities.

5.

Following a pattern where the supply responds to a lag in current prices since it takes time for investments tocome on stream.

215

Global Economic Prospects
1818 H Street, NW
Washington, DC 20433 USA
E-mail: globaloutlook@worldbank.org
Website: www.worldbank.org/globaloutlook