A World Bank Group
Flagship Report

JUNE 2015

GlobalEconomic
Prospects
The Global Economy
in Transition

Global
Economic
Prospects

A World Bank Group
Flagship Report

June 2015

GlobalEconomic
Prospects
The Global Economy
in Transition© 2015 International Bank for Reconstruction and Development / The World Bank
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Contents
Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii
Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv
Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xvii
Chapter 1

Global Outlook: The Global Economy in Transition . . . . . . . . . . . . . . . . . . . . . . . . 1
Summary and Key Messages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Recent Developments and Outlook in Major Economies . . . . . . . . . . . . . . . . . . . . . . 6
Global Trends and Spillovers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Recent Developments and Outlook in Developing Countries . . . . . . . . . . . . . . . . . . 24
Risks to the Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Policy Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Boxes
1.1

Negative Interest Rates in Europe: A Glance at
Their Causes and Implications .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

1.2

Low Oil Prices in Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

1.3

Recent Developments in Emerging and Developing
Country Labor Markets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  49

Special Feature 1 Hoping for the Best, Preparing for the Worst: Risks around U.S. Rate Liftoff
and Policy Options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
How Have Growth Prospects and Policies in Advanced Countries Changed
since the Taper Tantrum? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
What Are the Major Risks around the Liftoff? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
What Are Possible Implications of the Liftoff for Emerging Markets? ... . . . . . . . . 70
What Are the Major Lessons for Emerging Markets from the Taper Tantrum? . . . . . 72
How Have Growth Prospects and Vulnerabilities in Emerging Markets
Changed since the Taper Tantrum? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
What Policy Options Are Available to Prepare for Risks around Liftoff? . . . . . . . . . 76
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Boxes
SF1.1 Econometric Analysis of U.S. Yields and Spillovers . . . . . . . . . . . . . . . . . . . . 79v

vi

Contents

G L O B A L E C ONO M I C P R OS P E C TS | J U NE 2 0 1 5Special Feature 2 After the Commodities Boom: What Next for Low-Income Countries? . . . . . . . . . 91
A. Implications of the Recent Decline in Commodity Prices for Commodity
Exporting, Low-Income Countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  93
B. Recent Developments and Near-Term Outlook in Low-Income Countries. . . . .  102References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  104Chapter 2

Regional Outlooks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
East Asia and Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
Policy Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
Europe and Central Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Policy Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
Latin America and the Caribbean . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
Policy Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
Middle East and North Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
Policy Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
South Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
Risks and Policy Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
Sub-Saharan Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161
Policy Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
Boxes
2.1
Linkages between China and Sub-Saharan Africa. . . . . . . . . . . . . . . . . . . . . 163
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171

Statistical Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175

G L O B A L E C ONO M I C P R OS P E C TS | J U NE 2 0 1 5Contents

Figures
1.1

Global activity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  5

1.2

Global trends and policy challenges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  6

1.3

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  7

1.4

United Kingdom. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  8

1.5Euro Area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  9

1.6

Japan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  10

1.7

China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  11

1.8

Implications of the European Central Bank’s quantitative easing for
global financial conditions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  12

B1.1.1 Negative interest rates in Europe: Context. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  14
B1.1.2 Negative interest rates in Europe: Some consequences. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  17
1.9

Implications of the European Central Bank’s quantitative easing for developing countries. . . .  20

1.10

Implications of launch of monetary tightening in the United States. . . . . . . . . . . . . . . . . . . . .  21

1.11

Developing countries’ capital flows and borrowing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  22

1.12

Oil markets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  24

B1.2.2 Global growth and inflation around oil price declines. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  27
B1.2.3 Financial market developments around oil price declines. . . . . . . . . . . . . . . . . . . . . . . . . . . . .  29
B1.2.4 The new oil map . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  30
1.13

Oil price volatility and non-oil commodity prices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  31

1.14

Global trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  32

1.15

Developing and emerging-market growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  33

1.16

Terms of trade effect on GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  35

1.17

Developing country currencies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  36

1.18

Exchange rates and competitiveness in major emerging economies . . . . . . . . . . . . . . . . . . . . .  37

1.19

Inflation in developing countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  38

1.20

Private debt in developing countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

1.21

Risk of a rough awakening. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  40

1.22

Emerging market credit ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  41

1.23

Risk of excessive U.S. dollar appreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  42

1.24

Risk of stagnation and deflation in the Euro Area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  43

1.25

Risk of a hard landing in China. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  44

1.26

Monetary policy in developing countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  45

1.27

Fiscal pressures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  46

1.28

Income convergence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  47

1.29

Structural reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  48

B1.3.1 Global unemployment rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  49
B1.3.2 Unemployment rate in developing and advanced economies. . . . . . . . . . . . . . . . . . . . . . . . . .  50

vii

viii

Contents

G L O B A L E C ONO M I C P R OS P E C TS | J U NE 2 0 1 5

B1.3.3 Regional unemployment rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  50
B1.3.4 Change in employment to population ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  50
B1.3.5 Labor force participation rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  51
B1.3.6 Changes in unemployment rate and GDP growth in Great Recession vs.
previous recessions in developing economies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  51
B1.3.7 Estimates of Okun’s Law coefficients for advanced, emerging, and frontier market
economies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  51
B1.3.8 Real GDP growth and change in unemployment rates in developing economies, 2000−14. . .  52
B1.3.9 Estimated informal employment shares in selected countries, 2011. . . . . . . . . . . . . . . . . . . . .  52
B1.3.10 Global average annual real wage growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  52
B1.3.11 Real wage growth in selected developing economies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  53
B1.3.12 Enterprise Survey results on key business constraints, 2013. . . . . . . . . . . . . . . . . . . . . . . . . . .  53
1.30

Fuel subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  57

SF1.1

Conditions in advanced countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  67

SF1.2

Explaining movements in U.S. bond yields: monetary and real shocks. . . . . . . . . . . . . . . . . . .  68

SF1.3

A smooth liftoff in light of past episodes?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  69

SF1.4

U.S. bond yields and capital flows during the taper tantrum. . . . . . . . . . . . . . . . . . . . . . . . . .  70

SF1.5

Market liquidity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  71

SF1.6

Implications of monetary and real shocks on activity and financial markets inemerging markets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  72

SF1.7

Surging U.S. yields and capital inflows to emerging and developing countries. . . . . . . . . . . . .  73

SF1.8

Growth prospects in emerging and developing economies. . . . . . . . . . . . . . . . . . . . . . . . . . . .  74

SF1.9

Debt, deficits and inflation in emerging markets: Oil exporters vs. oil importers. . . . . . . . . . .  75

SF1.10 Evolution of vulnerabilities in emerging markets since the taper tantrum. . . . . . . . . . . . . . . . .  76
SF1.11 Foreign currency exposure and corporate debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  77
SF2.1

Growth in low-income countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  94

SF2.2

Trends in commodity prices, exploration and discovery. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  95

SF2.3

Commodity exploration, spending and discoveries in Africa . . . . . . . . . . . . . . . . . . . . . . . . . .  96

SF2.4

Impact on growth, production, and exports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  97

SF2.5

Impact on investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  98

SF2.6

Employment and poverty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

SF2.7

Public sector receipts and spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  99

SF2.8

Commodity dependence: An Achilles heel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  100

SF2.9Drivers of growth in low-income countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  102

SF2.10 Growth prospects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  103SF2.11 Vulnerabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  1032.1East Asia and Pacific Regional growth and performance in China . . . . . . . . . . . . . . . . . . . . .  110

2.2Key exports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  111

G L O B A L E C ONO M I C P R OS P E C TS | J U NE 2 0 1 5Contents

2.3

Inflation and real exchange rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  112

2.4Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  113

2.5Policy issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  114

2.6Russian Federation: Growth and oil price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  120

2.7Selected economies, EMBI spreads . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  120

2.8Ukraine: Recent developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  121

2.9Selected economies: Exports by selected destinations (average 2011–14). . . . . . . . . . . . . . . .  121

2.10

Selected economies: Remittances inflows, 2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  122

2.11

Selected economies: Remittances inflows from Russia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  122

2.12

Selected economies: Central bank policy rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  122

2.13

Selected economies: Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  123

2.14

Selected economies: Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  123

2.15

EU-Central and Southeastern Europe: Drivers of growth. . . . . . . . . . . . . . . . . . . . . . . . . . . .  123

2.16

Selected economies: Real effective exchange rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  125

2.17

Foreign currency exposure and foreign currency vulnerability indicators, 2013 . . . . . . . . . . .  126

2.18

Unemployment, 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  127

2.19

Non-performing loans (NPL) ratios. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  127

2.20

Net foreign liabilities, 2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  128

2.21

Regional GDP growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  131

2.22

Prices of key commodity exports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  132

2.23

Export shares of key commodity exports, 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  132

2.24

Average annual inflation—headline and core. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  133

2.25

Monthly gross capital flows to LAC region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  133

2.26a

Exchange rate against U.S. dollar. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  134

2.26b

Real effective exchange rates,. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  134

2.27

Central bank policy rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  134

2.28

Regional medium-term growth outlook. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  135

2.29

Share of regional merchandise exports to the U.S., EU, and China, 2013 . . . . . . . . . . . . . . .  135

2.30

FDI into selected countries by source country, 2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  135

2.31

Consensus forecasts six years ahead, 2009–15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  136

2.32

Federal Reserve Board Vulnerability Index, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  136

2.33

Overall fiscal balance as a share of GDP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  137

2.34

Share oil/gas revenue in total government budget, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . .  137

2.35

Global rankings on quality and extensiveness of infrastructure, 2014–15. . . . . . . . . . . . . . . .  138

2.36

Oil production. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  142

2.37

Oil revenues, 2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  142

2.38

Nominal effective exchange rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  143ix

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2.39

Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  143

2.40

Share of exports to GCC and Euro Area countries, 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . .  145

2.41

Public debt and deficits, 2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  145

2.42

Unemployment rate and employment growth, 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  146

2.43

Business climate: distance to frontier. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  146

2.44

Growth in tourism arrivals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  146

2.45

India: Real GDP growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  149

2.46

India: Industrial production and credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  150

2.47

Export growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  150

2.48

Goods trade balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

2.49

Exchange rates against the U.S. dollar. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  151

2.50

Nominal effective exchange rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  151

2.51

Inflation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  152

2.52

Government finances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  152

2.53

Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  154

2.54

India: Impaired loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  155

2.55

Non-performing loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  155

2.56

Credit growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  155

2.57

Fiscal vulnerability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  157

2.58

Commodity prices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  158

2.59

Nigerian naira. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  158

2.60

Exchange rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  159

2.61

Inflation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  159

2.62

Real effective exchange rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  159

2.63

Sovereign bond spreads. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  160

2.64

Eurobond issuance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  160

2.65

GDP growth outlook. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  160

B2.1.1 Growth in Sub-Saharan Africa’s trade flows, by partner, 2000–13 . . . . . . . . . . . . . . . . . . . . .  163B2.1.2 Sub-Saharan Africa’s trade flows with China, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  164B2.1.3 Sub-Saharan Africa’s commodity exports to major trading partners, 2013. . . . . . . . . . . . . . .  164B2.1.4 Cumulative Chinese foreign direct investment in Sub-Saharan Africa . . . . . . . . . . . . . . . . . .  164B2.1.5 Chinese and U.S. foreign direct investment in Africa. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  165B2.1.6 Chinese foreign direct investment in Africa, by sector, 2012 . . . . . . . . . . . . . . . . . . . . . . . . .  165B2.1.7 SSA manufacturing exports to China. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  165B2.1.8 Distribution of aid and development financing flows from China. . . . . . . . . . . . . . . . . . . . .  165B2.1.9 Chinese development assistance and bilateral aid from OECD countries
to Sub-Saharan Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  166

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B2.1.10 Development assistance to Sub-Saharan Africa, 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166
B2.1.11 Bilateral aid from OECD countries to Sub-Saharan Africa, by sector, 2013. . . . . . . . . . . . . .  167B2.1.12 Contributions to growth in gross domestic product in Sub-Saharan Africa . . . . . . . . . . . . . .  167B2.1.13 Effect of slower growth in China on South Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  168

Tables1.1

The global outlook in summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  4

SF1.1

Studies on the effects of sudden stops . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  81

SF1.2

Studies on the implications of the taper tantrum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  83

SF2.1

Low-income country growth forecasts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  104

2.1East Asia and Pacific forecast summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  117

2.2East Asia and Pacific country forecasts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  117

2.3Europe and Central Asia forecast summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  1292.4Europe and Central Asia country forecasts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  130

2.5Latin America and the Caribbean forecast summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  139

2.6Latin America and the Caribbean country forecasts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  140

2.7Middle East and North Africa forecast summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  147

2.8Middle East and North Africa economy forecasts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  148

2.9South Asia forecast summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  156

2.10

South Asia country forecasts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  156

2.11

Sub-Saharan Africa forecast summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  169

2.12

Sub-Saharan Africa country forecasts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  170

A.1GDP growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  177

xi

Foreword
Changes, which in the long-run steady-state, may
be good for the global economy, can cause strain
and even a slowdown in the short run brought about
by the challenges of transition. This is the message
that underlies much of the June issue of the WorldBank Group’s Global Economic Prospects.
In addition to charting, as usual, our detailed outlook for the global economy and for each of theworld’s developing regions, this report goes on to
analyze two big challenges, associated with twotransitions, currently confronting policy makers theworld over and especially in emerging economies
and low-income countries: the impact of the looming monetary tightening cycle in the United States,
and the repercussions of low commodity prices.
Global growth has yet again disappointed, especiallybut not surprisingly in oil exporters and some large
developing countries. The reason for our short-term
forecast being somewhat downbeat is the expectedstrain of the transitions, even though the trends
bode well for the medium and long terms.
Under the baseline scenario, the first U.S. monetary
policy rate increase since the global financial crisis
will dampen capital flows to developing countries
modestly and gradually and is not expected to cause
any major turbulence. This is not to deny that thefirst rate increase will likely cause an increase in global
borrowing cost, and will be accompanied by greater
investor discrimination between countries based on
their vulnerabilities and structural strengths.
Commodity-exporting developing countries may bevulnerable to shifting investor sentiment since
sharply lower oil prices from a year ago have alreadybegun to reduce activity in most of them. Under astress scenario, some countries might struggle toadjust to the combination of these two shocks.
Although resilient thus far, low-income countries
could weaken over the medium term as investmentin the resource sector slows. The benefits from low
oil prices to growth in oil importers have thus far
been slow to materialize, but some oil importers
have seen their vulnerabilities decline as inflation
has slowed and fiscal or current account deficits
have narrowed, boosting their growth potential.
The global economy is expected to grow 2.8 percent
in 2015, slightly less than forecast in January, before
strengthening moderately to 3.2 percent in 2016–17. Developing country growth, buffeted by fallingcommodity prices, the stronger dollar, and tightening
financial conditions, has been revised downward to
4.4 percent in 2015 but is expected to pick up
momentum and reach 5.3 percent in 2016–17.
Risks to the outlook remain tilted to the downside,
as new challenges have emerged even as preexistingones have become more balanced. In particular,
tighter global financial conditions could combinewith deteriorating growth prospects, especially incommodity-exporting countries, to raise the possibility of greater financial stress. The strengthening
dollar could also slow the U.S. economy more than
expected earlier, leading to some global strain.
In the current environment, there will be a premiumon structural reforms in developing countries toensure a smooth adjustment to low commodity
prices and gradually tightening financial conditions.
Ambitious reform agendas will signal to investors
that authorities are serious about promoting longterm growth prospects. Lower commodity prices
underscore the importance of diversification incommodity-dependent economies.
Kaushik Basu
Chief Economist and Senior Vice President
The World Bank

xiii

Acknowledgments
This World Bank Group Flagship Report is a product of the Prospects Group in the Development
Economics Vice Presidency. The project was managed by Ayhan Kose and Franziska Ohnsorge,
under the general guidance of Kaushik Basu.
Several people contributed substantively to the report.
Chapter 1 (Global Outlook) was prepared by a team led by
Franziska Ohnsorge and Marc Stocker and included
Tehmina Khan and Dana Vorisek. Box 1.1 (Negative
Rates) was prepared by Carlos Arteta and Marc Stocker
with contributions from Eung Ju Kim and Bryce Quillin.
Box 1.2 (Oil Markets) was prepared by John Baffes andMarc Stocker. Box 1.3 (Labor Markets) was prepared byBryce Quillin. The Special Feature 1 was prepared by teamled by Carlos Arteta, Ayhan Kose, Franziska Ohnsorge,and Marc Stocker and included Derek Chen, Raju
Huidrom, Ergys Islamaj, Eung Ju Kim and Tianli Zhao.
Research assistance was provided by Jiayi Zhang and Trang
Nguyen. The Special Feature 2 was prepared by Tehmina
Khan (Section A) and Gerard Kambou (Section B). Chapter 2 (Regional Outlooks) was coordinated by Franziska
Ohnsorge. The authors were Ekaterine Vashakmadze (EastAsia and Pacific), Allen Dennis and Ekaterine Vashakmadze with contributions from Jungjin Lee (Europe andCentral Asia), Derek Chen (Latin America and the Caribbean), Damir Cosic (Middle East and North Africa),
Tehmina Khan (South Asia), and Gerard Kambou (SubSaharan Africa). Ajai Chopra, Kevin Clinton, and David
Robinson provided consultancy support. Editorial review
was provided by Mark Felsenthal and Graeme Littler.
John Baffes, Damir Cosic, and Shane Streifel provided inputs
on commodity markets, and Eung Ju Kim and Marc Stocker
on financial markets. Modeling and data work were producedby Thi Thanh Thanh Bui, Xinghao Gong, Jungjin Lee, Trang
Thi Thuy Nguyen, Kiwako Sakamoto, and Jiayi Zhang.
The online publication was produced by a team including
Graeme Littler, Praveen Penmetsa, Katherine Rollins, withtechnical support from Marjorie Patricia Bennington,
Ugendran Machakkalai and Gayathri Natrajan.
Indira Chand, Merrell Tuck-Primdahl, and Phil Hay
managed media relations and the dissemination. Maria
Hazel Macadangdang, Keisha Lynn McGee, Katherine
Rollins, and Ann-Marie Wildman produced the hard
copy publication, in collaboration with Aziz Gökdemir
and Patricia Katayama.
Several reviewers offered extensive advice and comments.
These included: Enrique Aldaz-Carroll, Marina Bakanova,
Kevin Barnes, Kaushik Basu, Hans Anand Beck, Kirida
Bhaopichitr, Gregor Binkert, Genevieve Boyreau, Cesar
Calderon, Jose Lopez Calix, Vandana Chandra, Shubham

Chaudhury, Guang Zhe Chen, Marcel Chistruga, Ajai
Chopra, Karl Kendrick Tiu Chua, Punam Chuhan-Pole,
Kevin Clinton, Tito Cordella, Somneuk Davading, Simon
Davies, Agim Demukaj, Shantayanan Devarajan, Alain W.
D'Hoore, Tatiana Didier, Viet Dinh, Makhtar Diop, Ndiame Diop, Doerte Doemeland, Bakyt Dubashov, Olga
Emelyanova, Marianne Fay, Erik Feyen, Cornelius Fleischhaker, Frederico Gil Sander, Indermit S. Gill, Marcelo
Giugale, Chorching Goh, Anastasia Golovach, Gloria M.
Grandolini, Poonam Gupta, Gohar Gyulumyah, Kiryl
Haiduk, Birgit Hansl, Zahid Hasnain, Marco Hernan¬dez,
Yumeka Hirano, Sandra Hlivnjak, Bert Hofman, Vivian Y.
N. Hon, Elena Ianchovichina, Stella Illieva, Ivailo Izvorski,
Evans Jadotte, Saroj Kumar Jha, Markus Kitzmuller, Fritzi
Koehler-Geib, Christos Kostopoulos, Auguste Tano
Kouame, Ahmed Kouchouk, Aurelien Kruse, Jean Pierre
Lacombe, Melanie Laloum, Daniel Lederman, Taehyun
Lee, Tenzin Lhaden, Joseph Louie C. Limkin, John Litwack, Julio Ricardo Loayza, Rohan Longmore, Mark R.
Lundell, Sodeth Ly, Dorsati Madani, Sanja Madzarevic-Sujster, William F. Maloney, Paul Mariano, Miguel Eduardo
Martin, Khalid El Massanoui, Ernesto May, Elitza Mileva,
Saiyed Shabih Ali Mohib, Lilli Mottaghi, Maria Bru Munoz,
Zafer Mustafaoglu, Evgenij Najdov, Gaurav Nayyar, Antonio Nucifora, Rei Odawara, Samuel K.E. Otoo, Lucy Pan,John Panzer, Catalin Pauna, Samuel Jaime Pienknagura,
Miria A. Pigato, Ruslan Piontkivsky, Catriona Mary Purfield, Rong Qian, Mahwish Qureshi, Mohammad Zia M.
Qureshi, Martin Rama, Luc Razafimandimby, Elliot Joseph
Riordan, David Robinson, David Rosenblatt, Michele Ruta,
Pablo Saavedra, Seynabou Sakho, Ilyas Sarsenov, Cristina
Savescu, Philip Schellekens, Sergio Schmukler, Lazar Sestovic, Smriti Seth, Sudhir Shetty, Saurabh Shome, Peter
Siegenthaler, Alex Sienaert, Karlis Smits, Nikola Spatafora,
Shane Streifel, Ashley Taylor, Mark Roland Thomas, TheoDavid Thomas, Hans Timmer, Augusto de la Torre, Sergei
Ulatov, Ekaterina Ushakova, Robert Utz, Rogier J. E. Van
Den Brink, Ralph Van Doorn, Sona Varma, Aristomene Varoudakis, Julio Velasco, Mathew Verghis, Gallina Andronova Vincelette, Adrien Vogt-Schillb, Dana Vorisek, Ekaterina Vostroknutova, Kei-Mu Yi, Ayberk Yilmaz, Hakan
Yilmazkuday, Puri Shen Yoong, Albert Zeufack, Luan Zhao,
May Thet Zin, and Johannes Zutt. Regional projections andwrite-ups were produced in coordination with country
teams, country directors, and the offices of the regional chief
economists.

xv

Abbreviations
ASEAN

Association of Southeast Asian Nations

bbl

barrelCPI

Consumer Price Index

EAP

East Asia and Pacific

ECA

Europe and Central Asia

ECB

European Central BankEITIExtractive Industries Transparency InitiativeEM

emerging market

EMBI

Emerging Markets Bond Index

FDI

foreign direct investment

FOMC

Federal Open Market Committee

FRB

Federal Reserve Board

FY

fiscal year

GCC

Gulf Cooperation Council

GDPgross domestic productCDS

credit default swap

GEP

Global Economic Prospects

GST

Goods and Service Tax

IMFInternational Monetary Fund

LAC

Latin America and the Caribbean

LIC

low-income country

MENA

Middle East and North Africa

NPL

nonperforming loan

OECD

Organisation for Economic Co-operation and Development

OPEC

Organization of the Petroleum Exporting Countries

RHS

right-hand side (in figures)

SAR

South Asia

SSA

Sub-Saharan Africa

VAR

vector auto regression

VAT

value added tax

WDI

World Development Indicators

WEO

World Economic Outlook

xvii

CHAPTER 1

GLOBAL OUTLOOKThe Global Economy in Transition

G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5

chapter 1

Summary and Key Messages
Global growth is expected to be 2.8 percent in 2015, lower than anticipated in January. Growth is expected to pickup to 3.2 percent in 2016–17, broadly in line with previous forecasts. Developing economies are facing two transitions. First, the widely expected tightening of monetary conditions in the United States, along with monetary expansion by other major central banks, has contributed to broad-based appreciation in the U.S. dollar and is exerting
downward pressure on capital flows to developing countries. Many developing-country currencies have weakened
against the U.S. dollar, particularly those of countries with weak growth prospects or elevated vulnerabilities. In somecountries, this trend has raised concerns about balance sheet exposures in the presence of sizeable dollar-denominatedliabilities. Currency depreciations have been significantly less in trade-weighted terms, partly due to a weakening euro
and yen, thus offering only modest prospects for competitiveness gains to boost exports. Second, despite some pickup
in the first quarter of 2015, lower oil prices are having an increasingly pronounced impact. In oil-importing
countries, the benefits to activity have so far been limited, although they are helping to reduce vulnerabilities. In
oil-exporting countries, lower prices are sharply reducing activity and increasing fiscal, exchange rate, or inflationary pressures. Risks remain tilted to the downside, with some pre-existing risks receding but new ones emerging.

Global growth hit a soft patch at the start of theyear, but remains broadly on track to reach about
2.8 percent in 2015, somewhat below earlier forecasts, with a modest pickup in 2016–17 (Table1). However, important shifts are emerging. The
recovery in high-income countries is expected togather momentum, while a broad-based slowdown
appears to be underway in developing countries
this year (Figure 1.1). Looking forward, global activity should be supported by continued low commodity prices and generally still-benign financing
conditions, notwithstanding the expected modest
tightening in U.S. monetary policy. Among major
economies, growth in the Euro Area and Japan is
picking up, and the United States should continue
to expand at a robust pace despite recent setbacks,
while the slowdown in China is proceeding as anticipated in January. High-income countries are expected to grow by 2 percent in 2015 and 2.3 percent
in 2016–17.
Developing countries are facing two transitions, as
they adjust to prospects of low commodity prices
over the medium-term and tighter financial conditions ahead. Oil prices appear to have found some
support, upon evidence of a sharp decrease in unconventional oil production capacity in the UnitedStates, but are likely to remain low. Other commodity prices continue to be soft, on weak demand as
well as ample supplies. As a result, in commodityexporting countries, especially those with limited
reserve and fiscal buffers, activity has slowed morethan anticipated, currencies have weakened, anddomestic and external vulnerabilities have grown.

Shrinking current account surpluses among oilexporting countries have narrowed global current
account imbalances. In contrast, commodityimporting countries have benefited from declining
vulnerabilities, as current account and fiscal balances have strengthened and inflation has fallen.
Offset by country-specific headwinds, low oil prices
have not yet been fully reflected in stronger activity
in oil-importing countries. Compared with 2014,
growth in developing countries is expected to slow
to 4.4 percent in 2015, 0.4 percentage point lessthan anticipated in January, before rising to 5.3 percent in 2016–17. Growth prospects for low-income
countries (LICs) remain robust, above 6 percent
in 2015–17. Among several commodity exporters,
the negative impact of low commodity prices is expected to be offset by strong public investment.
In a second transition, developing countries will
be at heightened risk of depreciation amid a gradual tightening of financial conditions, albeit fromvery accommodative levels, and moderating capital
flows. The announcement of quantitative easing
by the European Central Bank (ECB) in January,continued monetary easing in Japan, and the prospect of an interest rate increase in the United States
have been associated with a broad-based appreciation of the U.S. dollar and some financial market
volatility (Figure 1.2). Currency depreciations havebeen largest in developing countries with deteriorating growth prospects—most notably commodity exporters—and elevated external vulnerabilities.
Currency depreciations against the U.S. dollar haveraised concerns about U.S. dollar exposures in sov-3

4

chapter 1

G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5

Table 1.1 The global outlook summary
2012

2013

2014e

2015f

2016f

2017f

(percent change from previous year, except interest rates)
REAL GDP1
WorldHigh income
United States
Euro Area
Japan
United Kingdom
RussiaDeveloping countries
East Asia and Pacific
China
Indonesia
ThailandEurope and Central Asia
Kazakhstan
TurkeyRomania
Latin America and the Caribbean
BrazilMexicoArgentina
Middle East and North Africa
Egypt2
IranAlgeriaSouth Asia
India2
Pakistan2 3
Bangladesh2
Sub-Saharan Africa
South Africa
Nigeria
AngolaMEMORANDUM ITEMSReal GDP
World (2010 PPP weights)
OECD
Non-OECD
Developing countries excluding BRICS
BRICS
Low-income countries
World trade volume4
Oil price5
Non-oil commodity price index
Manufactures unit export value6
6–month U.S. LIBOR interest rate (percent)7
6–month Euro LIBOR interest rate (percent)7
International capital flows to developing countries (% of GDP)8
Developing countries
East Asia and Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub–Saharan Africa

2015f

2016f

2017f

(percent point change fromJanuary 2015 GEP)

2.4
1.4
2.3
-0.7
1.7
0.7
3.4
4.9
7.4
7.7
6.0
7.3
1.9
5.0
2.1
0.6
2.9
1.8
4.0
0.8
1.3
2.2
-6.6
3.3
5.4
5.1
3.5
6.0
4.1
2.5
4.3
8.4

2.5
1.4
2.2
-0.4
1.6
1.7
1.3
5.1
7.1
7.7
5.6
2.8
3.7
6.0
4.2
3.5
2.7
2.7
1.4
2.9
0.5
2.1
-1.9
2.8
6.3
6.9
4.4
6.1
4.2
1.9
5.4
6.8

2.6
1.8
2.4
0.9
0.0
2.8
0.6
4.6
6.9
7.4
5.0
0.9
2.4
4.3
2.9
2.9
0.9
0.1
2.1
0.5
2.2
2.2
3.7
4.1
6.9
7.3
5.4
5.6
4.6
1.5
6.2
4.4

2.8
2.0
2.7
1.5
1.1
2.6
-2.7
4.4
6.7
7.1
4.7
3.5
1.8
1.7
3.0
3.0
0.4
-1.3
2.6
1.1
2.2
4.2
1.0
2.6
7.1
7.5
6.0
6.3
4.2
2.0
4.5
4.5

3.3
2.4
2.8
1.8
1.7
2.6
0.7
5.2
6.7
7.0
5.5
4.0
3.4
2.9
3.9
3.2
2.0
1.1
3.2
1.8
3.7
4.5
2.0
3.9
7.3
7.9
3.7
6.7
4.6
2.1
5.0
3.9

3.2
2.2
2.4
1.6
1.2
2.2
2.5
5.4
6.6
6.9
5.5
4.0
3.6
4.1
3.7
3.5
2.8
2.0
3.5
3.0
3.8
4.8
2.0
4.0
7.5
8.0
4.5
6.7
5.0
2.4
5.5
5.1

-0.2
-0.2
-0.5
0.4
-0.1
-0.3
0.2
-0.4
0.0
0.0
-0.5
0.0
-1.2
-0.1
-0.5
0.1
-1.3
-2.3
-0.7
1.4
-0.3
0.7
0.1
-0.7
1.0
1.1
1.4
0.1
-0.4
-0.2
-1.0
-0.8

0.0
0.0
-0.2
0.2
0.1
0.0
0.6
-0.1
0.0
0.0
0.0
0.0
-0.2
-0.3
0.2
0.0
-0.9
-1.4
-0.6
0.2
0.7
0.7
1.0
0.4
0.7
0.9
-1.1
0.2
-0.3
-0.4
-0.8
-1.1

0.0
0.0
0.0
0.0
0.0
0.0
1.4
0.0
-0.1
0.0
0.0
-0.5
-0.4
-0.6
-0.2
-0.4
-0.5
-0.7
-0.3
-0.1
0.3
0.8
-0.2
0.5
0.7
1.0
-0.4
-0.3
-0.1
-0.3
-0.7
-0.1

3.1
1.2
3.8
3.5
5.4
6.5
3.1
1.0
-8.6
-1.2
0.7
0.8

3.3
1.3
2.6
4.3
5.4
6.2
3.3
-0.9
-7.2
-1.4
0.4
0.3

3.4
1.7
2.2
3.9
5.0
6.2
3.6
-7.5
-4.6
-0.2
0.3
0.3

3.4
2.1
0.9
4.3
4.7
6.2
4.4
-39.7
-11.0
-0.2
0.4
0.1

3.9
2.4
2.4
4.6
5.5
6.6
4.9
9.6
1.2
1.9
…
…

4.0
2.1
3.2
4.6
5.6
6.6
4.9
5.6
1.3
1.7
…
…

-0.2
-0.2
0.0
-0.7
-0.4
0.1
-0.1
-7.8
-9.9
0.0
…
…

-0.1
0.0
0.0
-0.3
0.0
0.2
0.1
4.7
1.0
0.0
…
…

0.0
0.0
0.3
-0.5
0.0
0.1
0.1
0.9
1.0
0.0
…
…

5.0
4.6
8.0
5.4
1.9
5.7
5.4

5.9
6.4
7.5
5.9
2.5
4.5
5.2

5.4
5.7
5.0
5.9
2.1
5.8
4.3

5.1
5.1
5.0
5.4
2.2
5.8
4.2

5.0
4.9
5.8
5.5
2.1
5.6
4.0

4.8
4.6
6.5
5.2
2.2
5.5
3.9

-0.4
-0.8
-1.0
-0.5
0.4
0.5
-0.5

-0.3
-0.6
-0.4
-0.2
0.2
0.3
-0.8

…
…
…
…
…
…
…

Source: World Bank.
Notes: PPP = purchasing power parity; e = estimate; f = forecast.
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 differ at any given moment in time.
1. Aggregate growth rates calculated using constant 2010 U.S. dollars GDP weights.
2. 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 ona calendar year basis. 2014 data for Bangladesh show growth in 2014-15.
3. GDP data for Pakistan are based on market prices.
4. World trade volume for goods and non-factor services.
5. Simple average of Dubai, Brent, and West Texas Intermediate.
6. Unit value index of manufactured exports from major economies, expressed in U.S. dollars.
7. The 2015f rates are the average of daily interest rates up to latest available data.
8. Balance of payments data for net capital inflows of foreign direct investment, portfolio investment, and other investment (BPM6).

G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5

Low oil prices, set against the prospect of graduallytightening global financial conditions, raises diverging policy challenges and opportunities. In many
oil-importing countries, lower inflation and shrinking fiscal and external vulnerabilities have createdspace for central banks to cut rates to support weak
activity. In countries with large fuel subsidies andlow energy taxation, lower oil prices also present
an opportunity for subsidy and tax reform: the fiscal windfall can be used to re-build buffers against
future cyclical downturns, or to expand spending
on infrastructure investment and poverty-reducing
activities. In oil-exporting countries, in contrast,
depreciation pressures and rising inflation have narrowed central banks’ room for maneuver. Several
countries, faced with a policy dilemma, have raised
policy rates, despite slowing growth, to defend exchange rates or reduce the risks of financial instability. In some cases, higher rates have coincided withprocyclical fiscal tightening as commodity-related
revenues have fallen. In most developing countries,

The global economy is growing somewhat more slowly than expected, with disappointments in developing countries, especially in oil exporters and Brazil. Forecasts
have been revised upwards in the Euro Area and India, but downwards in the UnitedStates, Brazil and oil-exporting countries. As a result, growth in the BRICS is increasingly diverging.

8

Percent
100
90
80
70
60
50
40
30
20
10
0
2017
1980s

World
High-income countries
Developing countries

6
4
2
0
-2
-4

2007

2009

2011

2013

2015

50 percent threshold1990s 2000-08 2011-14 2015-17

Percent
0.4 Oil exporters
India
0.2 Developing countries

Percent
10
8
6
4
2
0
-2
-4

0
-0.2
-0.4
-0.6

2015

2016

2013

2014

2015

BrazilOil importers
BrazilMexicoD. Emerging and developing
countries: Growth

India

C. Contribution to developing
countries’ growth revisions

2016

South Africa

Percent
10

B. High-income countries: Contribution to
global growth

RussianFederation

A. Growth forecasts

China

The transitions to lower commodity prices andweaker currencies are having diverging inflationary consequences. In oil-importing countries andoil-exporting countries with fixed exchange rates,
headline inflation has generally slowed on fallingenergy and transport prices, although core inflation
has remained broadly stable (Figure 1.2). This disinflationary effect will be transitory as commodity
prices settle around lower equilibrium levels. It will
dissipate in 2016 unless lower inflation expectations
become entrenched after several months of negative
or below-target inflation. Falling inflation expectations would cause challenges in countries where
inflation is already very low, especially where thiswould heighten the risk of deflation. In contrast, inmany oil-exporting countries with flexible exchange
rates, the pass-through of exchange rate depreciation has lifted inflation.

FIGURE 1.1 Global activity

Developing
countries

ereign and corporate balance sheets in some countries, especially those with rapid post-crisis credit
growth. Since trade exposures tend to be diversified,depreciations have been considerably more modest,
if not negligible, in trade-weighted terms for mostdeveloping countries and may not deliver significant
competitiveness gains. With the gradual tightening
in U.S. monetary policy likely to start later in 2015,
capital flows are expected to ease and overall financial conditions for developing countries to tighten
modestly.

5

chapter 1

E. Manufacturing PMI: High-income
countries

F. Manufacturing PMI: Emerging anddeveloping countries

Index, +50: Expansion
58

Index, +50: Expansion
58

56

56

54

54

52

52

50

50

48
2010

2011

2012

2013

2014

2015

48
2010

2011

2012

2013

2014

2015

Sources: Haver Analytics; World Bank.
A. Shaded areas indicate forecasts.
C. Oil importers exclude Brazil, China, and India.
E. F. The red line shows the trend. The latest observation is May 2015. PMI = Purchasing Managers’ Index.

the growth slowdown underway is a reminder of theneed for structural reforms, including to promote
diversification beyond commodity exports.
Low oil prices should generally benefit the poor,
since more than 70 percent of the world’s poor livein oil-importing countries. In general, as food prices
respond to falling energy input costs, the majorityof poor households in low-income countries should
eventually enjoy rising real incomes since they tend
to be net food buyers. However, a number of oil6chapter 1

G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5

FIGURE 1.2 Global trends and policy challenges
Diverging monetary policy in major high-income countries has contributed to a broadbased dollar appreciation. Oil prices appear to have found a floor as unconventional
supplies have begun to adjust, but are expected to remain low and have helped reduce
inflation pressures and current acount imbalances. Depreciations and low commodity
prices present monetary and fiscal policy challenges.
A. U
 .S. dollar and euro: Broad tradeweighted currency indicesB. Oil prices and U.S. rig counts

Index, Jan 2, 2013 = 100

US$ per barrel
120

Count
1,800

115

100

1,600

110

80

1,400
1,200

60

C. Inflation, medianJan-10May-10
Sep-10Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
Jan-13May-13
Sep-13Jan-14May-14
Sep-14Jan-15May-15Jan-15Mar-15

Nov-14

800
600

6
5
4
3
2
1
0

1983

1991

1999

2007

2015

F. General government debt andprimary balance, developing
countries

15-Q1

Percent of GDP
100

Government debt

Percent of GDP
12

Government primarybalance (RHS)

80

8

60

4

40
0

20
0

Oil Ex.

Oil Im.

Oil Ex.

2014

2007

2014

2007

2014

2007

-4

2014

Number of policy rate changes
40
Hikes
Cuts
35
30
25
20
15
10
5
0
Oil Ex. Oil Im. Oil Ex. Oil Im. Oil Ex. Oil Im.

Recent Developments andOutlook in Major Economies
Divergences across major economies will narrow in
2015-16 as growth plateaus in the United States andstrengthens in the Euro Area and Japan. Lower oil
prices will support consumer spending and hold inflation at record lows in the short term, but these effects
will wane by 2016. Activity in China will continue
to decelerate modestly in line with expectations, withthe slowdown buffered by scaled-up monetary and fiscal accommodation.

Percent of world GDP

2007

E. Monetary policy decisions,developing countries

14-Q4

1,000

D. Global imbalancesYear-on-year, percent
High-income countries
8
7
Developing countries
6
5
4
3
2
1
0

14-Q3

Jul-14May-15Jan-15

Sep-14May-14Jan-1420

Sep-1390May-1340
Jan-13

95

Brent
WTI
U.S. oil rig count (RHS)
Jan-14100

Sep-14105

May-14Euro

Mar-14

U.S.$

120

up. The beneficial effects of lower commodity prices
on activity may yet materialize more strongly thancurrently expected. However, new risks have arisen.
The likelihood of disruptive exchange rate adjustments in developing countries may have increased,
as market expectations have continued to differ
from those of U.S. Federal Reserve policy makers.
In addition, U.S. growth may turn out to be morefragile than anticipated and slower than expected asa result of the broad-based dollar appreciation.

Oil Im.

Sources: World Bank; Bloomberg; Baker Hughes; International Monetary Fund.
A. The latest observation is June 05, 2015.
B. The latest observation is May 22, 2015.
C. The latest observation is March 2015. Data for 55 high-income countries (data for 45 available in March 2015)
and 120 developing countries (data for 89 available in March 2015).
D. Defined as the sum of absolute current account positions for 120 countries as a percent of global GDP.
E. “Oil Ex.” stands for oil-exporting countries; “Oil Im.” stands for oil-importing countries.
F. Bar illustrates interquartile range. Dot shows median

exporting countries account for a significant proportion of the poor population and their livelihoods
may come under pressure as growth slows.
Global risks to growth remain tilted to the downside. Deflation risks in the Euro Area remain but
have receded as inflation expectations have picked

High-income countries are expected to grow at
2.0 percent in 2015 (compared with 1.8 percent
in 2014) and 2.3 percent, on average, in 2016–17.
The expected growth pickup reflects the recovery
in the Euro Area, continued robust activity in the
United States, and increased traction from Japan’s
monetary, fiscal, and structural policy efforts.
In the United States, activity stalled at the start of
the year, partly as a result of another cold winter,
disruptions to port activity, sharp cutbacks in capital
expenditures in the oil and gas industry and residual
calendar effects. These factors are expected to dissipate, resulting in a rebound in activity later in 2015,
but a strong U.S. dollar will continue to weigh onexports. For example, the almost 15 percent dollar
appreciation in trade-weighted terms between mid2014 and March 2015 has been estimated to reduce
growth by as much as ¾ percentage point this year
(Laforte and Roberts 2014). Driven predominantly
by private consumption, growth should strengthen
modestly to 2.7 percent in 2015 and further to 2.8
percent in 2016, before slowing towards potential
growth in 2017 (Figure 1.3). The unemployment
rate is expected to fall to 5.2 percent by end-2015,
below the level at the start of the previous monetary
tightening cycle in 2004 and close to estimates ofG L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5

A. Growth

B. Inflation

Percent
4
GDP growth

Percent
4

Potential growth
3

3

2

2

1

1

0

2013

2014

2015

2016

0

2017

Inflation
Inflation target

2013

2014

2015

C. Distance to U.S. Fed policy targets

D. Job creation and growthDistance to dual policy target
Percentage point
5

12-month cumulative change,
millions4

2017

Year-over-year
percent change

86Distance to target

2

2
0

2

0

-2

E. Government debt and deficit
Percent of GDP
110
100
90
80
70

-8
1985

50

-2

Non-Farm Payrolls
Latest observation
Real GDP growth (RHS)
1991

1997

2003

-4
2009

-6
2015

F. Household and corporate debt

Percent of GDP Percent of GDP
Debt
0 110
Deficit (RHS)
-2
100
-4
90
-6
-8 80

60
40

2016

2014

2012

2010

2008

-6
2006

0

2004

-4
2002

1

6
4

4

Expected in 15Q4

3

2016

-10 70
-12
60
-14
50
-16

Household Debt
Corporate Debt

Jan-09Jun-09
Nov-09Apr-10
Sep-10Feb-11
Jul-11
Dec-11
May-12Oct-12Mar-13Aug-13Jan-14Jun-14

The recovery in the United Kingdom remains on
track despite mixed data in the first quarter, including
indications of weak construction and manufacturing
activity. Growth is expected to average 2.6 percent
in 2015, slightly lower than in 2014 (Figure 1.4).
Lower oil prices, robust job creation and rising wages
will continue to bolster consumer spending. Growth
should, however, gradually slow towards its potential
rate by 2017, as spare capacity is absorbed. Headline
inflation turned negative in the first quarter of 2015,
due to falling energy prices, and will likely stay below
1 percent until end-2015. As these temporary effects
unwind, inflation is expected to move closer to the 2
percent target rate towards the end of 2016. The Bankof England is expected to implement its first postcrisis policy rate increase in the first half of 2016. The
strengthening resilience of U.K. bank balance sheets(Bank of England 2014) has allowed the government
to begin to unwind its support measures and reduce

As a result of sustained job creation, the unemployment rate is approaching structurallevels and inflation is expected to move closer to the Federal Reserve’s target in2016. This, together with broadly neutral fiscal policy and healing household balance
sheets, should support above-potential growth in 2015-16.

2000

Overall, policy in the United States is expected toremain accommodative. The fiscal stance should bebroadly neutral, although unresolved discussions
about legal caps on government borrowing and tax
and entitlement reform are potential disruptions.
As the economy closes in towards the employment
and inflation objectives of the Federal Reserve’s dual
mandate later in 2015, a very gradual monetary
tightening cycle is expected to begin. Long-term interest rates, however, would remain low. Falling oil
prices and a strengthening U.S. dollar have pushed
headline inflation temporarily below zero in the firstquarter of 2015. Core inflation is projected to stay
below the Fed’s 2 percent target until the end of theyear, but gradually increase towards it during 2016.
The current account deficit is expected to widenmodestly as the real dollar appreciation increasingly
encourages imports and discourages exports.

FIGURE 1.3 United States

2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

its structural level. The labor force participation rate
is predicted to remain broadly unchanged at current low levels, as a return of discouraged workers
is offset by the ongoing retirement of the sizeablebaby-boomer cohort. Sharply lower oil prices aresupporting household purchasing power (especiallyin lower-income households). While household saving rates initially increased, real income gains fromlower energy bills are expected to continue lifting
consumption in the remainder of 2015. This will
help mitigate the cuts in capital expenditures in theenergy sector that will dampen private sector investment in 2015.

7

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Sources: World Bank; International Monetary Fund; Congressional Budget Office (2015); Haver Analytics;
Federal Reserve St. Louis; Bank for International Settlements.
A. The Congressional Budget Office estimates and projects potential output growth by adjusting observed inputs(labor force and total factor productivity) for the influence of the business cycle. The inputs’ cyclical components
are estimated by means of an analysis of the relationship between each input and the unemployment gap (thatis, the gap between the actual unemployment rate and CBO’s estimate of the underlying long-term rate ofunemployment).
B. Inflation is the annual average change in the consumption deflator.
C. Distance to target is equal to (π-π*)2+(μ-μ*)2] where π is inflation, π* is the target rate of inflation in 		
percentage points, μ is the unemployment rate and μ* is the long-run average rate of unemployment(Bullard 2014).
D. The latest observation is 2015Q1.

net public debt. Financial sector risks have shifted as
financial activity migrated to less-regulated nonbanks
since the global financial crisis. However, the Bankof England's Financial Policy Committee are now
monitoring risks across the whole sector.

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FIGURE 1.4 United Kingdom
In the United Kingdom, strengthening activity—notwithstanding stabilizing housing
prices—and shrinking bank balance sheets are allowing a reduction in net government
debt. Substantial slack, together with low oil prices, is expected to reduce inflation
temporarily.
A. Growth

B. Inflation
Percent

Percent
GDP growth
Potential growth

3

3

2

2

1

1
0
2013

2014

2015

2016

2017

C. Public debt and bank liabilities

2013

2014

2016

2017

D. Household debt and house prices

Percent of GDP
160

Percent of GDP

Index, 2010 = 100
120

100

140
120

100

90

80

80

Household debt
House Prices (RHS)

60
70

60
40

2014

20
2004

60

2002

2014

2012

2010

2008

2006

2002

2000

1998

2004

Net Public Debt
Excluding public sector banks

20

2000

40

2012

80

2010

100

0

2015

2008

0

Inflation
Inflation target

4

2006

4

0

Sources: World Bank; Haver Analytics; Office for Budget Responsibility (2014); Bank for International
Settlements.
B. Inflation is the annual average change in the consumption deflator.
C. The jump in net public debt at the end of 2008 (around £1.3 trillion) was caused by banking sector support,
notably by the Royal Bank of Scotland and Lloyds Banking Group.

The recovery in the Euro Area has progressed more
rapidly than expected since late 2014, supported
by a weakening euro, declining oil prices, recordlow interest rates, and an improvement in bankcredit supply conditions. Euro Area growth is
now projected to reach 1.5 percent this year, increasing to 1.7 percent in 2016-17 (Figure 1.5).
The depreciation of the euro since June 2014
should contribute around ½ percentage point togrowth in the Euro Area in 2015 (OECD 2015a,
European Commission 2015), while lower oil
prices should support consumer spending and corporate profits. Private investment should gradually
pick up, but elevated corporate leverage, persistentfinancial fragmentation, significant slack in the labor markets of periphery countries, lingering supply-side impediments, and weak demand continue
to weigh on prospects for a swift recovery (Barkbu
et al. 2015). Fiscal policy will be broadly neutral
this year and next, following several years of significant consolidation efforts. The turmoil in Greeceis having wide-ranging repercussions for the Greek
economy itself, but has had thus far limited knock-on effects on the Euro Area as a whole. However,
the risk remains that a further deterioration affects
broader Euro Area confidence.
A mix of supply and demand shocks in the aftermath of the crisis left lasting damage to output
and employment across the Euro Area. Additional easing by the ECB in 2014–15, including the launch in March 2015 of a quantitativeeasing program, brought long-term interest rates
to record lows in both core and periphery countries (Box 1.1), even as concerns about Greece’s
financial strains intensified. It also contributed
to a 10 percent depreciation of the euro in tradeweighted terms since mid-2014, which should
support activity and gradually lift headline andcore inflation from currently very low levels. Inflation was negative in the first quarter of 2015,
but should rise gradually from mid-year onwards
as the impact of declining oil prices wanes. The
Euro Area current account surplus should reach arecord 3.5 percent of GDP in 2015. It is driven bya depreciated exchange rate, lower oil prices, weak
import demand and competitiveness improvements in the periphery, structurally high savings inGermany, and depressed investment rates.
Activity in Japan started picking up in late 2014
and was robust in the first quarter of 2015. Growthis predicted to average 1.1 percent this year, before
accelerating to 1.7 percent in 2016, supported by expansionary policies (Figure 1.6). Potential growth inJapan may be as low as 1 percent, as the working-age
population shrinks. Following persistent economic
weakness during 2014 and bolstered by a victoryin general elections in December 2014, the government implemented a series of fiscal stimulus measures, and postponed to April 2017 a second sales
tax increase originally scheduled for October 2015.
This stimulus, combined with policy accommodation by the Bank of Japan, cost savings for firms
and households due to declining energy prices, announced product and labor market reforms, and theprospect of higher earnings following spring wage
negotiations, should boost activity and confidence
throughout 2015. Inflation is likely to remain below
the target 2 percent through 2017.
As structural adjustments and policy efforts
to address financial vulnerabilities continue,
growth in China is expected to decelerate modestly to 7.1 percent in 2015 and 6.9 percent by
2017 (Figure 1.7). Fixed asset investment growth

G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5

Growth in BRICS (except China) is soft andhas increasingly diverged. Falling oil prices andgeopolitical sanctions have been accompanied
by a steep slowdown in 2014 and are expected
to result in a contraction in the Russian Federation in 2015. Fragile confidence, increases in administered prices, and low commodity prices are
expected to contribute to a recession in Brazil
in 2015 with a modest recovery in 2016–17. In

A modest recovery is underway. Euro Area economies have diverged since the global
financial crisis, with demand shocks in the core economies correlating more closelywith each other, but not with those in the periphery. Import compression and improving competitiveness have turned current account deficits into surpluses; the aggregate Euro Area surplus is widening. Substantial slack, together with low oil prices,
should keep inflation to near-zero in 2015. High government debt remains a burden.
A. Growth

B. Inflation

Percent
4
GDP growth

Percent43

3Potential growth

2

2

1

1

0

Inflation
Inflation target

0
2013

2014

2015

2016

2017

-1

2013

2014

2015

2016

C. Correlation of demand shocks
with Euro Area average

D. Current account balance

Correlation
1.2

Percent of GDP

1

Interquartile range
Median

0.8

4

0.6

0

0.4

Germany

2017

Spain

-4

0.2

E. Employment

F. Household and government debt

Index = 100 in 2007Q1
115

Percent of GDP
100
Household debt

70
60

Source: World Bank; Bank for International Settlements; Dealogic; Organisation for Economic Co-Operation
and Development; European Central Bank; Central Bank Rates.
B. Inflation is defined as the annual average change in consumption deflator.
C. Values are the correlation of each country’s demand shocks with the Euro Area average. Demand andsupply shocks are identified as in Blanchard and Quah (1989) with country-specific vector autoregression
models of unemployment rates and growth. Demand shocks are assumed to have short-term impacts,
supply shocks long-term impacts.
D. The latest observation is 2014 Q4.

contrast, growth is gradually resuming in South
Africa, but is held back by energy shortages,
weak investor sentiment amid policy uncertainty,
and by the anticipated tightening of monetaryand fiscal policies. In India, activity is buoyed bystronger confidence as a reform-minded government implements its agenda and lower oil prices
help contain vulnerabilities.

2014

2012

2010

2008

2006

2004

2002

40

2000

2014

2013

50
2012

2011

75

2010

85

80
Germany
Spain
Portugal
Ireland
GreeceFrance and Italy (average)
Euro Area
2009

95

Government debt

90

105

2014

2013

2012

2010

2009

2008

2007

2006

2005

Core Economics

2004

Periphery Economics

2003

-8
Pre-crisis Post-crisis Pre-crisis Post-crisis -12

2002

0

Euro Area

8

2011

-1

2008

To support activity amid tightening regulations ontrust and interbank lending, the People’s Bank of
China continued to ease monetary policy in early
2015, lowering benchmark deposit and lending
rates, making targeted cuts in the required reserve
ratio, and announcing plans to accept municipal
bonds as collateral for its refinancing and lending
operations with commercial banks. As a result,
there has been a shift towards greater bank lending. Tightening regulations on trust lending arebeing accompanied by efforts to limit local governments’ off-balance sheet activities. In its 2015
budget, a RMB 1 trillion debt-for-bond swap was
introduced to reduce local governments’ interest burdens, and extend the maturity of existing
debt. In tandem with the broad-based dollar appreciation, the renminbi has also appreciated in
nominal effective terms by 1.7 percent since mid2014. Despite the associated real appreciation,
the current account surplus is expected to remainaround 2 percent of GDP by 2017 as growth
picks up in high-income countries. Narrowinginterest rate differentials with the United States,
fading expectations for further renminbi appreciation, and slowing domestic growth, have led toincreased private capital outflows, and a slowing
of official reserve accumulation.

FIGURE 1.5 Euro Area

2007

slowed to 15.2 percent in 2014, down from 19.4
percent in 2013, but is still the leading driver ofaggregate demand. Despite reportedly stagnating employment in industries with overcapacity(e.g., various metals processing and mining industries and cement), the labor market appears
to remain tight. The ratio of job openings to job
seekers increased to multi-year highs, as a resultof rapid services sector growth. Inflation, which
has steadily declined since 2013, should stabilize
at a low level after the effect of declining energy
prices dissipates. However, producer prices arecontracting significantly, particularly in industrial sectors affected by overcapacity.

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FIGURE 1.6 Japan
A modest recovery in Japan is supported by rising consumer spending and exports,
partly reflecting improved competitiveness from depreciation. Inflation is expected topick up in 2016 as yen depreciation is passed through. Steadily rising government debt
poses risks.
A. Growth

B. Inflation

Percent
GDP growth3
Potential growth

Percent

2

2

1

1

0

0

-1

2013

2014

Inflation
Inflation target

3

2015

2016

2017

-1

2013

2014

2015

2016

C. Exchange rate and exports

D. Government debt and deficit

Index = 100 in 2000
Real effective exchange rate
Export market share
105

Percent of GDP
300

115

Debt
Deficit (RHS)

2017

Percent of GDP
0
-2

250

-4

95
75

-8

150

2014

2012

2010

2008

2006

2004

-10
2002

100

2000

2014

2012

2010

2008

2006

2004

2002

2000

65
55

-6

200

85

-12

Sources: World Bank; CPB World Trade Monitor; Organisation for Economic Co-operation and Development;International Monetary Fund.
B. Inflation is defined as the annual change in the consumption deflator.
C. An increase in the real effective exchange rate denotes an appreciation. Export market share is defined asmonthly real manufacturing exports divided by global real manufacturing imports

Global Trends and Spillovers
As a result of developments in major economies, developing countries face two transitions: to tightening financial conditions which will be associated with moderating capital flows, gradually rising financing costs,
and heightened risks of further currency depreciationand to persistently low oil prices over the long-term.
Diverging monetary policy prospects in major economies have already caused significant depreciations and,looking ahead, are expected to contribute to moderating capital flows to developing countries and graduallytightening financial conditions. The surge in unconventional oil production in North America and Europe has altered oil markets and will keep oil prices low
over the long-term. The interaction between these twoforces has starkly different implications for commodity
exporting and importing developing countries. It is set
against the backdrop of a trend slowdown in developing country growth.

Easy but Gradually Tightening Financial
Conditions
Global borrowing costs remain low, partly as a resultof monetary stimulus in the Euro Area. Quantitativeeasing by the ECB and the nearing prospect of U.S.
Fed tightening have caused a broad-based appreciation of the U.S. dollar and have been followed by somevolatility in global bond markets. On balance, global
financial conditions are expected to tighten modestly,
and tilt capital flows towards developing countries withsound prospects and low vulnerabilities.
The launch of the ECB’s quantitative easing program
has helped maintain low global financing costs. With
the approaching prospect of the first post-crisis policy rate increase in the United States, the expected
divergence in monetary policies has contributed tosignificant exchange rate movements, in particulara broad-based U.S. dollar appreciation, and somevolatility in European and U.S. long-term interest
rates. On balance, in light of the sizeable impact of
U.S. monetary policy decisions on global financial
markets, global borrowing costs are expected to risewith the launch of the tightening cycle. As world
financing conditions tighten, investors are likely toincreasingly discriminate based on country prospects and vulnerabilities. Many countries will also
face an added debt service burden through the riseof the U.S. dollar and borrowing costs.
Implications of the ECB’s quantitative easing fordeveloping countries
In March, the ECB launched a €1.1 trillion quantitative easing program, extending until at least September 2016. This has begun to feed into financial
markets through multiple channels (Dahlhaus andVasishta 2014; Sanchez 2013).
•

Portfolio balance channel (a reduction in longterm sovereign bond yields, tilting investor incentives towards riskier assets). Sovereign bondyields in the Euro Area were at record-lows
throughout 2014. They initially declined further
after the announcement of quantitative easing inJanuary, but increased in May during a bout offinancial market volatility (Figure 1.8). In someEuro Area countries (Austria, Belgium, Finland,
France, Germany, the Netherlands), yields onsovereign debt of short maturities remain negative, including as a result of increased scarcity

G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5

A. Growth and inflation

B. Consumption and investment

Percent
Real GDP growth8
Inflation (RHS)

Share of GDP
80

Liquidity channel (reducing liquidity premia and facilitating lending by liquidityconstrained banks). This channel has been particularly impaired in the Euro Area. Despite ample central bank liquidity since the crisis, bankcredit has been held back by the need to rebuild
balance sheets, uncertain growth prospects, and a
gradual move to tighter regulatory requirements.
Nevertheless, bank credit to the private sector,
especially to non-financial corporates, has pickedup (although the growth rate still remains negative in parts of the Euro Area periphery).

C. Job openings and growth

Exchange rate channel (reducing the exchange
value of the euro and improving the cost competitiveness of the Euro Area). Since ECB President Draghi’s speech at Jackson Hole in August
2014 raised prospects for quantitative easing,
the euro has depreciated by more than 16 percent against the U.S. dollar and 10 percent innominal effective terms.2

1However, very low long-term interest rates in the United States still

primarily reflect prospects for low inflation and real equilibrium interest
rates in the United States (Hamilton et al. 2015).
2Pressures have also mounted on other high-income country currencies. To maintain its exchange rate peg against the euro, the Danish
central bank accumulated reserves amounting to 15 percent of GDP
in the first two months of 2015. Having already accumulated reservesof 10 percent of GDP during 2014, the Swiss central bank abandoned
its currency floor against the euro in mid-January and the Swiss franc
appreciated against the euro by 15 percent by end-March 2015 (Box 1).

7.5

Investment
Consumption

70
60

7

3

6.5

50
40

Millions

Job openings
Job seekers
GDP growth (RHS)

8
7Percent

10

15

8

4

6

3

4

2

2

1
2012

2013

2017

2014

12

Employment levels, millions
25
Ferrous Metal Smelting & Pressing
Chemical Materials & Products
Non Metallic Mineral Products
20
Coal Mining & Dressing

14

5

2011

2011

D. Employment in overcapacity sectors

6

0
2010

20

2008

2

2017

2005

2016

2002

2015

1999

2014

1996

2013

1993

6

1990

30

0
2015

2014

10
5
0

2000

2004

2008

2012

E. Consumer and producer prices

F. Foreign reserves and exchange rateYear-on-year percent change

Percent of GDP
Index = 100 in 2000
Reserves
50
Nominal effective exchange rate (RHS) 150
Real effective exchange rate (RHS)
140
40
130
30
120

Jan-15Mar-15

Nov-14

PPI
PPI: Mining and Quarrying
PPI: Consumer Goods (RHS)

Jul-14

4
0
-4
-8
-12
-16
-20
-24

Sep-14

Asset price channel (raising asset prices to lift consumer wealth). Immediately following the announcement of quantitative easing by the ECB,Euro Area equity markets gained 6 percent andcontinued to rise steadily to reach, by early May,
14 percent above end-2014 levels (Figure 1.9).

4

0.4
0.0
-0.4
-0.8
-1.2
-1.6
-2.0
-2.4

110

20

100

10
0

90
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

•

Signaling channel (signaling persistently low interest rates in the Euro Area which encourages
carry-trades and capital flows to non-Euro Area
countries). So far, portfolio outflows from theEuro Area appear to have been disproportionately
towards U.S. assets, particularly to long-term
debt securities (Figure 1.9). This reallocation, besides supporting the U.S. dollar, has appeared tohelp keep U.S. Treasury bond yields low.1

The moderation in growth, especially of investment, continues as expected, bufferedby fiscal and monetary policy support. Labor markets remain tight although employment in overcapacity industries has reportedly stagnated. International reserve accumulation has slowed, partly as a result of capital outflows.

May-14•

FIGURE 1.7 China

Jan-14•of highly-rated bonds eligible for the ECB’s asset purchase program. Negative rates may help
boost exports by leading to depreciation andlower borrowing cost but could have adverse
consequences for financial stability (Box 1).

Mar-14•

11

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Source: World Bank; Haver Analytics.
A. Annual averages.
C. The last observation is 2015 Q1.
F. The last observation is April 2015.

Although the ECB’s decision to implement quantitative easing was anticipated, markets responded tothe announcement in January and to the first bondpurchases under the program in March with a sharp
euro depreciation, which partially reversed later on.
Taking into account developments during the runup to the announcement of quantitative easing, theimpact on bond yields appears broadly comparable
to that observed previously in the United States andthe United Kingdom (ECB 2015).
The ECB’s quantitative easing program could havesizeable effects on capital flows to emerging mar-

80

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FIGURE 1.8 Implications of the European Central Bank’squantitative easing for global financial conditions
Euro Area activity only returned to pre-crisis levels in 2014, but is expected to receive
a boost from the European Central Bank’s quantitative easing. This easing has helped
reduce bond yields (although they spiked in May), contributed to euro depreciation andcapital outflows, especially into U.S. assets. However, currency and bond market volatility
has increased.
A. Real GDP levels

B. Economic surprise indices for theUnited States and the Euro Area

Index=100 in 2007Q1

Index, positive value = Better than consensus estimate

115

150

United States
Euro Area

50

1.5
1.4

0

105

1.3

-50

1.2

-100

C. Central bank balance sheets

Percent of GDP
50

30

0

50
11

12

13

14

15

16

Euro Area United States Japan (Apr 13(Mar 15 - Sept (Nov-09 - Oct- Apr 16)
16)
14)

F. Volatility

Percent
3.6
3.2
2.8
2.4
2
1.6
1.2
0.8
0.4
0

Index

8
7
6

May-14

5
Jan-14

27
24
21
18
15
12
9
6
3

U.S. equities
FX (USD/Euro)
U.S. Treasuries (RHS)

Mar-14May-15Jan-15

Sep-14May-14Jan-14

Sep-13German U.K. Japan U.S.

May-13Jan-13

E. 10-year government bond yields

Jan-15

10

100

Mar-1520

150

Nov-14

Japan

200

0
2010

Announced
Realized

40

United States

250

1.0

D. Net asset purchases after theannouncement of quantitativeIndex = 100 in January 2010
400
Euro Area
350
300

Jan-1515

Dec-1414

Oct-1413

Nov-1412

Sep-1411

Sep-1410

Aug-1409

Jul-142007 08

1.1
Jul-14-150

Jun-14

100
95

1.6

May-15110

1.7

Economic Surprise (Euro Area
minus U.S.)
US$ per Euro (RHS)

100

4

Source: World Bank; Bloomberg; Haver Analytics.
B. The Citigroup Economic Surprise Index is a weighted average if data surprises (actual releases versus theBloomberg survey median). A positive reading suggests that economic releases have been better than expected.
The indexes are calculated daily in a rolling three-month window.

kets. For example, quantitative easing programs in
the United States in 2008-14 were associated withrising equity markets, a compression of bond yields,
and considerable increases in demand for emerging market U.S. dollar-denominated bond issues(McCauley et al. 2015). U.S. dollar credit to bor-

rowers outside of the United States, comprising bothbond and bank lending flows, grew at double digit
rates, whereas credit to the U.S. private sector remained
subdued. A similar effect is expected from the ECB’s
quantitative easing, although weakening fundamentals among emerging markets and greater competition
from U.S. issuers could dampen positive spillovers.
The ECB’s quantitative easing could shift the composition of capital flows to developing countries.
A significant share of global portfolio flows to developing countries tends to originate in the UnitedStates, while European banks provide the bulk ofcross-border bank lending flows. A policy rate increase by the U.S. Federal Reserve will further tilt
capital flows to developing countries from bond andequity markets into bank lending. This tendency
will be reinforced by the gradual healing of European banks’ balance sheets, notwithstanding regulatory tightening since 2008. Regions that have been
particularly reliant on bond and equity inflows (EastAsia and Pacific, Latin America) could face a slowdown in capital inflows, while capital inflows may be
more resilient to regions that receive predominantlybank lending-based inflows (Central Asia, Eastern
Europe, Middle East and North Africa, see below).
Implications of the launch of the U.S. monetary
tightening cycle for developing countries
In the second half of 2015, the U.S. Federal Reserveis expected to raise interest rates for the first timesince the 2008 financial crisis. This is likely to initiate a gradual tightening cycle from currently recordlow interest rates. Rate increases will coincide withimproved growth prospects for the United States,
which would dampen the impact of rising financing costs on developing country trading partners(Special Feature 1).
Some previous U.S. tightening cycles (especially1999 and 2004) were associated with a flattening of
the yield curve (a narrowing of the spread between
long and short-term interest rates). Some episodes(especially 1994 and 2004) were also followed bydepreciating emerging market currencies and modestly declining capital flows to developing countries—if not on average across developing countries,
at least for vulnerable economies (Figure 1.10).
Many emerging market central banks respondedwith interest rate increases, especially during the2004 tightening cycle.

G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5

chapter 1

BOX 1.1 Negative Interest Rates in Europe: A Glance at Their Causes and Implications

A number of major central banks in Europe have set key
policy rates at negative levels in order to further encourage
lending by making it costly for banks to hold excess reservesat their central banks. Amid negative policy rates, nominal yields on some bonds of highly-rated European governments have also dropped below zero. Explanations for thephenomenon of negative yields include very low inflation,
further “flight to safety” toward fixed income assets in
Europe’s core, and—perhaps the main proximate cause—the increased scarcity of highly-rated sovereign bonds eligible for the European Central Bank's asset purchase program. Negative rates may help boost exports by encouraging
currency depreciation and may support lending and domestic demand by further easing credit conditions. At thesame time, they could also have some adverse consequences
for financial stability through an erosion of bank profitability, through funding problems for some non-bank financial institutions, and through excessive risk-taking byinvestors seeking a higher rate of return. Potential implications for developing countries include a search for yield supporting capital inflows, which could help offset the impactof an approaching liftoff in U.S. policy interest rates.

countries at a time when global financial markets are
not in crisis is unprecedented.
This box briefly explores the causes and implications ofnegative interest rates and yields in Europe. It aims toshed light on the following questions:•

Why are some European policy interest rates
negative?

•

What are the implications of negative policy rates
for sovereign bond yields?

•

What are the implications of negative rates andyields for activity and financial stability?

•

What are the implications for developing
countries?

Why are some European policy interest rates
negative?

As an additional measure to stabilize inflation expectations and stave off the risk of deflation, a number ofmajor central banks in Europe—including the European Central Bank (ECB), the Danish National Bank
(DNB), the Swedish Riksbank, and the Swiss National
Bank (SNB)—have pushed key short-term policy rates
into negative territory. 1 Amid these movements, yields
on some sovereign bonds at relatively short maturities
in several European countries—including Austria,
Denmark, Germany, the Netherlands, and Switzerland—have also fallen below zero. Negative interest
rates have been an extremely rare phenomenon: evenduring the Great Depression, U.S. short-term rates
were never negative, and during the height of the recent global financial crisis in 2008 some U.S. Treasury
bill yields only very briefly fell below zero.2 That they
have simultaneously appeared in several European

In June 2014, the ECB pushed the policy interest rateapplied on its deposit facility below zero, with an additional cut in September 2014. (Figure B1.1.1). In
February 2015, the Riksbank also cut its deposit rate
below zero. The main motivation for these decisions
was to further ease the already accommodative monetary policy stance to fight the growing threat of deflation amid downward pressures to inflation expectations in the second half of last year and into early 2015
(Figure B1.1.1).3 The SNB and DNB have also taken
similar actions at different points in the past, albeit forslightly different reasons. The DNB, which maintains
its currency within a narrow fluctuation band aroundthe euro, was actually the first central bank in Europe
to set its deposit rate below zero—in July 2012, in response to rising capital inflows amid heightened financial stress in the Euro Area. It pushed the rate down
again to negative territory in September 2014, following the ECB. The SNB set its deposit rate below zeroin December 2014 amid currency appreciation pressures, and pushed it further down in January 2015
when it abandoned the Swiss franc’s cap against theeuro.

This box was prepared by Carlos Arteta and Marc Stocker, with contributions from Eung Ju Kim and Bryce Quillin.

The implementation of these negative policy interest
rates have a common element. Commercial banks nor-

1The discussion of setting policy rates below zero is not recent. For instance, Mankiw (2009) argued that the U.S. Federal Reserve should haveconsidered this possibility during the Great Recession
2Based on closing levels, U.S. 1-month and 3-month T-bill rates fell
below zero between early December and mid-December of 2008.

3In the ECB’s case, an ongoing contraction of its balance sheet in 2013
and 2014 had weakened the overall transmission of low policy rates tobroader financing conditions. The ECB reacted with an extended programof asset purchases, as well as a negative deposit rate (ECB, 2015).

13

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BOX 1.1 (continued)

Figure B1.1.1 Negative interest rates in Europe: Context
Some European central banks have pushed policy rates below zero, amid declining inflation expectations in the second half of 2014 and early 2015.
Reflecting negative policy rates and increasing purchases of highly-rated sovereign bonds, some bonds now offer negative yields. Bank lending
in the Euro Area is increasing, suggesting a supportive role of negative rates.
A. Interest rates on excess reserves

B. Inflation expectations

Policy rate on excess reserves, percent
1.0

ECB

Denmark

0.6

SwedenSwitzerland

4-year ahead inflation expectations, percent
2.5Euro Area
Denmark

1.0
0.5
0.0

-0.6

D. Euro Area bank lending

Percent
0.2

Euro, billions, 3-month rolling sum

Apr-15Jan-15Oct-14Jul-14Apr-14Jan-14-1.0

Mar-15Jan-15

Nov-14

Sep-14Jul-14May-14Jan-14Mar-14-0.5

C. Two year government bond yields

150

0.0

100

-0.2
-0.4

50
0

Jan-15Mar-14May-13

Jul-12

Sep-11

Nov-10-100

Jan-10May-15

Apr-15May-15

Apr-15Mar-15Mar-15

Feb-15Jan-15

Feb-15Jan-15-50
Jan-15

Dec-14Oct-14-1.0

Dec-14-0.8

Nov-14Germany
Austria
Netherland
Denmark
Switzerland

-0.6

-1.2

Switzerland

1.5

-0.2

-1.0

Sweden2.0

0.2

Nov-1414

Source: Bloomberg, World Bank.
D. Euro Area bank loans to households and non-financial corporates. Last observation is for March 2015.

mally hold deposits at their central bank as settlementbalances for clearing payments, or to meet legal minimum reserve requirements. Central banks normally
pay interest—a “deposit rate”—on commercial banks’
excess reserves (i.e. reserves above the minimum level).
During normal times, banks usually minimize holdings in such excess reserves, because central bank deposit rates are below typical money market rates. In the
4In addition, unconventional monetary policies and the expansionof central bank balance sheets have significantly increased the amount ofbanks' excess reserves.

more uncertain environment since the global financial
crisis, and with money market interest rates at very low
levels, some banks have chosen to hold higher balances
at central banks. That is, some of them have been holding excess reserves because of heightened risk aversion,and because the opportunity costs of hoarding reserves—in terms of profitable lending opportunities—
have been quite low, given the low returns on assets
and the sluggishness of economic activity.4
The four aforementioned central banks are now charging (instead of paying) commercial banks for their ex-

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chapter 1

BOX 1.1 (continued)

cess reserves. Negative deposit rates should provide
some encouragement to banks to buy alternative assets,
and hence to put upward pressure on prices of such
assets and further downward pressure on yields andborrowing costs. This would be transmitted throughthe economy by a general easing of credit conditions.
However, as is discussed below, negative policy rates
have distinct implications for sovereign bond yields
and, crucially, for financial stability.
What are the implications of negative policy rates
for sovereign bond yields?
Policy rates provide the benchmark for short-term borrowing costs throughout the economy. This includes
shorter-dated bonds. Thus, negative policy rates in theEuro Area, Denmark, and Switzerland have been accompanied by negative market rates on government
bonds, particularly at the shorter end of the yield curve.
For example, the 2-year bond yields on highly-rated
European countries such as Austria, Denmark, Germany, the Netherlands, and Switzerland have been
negative during the first half of 2015, though they havegenerally ticked up amid recent bond market volatility(Figure B1.1.1.C). Besides the role of negative policy
rates, there are several potential explanations for the
emergence of negative yields, particularly those beyond
the short-end of the yield curve. These include very low
inflation, the persistence of the international “savings
glut,” and further “flight to safety” toward low-risk
fixed income assets. In consequence, sovereign bondsof certain countries in Europe that are deemed risk-freehave been in heavy demand.
That said, a key reason for negative sovereign yields incore European countries appears to be technical—a result of demand pressures stemming from the ECB’s
Extended Asset Purchase Program, which is in turn aconsequence of the design of the program. Purchasesannounced by the ECB, which will amount to €60 billion per month until at least September 2016 (for a
total of €1.1 trillion), will mainly be of sovereign
bonds, following a defined allocation, and strict eligibility criteria. These criteria prohibit purchases beyond
25 percent of the outstanding amount of individual
securities, 33 percent of any given issuer's debt, and ofbonds with yields below the ECB’s deposit rate, cur-rently set at –20 basis points. This lower yield limit isto ensure that purchases are implemented broadly
across eligible bonds, and to curb speculation on future
declines in bond yields. Such speculation would encourage holders, including banks, to hoard bonds.
While the ECB deposit rate might establish a lower
bound for bond yields, rising demand and limited supply of highly-rated sovereign bonds could bring theiryields well below that rate. In addition, since bonds canbe used as collateral in repurchase agreements, they
have additional value which could keep them attractivewith materially negative yields.
The prospects of growing imbalances between the limited supply of eligible bonds and rising demand under
the ECB quantitative easing program have pushed
down yields in core Euro Area countries and, indirectly, in other European countries. Overall, the net
issuance of medium- and long-term securities by all
Euro Area debt management offices in 2015 is expected
to be around €200 billion, against total asset purchasesof €600 billion by the ECB (Cœuré 2015). In somecountries, including Germany, net issuance is expected
to be marginal or even negative, creating a mismatch
between effective supply and the intended scale of
ECB’s purchases.
Investors initially held on to core-European bonds on
expectation of further capital gains, which in itself
helped push yields to record low levels in April. A reversal in market sentiment in May led to an upward
adjustment in yields. However, scarcity considerations
will likely continue to drive core-European bond markets, potentially intensifying if the share of eligible sovereign bonds trading with negative yields approach thelower limit for eligibility. This should keep yields at
exceptionally low levels, and perhaps below zero for awhile longer.
Investors may hold instruments with negative returns
for various reasons, such as for speculative and arbitrage reasons, institutional and regulatory requirements, or simply for lack of alternative assets.
•

Speculative and arbitrage reasons. Investors may
be expecting increased demand for bonds—for example, due to the announcement by the ECB of

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BOX 1.1 (continued)

bond purchases discussed earlier—and risingbond valuations. Alternatively, they may be expecting currency appreciation and rising
returns when bond portfolios are converted into
other currencies. This might be a particularly important channel of transmission of negative yields
from the Euro Area to other European bond markets facing upward currency pressures as a resultof ECB actions, such as Switzerland, Denmark or
Sweden. In either case, total bond returns, adjusted for expected capital gains or currency
movements, could compensate investors for negative home-currency yields.
•	Institutional and regulatory requirements. Institutional investors often maintain portfolios with large
government bond holdings in pursuit of stable, riskadjusted returns to meet long-term obligations. Regulatory requirements on the level of risk that someinstitutional investors can take or agreements withstakeholders may drive these portfolio decisions.
•	Lack of alternative assets. For non-bank investors, holdings of cash at zero return may appear to
be more remunerative than a negative-yield bond.
However, the security, transactions, and storage
costs would be prohibitive for large holdings,
which would result in a potentially substantiallynegative rate of return of cash.
What are the implications of negative rates andyields for activity and financial stability?
Broadly speaking, central banks use policy interest
rates to achieve, over the medium term, a level of realinterest rates that is consistent with a rate of inflationin line with policy objectives and a level of economic
activity close to its full potential. Such levels of real inter5The chronically low levels of real interest rates has led some observers
to argue that advanced economies may be facing a period of “secular stagnation,” where the level of spending at any given level of interest rates is likely
to have declined and may remain depressed (Summers 2014).
6In the United States, potential disruptions to financial market func-

tioning are likely a key reason why negative policy rates have never beenused as a policy option. First, money market funds operate under rules thatmake it difficult for them to pay negative interest rates. Second, the auction
process for new U.S. Treasury securities does not currently permit participants to submit bids with negative rates. Third, a decrease in the intereston reserves (IOR) rate would affect the federal funds market, reducing the
incentives for banks to borrow in this market (Keister 2011).

est rates might be negative in an environment of weakdomestic demand.5 With inflation remaining below target, they could require maintaining nominal policy rates
at or below zero, along with the implementation of unconventional measures to bring longer-term rates further down, including asset purchase programs.
Thus, some of the effects of negative rates are qualitatively analogous to those of very low but non-negative
rates. First, insofar as negative nominal rates help keep
real interest rates below the neutral level, they canboost consumption and investment. Second, the positive cash flow effects of low or negative nominal rates
permits increases in spending by liquidity-constrained
firms and households. Third, low or negative policy
rates may help stimulate lending, as evidenced by the
recent pickup in credit in the Euro Area (Figure
B1.1.1.D). Fourth, declines in domestic interest rates
from any level can trigger a depreciation of the currency, as suggested by the fall of the euro vis-à-vis thedollar amid negative German yields (B1.1.2.A), which
boosts exports. Fifth, in countries concerned about
capital flow-driven appreciation pressures (e.g. Switzerland and Denmark), they discourage capital inflows.
In addition to these effects that are largely intended bypolicy makers, negative nominal interest rates may
have undesirable side effects on financial stability andcapital market functioning.6•

Erosion of bank profitability. Negative rates may
erode bank profitability by narrowing banks’ netinterest margins (the gap between commercial
banks’ lending and deposit rates), since banks may
be unwilling to pass through negative deposit rates
to their customers to avoid the erosion of theircustomer base (Genay and Podjasek 2014, Hannoun 2015). This unwillingness is due to the fact
that, for retail depositors, the costs of avoiding
negative rates by substituting currency for deposits
is probably lower than for larger, business, and institutional investors (McAndrews 2015). As a consequence, interest margins have recently narrowed
substantially (Figure B1.1.2.B). Compressed longterm interest rates also reduce profit margins on
the standard banking maturity transformation offunding short-term and lending at a somewhat
longer term. However, banks can realize capitalG L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5

chapter 1

BOX 1.1 (continued)

Figure B1.1.2 Negative interest rates in Europe: Some consequences
Negative European interest rates and yields have been accompanied by euro depreciation, despite a recent retracement. But negative rates havealso been associated with a significant narrowing of spreads between bank lending and deposit rates, which may erode bank profitability. Regarding implications for developing countries, the difference between benchmark German and developing-country bond yields has widened, which has
been accompanied by an acceleration in foreign inflows to developing-country bond funds.

1.3

6

0.0

1.2

4

-0.2

1.1

2

1.0

0

0.9

-2

German 2-year yield-0.4

Apr-15Jan-15Oct-14Jul-14Apr-14Jan-14-0.6

Euro exchange rate (RHS)

C. Benchmark government bond yields for Germany andemerging markets

Apr-150.2

Jan-158

Oct-144-week moving average, basis points

1.4

Jul-14

US$ per Euro

0.4

Apr-14

Percent

B. Net interest margin for Euro Area banks

Jan-14

A. Euro-dollar exchange rate and government bondyieldsD. Foreign portfolio flows into emerging-market bond funds

US$, billions, 4-week moving average

Percent

1.4

7
6

0.8

5
0.2

4

EM sovereign bond yield
German 10-year government bond yield

3

-0.4

2

Apr-15Jan-15Oct-14Jul-14Apr-14Apr-15Jan-15Oct-14Jul-14Apr-14-1.6
Jan-140

Jan-14-1.0

1Source: Bloomberg, Emerging Portfolio Fund Research, JPMorgan Chase, and World Bank.
B. Net interest margin is proxied by the difference in borrowing and lending rate of banks without compensating for the fact that the amount of earning assets and borrowed funds may be different.

gains on the sale of their government bonds tocentral banks and, in doing so, bolster their capital
position and, therefore, their capacity to extend
loans (Cœuré 2015).
•

Pressures on non-bank financial institutions.
Under negative interest rates, some non-bank financial institutions—especially pension and life
insurance companies—may struggle to meet theirlong-term liabilities, such as pensions or life insurance policies, offered at fixed nominal rates (Hannoun 2015). In particular, various European life
insurance companies that have guaranteed payouts
exceeding the yields on local 10-year government
bonds are likely to face significant pressures (IMF
2015a). Insurance companies or pension funds
might be constrained to hold government bonds by

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BOX 1.1 (continued)

prudential requirements, hence contributing to thedemand glut and downward pressure on yields.
•••

Anomalies in the valuation of returns and payments streams. As interest rates approach zero,
the calculation of present values of streams of cash
flows becomes increasingly sensitive to the discount rate.7 Indeed, the present value of any
stream can be made arbitrarily large by choosing a
low enough discount rate. This becomes a contentious issue in the negotiation of fair value in legal
settlements. As discount rates of zero or less haveno economic meaning, a prolonged period of negative interest rates would create large ambiguities forthe valuation of assets and liabilities.
Effects on money market funds. Money market
funds make conservative investments in cashequivalent assets, such as highly-rated short-term
corporate or government debt, to provide investors
liquidity and capital preservation by paying a modest return. While these funds aim to avoid reductions in net asset values, this objective would not be
attainable if rates in the market were negative for a
substantial period.8 Disruptive reactions by disappointed investors would best be avoided by clear
understanding of the nature of these funds. Thatsaid, the Danish experience suggests that money
market funds can pass through the negative rates
without massive disruptions in the market (Huttl
2014).
Excessive risk-taking. Bank and non-bank investors may be encouraged by negative rates to takeexcessive risk in their search for positive yield(Hannoun 2015). This is consistent with various
studies that find a negative relation between shortterm interest rates and bank risk-taking (e.g.
Altunbas, Gambacorta, and Marqués-Ibáñez
2010; De Nicolò, Dell’Ariccia, Laeven, and Valen-

7One way to describe the problem for pension and life insurance plans
is to say that the steep drop in discount rates implies a steep rise in the present value of their liabilities.
8Money market funds may face adverse consequences even at zero, nonnegative rates (Di Maggio and Kacperczyk. 2015).

cia 2010; Dell’Ariccia, Laeven, and Suarez 2013).
Greater risk-taking could contribute to the formation of asset bubbles, particularly in higherdividend paying stocks which may already have excessive valuations.
•

Potential need to redesign the functioning of financial transactions. The issuance of interest bearing securities at negative yields may face design
problems (Garbade and McAndrews 2015). Contractual language surrounding the operation ofmoney and capital markets may not envision thepossibility of negative rates; thus, the latter may
create both legal and operational challenges. Moregenerally, if negative rates were to prevail for long,they may entail the need to redesign debt securities, certain operations of financial institutions, therecalculation of payment of interest among financial agents, and other operational innovations,whose costs may offset the benefits of negative
rates (McAndrews 2015).

One key question is how deep negative rates must be
for these kinds of distortions to become quantitatively
important. According to some observers, in an economy like the United States, market rates (not to be
confused with deposit rates on excess reserves) staying
below –50 basis points on a sustained basis might
spawn various financial innovations to circumvent
negative rates (Garbade and McAndrews 2012). Such
adaptations would, in themselves impose an eventual
floor, albeit somewhere below zero, on the extent towhich rates could fall (Svensson 2015). However, thesekinds of innovations, which uses valuable scarce resources, may impose a net loss in terms of economywide social value.
If they were to emerge, such financial innovations
could include new services, such as the creation of new
institutions to handle and store cash on behalf of others. It could also include new behavioral responses,
such as making excessive tax payments to the government and earn a zero return until a refund is received
from the government, thus avoiding negative rates(McAndrews 2015). At the extreme, if central banks
pushed rates too far into negative territory, there is arisk that large sectors of the economy could becomeG L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5

chapter 1

BOX 1.1 (continued)

cash-based. Under these circumstances, there could
even be discussions about the feasibility of a tax onmoney, a topic that has long been subject to debate inacademic circles as a way to overcome the zero boundon interest rates (Buiter and Panigirtzoglou 2003,
Ilgmann and Menner, 2011).9
The bottom line of all these factors is that, while thebenefits of negative rates are broadly similar to those ofvery low but positive rates, they posit unique risks forfinancial stability.
What are the implications of negative rates fordeveloping countries?
Current negative European policy rates highlight theasynchronous monetary policy stances in Europe andthe United States. This could have implications forreal activity and the financial sector in developing
countries.
Real effects. The overall effect on developing-country
exports via exchange rate movements is likely to bemodest. The reduction in European rates has contributed to euro depreciation against the dollar. However,since developing-country currencies have also been declining against the dollar, the impact of negative rates
on nominal and real effective exchange rates across developing countries may be contained.10 As a result, thedirect impact of negative rates on developing countries’
exports may be limited as a whole, albeit with large
country variations depending on specific trade exposures and currency developments.
Financial effects. Negative interest rates in Europe
may accelerate portfolio outflows from Europe, andsupport continued favorable financing conditions fordeveloping countries.
•	Widened interest rate differentials. The interest rate
differential between developing-country and European bond yields widened since the second halfof 2014, as suggested by the gap between the JP
Morgan EMBIG Index and the German 10-year

9There have even been discussions about the costs and benefits of phasing out paper currency as one way to eliminate the zero bound in interest
rates (Rogoff 2014).
10Chapter 1 discusses this issue at greater length.

bond yield (Figure B1.1.2.C). Despite recent volatility, which has slightly narrowed this differential,
German 10-year yields are generally following thesame contour as (currently negative) short-termyields. Amid interest rate differentials, foreign inflows into emerging market bond funds have remained steady since the beginning of the year (Figure B1.1.2.D)•	Increased search for yield and carry trade. Negative European rates and yields could shift investor demand
to higher-yielding emerging market debt and provide
additional funding opportunities for developing
countries in European markets. With negative nominal interest rates in Europe, there will also be incentives for increased carry trade, particularly to somehigher-yielding developing-country currencies.
•

Moderated effect of eventual U.S. liftoff on developing-country capital flows. Outflows from European
sovereign to U.S. Treasury markets would havelikely helped contain long-term yields in the
United States, in the face of the approaching liftoff in U.S. policy rates, thus providing support tocontinued capital flows to developing countries.

•	
Shifts in developing-country sources of funding.
Negative rates may be contributing to a gradualshift in the source of funding for some developing
countries, from U.S. dollar- to euro-denominateddebt instruments, and from bond to cross-borderbank lending flows, which mainly originate from
European lenders.
In sum, negative European interest rates may provide
ongoing support to capital flows to developing countries and help reduce pressures from a gradual normalization of U.S. monetary policy (Special Feature 1).
However, over the medium term, unsustainably low
interest rates may render some countries more vulnerable to the eventual unwinding of exceptional stimulus
measures in Europe and to a reversal of capital flows.

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FIGURE 1.9 Implications of the European Central Bank’squantitative easing for developing countries
The ECB’s announcement of quantitative easing (QE) was followed by falling sovereign bond yields, rising equity markets, and appreciation against the euro in emerging
markets. Similar to the cross-border credit expansion triggered by QE in the UnitedStates, ECB QE is expected to increase portfolio flows and, especially, bank lending todeveloping countries.
A. Impact of the U.S. announcementof quantitative easing on
emerging-market assets

B. Impact of the European Central
Bank’s announcement on developing
country financial markets

Percent change
3

Percent change Emerging Asia
Central Europe and Middle East
Emerging Latin America
Emerging Market
42Emerging Asia
Emerging Europe
Emerging Latin America
Emerging Markets

1

2

While there is a risk that a lift-off in U.S. policy rates
could lead to a sudden steepening of the U.S. yield
curve with disruptive consequences for developing
countries (reminiscent of the “Taper Tantrum” in
May/June 2013, Special Feature 1), the baseline assumption remains that of a very gradual increase in
U.S. long-term rates and a flatter yield curve, as observed during some previous tightening cycles andas expected by financial markets now. This should
result in only modestly tighter global financial conditions for developing countries later in 2015 andin 2016.

As financing costs gradually rise, investors are likely
to increasingly differentiate among country pros-2-4pects and vulnerabilities. Both during the finan-3-6cial market turmoil of May/June 2013 (the “taper
tantrum” following the U.S. Fed’s announcementof tapering large-scale asset purchases), and during
C. Portfolio investment from thethe broad-based U.S. dollar appreciation since midD. BIS-reporting banks’ cross-borderEuro Area and the United States,
claims, Q3 2014
2014, exchange rates depreciated sharply against
2013
the U.S. dollar in the more vulnerable developing
US$, billions
US$, billions
1600
3,000
economies and in those with deteriorating growthEuro Area banks
1400
2,500
Euro Area U.S.
U.S. banks
prospects, in particular commodity exporters. Risks
1200
2,000
1000
would be particularly sizable in developing countries
1,500
800
600
with high external and government debt; large cur1,000
400
500
rent account and fiscal deficits; heavy foreign cur200
00AllEmerging
Latin
Emerging
Others rency borrowing and high debt service payments;
All
Latin
Emerging Emerging
Othersdeveleoping Europe
AmericaAsiadeveloping America
Asia
Europeandelevated inflation; low reserve coverage; and poor
andCaribbean
Caribbean
growth prospects.
0

0

-1

-2

Stock
Government Exchange
Markets bond yields
Rates

QE2 Annoucement

Stock
Government
Markets bond yields

E. U
 .S. dollar credit growth to nonU.S. residents and U.S. residents
Percent30

Non-US Residents
US Residents

25
20
15
10
5

2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

0
-5

Exchange
Rate

Taper Tantrum

EquityReturns

Bond
YieldsOMT

Exchange
Rate

EquityBond
YieldsSMP

F. Euro credit growth to non-E.U.
residents and E.U. residents
Percent
30
25
20
15
10
5
0
-5
-10
-15

EU Residents

Non-EU Residents

2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

Exchange
Rates

Sources: Bank for International Settlements; McCauley, McGuire, and Sushko (2015); World Bank; International
Monetary Fund; Georgiadis and Gräb (2015); Rai and Suchanek (2014); Fratzscher, Duca, and Straub (2014).
A. QE2 refers to quantitative easing announcement by the U.S. Federal Reserve in November 2010 Tapertantrum refers to the volatility following U.S. Federal Reserve remarks on May 22, 2013. “Emerging Asia”
contains China; India; Indonesia; Malaysia; Philippines; Republic of Korea; Taiwan, China; and Thailand.
“Emerging Europe” includes Czech Republic, Hungary, Poland, Russian Federation, South Africa, and Turkey.
“Emerging Latin America” refers to Brazil, Chile, Colombia, and Mexico.
B. SMP and OMT stand for “Securities Markets Programme” and “Outright Monetary Transactions”, two anti-crisis
measures implemented by the ECB respectively in 2010 and 2012. “Emerging Asia” countries are China; Hong
Kong SAR, China; India; Indonesia; Malaysia; Philippines; Republic of Korea; Singapore; Thailand; and Taiwan,
China. “Central Europe and Middle East” includes Algeria, Israel, Morocco, Russian Federation, Turkey, andSouth Africa. “Emerging Latin American” countries are Argentina, Brazil, and Mexico. An increase in exchange
rates denotes an appreciation against the euro.
C. Emerging Asia includes countries in East and South Asia.
D. Emerging Asia includes countries in East and South Asia. BIS = Bank for International Settlements; Q3 =third quarter.

Capital flows to developing countries
Portfolio flows to developing countries remained
subdued in 2015, but low bond yields, and ample
liquidity continued to encourage investor interestin bond issuance, particularly in China and other
East Asian countries. On the whole, sovereign bondyields in emerging markets remained low despite
headwinds from expectations of U.S. policy tightening, currency depreciations and increased volatility in global bond markets.
However, issuer activity has softened in Latin America (especially Brazil) and Eastern Europe, on limited
funding needs, a shift to local debt markets, weakening prospects (especially in Latin America) and risingborrowing costs as market sentiment deteriorated.
Corporate bond spreads for emerging market oilcompanies also rose sharply (Figure 1.11).
Record-low global interest rates over the past halfdecade have encouraged external borrowing. As a

G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5Net capital inflows to developing countries are projected
to moderate marginally, to 5.1 percent of GDP in 2015
from 5.4 percent in 2014 (Table 1.1). At the same time,a gradual shift is expected from bond financing to banklending, and from U.S. dollar to euro-denominatedfunding (although the majority of emerging market
debt will remain U.S. dollar-denominated). Net capital flows are expected to recover in 2016 (in absolutevalue terms, though not relative to GDP), as the global
economy continues to improve and country-specificchallenges diminish among developing countries, but
are not expected to return to pre-crisis levels. Capital flows will continue to be constrained by concerns
about private-sector debt sustainability, tighter regulation, and increased competition for funding as highincome country issuance rises. Furthermore, natural
resource-based foreign direct investment is expected
to decline as a result of weak commodity prices anddeclining growth prospects among commodityexporting countries.

Past episodes of first rate increases in a U.S. monetary policy tightening cycle were
often accompanied by a flattening U.S. yield curve, and currency depreciations and/or monetary policy rate increases in emerging markets. The close correlation withemerging market borrowing costs suggests that lift-off in 2015 may increase global
financing costs, especially for vulnerable countries.
A. U.S. term spreads aroundprevious U.S. tightening cycles

B. Number of policy changes aroundpast episodes of U.S. rate hikes

Basis points; deviations from t = 0
1994 Q1

60
40
20
0
-20
-40
-60
-80
-100
-120
-140
-160
-180

1999 Q2

2004 Q2

2013 Q2

Number of policy changes aroundFeb.1994, June 1999, June 2004, and May 2013

20

Hikes
Cuts

15
10

-3

-2

-1 0
1
quarters

2

3

4

C. Emerging markets: Nominal
effective appreciation aroundprevious U.S. tightening cycles

D. Correlation between U.S. term
spread and emerging market bondspreads

Percent, deviations from t = 0
Feb-942

Jun-99Correlation coefficient

Jun-04May-13

0.5

0

0.3

-2

0.1

-4

Non-European EM
European EM

-0.1

-6

-3

-2

-1

0
months

1

2

-0.3

3

May 1998-May 2008

Since May 2008

E. “Taper Tantrum”: Emergingmarket vulnerabilities anddepreciation

F. O
 il price plunge: Emerging-market
vulnerabilities and depreciation

Currency depreciation against the US$, percent
From end-April 2013 to end-Jan. 20142

Currency depreciation against US$, percent
From June 2014 to May 2015
10

0
-2

0

Regression line; R-square = 0.61

-10

-4

-20

-6

-30

-8
-10

-40
3

4

5

6

7

8

9

10

11

2012 FRB Vulnerability Index

12

13

-50

3

4

5
6
7
8
9 10 112014 FRB Vulnerability Index

Low and volatile commodity prices

Sources: Bloomberg; U.S. Federal Reserve Board; Haver Analytics; World Bank.

Oil prices have begun to find some support after the
sharp decline in the second half of 2014, but are expected to remain well below their 2013 levels during
the next decade. Second-round effects of low oil prices
on other commodities, together with robust supplies
and soft demand, are expected to keep prices low formost other commodities in the medium-term.

B. Values are for emerging and frontier markets as defined in World Bank (2015a).

Oil prices have stabilized following the steep drop—
more than 50 percent—to a six-year low in JanuaryFeb-13Mar-13Apr-13May-13Jun-13
Jul-13Aug-130-4Mar-04
Apr-04
May-04
Jun-04
Jul-04Aug-04
Sep-04

5

Mar-99Apr-99May-99Jun-99Jul-99Aug-99
Sep-99In addition, currency risk may be rising for somecountries, as prospects of increasingly divergent
monetary policies between the United States andother major central banks increase the potential
for further appreciation of the U.S. dollar. This has
encouraged a shift towards euro-denominated corporate bond issuance (to around 13 percent of thetotal in the first quarter of 2015).

FIGURE 1.10 Implications of launch of monetary
tightening in the United States

Nov-93Dec-93Jan-94
Feb-94Mar-94Apr-94May-94

result, private external debt has risen since 2011,
whereas sovereign external debt has generally remained moderate as sovereigns shifted towards
domestic borrowing. However, several developing
country sovereigns have issued heavily in international bond markets. In some countries, this hashelped reduce their debt service payments. Other
countries, however, may experience record-highspikes in payments over the next decade (Ghana,
Jordan, Kenya, Nigeria, Zambia).

21

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12

A. Term spread denotes the difference between 10-year U.S. Treasury and 6-month T-bill yields, shown four
quarters before until four quarters after the launch of each U.S. tightening cycle (t= 0).
C. Median of nominal effective exchange rate of BRICS and MINT countries, three months before until threemonths after the beginning (t=0) of U.S. monetary policy hikes. The Russian Federation is excluded from thesample of the 1994 episode.
D. U.S. term spread is defined by the difference between the 10-year Treasury rate and the 3-month T-bill rate.
Emerging market bond spread is JP Morgan's EMBIG yield spread.
E. F. For the FRB vulnerability index, higher numbers = more vulnerable. Blue dots indicate net oil exporters.

2015. A substantial capacity adjustment in the U.S.
shale oil industry (Figure 1.12) has raised prices
somewhat from the January lows. The rig count—

13

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G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5

FIGURE 1.11 Developing countries’ capital flows andborrowing costs

a measure of future U.S. crude oil supplies—more
than halved between October 2014 and April 2015,
and major oil companies have announced sharp cutbacks in investment plans. Thus far, however, U.S.
shale oil production has remained robust, albeit
growing more slowly. It is expected to peak in later2015. In the short-run, continued weak demand,
U.S. dollar appreciation, ample and rising global
inventories, and unexpectedly solid production in
conflict-torn Republic of Yemen, Iraq, and Libya,
keep oil prices below their elevated 2013 levels (IEA
2015). A recently negotiated international agreement with the Islamic Republic of Iran could raise
supply further.3 Oil prices are expected to average
about $58 per barrel in 2015 and remain below $70
per barrel until 2018.

Sovereign bond yields have mostly remained low, but corporate bond yields haverisen sharply and portfolio flows have remained subdued. Post-crisis bond inflows
have raised corporate foreign currency debt, which is predominantly denominatedin U.S. dollar. Some sovereigns that haved recently accessed international capital
markets are likely to see sharp debt payment spikes. Euro-denominated bond issuances have picked-up since the start of quantitative easing in the Euro Area. As bankbalance sheets heal, regions that are more dependent on bank flows than bond flows
may benefit.

Sovereign (external)
Corporate (external)
Sovereign (local)

6.3
5.8
5.3
4.8
4.3

Apr-15Jan-15

Jul-14Oct-14Apr-14Jan-14Jul-13Oct-13Apr-13

3.3

Jan-13

3.8

C. G ross capital flows to developing
countries since 2011

4-week moving average, US$, millions
4,000
Equity
3,000
Bonds
2,000
1,000
0
-1,000-2,000-3,000-4,000-5,000

Jan Mar May Jul Sep Nov Jan Mar May
2014 2014 2014 2014 2014 2014 2015 2015 2015

D. Share of euro-denominatedemerging market internationalbond issuance

Percent of GDP

Private external debt
Sovereign external debt

19
15
11
7
3

1997 99

01

03

05

07

09

Oct-13Mar-14May-13

Jul-12

Dec-12

Feb-12

Apr-11

Sep-11

Jun-10F. Emerging and frontier market
peak annual debt service
payments

11

13

Average debt service as share of revenues, percent

90
80
70
60
50
40
30
20
10
0

Peak 2000-10
Peak, 2015-25

Ghana
JordanNigeria
Kenya
Mozambique
Tanzania
Bulgaria
Vietnam
Honduras
Ivory Coast
SenegalRwandaAngolaArmenia
EcuadorParaguay
Mongolia
Venezuela
Ethiopia
Bolivia
Gabon

E. Emerging-market private andsovereign external debt

Nov-10Jan-10

US$, billions
Percent of total
15 € denominated EM sovereign bonds
1,800
Equity€ denominated EM corporate bonds
1,600
Bond
12
Bank lending
1,400
9
1,200
1,000
6
800
3
600
400
0
200
0
LAC EAP ECA SAS SST MNA DEV

Jan-15Percent
6.8

B. Foreign portfolio inflows to EM
assetsAug-14

A. Emerging-market bond yields

Sources: World Bank; JP Morgan; Bloomberg; International Monetary Fund World Economic Outlook; Bloomberg
Emerging Market Bond Index; EFPR; Dealogic.
A. The last observation is May 5, 2015.
C. China is excluded from East Asia and Pacific. DEV = total capital flows to developing countries, excluding China.
D. The last observation is April 2015.
E. Emerging countries are: Argentina, Brazil, Bulgaria, Chile, China, Colombia, Czech Republic, Dominican
Republic, Ecuador, Hungary, India, Indonesia, Malaysia, Mexico, Pakistan, Panama, Peru, Philippines, Poland,
Republic of Korea, República Bolivariana de Venezuela, Russian Federation, South Africa, Thailand, Turkey,
Ukraine, and Uruguay.

The decline in oil prices since mid-2014 partly reflects a secular increase in supply as new sources ofoil have been accessed. Similar to the expansion of
North Sea and Mexican oil production in the mid1980s, oil production from shale extraction, and, lessso, from biofuels and Canadian oil sands expanded
rapidly in the mid-2000s (Box 1.2). For now, thesesources supply about 7 percent of the global market and shale oil, the most sizeable of these sources,
has marginal cost in the range of $50-70 per barrel. However, the production of shale oil is highly
flexible with a relatively modest fixed cost of investment and a short lifespan of 2.5–3 years (WorldBank 2015b). Absent significant demand pressures,
this flexibility may limit room for oil price increases
above $80 per barrel in the medium- to long-term.
As a result, oil prices are expected to return to their2013 levels only in the next decade (by 2025).
As oil prices have found some support and begun torecover, their volatility has risen (Figure 1.13). Boththe realized and implied volatilities of oil prices haveincreased more than three-fold since the thirty days
prior to OPEC’s November 27 decision to abandon
the earlier price target. The level of oil price volatil3Iran and the five permanent United Nations Security Council
member countries plus Germany have agreed on a framework that
could lead to the removal of sanctions imposed on Iran by the UnitedStates and the European Union. Until then, the easing of sanctions under a deal made in November 2013 remains in place. Under that agreement, Iran’s crude exports are capped at 1 million barrels per day. In the
short-run, Iran’s capacity to ramp up production is limited. However,
over the long-term, it could add significantly to global oil supply. Before
the current sanctions were imposed in 2013, Iran produced about 3.5
million barrels per day and it currently has about 20 million barrels of
crude oil in storage.

G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5

4Since a fully-functioning gas market has been developed in the
United States, U.S. natural gas prices have largely de-linked fromoil prices and are determined by domestic gas supply and demandconditions.
5The weak El Niño event currently underway is expected to lastthrough the summer (NOAA 2015). Its effect on global prices is likely tobe limited, as most agricultural markets are well supplied.

100
80

Count
1,800

7

900

1,500
1,200
600

C. OPEC and non-OPEC oil
production
Million barrels per day
50

Jan-15Jan-14Jan-13Jan-12

Jan-11

Jan-10

Jan-09300
Jan-083

Jan-07Jan-17Jan-16

Jan-15Jan-14Jan-13Jan-12

Jan-11

Jan-10

Jan-09

Jan-08Jan-0740

Million barrels per day
11
Oil production
Rig count (RHS)
9

5

60

0

D. Oil production

Non-OPEC production
OPEC production

4

25

2

20

20

0

0

60

E. Changes in global oil production

2014

2008

2002

F. Marginal oil production cost, 2014

Million barrels per day, growth since 2010Q4
4 IranLibya
Syria
2 Yemen
United States
Net changes
0

US$ per barrel
140

-2

40

120
100
80
60

Europe CAN

BRA

USA

VEN

NGA

Total

IRN DZA ARE IRQ SAU

Sources: World Bank; International Energy Agency; Bloomberg; International Monetary Fund; Deutsche Bank;
Citi Research; Reuters; BP Statistical Review; U.S. Energy Information Administration; Baker Hughes.
A. The last observation is April 2015. Grey area indicates forecasts.
B. Oil production includes only crude oil production.
C. OPEC = Organization of the Petroleum Exporting Countries.
E. Crude oil supply for OPEC and non-OPEC producers. OPEC = Organization of the Petroleum ExportingCountries.

Falling gas, fertilizer, and agricultural commodity
prices may dampen or amplify some of the benefitsof lower oil prices. For oil-importing countries that
depend heavily on exports of gas (Indonesia) or
agricultural goods (e.g., cotton in Benin, Burkina
Faso, Mali, Tajikistan, and Uzbekistan; grains in

Onshore

Total

Total

Total

OnshoreDeep-water

Total

Shale

Deep-water

Ethanol

Offshore

Sand

Ethanol

OnshoreRUS

Biodiesel

0Arctic

2015Q1

2014Q1

20
2013Q1

-4

1996

1990

1984

40

2014

2012

30

2010

6

2008

8

35

2006

40

2004

45

Million barrels per day
Mexico and North Sea
Biofuel, U.S. shale, and Canadian sands
Others (RHS)
1080

2012Q1

Food commodities. Food production is 4–5 times
more energy-intensive than manufacturing. Energy, and oil in particular, is used to fuel farm machinery, for transport of farm produce to markets,and in the highly energy-intensive production ofagricultural chemicals including fertilizers. Oil
thus constitutes a significant proportion of thecost of food production. As a result, a 45 percent
decline in oil prices could generate a 10 percent
drop in food prices (Baffes et al. 2015). In addition, recent harvests have been good, contributing an additional 10 percent decline in food commodity prices since end-2014.5

120

2011Q1•

Fertilizer. Natural gas is a key input into fertilizer
production. Already, fertilizer prices have fallen
more than 40 percent below their mid-2011 peak.
Following the post-2005 drop in natural gas prices
in the United States (due to the shale gas boom),
many fertilizer companies began moving theirproduction plants to the United States.

B. U.S. oil production and rig countNominal index, 2010=100
180
Agriculture
Energy160
Metals and minerals
140

2002

•

Natural gas. The prices in most contracts for liquefied natural gas deliveries to Asia are linked tooil prices, though with a considerable lag. As aresult, liquefied natural gas prices have alreadydeclined substantially (in Japan, by more than
15 percent since June 2014) and are expected
drop further. In Europe, a natural gas market
is slowly emerging such that a smaller share ofgas contracts is directly linked to oil prices. This
share, however, is sufficient to put downward
pressure on European natural gas prices.4

A. Commodity price indices

2000

•

Unconventional oil supplies (Mexican and North Sea Oil in the 1990s, and shale oil,biofuels and Canadian sands in the 2000s) have increased global supplies. On signsof sharp investment cuts in the shale industry in 2015, oil prices appear to have founda floor. Longer-term prospects of ample supply from unconventional, non-OPEC oil
production suggest that prices will likely remain low, constrained by the marginal costof unconventional sources.

2010Q1

Weak global demand (including from China), U.S.
dollar appreciation, and low oil prices have put
pressure on non-oil commodity prices, in particular
those for natural gas, fertilizers, and food.

FIGURE 1.12 Oil markets

Thousands

ity remains well below spikes in 1985/86, 1990/91,
and 2008/09. However, if sustained or amplified, it
could induce uncertainty that deters investment andreduces employment growth, by generating costly
resource reallocations to and from energy-intensive
activities (Guo and Kliesen 2005; Federer 1997).

23

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24chapter 1

Argentina and Brazil), lower oil prices may support
energy-intensive production and consumption but
export revenues will fall. Oil-importing countries
that are also important food importers (Arab Republic of Egypt, Morocco) may benefit from both
lower oil prices and food prices to the extent thatthey are passed through into local prices. The combination of lower oil and food prices will further
weaken prospects in oil-exporting countries that
also export foods (e.g., grain in Kazakhstan and theRussian Federation).
Metals and agricultural raw materials prices—among the most business cycle-sensitive commodity prices—fell 15 percent between mid-2014 andApril 2015. Since the factors that have driven allcommodity prices down since 2011 remain in place,non-oil commodity prices are expected to remain
well below their 2011 peaks throughout the forecasthorizon.
Subdued and shifting global trade
Global trade remains subdued, with a gradual shift ofimport demand from emerging markets towards theUnited States. However, global trade may receive asmall boost from the decline in oil prices as a result of
reduced freight costs.
At 3.6 percent in 2014, global trade growth continued to be substantially weaker than its pre-crisis
average of about 7 percent. Some recovery in global
trade is projected over the next two years, but at apace still significantly below pre-crisis averages, bothin absolute terms and in relation to global GDP
growth. This reflects weak import global growth aswell as a maturing of supply chains and a shift inthe sources of global growth from trade-intensive
investment towards government and private consumption (World Bank 2015a).
Since 2014, rising demand from the United States
has expanded the share of trading partner exports to
the United States. Trade-intensive investment goods
account for a larger share of U.S. imports comparedwith other high-income country imports (Figure1.14), and this share has been increasing. Imported
machinery, electrical and transportation goods, predominantly from China and Mexico, are notable
examples. As a result, growing U.S. imports may
provide a boost to global manufacturing trade andactivity, even if fuel imports continue to decline in
the face of competition from domestic oil and gas.

G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5

While the Euro Area continues to account for by far
the largest share of global imports, its contribution
has declined steadily as an export market destination, including in the second half of 2014. In 2015,
however, Euro Area import demand is expected to
expand and support key trading partners in Eastern Europe, North Africa, and Asia. Imports by
emerging markets, despite decelerating since 2011,
remain the most dynamic contributor to global export growth at present.
The recent oil price plunge reduces the cost of transport, and hence should encourage global tradeflows. Global trade has been estimated to rise by up
to two percent for every one percent decrease in thefreight cost relative to the value of the shipment(Behar and Venables 2010). Since fuel accounts for
40-63 percent of operating cost for a typical shipment (UNCTAD 2010), falling oil prices could significantly bolster trade.

Recent Developments andOutlook in Developing
Countries
The income shifts caused by falling commodity prices
are having increasingly pronounced effects. Many
commodity-importing countries have benefited fromshrinking vulnerabilities: lower inflation and narrowing fiscal and external deficits. This has created room
for central banks to support activity. In most oil-exporting countries, however, activity has slowed. Currencies
have depreciated, compelling some central banks totighten monetary policy. Governments have cut spending to offset falling resource revenues.
Recent growth disappointments and outlook
Growth in developing countries has again fallen
short of expectations in 2014. In particular, growth
was revised downward in many oil exporting countries and in Brazil, where supply-side bottlenecks, adrought, and setbacks to investment and consumer
confidence from ongoing investigations appears tohave a stronger impact on growth than expected. Recent softness in activity has been wide-spread, withan ongoing slowdown in China, a deepening recession in Russia, and contraction in Brazil and Venezuela dampening activity in their respective regions.
In several large developing countries, manufactur-G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5

chapter 1

BOX 1.2 Low Oil Prices in Perspective

The price of oil is expected to remain low for a considerable
period of time and could become increasingly volatile. Past
episodes of sustained oil price declines were often followedby relatively weak global economic recoveries, with multiple factors affecting final outcomes. The current episodehas been predominantly driven by supply factors, andcould lead to changes in the structure and functioning of
global oil markets.

tions for the future structure and functioning of oil
markets. This box addresses three questions:

The oil price plunge since mid-2014 was caused bychanges in underlying supply and demand conditions,amplified in the short term by a sharp appreciation of
the U.S. dollar, a shift in Organization of the Petroleum Exporting Countries (OPEC) policy, and abating
geopolitical risks. Although the supply capacity of relatively high-cost and flexible producers, such as theshale oil industry in the United States, is already adjusting to this low-price environment, most of the underlying factors point to persisting weakness in oil
prices over the medium term.

What happened during past episodes of rapid oil
price declines?

The negative impact of sharply lower prices on exporters has been immediate, and in some cases accentuatedby financial market pressures, while the positive impact
for importers appears more diffuse and has not yet
fully materialized. Evidence from past episodes showsthat sharply declining oil prices were generally followed by quite diverse global growth outcomes, pointing to other important forces either mitigating or reinforcing the impact of declining oil prices on activity. As
the current decline in oil prices has been largely driven
by supply factors and is expected to be persistent, thenet effect for the global economy should be positive
over the medium term. The distinction between supply
and demand factors is of key importance, as the former
has much more positive and lasting effects on activity.
As a benchmark, a purely supply-driven and permanent 45 percent drop in oil prices could be associatedwith a 0.7–0.8 percent increase in global gross domestic product (GDP) over the medium term, with theeffect peaking after two years.
The growing importance of unconventional oil production and technological innovations has forced OPEC torethink its policy and role as a swing producer to stabilize prices. This changing landscape could have implicaThe main authors of this box are John Baffes and Marc Stocker.

•

What happened during past episodes of rapid oil
price declines?

•

How is the current episode different?

•

What does the current episode mean for the future
structure of oil markets?

The drop in oil prices since June 2014 is the third largest among six episodes of significant declines over the
past three decades (Figure B1.2.1). Previous episodes
were preceded by a period of weakening global growth,which contributed to the observed decline in price
FIGURE B1.2.1 Major oil price declines since1984
The drop in oil prices in the second half of 2014 is one of six episodes of significant oil price declines over the past three decades.
Magnitude of significant oil price drops

Percent
0
-20
-40
-60
-80

Jan-86 to Oct-90 to Oct-97 to May-01 to Jun-08 to Jul-14 toJul-86
Apr-91
Apr-98Nov-01 Dec-08
Jan-15

Sources: World Bank.
Note: Nonconsecutive episodes in which the un-weighted average of West Texas Intermediate, Dubai, and Brent oil prices dropped by more than 30 percent over a six-month
period.

(Figure B1.2.2). Those episodes were followed by relatively slow recoveries, as benefits for oil importers tooktime to materialize and were in some cases offset by prevailing headwinds. Although virtually all episodes ofsignificant oil price drops since 1984 were accompanied
by monetary policy loosening in the United States andsome other major advanced economies, several were accompanied or followed by financial market strains.

25

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G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5

BOX 1.2 (continued)

1985–86. The 1985–86 oil price slump was the episode most closely associated with changing supply conditions, as OPEC reverted to its production target of
30 million barrels per day despite rising unconventional oil supply from the North Sea and Mexico.
Prices dropped 60 percent from January to July 1986,
leading to a prolonged period of low real oil prices during the following two decades. Around that period, theU.S. Federal Reserve embarked on a series of interest
rate cuts to fend off slowing activity and declining inflation. The lack of improvement in global activity, despite these supportive conditions, was tightly connected to a period of weak growth and significant debt
problems in some large developing countries, slow
growth in Japan and many European countries, and, atthe end of 1987, the impact of a significant downward
correction in U.S. and global stock markets.
1990–91. The oil price decline of 1990–91 reversed anearlier spike triggered by the first Gulf War, leaving alimited trace on the global economy. Despite being accompanied by monetary policy loosening, global growth
failed to strengthen significantly. Instead, it slowed in
1992 before recovering modestly in 1993, as a recessionin Europe ran its course, the recovery in the UnitedStates remained hesitant, and Japan entered a period of
prolonged stagnation. In advanced countries, a processof debt reduction and balance sheet restructuring; elevated long-term real interest rates; financial and exchange rate stress, especially in Europe; and weak confidence hampered the global upturn. In contrast, growth
in many developing countries was resilient, with significant capital inflows helping commodity exporters offset
negative terms-of-trade effects from weakening prices.
1998. A sharp decline in oil prices was associatedmostly with weakening demand as a result of the 1997
Asian crisis. The continued expansion of OPEC production until mid-1998 might have played a role aswell (Fattouh 2007). The global recovery remained
tepid for most of 1998, partly as a result of financial
market stress in the United States and major emerging
markets. The recovery gathered momentum only in
1999–2000 when oil prices started recovering as well,as growth in the United States, the Euro Area, and several large developing economies rebounded.

2001. The disruptions and uncertainty caused by the
September 11 terrorist attacks in the United States intensified a growth slowdown already underway as the“dotcom” bubble deflated. Softening global activity
and rising uncertainty were the main triggers behind a
sharp decline in oil prices around that period. However, aggressive easing in monetary policy by the Federal Reserve and other major central banks propelled arapid rebound in activity and lower oil prices might
have provided some further support.
2008–09. A severe contraction in global demand sent
all commodity prices tumbling during the Great Recession of 2008–09. Wide-ranging central bank andgovernment interventions, together with resilient
growth in major developing countries, gradually stabilized global activity. However, the recovery remainedsluggish, constrained by financial sector restructuring,large asset price losses, and widespread deleveraging
pressures in high-income countries. The combined
impact of a rapid rebound in commodity prices anddeclining interest rates supporting capital flows to developing countries created particularly favorable conditions for commodity-exporting developing countries
in 2010–12.
How is the current episode different?
The footprint of sharply lower oil prices since mid2014 has become increasingly visible, but has not yet
translated into stronger global growth. Oil exporters
have faced increasing headwinds, diverging monetary
policy across major reserve currencies has led to risingexchange rate volatility, and China has continued toslow down. Global growth was subdued at the start of2015, but is predicted to gain momentum, as theUnited States emerges from a soft growth patch at thestart of 2015, the Euro Area continues to recover, andoil-importing emerging economies gather strength.
Unlike during previous episodes of significant oil pricedeclines, the U.S. Federal Reserve is widely expected tostart hiking policy rates before the end of the year,
while unconventional easing measures in the EuroArea and Japan maintain highly accommodative conditions in other parts of the world.

G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5

chapter 1

BOX 1.2 (continued)
Figure B1.2.2 Global growth and inflation around oil price declines
Past episodes of significant oil price declines were often preceded by global growth slowdowns and followed by relatively weak recoveries inhigh-income and developing countries, mostly as a result of financial market stress. U.S. monetary policy eased around most of the past episodes.
A. Global growth

B. U.S. monetary policy interest rates

Year-on-year, percent

Percent

1985-86
2001Q4

6

1991Q1
2008Q4

1998Q1
Current

12

4

10

2

8

0

6

-2

4

-4

2

-6

0
-8

-6

-4

-2

0
quarters

2

4

6

8

-8

-6

1986Q2

1991Q1

1998Q1

2001Q4

2008Q4

2014Q4-4-20quarters

C. High-income countries’ growth

D. High-income countries’ inflation

Year-on-year, percent

Year-on-year, percent
1986Q2
6
2001Q4

6
4

1986Q2

1991Q1

1998Q1

2001Q4

2008Q4

2014Q4

4

1991Q1
2008Q4

6

8

1998Q1
2014Q4

5
4

2

3

0

2

-2

1

-4

0

-6

2

-1
-8

-6

-4

-2

0
2
quarters

4

6

8

-8

-6

-4

-2

0
quarters

E. Developing countries’ growth

F. Developing countries’ inflation

Year-on-year, percent
1986Q2
10
2001Q4Year-on-year, percent

1991Q1

1998Q1

2008Q4

2014Q4

14
12

8

2

4

1986Q2

1991Q1

1998Q1

2001Q4

2008Q4

2014Q4

6

8

6

8

10

6

8
4

6

2
0

4
-8

-6

-4

-2

0
quarters

2

4

6

8

2

-8

-6

-4

-2

0
quarters

2

4

Sources: World Bank and Federal Reserve Bank of St. Louis.
Note: Shaded areas indicate the period of the sharp oil price drop.
A. Global growth computed on the basis of a weighted average (using 2010 US$ GDP weights) of countries for which quarterly national accounts data are available. Time “0” is the quarter of the trough of a significant oil price decline episode (30 percent drop over a seven-month period, which is the shaded region); −8 corresponds to 8 quarters before the trough and 8
corresponds to 8 quarters after the trough.
B. Effective U.S. nominal federal funds rate.
D. Consumer price index (CPI) inflation aggregated across countries using consumption weights.
F. Median CPI inflation across developing countries.

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BOX 1.2 (continued)

Regarding the drivers of the recent crash in oil prices, acomparison with previous episodes points to a predominant role of supply factors, with important similarities
to the 1985–86 episode. Both episodes followed periodsof high oil prices and a rapid expansion of non-OPEC
oil supplies—Alaska, North Sea, and Mexico in the former, and U.S. shale oil, Canadian oil sands, and biofuelsin the latter. And in both crashes OPEC changed its
policy objective, from price targeting to market share.
In contrast, other sharp declines were largely precipitatedby slowing global demand or, in the case of the 1990–91
crash, associated with the first Gulf War. The 2008–09
collapse exhibited some unique characteristics. Prices during that period were highly correlated with equity andexchange rates, while co-movements across most commodity prices were twice as high compared with the historical average (and other crashes), highlighting the predominant role of deteriorating demand conditions.
The dominant role of supply factors behind the 2014–15 drop bodes well for its eventual impact on global
activity. Estimates suggest that a purely supply-driven
decline of 45 percent in oil prices could be associatedwith a 0.7–0.8 percent increase in global GDP over the
medium term (Baffes et al. 2015).
However, the ultimate impact on global activity remains uncertain. First, with a confluence of cyclicaland structural forces at work in the global economy,
the expected gains for growth from the drop in oil
prices could be lower than suggested by the standard
model simulations. These mitigating factors include
current financial vulnerabilities, high indebtedness,
limited room for monetary policy in major economies
to be loosened further, elevated unemployment, andslowing long-term growth prospects in major oilimporting economies. These factors may encourage
precautionary savings by households and corporations,particularly in countries still facing important crisis
legacies and weak balance sheets.
Second, the precise contributions of the supply and demand factors behind the recent oil price crash remain
uncertain and subject to debate. According to Baffes etal. (2015), supply shocks have accounted for roughly
twice as much as demand shocks since mid-2014, particularly after OPEC’s decision to forgo price targetingin November.1 Analysis by the International Monetary
Fund (IMF 2015b) points to weak demand playing amore significant role in the initial phase of the decline(July to mid-October 2014), while supply factors dominated in the subsequent period. Other studies, such as
Hamilton (2014), Baumeister and Kilian (2015), andBadel and McGillicuddy (2015), point to varying effects
of weakening global growth on oil prices in 2014–15.2
Some of these empirical investigations focus on the comovement of oil prices with equity and other financial
and commodity prices. The current episode has been
associated with relatively strong performance of U.S.
and global equity markets, which has been interpreted
as evidence of a positive supply shock, reflecting expectations of more supportive conditions for activity
ahead (Figure B1.2.3). Another important feature of
the recent period of sharply declining oil prices has
been the significant and broad-based appreciation of
the U.S. dollar, in contrast with the 1985–86 episode.
A strong dollar might have accentuated the decline inoil prices, contributing to lower demand in importing
countries with depreciating currencies while encouraging supply from producers.
What does the current episode mean for the future
structure of oil markets?
Over the medium term, oil prices are projected to recover gradually from their current lows, but will remain below recent peaks and could witness more volatility. The pace of the recovery in prices will largely
depend on the speed at which supply will adjust to current market conditions. Given that OPEC, for now,
appears to have relinquished its role as swing producer,
U.S. shale oil producers, with their relatively short production cycles and low sunk costs, may see the greatest
1Looking at high-frequency co-movements between oil and global equity markets since mid-2014, Baffes et al. (2015) find that supply factors
were the dominant factor. Adverse demand shocks (that reduce oil and equity prices) peaked around end-2014, whereas favorable supply shocks kept
mounting until February 2015.
2Hamilton (2014) finds that two-fifths of the oil price decline in thesecond half of 2014 reflected new indications of weakness in the global
economy, while Baumeister and Kilian (2015) report that shocks to thedemand for oil inventories contributed to the recent oil price drop as well.
Badel and McGillicuddy (2015) argue that the decline in oil prices during
the second half of 2014 was largely driven by negative oil-specific demand
shocks—in anticipation of expected abundant oil supply.

G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5

chapter 1

BOX 1.2 (continued)

Figure B1.2.3 Financial market developments around oil price declines
The current episode has been associated with a significant appreciation of the U.S. dollar and relatively strong performance of U.S. and global
equity markets.
A. U.S. dollar

B. U.S. stock prices

Index = 1 in 0

Index = 1 in 0

1.2

1.6

1986Q2

1991Q1

1998Q1

2001Q4

2008Q4

2014Q4

1986Q2

1991Q1

1998Q1

2001Q4

2008Q4

2014Q4

-2

2

1.4

1.1

1.2
1.0

1.0

0.9
0.8

0.8
0.6
-8

-6

-4

-2

0
quarters

2

4

6

8

-8

-6

-4

0
quarters

468

Sources: World Bank and Federal Reserve Bank of St. Louis.
A. Nominal effective exchange rate of the U.S. dollar against a trade-weighted basket of major currencies. An increase denotes a nominal effective appreciation. Time “0” is the quarter of
the trough of a significant oil price decline episode (30 percent drop over a seven-month period, which is the shaded region); −8 corresponds to 8 quarters before the trough and 8 corresponds to 8 quarters after the trough.
B. U.S. equity market index in U.S. dollars.

adjustments in the short term, but could rapidly restore capacity as prices increase. This response could
contribute to more volatility in prices, around a lower
equilibrium level.
The increasing importance of unconventional oil production as an existing and prospective source of additional oil (Figure B1.2.4) has led to intensive debates
about the long-term role of OPEC as a cartel.
Looking back, efforts to manage world commodity
markets to achieve price objectives are not unique tothe oil market. Several commodity agreements, often
negotiated among producing and consuming nations
to stabilize prices, were put in place after World War II,
including wheat, sugar, tin, coffee, and olive oil (Swerling 1968). A renewed effort took place after the priceboom in the 1970s, with the agreements typicallybacked by the United Nations and extended to othercommodities, including cocoa and natural rubber(Gilbert 1996). These agreements had legal clauses regarding the tools to manage the corresponding markets, which were export restrictions and inventory
management. But over the long term, the price andtrade restrictions imposed by some of the agreements
on global market conditions either encouraged theemergence of competitor products (e.g., for tin) or theentry of new producers (e.g., for coffee).3 As a result, all
the agreements (except crude oil) eventually collapsed.
A key difference between OPEC, the only surviving
commodity organization seeking to actively manage
markets, and the earlier commodity agreements is that
OPEC does not have a legal clause on how to intervene
when market conditions warrant. Therefore, OPEC
can respond flexibly to changing circumstances.

3First negotiated in 1954, the International Tin Agreement (ITA) collapsed in 1985. Higher tin prices under the ITA encouraged new tin producers to enter the market and the development of a substitute product,
aluminum, which gained market share by capturing the growing demand
from the beverage can producers. In 1962, coffee-producing countries accounting for 90 percent of global coffee output and almost all developed
coffee-consuming countries signed the International Coffee Agreement(ICA) with the objective of stabilizing world coffee prices through mandatory export quotas. Elevated coffee prices encouraged the emergence of new
producers outside ICA, such as Vietnam, which by the early 2000s had
overtaken Colombia as the world’s second largest coffee producer after Brazil. The cartel was dismantled in 1989 (Baffes, Lewin, and Varangis 2005).

29

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BOX 1.2 (continued)
Figure B1.2.4 The new oil map
OPEC’s share of global oil supply has fallen, partly as a result of rising oil production from unconventional sources in the United States
and Canada, as well as biofuel production. These developments haveredefined the global oil map with important medium-term implications.
Oil sands(Canada)Existing
sourcesConventional(OPEC &
non-OPEC)

Biofuels(Global)Shale oil
(United States)

Crude oilproduction
Unconventional(mostly
non-OPEC)

Shale oil reserves(Argentina, China, Libya,
Russian Federation)Newsources

Arctic exploration(Canada, Greenland,
Norway, RussianFederation, United States)

Deep sea oil exploration(Brazil, Mexico,West Africa)

Coal liquefaction (China,
Indonesia, United States)
Source: World Bank.

OPEC began playing an important role following its decision to impose an embargo on oil exports in 1973, andwas also instrumental in tripling oil prices in 1978–79(OPEC 2015). Efficiency gains and new oil suppliers,
along with disagreements among various OPEC members (especially during the Iran-Iraq War and the first Gulf
War), reduced the cartel’s role for the next two decades.
OPEC intervened actively again following the Asian financial crisis—when oil prices dropped to less than $10/
barrel—by setting targets within price bands. OPEC’s decision to forgo price targeting and favor market share in
November 2014 marked a new step for the cartel.
Conclusion
The plunge in the price of oil in 2014–15 has left alarge footprint on the global economy and oil markets, but has not yet translated into stronger global
growth. Evidence from past episodes shows thatsharply declining oil prices were generally followed byquite diverse global growth outcomes, pointing toother important forces either mitigating or reinforcing the impact of declining oil prices on activity. Supply factors appear to have played a dominant role in
the recent plunge in oil prices, which bodes well for
its eventual impact on the global economy. However,uncertainty remains and positive effects could be mitigated by crisis legacies or weakening long-term
growth prospects in some oil-importing countries.
Looking ahead, the growing importance of unconventional oil production and technological innovations could lead to lower oil prices with substantial
volatility around a new equilibrium level.

ing sector confidence softened in the first quarter of2015 and industrial production growth slowed as
terms of trade deteriorated or domestic production
struggled with energy bottlenecks (Brazil, Nigeria,
South Africa). Policy uncertainty has weighed oninvestment in some countries (Bangladesh, Turkey,
Nigeria). Elsewhere, fiscal restraint, tight monetary
policy, or macroprudential measures are contributing to the slowdown in activity (East Asia).
Growth forecasts have been revised downward for2015 (Figure 1.15). Developing country growth is
now expected to slow to 4.4 percent in 2015, before
recovering somewhat by 2017, to 5.4 percent.
Commodity-exporting countries, in particular, arestruggling to adjust to low commodity prices. They

account for about one-third of developing country
GDP. Their slowdowns dampen activity in othercountries with close trade, finance, and remittancelinks. As a result, the downward revisions in theforecast are concentrated in the regions with largecommodity exporters (the eastern part of Europe
and Central Asia, Latin America and the Caribbean,
and Sub-Saharan Africa). Commodity-importing
countries face other challenges. Turkey, South Africa, and other countries that rely heavily on foreign capital inflows could be negatively affected byrising borrowing costs as the U.S. Federal Reserve
raises policy rates. In addition, a structural growth
slowdown has been underway in many developing
countries as the growth in working age populations,productivity, and investment has eased. Partly as a

G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5

B. Oil price volatility over timeJan-15Jan-12Jan-09

Jan-06

Jan-03Jan-00Jan-97

Nov-14Jul-14

C. Crude oil and natural gas prices

2008
financial crisis

First Gulf War

Jan-940

OPEC abandons
price targeting

Jan-9140

Jan-851

May-1560

Mar-152

Jan-1580

Sep-143

Percent
8
7
6
5
4
3
2
1
0

Jan-88Percent
4100

D. Commodity prices

Percent

Manufacture

PalmoilSilverLead
Tin
CopperRubber (Malaysia)
Cocoa
Soybean oil
Coffee (Arabica)
Soybean oil
RiceGold
NickelIron oilSoybeanZinc
Crude oil
Coal
Maize
Wheat
BananaTobacco
Sugar
Tea
CottonAluminum
Natural gas

Jan-15

Jul-14Jan-14Jul-13

F. Oil price elasticities

Jan-13

E. Share of energy in production, 2007

Jul-12

Cumulative change in percent of 2001Q1, real 2010 US$
600
2011Q1-2015Q1
500
2001Q1-2011Q1
400
Cumulative 2001-2015Q1
300
200
100
0
-100
-200
-300
-400
-500

Jan-12

US$ per barrel
Index, 2010=100
130
140
120
130
110
120
100
110
90
80
100
70
90
60
Crude oil80
50
Natural gas (RHS)
40
70
Jul-11

Europe and Central Asia. After slowing to 2.4
percent in 2014, regional growth is expected to
weaken further in 2015, to 1.8 percent, before
picking up in 2016–17. In the eastern part of theregion (Central Asia, Eastern Europe, and South
Caucasus), growth slowed particularly sharply,
reflecting recessions in Russia and Ukraine, anddownturns in oil-exporting economies (Azerbaijan, Kazakhstan) partly cushioned by fiscal
and reserve buffers. These regional headwinds
had significant negative spillovers to the region’s many oil-importing economies throughtrade (Armenia, Belarus, Georgia, Moldova),
and remittances (Armenia, Georgia, Kyrgyz
Republic, Moldova, Tajikistan), which dropped
sharply from the fourth quarter of 2014. This
more than offset the benefits of low oil prices,
caused depreciation and rising inflation, andcompelled a number of central banks to raiseinterest rates since mid-2014 (Armenia, Georgia, Kyrgyz Republic, Moldova, Tajikistan). In
contrast, growth accelerated modestly in thewestern part of the region led by Hungary, theCzech Republic, Poland, Slovakia and Slovenia,
supported by strengthening Euro Area activity.
The nascent recoveries in Bosnia & Herzegovina
and Serbia have been disrupted by heavy floods.
Activity continues to be held back by stillstretched balance sheets (Bulgaria, Serbia and,to a lesser extent, Romania), and high unem-

A. Crude oil and volatility
US$ per barrel
Brent price120
Volatility (RHS)

Jan-11•

East Asia and Pacific. Growth is expected toease to 6.7 percent in 2015 and to remain flat
thereafter, reflecting a continued slowdown in
China that is only partly offset by a pickup in
the rest of the region. Indonesia and Malaysia
face pressures from lower global prices of oil,gas, coal, palm oil, and rubber and softer external demand, particularly from China. Lower
energy prices will dampen oil and gas production, but should support the large non-oil
sectors in both economies. The effects of fiscal restraint (Malaysia, Vietnam), and tighter
macroprudential policies (China, Malaysia,
Thailand), are expected to be largely offset bya gradual recovery of investment and manufacturing exports, in line with the global recovery.

On average, commodity price declines since 2011 have reversed about one-third of
price increases during the 2000s. Although oil prices appear to have found a floor,
their volatility has risen. Low oil prices also dampen non-oil commodity prices, especially those of natural gas (with contracts typically tied to oil prices), and fertilizers andfood (with oil-intensive production).

Jul-10•FIGURE 1.13 Oil price volatility and non-oil commodity
pricesJan-10result of reforms to raise productivity, South Asia,
and East Asia and the Pacific should continue togrow quite rapidly, although at a somewhat slower
rate than in previous years (Chapter 2).

31

chapter 1

Elasticity

Agriculture

CottonWorld
High-income countries
Developing countries
Sub-Saharan Africa
United States
CanadaEU-12
China
Brazil
India
TurkeyPalm oil
Rice
Wheat
Soybeans
Maize
0

5

10

15

20

0

0.2

0.4

0.6

Source: World Bank staff calculations based on the Global Trade Analysis Project database; World Bank; Baffes
and Etienne 2014.
A. Volatility is the standard deviation of the oil price changes and is presented as a 30-day trailing window.
B. Values are 30-day rolling standard deviation of daily oil price changes in percent.
F. Elasticity estimates are based on a reduced-form, seemingly-unrelated regression estimation using annual
data for 1960-2013. According to Baffes and Etienne (2014), crude oil is the most important driver to food prices
among all sectoral and macroeconomic fundamentals. An average elasticity of 0.25 implies that the 200 percent
increase in energy costs during the past decade could explain more than half of the food price increases.

ployment (particularly in the Western Balkans).
Growth in Turkey has slowed, partly reflecting
policy uncertainty, while lower oil prices havehelped narrow the current account deficit.
•

Latin America and the Caribbean. Growth in
the region will decline to 0.4 percent in 2015,
as South America struggles with domestic

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FIGURE 1.14 Global trade
Global trade growth continues to be modest, with a gradual shift towards U.S. importdemand. Trade-intensive capital equipment accounts for a sizeable share of U.S.
imports.
A. Global GDP and import growth

B. High-income countries’
contribution to global imports

Percent
16

Percent
100
90
80
70
60
50
40
30
20
10
0
1980s

World import growth
World GDP growth (RHS)

Percent
8

12

6

8

4

4

2

0

0

-4

-2

-8

-4

-12

2000

2004

2008

2012

2016

C. Source of world import demand

Index = 100 in 2000
120
United States
Euro Area
115
Emerging markets
110-6

Middle East and North Africa. Growth is expected to remain flat at 2.2 percent in 2015.
The expected growth rebound to 3.7 percent in2016-17 is predicated on improving external
demand, strengthening confidence that boosts
investments in some oil-importing countries(Arab Republic of Egypt, Jordan), and an assumed gradual stabilization of security. The
plunge in oil prices is a particular challenge foroil-exporting countries, most of which have severe security challenges (Iraq, Libya, Republicof Yemen) or have limited buffers (Iran, Iraq).
For oil-importing countries, the potential positive effects of lower oil prices are partially offset
by spillover effects from more fragile countries
in the region, including through lower remittances and security risks. Long standing structural constraints present a chronic obstacle tofaster growth in the region. Measures to address these include policies to narrow the gap
between private and public employment, level
the playing field between firms, and improving
education (World Bank 2015a).

•South Asia. Growth is expected to firm to 7.1
percent in 2015 and 7.4 percent in 2016–17,
buoyed by a reinvigorated reform agenda in India and supported by strengthening demand in
high-income countries. The decline in global oil
prices has benefited the region, improving fiscal
and current account balances, enabling subsidy
reforms to proceed in India, and facilitating aneasing of monetary policy (India, Pakistan, Sri
Lanka). In India, gradual implementation ofreforms has supported business and investor
confidence and encouraged capital inflows.
However, credit growth remains modest, reflecting weak bank balance sheets (mainlyin public sector banks). This is holding backcredit-financed investment.

•

Sub-Saharan Africa. Low oil prices haveconsiderably reduced growth in commodityexporting countries (Angola, Nigeria), wheresoftening oil sectors have also slowed activity
in non-oil sectors. Although South Africa is expected to be one of the main beneficiaries of
low oil prices, energy shortages, weak investor
sentiment amid policy uncertainty, and by the

50% threshold1990s 2000-08 2011-14 2015-17

D. Merchandise imports by major
economies and world, by product,
2013
World

China

100

UnitedStates

95

EU27

90

0

85
2012

•

Japan

105

80
2010

the United States lifts activity in developing
North and Central America, along with the
Caribbean.

2014

Agricultural goods
Textiles, clothing, footwear
Fuels
Raw materials
Machinery and transport

50
Food products
Minerals
Chemicals
Metals
Other

100
Percent

Sources: World Bank; CPB Netherlands Bureau for Economic Policy Analysis; UN Comtrade database.
A. Grey area indicates forecasts.
C. The figure shows the ratio of manufacturing imports to global manufacturing exports; the trend line (solid line)
is a fourth-order polynomial trend function.

macro- and microeconomic challenges, weak
investor confidence, and low commodity prices.
In Brazil, activity softened in the first quarter of2015 as confidence fell further, mainly due to a
corruption scandal and increases in electricity
prices following a drought, while infrastructure
bottlenecks and pro-cyclical policies continue
to weigh on growth. Sentiment has remainedfragile and activity slowed in Mexico as a result of sharply lower oil prices, which could
reduce the short-term growth dividends fromenergy sector reforms, a weak first quarter in
the United States, and modest wage short-term
growth. However, the economy is expected tostrengthen for the remainder of 2015 on rising exports to the United States. For 2016–17,
growth in the region is expected to pick up
to 2.4 percent, on average, as South America
emerges from recession and robust growth inG L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5

Lower commodity prices: widespreadadjustments
The impact of the large real income shift from oilexporting to oil-importing countries caused by the
steep oil price drop in the second half of 2014 has
been amplified or mitigated (depending on country
characteristics) by declines in most other commodity prices. Commodity price weakness has had significant and immediate adverse effects on activity,and on fiscal and external positions in commodityexporting countries. In commodity-importing countries, lower oil and food prices have mainly resulted
in reduced vulnerabilities—lower inflation and narrower current account and fiscal deficits—whereas

Developing country growth forecasts were revised downward again, as sharply lower
oil prices reduced activity in oil exporters, while the support to activity in oil-importers
appears slower to materialize. Growth in low-income countries continues to be robust
as a result of strong public investment, good harvests, and, among oil-importing
countries, improving terms of trade.

Percent
14
12

LIC

UgandaTanzania,
United Rep.

Comoros

Kenya

Bangladesh

TurkeySouth Africa

Nigeria

RussianFederation

MexicoMalaysia

India

8
7
6
5
4
3
2
1
0

C. Low-income countries:
Growth

D. Fraction of developing countries withslower growth than 1990-2008 average
Percent
100
80

10

60

8
6

40

4

Source: World Bank.
C. The shaded area indicates the interquartile range. Red line indicates GDP-weighted average.
D. For each year, the fraction of developing countries in which growth is slower than its historical average for1990-2008. For 2015-17, the average of three years is shown.

benefits for activity have been largely offset by a wide
range of country-specific headwinds (see discussion
in previous section).
For most commodity exporters, the commodity
price declines since 2011, on average, reversed abouta third of their increases during 2002-11. The negative terms of trade shock in 2014–2015 is particularly acute for oil-exporting countries (Azerbaijan,
Colombia, Kazakhstan, Nigeria, Russia, Venezuela,
and to a lesser extent, Mexico) and natural gasexporting countries (Bolivia, Malaysia, Figure 1.16).
Countries reliant on export revenues from metal andother non-energy commodities (Argentina, Indonesia, Peru, South Africa, Zambia) also face challenges.
In contrast, Brazil’s large internal market and limited
trade openness dampen some of the impact of theterms of trade deterioration. Median growth among
commodity-exporting countries could fall 2 percentage points per annum as they transition from peak to

2015-17

2014

2013

2012

2011

2010

2009

2008

2007

2006

0

2005

0

2004

20

2
-2

June 2013
June 2014
June 2015

Percent

June 2013
June 2014
June 2015

Indonesia

BrazilPercent
10
8
6
4
2
0
-2
-4

B. Low-income countries: Growthforecasts for 2015

RwandaA. Emerging markets: Growthforecasts for 2015

China

Growth in low-income countries, on average, is expected to remain robust in 2015 at 6.2 percent, before rising to 6.6 percent, on average, in 2016–17.
In the short-run, it should be supported by infrastructure (Rwanda, Ethiopia) and mining (DRC,
Mozambique, Tanzania) investment (partly financed by China), agricultural growth (Ethiopia),and consumer spending (Bangladesh, Uganda).
However, continued weaknesses in the prices ofsome low-income countries’ main exports (especially base metals) will limit the benefits of the oil
price decline (Special Feature 2). In several fragile
countries (Madagascar, Mali), growth should pickup as investment rises on the back of increased political stability. Political uncertainty in Bangladesh andthe natural disaster in Nepal will dampen growth in2015. However, generally solid remittance inflows
should help to support consumption and, in Nepal, activity should rebound from a sharp decline
as reconstruction efforts get underway. In Guinea,
Liberia, and Sierra Leone, the Ebola epidemic willcontinue to constrain economic activity.

FIGURE 1.15 Developing and emerging-market growth

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017

anticipated tightening of monetary and fiscal
policies continue to hold back activity. Growthin the region is forecast to slow to 4.2 percent, adownward revision of 0.4 percentage point relative to the January 2015 forecasts. This mainlyreflects a reassessment of prospects in Nigeria
and Angola, following the sharp drop in oil
prices, and in South Africa, because of ongoingdifficulties in electricity supply. For 2016–17,
growth is expected to be only marginally higher
as these challenges partially offset higher trading partner growth and the continued expansion in the region’s low-income countries.

33

chapter 1

34chapter 1

trough in the commodity price cycle (Spatafora et al.
2009), but real exchange rate depreciation and theuse of fiscal space could cushion this impact.
The biggest beneficiaries from the commodity priceslump are likely to be large energy-importing countries in Asia and Eastern Europe, most notably China,
India, and Turkey. The recent fall in oil prices is expected to support consumption by raising real incomes, easing inflation, and by improving current account balances and reducing external vulnerabilities.
Even where, as a result of subsidy reform, domestic
fuel prices do not decline in line with global energy
prices (Arab Republic of Egypt), fiscal and current
account deficits are expected to narrow.
Exchange rate depreciations:competitiveness gains but some financial
stability risks
Divergent monetary policies among major economies and the prospect of higher interest rates in the
United States, combined with sharply lower oil prices,
have put pressures on emerging market currencies
and caused volatility. For many developing countries,
depreciation against the U.S. dollar since the start of
the year has been significantly more pronounced thanduring the “taper tantrum” in May/June 2013 (Figure1.17). The depreciation was particularly severe in oilexporters as their growth prospects dimmed and their
credit ratings were downgraded. Some countries withmanaged exchange rates have intervened in exchange
markets to stem depreciation (Algeria, Ghana, Nigeria until February 2014), and Morocco has changed
the composition of the currency basket underlying its
currency peg away from the euro.
Exchange rate depreciations—in trade-weighted
terms—may spur exports and help mitigate thedomestic impact of negative terms of trade shocks.
However, weakening currencies against the U.S.
dollar could also strain balance sheets with sizeable
amounts of foreign currency debt and hinder investment, after several years of rapid credit growth andprivate debt build-up. For many countries, export
markets are considerably more diversified than thecurrency composition of their external liabilities. As
a result, the benefits of improved competitivenessmay be outweighed by the risks from balance sheet
strains associated with sharp depreciations.
While most developing country currencies depreciated against the U.S. dollar, many were broadly sta-

G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5

ble or appreciated in trade-weighted terms. Oil-importing emerging market currencies have typicallydepreciated in trade-weighted terms by less than 3
percent, or appreciated, since mid-2014. After taking into account inflation, most have appreciated inreal, trade-weighted terms. Competitiveness gains
have thus been modest, if any. However, countries
heavily reliant on exports of services such as information technology and communications (India,
Turkey) could benefit even from modest competitiveness gains since these services tend to respond
more strongly to real depreciation than manufacturing (Eichengreen and Gupta 2013; Figure 1.18).
Sharp trade-weighted depreciations in some oilexporting countries (Colombia, Russia) and Brazil
brought real effective exchange rates closer to theirlong-term averages. Commodity exporters with
manufacturing industries that are already well developed, diversified, and open to trade (Malaysia,
Mexico) could stand to benefit from importantcompetitiveness gains as a result of depreciations.6
In contrast, in Brazil, export competitiveness continues to be held back by structural bottlenecks,
including weak infrastructure, limited openness
to trade, and a small number of exporting firms(Canuto, Fleischhaker and Schellekens 2015).
Inflation: lower oil prices versus depreciation
In many oil-importing developing countries, plunging oil prices have reduced inflation below inflation
targets, increasing the number of countries with low
or even negative inflation (Figure 1.19). The decline in inflation has been stronger where oil had alarger weight in consumption baskets, where depreciations were modest, and where fuel subsidies andother price regulations were limited. However, core
inflation has remained high in several oil-importing
6The less trade-weighted depreciations are passed through to domestic prices, the more they will help competitiveness. However,
emerging markets, and commodity-exporting countries especially, generally experience a larger exchange rate pass-through to export prices
than advanced countries, possibly because of limited pricing power oninternational markets (Campa and Goldberg 2005). The literature is
not unanimous on the larger exchange rate pass-through in emerging
markets (e.g., Ca-Zorzi, Hahn, and Sanchez 2007), perhaps because thepass-through has fallen over time (Mihaljek and Klau 2008). However,it appears more pronounced among commodity exporters like Indonesia, South Africa, Mexico and lower in India, Russia, Turkey, Hungary,or the Philippines (Bussière et al. 2014).

G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5

In contrast, in some oil-exporting countries (Colombia, Nigeria, Russia) or countries struggling withweakening investor confidence (Brazil), sharply depreciating currencies, increased administered prices,or domestic demand pressures contributed to rising
inflation. This pass-through of recent depreciation
into inflation is expected to be short-lived in countries with credible central banks and other institutional features that help anchor inflation expectations (Taylor 2000; Gagnon and Ihrig 2004).
Private debt buildup: weighing on domestic
demandSince 2009, record-low interest rates and access toabundant global liquidity have contributed to sizeable private debt buildups in a growing number ofcountries (Figure 1.20). By 2013, credit to the nonbank corporate sector in large emerging markets
had exceeded 100 percent of GDP, compared with
about 60 percent of GDP pre-crisis. The private
debt build-up was particularly large in the nonfinancial corporate and household sectors of East
Asia and Latin America. Some of the debt build-up
was financed externally. As a result, private external
debt is sizeable in several developing countries, especially in Europe and Central Asia.
Since 2014, credit growth has slowed sharply inmany emerging market economies, weighing on
domestic demand. In some cases, monetary policy
tightened to adjust to deteriorating terms of trade2012-142015

2016-17

Cumulated

Venezuela, RB

4

Indonesia

Change in trade balance, percent of GDP

2
0
-2
-4
-6

Nigeria

Russian Federation

Peru

Colombia

Argentina

MexicoZambiaMalaysiaBrazilSouth Africa

RomaniaEgypt, Arab Rep.

TurkeyPakistan

Hungary-8-10Philippines

In some countries, lower oil prices have magnified
downward pressures on inflation from anemic demand or overcapacity. This is especially the case inEastern Europe and parts of East Asia. For example,
inflation has been near-zero or below-target sincewell before the oil price plunge in Hungary andBulgaria. In China, persistent deflation in producer
prices suggests a build-up of overcapacity and lossof corporate pricing power, adding to balance sheetpressures of highly indebted corporates.

Terms of trade deterioration, following a sharp reversal of earlier commodity
price gains, is causing slowdowns in commodity-exporting countries.

India

This disinflationary impact of lower oil prices shouldbe transitory, fading during the second half of 2015
and in 2016. On average, a 45 percent oil price decline could be reflected in a decline in global inflationof 0.7–1.2 percent in the first year, with the effectdissipating rapidly thereafter (Baffes et al. 2015).

FIGURE 1.16 Terms of trade effect on GDP

China

countries (Arab Republic of Egypt, Brazil, Indonesia, Nicaragua, South Africa, Tunisia, Turkey).

chapter 1

Source: World Bank.
Note: Impact on trade balance (% of GDP) of terms of trade changes associated with commodity
price movements.

(Azerbaijan, Columbia, Indonesia, and Kazakhstan); in others, macroprudential regulations weretightened to contain financial stability risks after
several years of rapid debt buildup (Malaysia, Thailand) or domestic demand pressures (Brazil). In
Russia, economic sanctions and higher borrowing
costs contributed to a particularly sharp slowdown
in credit growth.
A protracted unwinding of earlier credit expansion
could severely dent growth. Past episodes of rapid
debt buildup were typically followed by several years
of weaker growth. For example, after episodes of debt
build-ups in excess of 30 percent of GDP over any
five year period, median growth slowed in the subsequent two years by more than 2 percentage points.

Risks to the Outlook
Risks remain tilted to the downside, although somewhat less so than in January. Some pre-existing risks,
especially of deflation in the Euro Area, have recededsomewhat but new financial stability and growth risks
have emerged. Deteriorating prospects in some developing economies, especially commodity-exporting ones,
are eroding their resilience. This, together with the possibility of volatility around U.S. monetary policy normalization, is increasing the risk of financial stress. In
addition, the broad-based dollar appreciation could
slow the U.S. economy more than expected. If thesedownside risks were to materialize at the same time,the disruptions to developing country financial markets

35

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FIGURE 1.17 Developing country currencies
Sharp depreciations against the U.S. dollar in several developing countries raise balance sheet risks. Depreciations were largest in oil exporters, the Euro Area’s close
trading partners, and countries with external vulnerabilities. In some countries, they werestemmed by reserve drawdowns or interest rate hikes. In trade-weighted terms, however, depreciations were modest, suggesting limited competitiveness gains.
A. Major emerging-market currencies

B. Depreciation since mid-2014 anddeviation of the real effective
exchange rate from the long-term
average

Percent change
20
0
-20
-40
-60
-100

RUS
COL
BRA
NGA
ROM
HUN
TUR
MEX
MYS
ZAF
IDN
IND
PHL
CHN

-80

20

Reversal ofundervaluation

NEER change, June 2014January 201540

U.S. dollars per local currency unit, 2014
Nominal effective exchange rate, 2014
U.S. dollars per local currency unit, 2013

10

IND
MAR

0

CHN
THA
EGY
PER

TUR
HUN

-10
-20
Increased
undervaluation

ECU
PAK

IDN
CHL
BGR
MYS
ROM

NGA

MEX
COL

-30
-40

Increased
overvaluation

BRA

RUS

Reversal of
overvaluation

80
100
120
140
160
180
REER deviation in June 2014 from long-term average

C. Real effective exchange rate leveland exposure to foreign investors

D. Foreign currency exposure andforeign currency vulnerability
indicator

REER deviation from 10-year average, percent
20
Thailand

Percent
120

10

80

-10

Romania
India-20

Malaysia

Indonesia
TurkeyBrazilColombia
Hungary60
MexicoSouth Africa-30 Russia-40 Foreign holdings of local bonds/FX reserves, percent
0
20
40
60
80

40
20
0

Thailand
Colombia
India
South Africa
Pakistan
Philippines
Indonesia
Nigeria
RussiaZambiaGhana
TurkeyKazakhstan
Jamaica
LebanonCambodia0

PeruForeign currency exposure ratio
Foreign currency vulnerability indicator100

Sources: World Bank; Moody’s Statistical Report; JP Morgan; Haver Analytics; Bloomberg.
A. A decrease in the exchange rate against the U.S. dollar and a decrease in the nominal effective exchange
rate denote a depreciation. Values for 2013 refer to May 2013 to January 2014; 2014 refers to June 2014 to
February 2015.
B. A decline in the nominal effective exchange rate (NEER) or real effective exchange rate (REER) denotes a
depreciation.
D. Foreign currency exposure is measured as the ratio of total foreign currency deposits in the domestic banking
system/total deposits in the domestic banking system. The foreign currency vulnerability indicator is defined as
total foreign currency deposits in the domestic banking system/(official foreign exchange reserves + foreign
assets of domestic banks).

and economies could be substantial. On the upside, thebenefits from lower oil and non-oil commodity prices
could prove stronger than currently anticipated.
Eroding credit worthiness and financial
market disruptions
The steady improvement in credit ratings acrossemerging markets during the early 2000s, mainly
for commodity-exporting countries, started reversing after 2012. Emerging market credit worthinessis eroding, especially in oil-exporting countries, atthe same time as the approaching first rate increaseby the U.S. Federal Reserve nears. Rising concerns
about widespread emerging market credit rating
downgrades or bouts of financial market volatility(such as during the “taper tantrum” in May/June2013) would increase the risk of financial market
disruptions in developing countries with high vulnerabilities or weak growth prospects.7
Although the U.S. Federal Reserve has adjusted its
guidance to prepare markets for monetary policy
tightening, long-term interest rates in the UnitedStates remain low. A significant gap between thepolicy rate expectations of market participants andthose of members of the Federal Reserve Open
Market Committee exists over the medium-term,
exceeding 100 basis points for 2017 (Figure 1.21).
The presence of such a wedge increases the risk, especially around policy announcement dates, of a
sharp upward adjustment of market expectations
that is accompanied by a sudden rise in long-term
interest rates and risk premia (Special Feature 1).
Capital flows to developing countries respondstrongly to risk appetite, and to interest rate movements in core reserve currencies, most prominently
the U.S. dollar (Bruno and Shin 2013; Forbes andWarnock 2012; Fratzscher, 2011; World Bank
2014b). An abrupt market reaction to a change in
Fed policy could result in sudden stops in capital
inflows to developing countries and a reassessmentof credit risk in those economies.
Tightening financial conditions, a general reassessment of credit and liquidity risks, and broad-based
U.S. dollar appreciation could amplify deteriorating prospects and rising vulnerabilities, especially in
oil-exporting countries. Weak commodity prices—compounded by weak global trade, prospects fortightening global financial conditions, deteriorating public finances, and political concerns—havecontributed to a number of ratings downgrades indeveloping countries since 2013 (Brazil, Nigeria,
Russia, South Africa, Ukraine, Venezuela). By comparison, upgrades (Mexico, the Philippines) havebeen rare.
Rising concerns about credit downgrades in a number of larger emerging market economies could
7Oil-importing developing countries (Indonesia, South Africa, Turkey) most affected by the turmoil of May/June 2013 could be less susceptible to turmoil in future episodes as their current account and fiscal
deficits and inflation rates have declined.

G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5

A 1 percentage point decline in U.S. GDP over two
years would have important repercussions for global

Nigeria

India

South Africa

BrazilTurkeyRussianFederation

MexicoIndonesia

China

Export growth, in percentage points, associatedwith a 10% real exchange rate depreciation
2.5
2.0

1.0
0.5
0.0

Modernservices

Herfindahl-Hirschman product concentration index
0.20

0.15
0.10

TurkeyRussiaMexico0.00

Indonesia

0.05
India

TurkeyRussiaMexicoHerfindahl-Hirschman market concentration index
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0

Traditional
services

F. Export product concentration
among major emerging markets,
2013

China

E. Export market concentration
among major emerging markets,
2013

Merchandise

BrazilBrazil

1.5

Nigeria

Indonesia

TurkeyRussian Federation

India

China

Malaysia

TurkeyHungary

BrazilPhilippines

Malaysia

MexicoThailandPortugal

South Africa

Indonesia

Venezuela

China

D. Real exchange rate depreciationand export growth, by sector

Sum of export and import as percent of GDP
70
60
50
40
30
20
10
0

Indonesia

The impact on U.S. GDP of a sustained U.S. dollar appreciation could be sizeable. Based on elasticities derived from the Federal Reserve Board staff’s
large-scale macroeconometric model (FRB/US), a
10 percent real effective appreciation of the U.S.
dollar (back to its 2002 peak) could reduce U.S.
GDP by as much as ¾ of a percentage point below
the baseline after two years.

C. Trade openness, 2014

India

However, there is a risk that the dollar appreciation
is more than warranted by U.S. growth prospects,
or that it does not invigorate activity in U.S. trading
partners as expected. In this case, it could choke theglobal recovery that is still quite fragile.

B. S
 ize of manufacturing sector,
2013
Manufacturing, value added, percent of GDP
35
30
25
20
15
10
5
0

Estimates
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
-0.2

China

The recovery in the United States since mid-2014
has supported global growth, but has been accompanied by a significant appreciation of the U.S. dollar (Figure 1.23). To the extent that the broad-based
dollar appreciation reflects robust growth prospects
in the United States compared with its trading partners, the dollar appreciation benefits trading partners and helps reignite a robust global recovery.

A. Exchange rate pass-through toexport prices

MexicoExcessive U.S. dollar appreciation

Exchange rate pass-through into domestic prices and costs varies widely acrosscountries. It tends to be larger in developing countries with more concentrated export
structures, in particular natural resource exports. Exports of modern services in communications and information technology appear to respond more strongly than in
manufacturing.

South Africa

A reassessment of credit and liquidity risk may be
accompanied by capital outflows, reserve losses,
sharp depreciations, and rising borrowing costs.
These could strain balance sheets of corporates and,by raising nonperforming loans, those of banks.
Although banking systems in most oil-exporting
countries have been considered resilient to oil pricechanges in stress tests (Baffes et al. 2015), financial
strains could eventually emerge if low oil prices coincide with tightening financial conditions, weakgrowth, and currency depreciation.

FIGURE 1.18 Exchange rates and competitiveness inmajor emerging economies

Brazilcause a general reappraisal of risk assets that spreads
to other emerging and frontier markets. Several large
emerging markets already struggle to maintain their
credit ratings. Credit rating downgrades are typicallyanticipated in credit default swap (CDS) markets,
which blunts the direct impact of the downgrade announcement (Hull, Predescu and White 2004; Norden and Weber 2004). In some developing countries, sovereign CDS spreads have already increased
beyond those of similarly rated sovereigns (Brazil,
Kazakhstan, Turkey, South Africa; Figure 1.22). Thatsaid, the risk remains that ratings downgrades trigger
a repricing, even if partially anticipated.

37

chapter 1

Sources: Bussiere et al. (2014); World Bank; UN Comtrade database; Eichengreen and Gupta (2013).
D. The figure reports the results of a model using annual data for 1980–2009 for 66 developed and developing
countries. Traditional services include trade and transport, tourism, financial services, and insurance. Modern
services refers to communications, computer information, and other related services.
E. The Herfindahl-Hirschman index of market concentration is measured on a scale of 0 to 1, with a value close
to 1 (0) indicating that a country’s merchandise exports go to very few (many) markets.
F. The Herfindahl-Hirschman index of product concentration is measured on a scale of 0 to 1, with a value close
to 1 (0) indicating that a country’s merchandise exports are concentrated in very few (many) sectors.

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FIGURE 1.19 Inflation in developing countries
Lower oil prices have reduced inflation in many oil-importing developing countries,
allowing their central banks to cut policy rates to support activity. However, currency
depreciations in oil-exporting countries have raised inflation and compelled central
banks to raise policy rates.

A. M
 edian inflation in developing
countries

Year-on-year, percent
RussiaNigeria
Venezuela (RHS)

2015

2014

20

2013

2012

2011

2010

2009

Year-on-year, percent
16
Oil importers
14
Oil exporters
12
10
8
6
4
2
0
2008

B. Inflation in selected commodity
exporters

C. Inflation in oil-importing countries
Percent40

LatestPeak (2013/2014)
Inflation target

30
20

80

15

60

10

40

5

20

0
2011

0

2012

2013

2014

2015

D. Core inflation in oil-importing
countries
Percent
20

LatestPeak (2013/2014)
Inflation target

15

SSA

BrazilMexicoRussiaTurkey

India

China

Indonesia

Philippines

Brent oil priceSouth Africa

E. Change in retail gasoline prices
Percent change since June 30, 2014
20
10
0
-10
-20
-30
-40
-50
-60

RussiaNigeria

TurkeySouth Africa

Indonesia

MexicoMalaysia

SAR

EAP

CEE

0

China

5
Ethiopia
BurundiUgandaRwandaMalawi
SerbiaRomania
Hungary
Bulgaria
FYR Macedonia
Armenia
VietnamThailand
China
Tunisia
MoroccoJordanLebanonIndia
Pakistan
Sri Lanka
Afghanistan-10

EcuadorAngola10

100Year-on-year, percent

12

Stagnation in the Euro Area or JapanThe risk of a prolonged period of stagnation anddeflation in the Euro Area appears to have receded
as inflation expectations have risen following the
ECB’s quantitative easing program. However, whilequantitative easing may attenuate deflation risks,
underlying weaknesses and legacies from the global
financial and Euro Area crises have yet to be fully
resolved. Several months of negative inflation as aresult of falling oil prices could yet de-anchor inflation expectations. Economic and financial stress in
Greece presents a risk to the regional outlook, although the exposures of other parts of the Euro Area
have diminished since 2010 (Chapter 2).
While the probability of a slide into prolonged period of stagnation and deflation in the Euro Area
is declining, the impact for the rest of the world
could be more pronounced than that of Japan in
the 1990s.

F. Number of developing countries
with low or negative inflation
Number of countries
50
Below 1 percent
45
Below zero
40
35
30
25
20
15
10
5
0
2000
03
06
09

economic prospects. In particular, it could reduce
GDP in close trading partners in Latin America andthe Caribbean by up to one percentage point. Elsewhere, especially in economies that are less reliant onexports to the United States, the impact would besmaller but still negative. In addition to these tradeeffects, sustained dollar appreciation could weakensovereign, corporate, and household balance sheetswith significant stocks of foreign-currency denominated debt.

15

Source: World Bank; www.globalpetrolprices.com; Haver Analytics; Barclays.
A. Hydrocarbon exporters (as proxy for oil exporters) are Algeria, Angola, Argentina, Azerbaijan, Cameroon, Coted’Ivoire, Colombia, Chad, Ecuador, Gabon, Indonesia, Iran, Iraq, Kazakhstan, Libya, Malaysia, Mexico, Nigeria,
Papua New Guinea, South Africa, Sudan, Turkmenistan, Uzbekistan, Venezuela, Vietnam, and Yemen.
C. India’s inflation target is 4 percent by 2017. “Latest” indicates February 2015.
D. “Latest” indicates March 2015.
F. The latest observation is March 2015. Data for 120 developing countries (data for 89 available in March 2015).

•

Trade. The Euro Area accounts for more than
one-sixth of global GDP, and in excess of onequarter of global trade and cross-border banking system assets—much more than Japan’sshares in the 1990s (Figure 1.24). Developing
countries in Eastern Europe and North Africa
rely particularly heavily on the Euro Area as anexport market.

•

Bank lending. Euro Area banks are more internationalized in their lending than Japanesebanks, despite sharp cuts after the global financial crisis (World Bank 2015a, Dailami andAdams-Kane 2012). Should non-performing
loans increase in a low-growth environment
and erode European banks’ capital cushions,(despite improved capital buffers over the past
few years), they could become more reluctant
to fund lending abroad. In addition, changes
in Euro Area market sentiment could gener-

G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5

Private debt rose rapidly in several developing countries over the past five years
until the recent slowdown. Similar past debt buildups were followed by sharp growth
slowdowns. Household debt is particularly high in parts of East Asia, South Africa,and Poland; whereas corporate debt is particularly high in parts of Eastern Europe,
East Asia, and Brazil.

00Risks to oil prices themselves are tilted to the downside. Security risks could be resolved unexpectedly.
Alternatively, an international agreement with Iran
could be reached and Iran could ramp up oil production and exports faster than expected. Either event
would allow the release of additional oil supplies
into global markets. This could depress oil prices
further and would raise global activity. However, it
8A period of stagnation could be associated with a 4 percent decline
in Euro Area GDP and a 1 percent decline in global GDP, over five
years (IMF 2013b). In the highly open economies of Eastern Europe,
tight bank lending and trade links mean that a 1 percent decline in EuroArea real GDP could reduce real GDP by as much as 2.5 percent below
baseline over two years (Fadejeva, Feldkircher, and Reininger 2014).
Through remittance and trade ties, such a slowdown could reduce activity in North Africa by about 1 percent (IMF 2013c).

Percent of GDP
180
160
140
120
100
80
60
40
20
0

2013

2011

2010

Interquartile range

Median

-1
-2
-3
-4
-5
2015

2014

2013

Percent0

2012

US$, billions, four-month moving average
20
China Brazil Others
18
16
14
12
10
8
6
4
2
0
2011

F. Growth deceleration following
episodes of private debt buildups

2009

E. International bond issuances bydeveloping countries

South Africa

TurkeyThailand

PolandMexicoIndia

South Africa

TurkeyThailand

PolandMexico

India

China

0

Indonesia

20

2007
2013
2014

Indonesia

40

Hungary

Percent of GDP
80
2007
2013
60
2014

China

D. Corporate debt

2009

2008

2007

2006

2005

2014

30

C. Household debt

Oil price risks
Risks related to oil prices have become somewhat
more balanced since January, with predominantly
downside risks to oil prices themselves and some
upside risks to their impact. Thus far, the benefits
from lower oil prices for oil-importing countries havemainly been reflected in shrinking vulnerabilities
such as lower inflation and improved external andfiscal accounts. Activity in many oil-importing countries, in contrast, has disappointed. However, lower
oil prices could yet boost activity more than expected.

2013

10

2012

50

2011

20

2010

100

2009

Percent of GDP
Emerging countries, excluding China
40
China

2008

Percent of GDP
Advanced countries
200
Emerging countries, excluding China
China
150

2007

B. External debt

2006

A. Credit to the non-bank corporate
sectorHungary

A prolonged period of Euro Area stagnation—perhaps triggered by spillovers from renewed economic
and financial stress in its periphery—could raisesovereign and corporate risk premia, as investors
reassess growth prospects, and might force somecountries to tighten fiscal policy yet further. Persistently high unemployment and anemic investment
could undermine potential longer-term growth.
The effect could be even larger if, in addition, banklending supply contracts (Fadejeva, Feldkircher, andReininger 2014). Under such conditions, the macroeconomic effects of a regulatory tightening designed to ensure financial stability would have to becarefully monitored.8 A slowdown in the Euro Area
would affect countries in Eastern Europe and North
Africa most immediately and strongly, through tighttrade, remittance, and bank links. Financial markets
in Latin America, where Euro Area residents account for a sizeable share of financial asset holdings,
could be dampened by Euro Area deleveraging.

FIGURE 1.20 Private debt in developing countries

2010

ate negative international financial market
spillovers.

39

chapter 1

-6

>15

>30

>50

Sources: World Bank; Bank for International Settlements; World Development Indicators; Dealogic.
A. Emerging countries (excluding China) are Czech Republic, Hungary, India, Indonesia, Mexico, Poland,
Republic of Korea, South Africa, Thailand, and Turkey. Values are GDP-weighted averages.
B. Emerging countries (excluding China) are Argentina, Brazil, Colombia, Hungary, Indonesia, India, Malaysia,
Mexico, Nigeria, Philippines, South Africa, Thailand, Turkey, and Venezuela. Values are GDP-weighted averages.
C. For reasons of data availability, Q1 2008 data for South Africa instead of 2007 data.
D. Brazil’s data represents private debt for lack of available data breakdown. For reasons of data availability, Q1
2008 data for South Africa is used, instead of 2007 data.
F. The figure shows the range of growth decelerations in a sample of 16 developing countries after an increase incredit to the private sector in excess of 15, 30, and 50 percentage points of GDP over the preceding five years.

would also add to financial, fiscal, and external pressures in oil-exporting countries and could discourage exploration and development of new capacity
in developing countries. As activity and real income
growth slows in oil-exporting countries, their labormarkets and non-oil sectors may also soften. Espe-

40chapter 1

G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5

FIGURE 1.21 Risk of a rough awakening
The gap between U.S. policy interest rate expectations of financial markets over the
next few years and the views of the Federal Reserve Open Market Committee suggests
there may be a risk of an abrupt adjustment in the yield curve, and a reappraisal of credit
risk. This could lead to a sharp decline in capital flows to developing countries. Somedeveloping countries have more limited reserve buffers than others.
A. Market versus FOMC policy rate
expectations
Percent
5 Market expectations

FOMC-Max

FOMC-Median

FOMC-Low

Term spreads (basis point)
400
320

200
160

1

120
2015

2016

2017

Longer Run

C. R
 esponse of developing-country
capital inflows to one standard
deviation shock in global longterm interest rates

Aug. 18JacksonHolespeech(Draghi)Sep. 18"no-taper"
announcement

D. External debt and foreign
currency reserves

Percent of developing country GDP

Ratio of short-term external debt to foreign reserves,
percent

0.2

200

0

160

1997

2014

120

-0.2

80

-0.4

3

4

5 6
Quarters

7

8

9

10

E. M
 edian bid-ask spread on
emerging government bonds:
foreign currency
Basis points
30
Median 3-month moving average
25
20

India

Turkey2

Mexico1

Philippines

0Indonesia

40

-0.6
-0.8

May. 22Bernanke's
testimonyinCongress

Jan. 22ECB
ann.
of new
QE

Jan-13Mar-13May-13
Jul-13
Sep-13
Nov-13Jan-14Mar-14May-14Jul-14
Sep-14
Nov-14Jan-15Mar-15May-15240

2Dec. 18actual
taper

Jun.19FOMC
minutes280

30Oct. 2releaseof
TLTRO
details360

Thailand4

B. U.S. term spreads aroundmonetary policy announcements

F. Median bid-ask spread on emerging
government bonds: local currency
Basis points
Median25

3-month moving average

20

10

5

5

0

0

Jan-10May-10
Sep-10Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
Jan-13May-13
Sep-13Jan-14May-14
Sep-14Jan-15May-15

10

Jan-10May-10
Sep-10Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
Jan-13May-13
Sep-13Jan-14May-14
Sep-14Jan-15May-1515

15

Source: World Bank; Bloomberg; U.S. Federal Open Market Committee.
A. FOMC = Federal Open Market Committee.
B. Values are the spread between U.S. 30-year and 1-year government bonds.
C. Global long-term interest rates are a GDP weigthed average of 10-year government bond yields in G-4
countries (United States, Euro Area, Japan and the United Kingdom). Impulse response derived from a VAR
model linking aggregate capital inflows to developing countries (as a percent their combined GDP), to quarterly
real GDP growth in both developing and G-4 countries, G-4 short-term rates, G-4 long-term rates, and the VIX
index of implied volatility of S&P 500 options. Dotted lines indicate 90% confidence interval.
E. Median bid-ask spreads for 10-year government bonds of Brazil, Chile, Colombia, Hungary, Indonesia,
Korea, Lithuania, Philippines, Poland, Romania, Turkey, and South Africa.
F. Median bid-ask spreads for 10-year government bonds of Brazil, Chile, Colombia, Hungary, Indonesia, Korea,
Lithuania, Philippines, Poland, Romania, Turkey, and South Africa.

cially in Gulf Cooperation Countries, this could be
associated with lower remittance outflows and lessdemand for foreign construction services.
Conversely, although tensions between Ukraine andRussia may be easing, security risks are mounting
in the Middle East and North Africa (Chapter 2).
Escalating violence in oil-exporting countries could
disrupt oil production and transport facilities, andtrigger abrupt spikes in oil prices. While many oilexporting countries would benefit, the current narrowing of vulnerabilities in oil-importing countries
would come to a halt.
Deeper-than-expected slowdown in China
Although low-probability, China’s anticipated
gradual rebalancing of drivers of growth away frominvestment could still turn into a steep decline ininvestment. The reforms that are currently being
cautiously implemented could, unintendedly, disrupt growth. This could include a correction in realestate markets, contraction in real estate investment
and construction, and a rapid unwinding of financial vulnerabilities (Figure 1.25). As sectors operating with low capacity utilization wind down theiractivities—as part of the authorities’ reform plans—
they could slide into financial distress. This could
result in non-performing loans for financial intermediaries and other investors. Weakening of lending institutions’ capital bases could lead to a moregeneral tightening of credit.
In principle, the authorities have sufficient buffers
to recapitalize banks and corporates. General government debt is below 60 percent of GDP (including contingent liabilities from local government
financing vehicles). Given capital and financial sector controls, there are few low-risk savings vehicles
beyond deposits in the predominantly state-ownedbanking system. This facilitates intervention to stabilize deposits in the event of a loss of confidence.
Capital controls limit large outflows abroad.
However, to avoid the recognition of losses and theneed for recapitalization, financial intermediaries
may be inclined to roll over nonperforming loans
to ailing firms. This could constrain lending to productive firms and could usher in a prolonged period of stagnation, as in Japan in the mid-1990s.99The drop in asset prices in Japan in 1989-91 severely weakened

the balance sheets of heavily indebted households, lending institutions,G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5

Quantitative easing will support activity and reduce deflation concerns in the Euro Area, but alasting recovery needs to be secured by appropriate
and non-financial corporates (Koo 2011). As banks faced mounting
impaired loans, lending to sound companies contracted—partly the
result of rolling over loans to weak companies (Caballero, Hoshi and
Kashyap 2006). Investment and consumption growth declined sharply
and persistently.

C.Average sovereign credit ratingand emerging market currency
index
Credit rating
BBB-

Average EM sovereign rating
EM currency index (RHS)

Index
120

100

BB

90
80
Jan-15B+
Jan-13Jan-15Jan-13Jan-11

Jan-05

D. Credit default risk and sovereign
credit ratings

110

Jan-11B+

Jan-01

E. Europe Emerging
and Africa markets total

70

Current 5-year sovereign CDS spreads (basis points)

Emerging
Asia

Jan-03BB-

Jan-09

BB

Index

1000
900
800
700
600
500
400
300
Net commodity exporters
200
Net commodity importers
100
Commodity price, S&P (RHS) 0
Jan-07BB+

Up Down Up Down Up Down Up Down
Latin
America

B. Average sovereign credit ratings
Average sovereign rating
in developing countries
BBB-

Jan-09

Monetary policy in the United States is expected to
begin to tighten in the second half of 2015 for the
first time since the 2008 financial crisis, provided
activity continues to be robust. This may unwind
pockets of excessive risk-taking in domestic credit
markets (such as high-yield bond markets and realestate investment vehicles) that may have built up
amidst abundant liquidity and exceptionally low interest rates. Fiscal policy has eased to a broadly neutral stance in 2014–15, having weighed on activity inprevious years. A comprehensive long-term plan toensure fiscal sustainability is needed, covering healthcare cost containment, tax reform, improved qualityof public spending, and adequate infrastructure investment. Although important health care reforms
were implemented in 2013–14 to help reduce costsin government health care provision and increaserisk pooling elsewhere, greater efficiency gains areneeded to ensure long-term sustainability. The tax
system needs to be streamlined, the persistence oflong-term unemployment reduced, and the education system made more inclusive (OECD 2015a).

Number of rating actions
50
45
40
35
30
25
20
15
10
5
0

Jan-07

Monetary policies are expected to remain highly accommodative, except in the United States where thefirst policy rate increase is currently projected to takeplace later in 2015. Fiscal consolidation is expected toease across major economies, but several have yet to put
in place plans to secure long-term fiscal sustainability.
Structural reforms are underway in Japan and China,
but need to be invigorated in the Euro Area and theUnited States.

A. Number of sovereign credit rating
actions, 2014–15

Jan-05

Policy challenges in major economies

Credit ratings have begun to deteriorate, especially, for commodity exporters. The
downgrades have coincided with depreciating currencies and rising credit default
swap (CDS) spreads. In several countries, CDS spreads are now in line with those oflower-rated countries.

Jan-03

Policy Challenges

FIGURE 1.22 Emerging market credit ratings

Jan-01

If confidence in China’s growth prospects were towane as high-income country growth strengthens,
private capital outflows could accelerate, despite
capital controls, triggering a tightening of domestic
financing conditions.

41

chapter 1

500

400

Spreads above
similarly rated
countries

300

200

100
Spreads below
similarly rated
countries

0

AAA
BBB- BB+ BB BB-22
0 AA+ AA AA- A+5 A A- BBB+ BBB 10
15

Average credit rating of S&P and Fitch

Sources: World Bank; Bloomberg.
B. The sovereign rating is calculated based on the simple average of long-term foreign-currency credit ratings ofcountries by Standard & Poor’s Rating Service. The latest observation is April 2015.
C. The sovereign rating is calculated based on the simple average of long-tern foreign-currency credit ratings ofcountries by Standard & Poor’s Rating Service.

fiscal policy support and growth-enhancing structural reforms. In 2015, fiscal policy is expected to
be broadly neutral, although, under the Excessive
Deficit Procedure, several countries (Cyprus,
France, Greece, Ireland, Malta, Portugal, Slovenia,
Spain) need to proceed with their fiscal consolidation plans. Activity in the European Union may
also be supported by a €315 billion (2.2 percent
of GDP) investment program (the “Juncker Plan”)
intended to stimulate growth and create jobs. The
initiative should help better leverage the EU budget
and European Investment Bank programs for greater
private investment. However, long-term growth remains weighed down by rigid and fragmented labor,
product, and services markets, hampering productivity and innovation. Notwithstanding significant

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G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5

FIGURE 1.23 Risk of excessive U.S. dollar appreciation
Growth in the United States remains robust, but a further strengthening of the U.S. dollar
could curtail the recovery. Spillovers from a U.S. slowdown would reduce activity elsewhere (and especially in Latin America and the Caribbean). The U.S. current accountdeficit is well below pre-crisis levels.
A. U.S. real GDP growth
Percent
8

B. Size of U.S. economy, 2013/14

U.S. GDP growth
Average 1992-2007
Average 1980-2014

6

35
30

4

25
20

2

15

0

10
5

-2
-4

Percent of global4001980 1985 1990 1995 2000 2005 2010 2015

GDP

Imports

Foreign claims Stock market
capitalization

D. U.S. current account

Percent deviation from baseline

Percent of GDP
2
1
0
-1
-2
-3
-4
-5
-6
-7

0

End of first year

End of second year

-0.5

-1

Ouput Gap

InflationFederal Funds
Rate

1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013

C. Impact of 10 percent U.S. dollar
real effective appreciation

Sources: World Bank; Federal Reserve Board (2014); Haver Analytics; Bank for International Settlements (BIS);World Federation of Exchanges.
A. GDP = gross domestic product.
B. Values are from 2014 data for GDP and imports; Q3 2014 data for foreign claims of BIS-reporting banks; and2013 data for stock market capitalization.
C. Elasticities to U.S. dollar appreciation are from Federal Reserve Board (Laforte and Roberts, 2014; Brayton,
Laubach and Reifschneider, 2014).

steps to strengthen bank balance sheets, enhancesupervision and contain bank-sovereign feedback
loops in bank resolution, two important elements ofa Euro Area banking union (financial system backstops and recapitalization) remain national, thus
reducing the support available for weaker banks instress situation. In France and Italy, proposed reforms to improve competitiveness have been heldup, while acute challenges faced by Greece will require a clearer path towards fiscal sustainability.
For the time being, the clear priority for Japanis for accommodative policies, to sustain growthand inflation momentum, coupled with growthenhancing reforms. Japan’s experience in the 1990s
highlights the importance of avoiding premature
policy tightening in response to early signs of green
shoots. Indeed, monetary policy remains highly accommodative in Japan, while medium-term fiscal

consolidation and structural reform efforts are underway. The Bank of Japan continues to implement
its quantitative easing program as planned, and afurther expansion remains possible later in 2015
if inflation fails to pick up significantly. Financial
markets expect policy rates to remain at zero until
end-2018. Japanese banks and some pension funds
continue to shift their portfolios away from holdings of Japanese government bonds, whose yields remain low. A search for higher yields by financial institutions could lead to balance sheet vulnerabilities.
Government debt sustainability is under pressure
from a fiscal deficit in excess of 7 percent of GDP
in fiscal year 2014 and public debt at 234 percent of
GDP in 2015. The planned consolidation for fiscal
year 2015 and beyond will, however, be challenging
in light of increasing outlays for social welfare and defense and delays in implementing the next consumption tax increase. Bolstered by an election victory inDecember 2014, the government has committed to
speeding up its ambitious structural reform agenda.
With inflation contained, the monetary policy interest rate in the United Kingdom is expected to rise
only gradually from 2016, despite diminishing slack
and robust domestic demand. Demand has also beenstrengthened by allowing automatic fiscal stabilizers
to operate in recent years. However, revenue and expenditure reforms are needed to meet medium-term
fiscal objectives. Investments to reduce bottlenecks ininfrastructure and to upgrade human capital will be
key to supporting productivity improvements needed
to sustain strong growth (IMF 2014b).
China continues to implement, in several steps, thereforms announced in November 2013. These efforts are being supported by selective accommodative monetary and fiscal policies, to prevent a sharp
growth slowdown. The central bank has repeatedly
implemented targeted measures to ease pockets ofliquidity tightness. Progress in implementing structural reforms is notable in the following areas:•

Fiscal reforms. A revised budget law and newrules on local government borrowing wereintroduced to control local government borrowing and switch to borrowing through local
government bonds. However, local government
finances need to be brought onto a more sustainable footing more broadly, addressing expenditure and revenue mismatches across different levels of government, and reinforcing

G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5

Much of the reform agenda, including a broadbased reform of state-owned enterprises, remains to
be implemented. Issues that need to be addressed
include: implicit and explicit government guarantees, non-binding budget constraints, low efficiency,
and a lack of transparency and accountability(World Bank and Development Research Center of
the State Council 2014, OECD 2015b).

Percent of total
40

Percent of global
45Euro Area (2014)
Japan (1994)
GIIPS (2014)
30

35
30

Exports to the Euro Area
Remittances from the Euro
Area

25
20

15

15
10
5
GDP

Imports

Cross-borderbank claims

C. Share of FDI, portfolio, and bankclaims of Euro Area residents oneach region
Percent of total
50

FDI claims of Euro
Area
Portfiolio claims ofEuro Area
Bank claims of EuroArea banks

40
30

EAP

ECA

LAC

MNA

SAR

SSA

D. Growth response of a 1 percentage
point decline in Eurozone’s growth
Percent
0.0

Cumulated effect on GDP growth at the end of second year
Cumulated effect on GDP growth at the end of first year
Effect on GDP growth in the first quarter

-0.2
-0.4
-0.6

20

-0.8
-1.2
EAP

ECA

LAC

MNA

SAR

SSA

Morocco

-1.0

10
0

0

Jordan0

Romania

Administrative and other reforms. Administrativereforms were accelerated including by reducing
and centralizing preconstruction approvals, andcourt proceedings were streamlined to facilitatecontract enforcement. Pilots were initiated toconvert land use rights into ownership shares;
to allow some municipal government bond issuance; to corporatize state-owned enterprises;
to operate a cap-and-trade trading system tolimit carbon emissions; and to further relax thehousehold registration system.

B. Share of Euro Area in exports andremittances

Bulgaria•

Energy sector reform. New rules were issued in
March 2015 to separate electricity generationfrom distribution, and to encourage greater
competition. Private companies will be allowed
entry. However, an independent competition
authority aimed at ensuring well-functioning
markets remains to be established. In addition,higher fuel taxation and stricter enforcement ofenvironmental rules have been implemented toreduce pollution.

A. Share of global GDP and imports

Turkey•Financial sector reform. The deposit rate ceiling
was raised, deposit insurance was introducedin May, and a Financial Consumer Protection
Bureau was established. Some nontraditionalbanking activity was reined in, for example efinancing platforms. Margin requirements forstock market transactions were tightened andthe Shanghai-Hong Kong Stock Market Connect program facilitated some international
capital flows. The exchange rate band was widened from 1 to 2 percent.

Given greater gross domestic product and imports, a prolonged stagnation in the EuroArea could have deeper global repercussions than Japan’s decade of slow growth didin the 1990s and early 2000s. Eastern Europe and the Middle East and North Africa
would be particularly affected through trade, remittances, and bank exposures. Financial markets in Latin America and the Caribbean could come under pressure from EuroArea deleveraging.

MENA

•

FIGURE 1.24 Risk of stagnation and deflation in theEuro Area

ECA

local government revenue capacity including
through a property tax. The business tax is being replaced with value-added taxation (e.g. inrailways since January 2014 and in telecommunications since June 2014) and environmental
taxes have been increased.

43

chapter 1

Sources: Bank for International Settlements; International Monetary Fund Coordinated Direct Investment Survey
and Coordinated Portfolio Investment Survey; World Bank staff estimates.
A. GDP = gross domestic product.
C. Investment claims of Euro Area residents at end-2013 for foreign direct investment (FDI), at end-June 2014 forportfolio investment claims, and end-September 2014 for cross-border bank loans.
D. Results for the cumulated effect on GDP growth at the end of first and second years are statistically significant
at the 16th-84th percentile range based on 2000 draws for ECA, MENA, Turkey, Bulgaria, Romania, and Jordan.

Monetary policy challenges in developing
countries
Against the background of soft growth and the prospect of rising global interest rates, falling oil prices haveeased monetary policy constraints in oil-importing
countries but opened new policy dilemmas in oil-exporting countries.
Lower oil prices have eased constraints on monetary policy in oil-importing countries by slowing
inflation and reducing current account deficits. This
has allowed central banks in a number of inflationtargeting or oil-importing countries to cut policy
rates to support slowing or weak activity in 2015

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FIGURE 1.25 Risk of a hard landing in China
The risk remains of a hard landing, followed by a period of anemic growth, although it is
low-probability. A hard landing could be triggered by financial distress in industries with
substantial excess capacity, including steel and coal.
A. Steel production

B. Share of China in global coalproduction

Index, 2005 = 100
Percent
270 China
70
250 Rest of the world
60
230 China in percent of global production (RHS)
50
210
190
40
170
30
150
130
110
90
70

20
10
2005

2008

2011

2014

0

Percent of global
48
47
46
45
44
43
42
41
40
39
38
2008 2009

2010

2011

2012

2013

Sources: BP Statistical Review of World Energy June 2014; National Bureau of Statistics of China; World Bank
Commodity Price Data (The Pink Sheet).

(Arab Republic of Egypt, India, Peru, Romania; Figure 1.26). In India, the introduction of formal inflation targeting and increased central bank credibility
have provided additional policy space. In Eastern
Europe, lower oil prices have added to deflationarypressures central banks are struggling with as policy
rates are at historic lows. Looking ahead, however,tighter global financing conditions and moderating
capital inflows may constrain room for monetary
policy maneuvering in emerging markets, especiallythose with a rapidly rising stock of external debt
(Turkey, South Africa).
In commodity-exporting countries, policy tradeoffs
have been starkly different as central banks have had
to balance the need to support growth with inflation
and balance sheet concerns resulting from depreciation pressures. Tightening global financial conditions
over the medium term will intensify these dilemmas.
Sustained currency weakness—interacting in somecases with supply constraints (Ghana, Mongolia) or
spillovers from geopolitical risks (Central Asia andSouth Caucasus)—has increased inflation in oil-exporting countries and, for foreign currency borrowers, financial stability risks. While non-concessional
external debt, which is mostly foreign currencydenominated, is modest in most developing countries,
it has risen considerably since 2011 in some commodity-exporting countries (Indonesia, Mongolia).
To contain risks from depreciation pressures, central
banks have been compelled to raise policy rates procyclically (Belarus, Mongolia) or to intervene in foreignexchange markets (Mexico, Nigeria, Zambia).

Shifting fiscal pressures in developing
countries
Many oil-exporting countries are tightening fiscal
policy, even as growth slows. Oil-importing countries,
however, have the opportunity to reform energy subsidies and taxes, and to build fiscal space.
For commodity-exporting countries with flexible
exchange rate regimes (Malaysia, Mexico, Peru,
Russia), the fiscal impact of declining commodity prices has been somewhat cushioned by depreciating currencies (Figure 1.27), whereas it
has been more severe in commodity-exporting
countries (Ecuador, Iraq) with fixed exchange
rates. Nevertheless, many commodity-exporting
countries have had to tighten fiscal policy despite
slowing growth. This is particularly the case incountries where fiscal deficits were already large
before commodity price declines (Angola, Brazil,
Cameroon, Ghana, Mongolia, Venezuela, Zambia), or debt levels were elevated (Ghana, Mongolia), or “rainy day” savings or stabilization funds
were of limited size (Mongolia, Nigeria). Concerned about possible credit rating downgrades,
policymakers pursued consolidation budgets inseveral oil-exporting countries (Malaysia, Nigeria). However, despite recent downward revisions
in some oil-exporting countries, fiscal breakeven
oil prices are estimated to remain at or over $90
per barrel (Azerbaijan, Gabon, Kazakhstan, Nigeria) or above $120 per barrel (Angola, Ecuador).
The loss in oil revenues for these countries strains
government budgets and will generally need to
be offset by spending cuts. Unless widening fiscal
deficits can be reined in and reduce the burden on
tightening monetary policy, private investment
could be crowded out (Angola, Gabon, Mongolia, Nigeria, Republic of Congo).
Among oil-importing countries, the drop in oil
prices could generate substantial fiscal savings,
particularly where fuel prices are subsidized. Notwithstanding significant cuts in 2014 and 2015, especially in East and South Asia, pre-tax subsidies,
which allow energy consumers to pay below-costprices, are high in several developing economies(IMF 2013a; Clements et al. 2014). Lower oil prices
have helped some countries deregulate local fuelprices (Arab Republic of Egypt, India). In countries
with unusually low energy taxes, lower oil prices
also make it easier for governments to raise theseG L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5

Reform momentum and needs in developing
countries
While countercyclical fiscal and monetary policies canhelp smooth the transition, the current juncture puts apremium on structural reforms that ensure a sustainable adjustment to a new equilibrium of low commodity prices and gradually tightening financial conditions. Several large developing countries are gradually
implementing ambitious reform agendas, but many are
lagging behind.
As growth in high-income countries picks up, buteases steadily in developing countries, convergenceof GDP per capita is expected to slow. For somemiddle-income commodity exporters, the income
gap may well widen over the next two years (Figure1.28). This reflects declining productivity growth aswell as demographic pressures. Investment growthin developing countries has slowed from pre-crisis
rates as well as the adoption of productivity-enhancing technology (Fisher 2006). The upcoming tightening in global financial conditions might further
hold back investment growth.

Easing inflation has allowed several central banks in oil-importing countries to cut
rates. Currency depreciations and associated inflation pressures have compelledcentral banks of commodity exporters to raise rates. In some countries, the exchange
rate risks inherent in high external debt with limited reserve coverage constrain monetary policy room to support activity.
B. Selected countries, policy interest
rates

Number of policy rate changes
40
Hikes
Cuts
35
30
25
20
15
10
5
0
Oil Ex. Oil Im. Oil Ex. Oil Im. Oil Ex. Oil Im.

Percent
25
20
15
10
5
0

14-Q4

15-Q1

Ratio
400

300

Percent of GDP
Reserve to non-concessional external debt ratio
Non-concessional external debt (RHS)

100% Reserve-to-debt ratio (RHS)

160

120

200

80

100

40

0

0

Source: World Bank; Haver Analytics.
A. Oil Ex. = oil-exporting countries; Oil Im. = oil-importing countries.

Growth in upper-middle-income countries has accounted for almost half of global growth since 2005,
but may slow because of demographic factors. Overthe past three decades, these countries have benefited
from a rising share of the working age population. Thishas yielded an important “demographic dividend” forgrowth. For example, China’s demographic dividend
has been estimated to have contributed one-quarter tothe country’s per capita GDP growth during 1982–
2000 (Cai and Wang 2005). The demographic dividend may have accounted for two-fifths of East Asia’s
rapid growth during 1965–90 and for 1 percentage
point of per capita GDP growth in Southeast Asia between 1975–90 (Bloom, Canning, and Sevilla 2003).
Over the next few decades, however, the share of theworking age population in middle-income countries
is expected to decline and, with it, growth prospects,
unless structural reforms lift productivity.

Thailand

Korea, Rep.

MexicoMalaysia

Armenia

C. Ratio of reserves to non-concessional external debt andnon-concessional debt for frontier markets

2015

Colombia

TurkeyIndonesia

Brazil2014

Russian Fed.

14-Q3

Ghana

A. Policy interest rate moves

Mongolia

In this way, the tailwinds of low oil prices provide
an opportunity for oil-importing countries to either build fiscal space, which would allow an effective counter-cyclical response during the next
slowdown, or to invest in critical infrastructureor human capital (World Bank, 2015). A priority
for rebuilding fiscal space is particularly importantin countries that are vulnerable to shocks becauseof high levels of government debt, particularly
where it has risen rapidly since 2010, such as the
10 percentage point of GDP increases in the Arab
Republic of Egypt, Cabo Verde, Eritrea, Jordan,
Lebanon, Pakistan, and South Sudan. On average,
however, developing country government debtto-GDP ratios declined in low-income countries
or has been stable since 2010 in middle-income
countries. This contrasts with the strong increasein private debt in developing countries since 2010.
Where countries have fiscal space, fiscal windfalls
from lower oil prices could be used to increase
critical investment or buffer any near-term disruptions from structural reforms.

FIGURE 1.26 Monetary policy in developing countries

Mongolia
Bulgaria
Jamaica
Mauritius
UkraineSerbiaLebanonRomaniaFYR Macedonia
Tunisia
Cote d'Ivoire
Honduras
Vietnam
Ghana
Ecuador
Bolivia
Botswana
ZambiaKenya
SenegalRwandaBangladesh

taxes closer to international norms (Arab Republicof Egypt, India, Indonesia). This would help reverse
some of the post-crisis spending increases made possible by rapid revenue growth.

45

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G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5

FIGURE 1.27 Fiscal pressures•

Lower commodity prices are a reminder forcommodity-exporting countries of the need todiversify their economies away from commodities (see below).

•

In addition to ensuring long-term growth, somereforms can support demand against the backdrop of cyclically slower growth. These include,especially, investments in critical infrastructureand education.

•

Productivity growth needs to be increased tostem the trend slowdown in developing country
growth and ensure sustained prosperity.

Fiscal balances in oil-exporting countries have come under pressure as resource revenues have fallen. In oil-importing countries, declining fuel subsidies may help reverse
some government spending growth since the crisis. Still-moderate government debt in
oil-exporting countries and low-income countries may begin to rise as growth slows.

US$ per barrel
350
300
250
200
150
100
50
0

Percent change
50

2014
2015

UkraineIraq

45
Brazil40

Egypt, Arab
Rep.

Expenditure

Qatar

KuwaitIraq

United Arab Emirates

Oman

Saudi Arabia

Bahrain

Algeria35

Iran, Islamic Rep.

Libya

B. C
 hange in government expendituresand revenues, 2010–14

Yemen, Rep.

A. F
 iscal breakeven prices, oil
exporters

Mexico

30
25
20
15
10

China

PakistanIndia

Malaysia

Indonesia
Iran, Islamic
Rep.
Nigeria10

Phillipines
20

Saudi Arabia
TurkeyColombia

United ArabEmirates

Peru

30

40

Revenue

Percent change

C. Fiscal balance, oil and gas
exporters

D. Fiscal balance, oil importers

Percent of GDP
15

Percent of GDP

2012-20142012-20148

2015-20172015-2017

4

5

50

0

-5

-4

-15

-12

E. G
 overnment and private debt,
developing countries
Percent of GDP, GDP weighted
Government debt,
developing oil exporters
Government debt,
developing oil importers
80
Private debt, developing oil
exporters and importers

100

60

TurkeyPeru

South Africa

BrazilEgypt, Arab Rep.

India

UkraineChile

Pakistan

China

Philippines

Korea, Rep.

Indonesia

Colombia

MexicoIran, Islamic Rep.

Iraq

Nigeria

Russian Federation

Malaysia

Saudi Arabia

United Arab Emirates-8

F. Government debt, low-income
countries
Percent of GDP, GDP weighted
Government debt, low-income oil importers
Government debt, low-income oil exporters

160
140
120
100
80
60

40

40
20

2001 2003 2005 2007 2009 2011 201320

2001 2003 2005 2007 2009 2011 2013

Sources: World Bank including World Development Indicators; International Monetary Fund including
World Economic Outlook.
B. Blue lines are oil importers; Red lines are oil exporters.

At the current juncture, structural reforms are particularly urgent.
•

Ambitious reform agendas signal to investors
that the authorities are proactive about ensuring long-term growth prospects. This will help
support capital inflows and investment even as
global financial conditions tighten.

The pace of reform has accelerated in some major emerging-market countries in 2013–15. In
2013–14, Mexico approved a major energy reformthat includes opening up deep water and shale oilfields to the private sector, increased competitionin the telecommunications sector, widened thetax base, and eased some employment restrictions.
China continues to gradually implement its November 2013 reform agenda. India formally adopted
inflation targeting in 2015, thus strengthening thecredibility of the central bank; reduced barriers to
FDI in insurance, telecommunications, railways,
and retail; eliminated diesel subsidies while raisingexcise duties on petroleum and diesel fuel; approved
the introduction of a harmonized goods and services
tax; and committed to increasing public investment.
South Africa put in place some active labor market
policies, Turkey has made progress in privatizing energy companies, and Rwanda has reduced a range oflicensing and registration requirements.
This said, many emerging market countries fallshort of best practices for creating a business environment conducive to productivity growth (Figure 1.29). Indicators of impediments to structural
productivity growth—barriers to open markets
and access to finance—suggest that the impediments are well below average (among 30 emerging market economies) for Malaysia, Mexico, andSouth Africa, while significantly above average inArgentina, Russia, and Venezuela (Qureshi, DiazSanchez and Varoudakis 2015). Reducing thesebarriers to the level of the best-ranking emerging
economies could spur productivity and increase
resilience to external shocks.
While reform needs are necessarily highly countryspecific, they fall into a few categories (G20 2014b).
These include easing infrastructure bottlenecks,

G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5••

Savings on subsidies. When imposed in a
non-targeted fashion, the economic benefits ofsubsidies are concentrated on higher-income
households, as these consume more subsidizedenergy than poor ones. For example, a study of
20 developing countries showed that subsidies
on gasoline and LPG are strongly regressive(Arze del Granado, Coady, and Gillingham
2012).11 In addition, the actual benefits interms of access to good quality, clean energy
sources are a subject of intense debate. Rationing and shortages often accompany subsidized
forms of energy consumption. In the case of
networked utilities such as electricity, power
outages resulting from lack of investment may
lead richer households to rely on private generators, leaving poorer households either cut
off from electricity or forced to rely on more
expensive alternatives.
Incentives for energy use. Energy subsidies
can also crowd out priority public spending
and private investment, encourage excessive
energy consumption, reduce incentives forinvestment in renewable energy, and acceler10Drawing groups with low labor market participation into the la-bor market could generate substantial productivity gains (Hsieh et al.
2013).
11Studies reviewed by the World Bank (IEG, 2008) across developing countries find that only 15–20 percent of subsidies benefited thepoorest 40 percent of the population, a result that confirms findings
by Coady (2006).

FIGURE 1.28 Income convergence
Upper-middle-income countries have accounted for about half of global growth since
the crisis. However, their growth prospects are deterioriating as their populations age
and investment, export, and productivity growth fails to return to historical average
rates.
A. Investment growth in developing
countries
Percent
15
12

B. Upper-middle-income countries:
Share of working-age populationand share of global growth
Percent

2003-08
2010-132014-15
1990-08

0.5

9

0.4

6

0.3

C. Growth of exports in developing
countries
Percent
20152035-40

2030-352025-30

2020-25

2015-20

2010-15

72
70
68
66
64
62

D. Productivity growth in developing
countries

2003-08
2010-132014-15
1990-08

Percent, GDP weighted
5
2003-08
2010-132014-154
1990-08
3

10

2

5
0

2005-10

EAP LAC ECA SAS SSA MNA DEV

2000-050.1

01995-00

0.2

3

-3

Percent

Share of global growth contributed by upper middle
income countries
Share of working age population in upper middle income
countries (RHS)
74

1990-95

especially in energy and transportation; improving
education; reforming labor markets and increasing
female participation (Box 1.3); enhancing competition and easing administrative burdens; improving access to private and multilateral financing,
reducing barriers to trade and facilitating regional
integration; and reforming energy subsidies. 10
Such reforms could help, but may need to becomplemented by others, to shift the compositionof growth away from consumption (Brazil, Philippines, Turkey), investment (China), or natural resources (many commodity-exporting countries). A
number of developing countries provide large fuelsubsidies to their populations. In some cases, thecost of subsidies exceeds 5 percent of GDP (IEA,
2014). However, these subsidies often benefit middle-income households more than low-income ones
and tilt consumption and production towards energy-intensive activities.

47

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1
EAP LAC ECA SAS SSA MNA DEV

0

EAP LAC ECA SAS SSA MNA DEV

Source: United Nations Population Statistics; World Bank.
A. GDP-weighted annual averages. DEV = developing country average. Investment refers to gross fixed capitalformation.
B. Values are based on the share of population age 15–64 years in the medium-fertility scenario (UN Population
Prospects, 2012 revision). Share of global growth is defined as the contribution of upper-middle-income countries
to 5-year growth relative to global 5-year growth.
C. D. GDP-weighted annual averages. DEV = developing country average.

ate the depletion of natural resources. In fact,
low energy costs associated with subsidized or
low oil prices may encourage a move toward
more fossil fuel-intensive or energy-intensive
production. This runs counter to broader environmental goals in many countries. To offset
the medium-term incentives for increased oil
consumption, while at the same time building fiscal space, policymakers could modify
tax policies on the use of energy, especially incountries where fuel taxes are low.
Falling oil prices reduce the need for fuel subsidies,and provide an opportunity for subsidy reform withlimited impact on the prices paid by consumers.
Such subsidy reform should lead to a comprehensive
and permanent shift towards more market-based
fuel pricing. This should in turn prevent rising fuel48

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FIGURE 1.29 Structural reforms
Some developing countries have initiated structural reforms as growth has slowed. However, in several respects business environments remain weaker, on average, than thosein advanced countries. Particular areas of reform are highly country-specific.
A. Change in ease of doing businessDistance to frontier score
Change 2014-2015
4

3
2
1
0
-1

B. Aggregate index of structuralbottlenecks, 2005–2012.

Distance to frontier score2015 (RHS)
80

70
60
40

South Africa

BrazilTurkeyMexicoIndia

Indonesia

China

Nigeria

Russian Federation

50

Malaysia
South Africa
MexicoColombia
Tunisia
ThailandIndia
TurkeyIndonesia
BrazilArgentina
Russian Federation
Kazakhstan
EcuadorVenezuela, R.B.

-2

-1

0

1

2

3
Index

C. Ease of doing business by sector,
BRICS, 2015

D. Ease of doing business by sector,
MINT, 2015

Distance to frontier score
Brazil
India
South Africa

100

RussiaChina
High-income countries

100

80

Indonesia
TurkeyHigh-income countries

80

60

60

40

40

20

Resolving
Insolvency

Enforcing
Contracts

Trading AcrossBorders

Paying Taxes

Getting
Electricity

Dealing with
Construction
Permits

0

Starting a
Business

Resolving
Insolvency

Enforcing
Contracts

Paying Taxes

Trading AcrossBorders

Getting Electricity

Dealing with
Construction
Permits

20
Starting a
Business

0Distance to frontier score
MexicoNigeria
Malaysia

Sources: World Bank; Qureshi and Varoudakis (2014).
A. The distance-to-frontier score shows the distance of each economy to the frontier, which represents the best
performance observed on each of the indicators across all economies in the Doing Business sample since2005. An economy’s distance to the frontier is reflected on a scale from 0 to 100, where 0 represents the lowest
performance and 100 represents the frontier.
B. A higher index denotes greater structural bottlenecks.
C. BRICS = Brazil, Russian Federation, India, China, and South Africa.
D. MINT = Mexico, Indonesia, Nigeria, and Turkey.

subsidies when oil prices start increasing again. The
Arab Republic of Egypt, India, Indonesia, Iran, Malaysia, and Morocco implemented such reforms in
2013–2015, removing some of the distortions andinefficiencies associated with subsidies. Fiscal resources released by lower fuel subsidies could either
be saved to rebuild fiscal space lost after the global
financial crisis or reallocated towards better-targeted
programs to assist poor households and support
critical infrastructure and human capital investments. A broad spectrum of measures could provide
more effective means of supporting the poor. For
example, cash transfers and near-cash transfers areprogressive in a great majority of cases—supporting
lower income households more than higher income
ones—in contrast to energy subsidies (Komives etal. 2007; Vagliasindi 2012; Figure 1.30). The effectiveness of such measures improves with carefultargeting and administrative capacity.12 An acceleration of fuel subsidy is both timely and fully alignedwith G20 objectives set in the Pittsburgh summit in2009 to “rationalize and phase out over the medium
term inefficient fossil fuel subsidies that encourage
wasteful consumption” (G20 2009). The resolution
was reaffirmed in St. Petersburg in 2013 and in Brisbane in 2014.13
Subsidy reform should be combined with energy
tax reform. Fuel prices are low in many developing
countries compared with high-income countries.
For example, in several large developing countries
in East Asia (Indonesia, Malaysia, Thailand), fuelprices were well below those of high-income countries in the region (Japan, Singapore; World Bank
2015d). The fall in oil prices has been such that,even after subsidy cuts, local fuel prices have fallen
further. This could be offset by raising energy taxation, as has been done in India on petroleum anddiesel fuels in 2015.
Current low commodity prices are also a reminder
to commodity-exporting countries of the importance of diversification. Many commodity exporters’ economies are highly concentrated in one, ora few, products. Past episodes suggest that the paceof diversification often increases when resource revenues begin to decline. Examples of a successful diversification policy include Mexico and Malaysia.
Diversification efforts could include the following
elements:•

Building institutions to reduce economic volatility. Resource-rich economies face the challengeof managing volatile resource revenues. Fiscal
rules or well-managed stabilization funds canhelp smooth revenues and stabilize government
spending (Gill et al. 2014).

•

Changing incentives away from non-tradables (including from employment in the public sector). Resource-rich economies tend to have a significant
share of government employment, and a sizeable non-tradables sector, which benefits fromgovernment spending and abundantly available

12In Mexico, cash transfers are provided in parallel with subsidies
accruing to lower-consumption households. Prospera, Mexico’s main
anti-poverty government cash-transfer program, has been quite successful in targeting the poor, in contrast to electricity subsidies.
13On the request of G20 leaders, the World Bank released a report in
September 2014 providing a roadmap for transitional policies to assist thepoor while phasing out fossil fuel subsidies (World Bank 2014c).

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BOX 1.3 Recent Developments in Emerging and Developing Country Labor Markets
The Great Recession had a relatively mild impact on the labormarkets of developing countries. Since 2010 unemployment rates
have generally been below pre-global financial crisis levels, anddeclining. This is in stark contrast to the steep rise, and sluggish
decline, of unemployment rates in high-income economies. The
resilience of developing-country labor markets reflects, in largepart, stronger output growth during and after the crisis. As growthin developing economies slows from post-crisis peaks, labor markets may weaken. Since job creation plays a critical role in reducing poverty, and promoting shared prosperity, this risk heightens
the importance of implementing reforms to support growth, andof removing structural constraints on labor markets.
The 2007−09 financial crisis had a sizeable impact on global
labor markets, with social and human costs: a reduction of
lifetime income, an increase in poverty, and the loss of human capital (Gourinchas and Kose 2013). Though global
unemployment rates returned to pre-crisis levels by 2014,
according to official statistics, labor markets of advanced anddeveloping economies followed very different paths. The unemployment rate in advanced economies increased by nearly
three percentage points during 2007−09; in contrast, official
statistics show an increase of less than half a percentage pointin the jobless rate in developing countries over the same period. In advanced countries, the unemployment rate remains
about 1.5 percentage points above pre-crisis levels; in thedeveloping world it is one-percentage point below them.
Formal unemployment statistics cover only part of the story
in developing economies, because of problems in measurement related to high levels of informality and underemployment. The latter—low-income employment, under-utilization of skills, and lack of full-time job opportunities—are
particularly evident (World Bank 2012). Understanding theevolution of labor market conditions in developing countries is of paramount importance, as labor is the main sourceof income for the poor. Unemployment or underemployment are often associated with extreme poverty. Employment and wage growth are therefore critical for achieving theWorld Bank’s twin goals of reducing extreme poverty andpromoting shared prosperity (World Bank 2013).
How resilient were labor markets in developing countries during the Great Recession?
The global average unemployment rate rose sharply from2007 to 2010, reflecting steep increases in high-income
economies (Figures B1.3.1 and B1.3.2). As one would exThe main author of this box is Bryce Quillin.

pect, employment contracted especially sharply in the countries that experienced the sharpest declines in output.
In contrast, unemployment rates in developing countries,
based on official statistics, show a modest one-half percentage
point uptick in 2009, and a return to pre-crisis levels by 2011.
The largest increases in unemployment rates and declines in
employment growth were in the regions with the largest output losses: Europe and Central Asia (ECA); and Latin America and Caribbean (Figures B1.3.3 and B1.3.4). This reflected
contractions of demand in the export markets of Western Europe and the United States. Participation rates show a more
complex pattern, generally (but not uniformly) declining during the global recession, and rising afterwards (with the exception of East Asia (Figure B1.3.5). In other developing regions,
unemployment rates increased more moderately and participation rates remained near pre-crisis levels. China’s relatively
strong growth during the peak of the Great Recession helped
support developing country exports, particularly in East Asia.
The resilience of developing economy employment compared to high-income economies during the Great Recession
can be attributed to three factors:•

Less severe contractions. The 2008–09 slowdown indeveloping countries was not particularly severe, relative to that of the advanced economies, or for that matter, relative to earlier recessions in developing countries,
Figure B1.3.1 Global unemployment rate
Global unemployment has receded towards pre-crisis levels.

Percent
7.0

6.5

6.0

5.5

5.0

2000

2002

2004

2006

2008

2010

2012

2014

Sources: International Monetary Fund; International Labor Organization.
Note: Weighted by size of national labor force; 2014 value is projection from IMF's World
Economic Outlook.

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BOX 1.3 (continued)
Figure B1.3.2 Unemployment rate indeveloping and advanced economies

Figure B1.3.4 Change in employment topopulation ratio

During the crisis, unemployment rose sharply in advanced countries,
less so in developing countries.

In LAC and ECA, employment rebounded strongly from
employment losses in the crisis.

Percent

Developing economies

9Percent

Advanced economies

8

1

7

0

6

-1

5

2000

2002

2004

2006

2008

2010

2012

-2

2014

Sources: International Monetary Fund; International Labor Organization.
Note: Aggregates weighted by size of national labor force. 2014 values are projections
from WEO, IMF.

Figure B1.3.3 Regional unemployment rate

12
6
8
3

SSA

SAR

MNA

LAC

ECA

4

EAP

SSA

0

Source: International Labor Organization.
Note: EAP stands for East Asia and Pacific, ECA stands for Europe and Central Asia,
LAC stands for Latin America and the Caribbean , MNA stands for Middle East andNorth Africa, SAR stands for South Asia, SSA stands for Sub-Saharan Africa.

and the recovery was somewhat quicker (Figure B1.3.6).
As a result, in 2008–09, unemployment rates re-attained pre-recession levels faster than in earlier recessions. The linkage between growth and unemployment
is also seen in divergences among developing regions.
For example, ECA and LAC experienced the biggest
drops in both output and employment growth.

2007

2009

2011

2013

Informality and measurement uncertainties. Weaker
Okun coefficients may reflect the high levels of informality and labor market segmentation in developing
economies (UNCTAD 2012). In the absence of social
safety nets, workers may be unable to afford periods of

9

Real GDP growth (2008-13 avg, RHS)

0

SAR

•

2009
2013

MNA

Less sensitivity of unemployment rates to growth.
Unemployment rates respond less to changes in economic activity in developing countries than in high-income countries. Historical estimates of “Okun’s Law”
suggest that a 1 percentage point increase in growth isassociated with a smaller decline in unemployment inemerging than advanced economies; the estimated elasticity for frontier markets is about half that for advanced
economies (Loungani 2014, Figures B1.3.7 andB1.3.8). However, these estimates vary widely overtime, over countries, and over sectors (Cazes et al. 2012;
Moosa 2012; Ball, Leigh and Loungani 2013).1 For example, in Sub-Saharan Africa (SSA), LAC, and India,
employment in manufacturing tends to be less responsive to growth than in agriculture, construction, or services (World Bank 2012).

2008
16

LAC

•

Percent

2000-07

ECA

Source: International Labor Organization.

The increase in unemployment rates during the crisis was mostpronounced in developing countries in LAC and ECA.
Percent

EAP

2

1There are two versions of Okun’s Law. The “gap” version relates thatfor every 1 percentage point increase in the unemployment rate, a country’s
GDP will be about 2 percentage points lower than its potential. The “differences” version (as originated in Okun, 1962) describes the relationshipbetween quarterly changes in unemployment and GDP.

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BOX 1.3 (continued)
Figure B1.3.5 Labor force participation rate
In the post-crisis rebound, labor force participation rates also rosein LAC and ECA.
Percent

2008

2000–0785

2009

Figure B1.3.7 Estimates of Okun’s Law
coefficients for advanced, emerging, andfrontier market economies
Additional growth is associated with a smaller reduction in theunemployment rate in emerging and frontier markets than inadvanced markets.

2013

Percentage point
0.0

70

40

-0.2

MNA

SAR

EAP

AFR

-0.1

ECA

55

Source: International Labor Organization.
Note: Modeled ILO estimate. EAP stands for East Asia and Pacific, ECA stands for Europe and Central Asia, LAC stands for Latin America and the Caribbean , MNA stands for
Middle East and North Africa, SAR stands for South Asia, SSA stands for Sub-SaharanAfrica. Labor force divided by working age population of ages 15-64.

-0.3

Advanced

Emerging

Frontier

Source: Furceri and Loungani (2014).
Note: Bar represents the impact of an extra percentage point of GDP growth on the unemployment rate.

Figure B1.3.6 Changes in unemployment
rate and GDP growth in Great Recession
vs. previous recessions in developing
economies
During the 2009 recession, the unemployment rate in developing
countries rose less than in earlier recessions.
Percent

Unemployment rate, the Great Recession
GDP growth, the Great Recession

8

Unemployment rate, median for previous recessions from 1990
GDP growth, median for previous recessions from 1990

40

What are the prospects for developing country labormarkets after the Great Recession?

-4-8

B1.3.9). The very nature of informality makes it difficult
to measure (note the wide range of the estimates in Figure
B1.3.9). In addition, by blurring the distinction between
employment and unemployment, it increases the margin
for error in the unemployment data. Large-scale underemployment of workers, in low-paid, low-productivity occupations that under-utilize their skills, means that the measured unemployment rate in developing economies cannot
be interpreted in the same way as that in advanced economies, either as a cyclical indicator, or as a gauge of economic welfare.

-3

-2

-1

0

1

2

3

Source: International Labor Organization. World Bank calculations. Definition of recessions obtained from World Bank 2014a.
Note: The zero (“0”) represents trough and the -3 to 3 values represent years before andafter the trough. Sample comprises 11 emerging market economies.

unemployment and there may be a revolving door fromformal to informal jobs that cushions the impact of slower
economic growth on official unemployment rates. Informal employment can account for 70 percent of total employment in Asia and the Pacific, over 60 percent in Africa
and LAC, and over 20 percent in ECA (ILO 2014; Figure

Moderating growth in several large developing economies
since 2010 has not yet had a large labor market impact, butsome signs of weakness are emerging. Unemployment rates
in all developing regions are around or below the pre-crisis
average. Likewise, aggregate rates of employment growth remain solid, although there are exceptions, such as the marked
declines in employment growth in ECA from 2011, and thesoftening in East Asia and Latin America in 2012. The International Labor Organization (ILO) projects that unemployment rates will rise in ECA, East Asia, and South Asia in
2014, with employment growth falling short of the growth of
the working age population (ILO 2014). Global real wage

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BOX 1.3 (continued)
Figure B1.3.8 Real GDP growth and change
in unemployment rates in developing
economies, 2000−14

Figure B1.3.9 Estimated informal
employment shares in selected countries,
2011

Higher growth was associated with falling unemployment rates.

Informal sectors are large in developing countries.

GDP, average annual growth, percent

Percent of total employment

12
10

40

6

Unemployment rate,
average annual change, percent•

Reduced space for counter-cyclical fiscal policy. Partof the relative resilience of emerging market economies
during the Great Recession was due to the use of simulative fiscal policy to support domestic demand. Many
countries, having used much of the available space, will
be unable to respond as strongly in the event of anothercyclical slowdown (World Bank 2015c).
Structural policy weaknesses. Structural constraints
on the private sector and labor markets create risks forpost-Great Recession employment prospects. The private sector is the main engine of job creation: during
1995−2005, the private sector accounted for over 90
percent of the jobs created in Brazil, the Philippines,
and Turkey. Small- and medium-sized enterprises(SME) employed over 60 percent of formal sector

Since the crisis, real wage growth has declined in developing
countries.
Percent

GlobalGlobal (without China)

3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0

2013

Aside from the signs of cyclical softening, labor markets indeveloping countries face macroeconomic and structural
policy challenges that make them vulnerable to a global
slowdown.

Figure B1.3.10 Global average annual real
wage growth

2012

growth declined in 2013 (Figure B1.3.10). Large emerging
markets (China, India, South Africa) reflected this trend(Figure B1.3.11), although the wage increase in China, of
more than 7 percent, held the global rate of increase close to
2 percent.

Source: International Labor Organization.
Note: Calculations based on a sample of 49 countries.

2011

Source: International Labor Organization; International Monetary Fund. World Bank staff
calculations.
Note: Shaded area reflects 95 percent confidence interval. 2014 values are projections
from WEO, IMF.

Latin America and the
Caribbean

1.0

2010

0.5

2009

0.0

2008

-0.5

2007

-1.0

2006

-1.5

Middle East2

Europe and central Asia

Sub-Saharan Africa

0Asia and Pacific

20

4

•

Maximum estimate

60

8

0

Minimum estimate

80

Source: International Labor Organization Global Wage Report 2014/15.
Note: Weighted average of y-o-y growth in average monthly real wages in 130 countries,
covering 96% of all employees.

workers in developing countries (IFC 2013, WorldBank 2012). Firms, particularly SMEs, report that their
growth and hiring is limited by infrastructure issues, access to financing, and competition from the informal
sector caused by cumbersome labor regulations andG L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5

chapter 1

BOX 1.3 (continued)
Figure B1.3.11 Real wage growth in selecteddeveloping economies
Real wage growth has been particularly weak in LAC.
Percent
16

2012

2013

12

What policies could help address structural problems?
The nature of the policy challenges varies with the level ofdevelopment, institutional strength, and endowments.
However, promoting growth and addressing structural rigidities in labor and product markets will be parts of thesolution. The reform agenda can be described along four
themes (World Bank 2012).
•

Strong macroeconomic fundamentals. Given the universal importance of sustained economic growth to thecreation of permanent work, an overarching priority is amacroeconomic policy mix that supports steady growth.

•

Structural policies encouraging SME development.
In particular, policies should support SME development, given their contribution to employment. SMEs
in developing countries are much less successful ingrowing into larger firms than in advanced economies:
a study by IFC found that 35-year-old companies inIndia were typically born large, and shrunk by one
fourth over their lifetimes; in Mexico they doubled insize. Yet in the United States they grew by a factor of 10(IFC 2013). Reforms to broad-based infrastructure andfinancial-sector policies may be required to improve
SME access to electricity and finance. Obstacles in these
two areas pose binding on constraints firms in low-income and lower-middle income country (IFC 2013).

•

Labor market reforms. A key priority is to eliminate
government-created incentives for informal employment. Poorly designed regulation of formal employment often results in excessive red tape on hiring, and

84South Africa

UkraineMexicoBrazil

-4

China

0

Source: International Labor Organization Global Wage Report 2014/15.

poor enforcement (Figure B1.3.12, IFC 2013). Rigid
labor regulations have been correlated with increases inurban poverty, fewer business start-ups, and lower productivity growth (Djankov and Ramalho 2009; Bassanini, Nunziata, and Venn 2014; Scarpetta 2014). The
role and size of the state is also important. In MENA,
which has the highest levels of unemployment, and thelowest labor force participation rates (particularly
among women), the formal private sector employs no
more than 20 percent of the labor force, with state employment exceeding 80 percent in some countries(World Bank 2013).
In addition to these policy-related risks to labor markets, demographic change is leading to rapid aging in many developing countries. Over the next 15 years, the growth in theworking age population will slow from 2000–15 rates, insome cases sharply, in every developing region. Dependency
ratios are already rising in Central and Eastern Europe andmuch of East Asia as a result of lower fertility and mortality
rates (Galor 2012; Soares 2005; Acemoglu and Johnson
2007). Aging has broad-based policy implications, particularly for fiscal policy, and will impact labor markets by lowering labor supply and potentially lowering productivity andentrepreneurship (IMF 2004; World Bank forthcoming (a);World Bank forthcoming (b)). These demographic pressures
exacerbate existing risks to labor markets and increase theneed to pursue policies that promote formality.

Figure B1.3.12 Enterprise Survey results on
key business constraints, 2013
Enterprises consider labor regulations and informality key
constraints to business.

Political
instability
8%Worker Security
skills5%
8%

Businessregulations
46%

Access tofinance
16%

Other
31%
Labor
regulations
3%
Informality
12%

Access to
infrastructure17%
Source: Enterprise Surveys, World Bank. IFC (2013).

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BOX 1.3 (continued)
high penalties on firing. In turn, these encourage informality, or poor enforcement. Simulations of labor market models suggest that policy changes should be carefully sequenced, as increasing enforcement may reduce
informality yet cause higher unemployment and lower
welfare. Policies that first reduce costs in the formal sector would help avoid this outcome (Ulyssea 2010).
•

Country specifics. Relevant country idiosyncrasies include economic institutions, natural resource dependency, and demographics. In some regions, states areembroiled in conflict, or post-conflict, situations thathave large economic repercussions (World Bank 2012).
�or agrarian countries, improving transportationF
to cities will be a high priority, as will be improving
productivity in agriculture.

�ging economies, with growing dependency raA
tios, need to focus on policies that encourage
health. Doing so will support labor force participation ratios by promoting longer working lives.
There would also be fiscal savings, including on
health care. Revised immigration policies may beneeded to increase the size of the work force, particularly for non-traded services.

labor (Callen et al. 2014). This non-tradables
sector is typically characterized by low productivity growth relative to the tradables sector, in particular manufacturing (Cherif andHasanov 2014). Reforms to provide market
incentives for a transfer of resources towards
the non-resource-based tradables sector may
be helpful in some commodity-exporting
countries.
•

Encouraging export diversification. Export diversification is associated with higher growth(Lederman and Maloney 2007). Public policy
can support export diversification and sophistication by fostering vertical diversification inoil, gas, and petrochemical sectors (i.e., increased processing of the raw materials), andhorizontal diversification beyond these sectors (Cherif and Hasanov 2014).

�ountries with growing populations may be at riskCof a “youth bulge” that increases competition forjobs, and dampens wage growth. Education programs can assist skills development, while businessenvironment reforms may enhance business entry
and market access. Large public sector employment, on the other hand, may crowd out private
sector opportunities and lead to an inefficient allocation of human capital (World Bank 2013).

�esource-rich economies may need to focus on imR
proving human capital and institutions. Excessive hiring by the public sector, or a loss of export competitiveness due to an appreciation of real exchange rates
during periods of high commodity prices, may crowdout private sector job creation (World Bank 2014).

�In conflict-affected countries, the availability ofjobs that provide life-long skills for ex-combatants,
or for youths who may be drawn into violence, isparticularly important. Without decent employment opportunities, the risk is high that such people will become permanently disaffected. Productive infrastructure investments can provide such
employment, and help build social cohesion.

•

Building human capital. Government investment, including in human capital, would bean effective complement to efforts to accelerate productivity growth in the tradables
sector (Cherif and Hasanov 2012). In developing countries, social returns to education
have been shown to be significant, and potentially higher than returns to physical capital(OECD 2012; Psacharopoulos and Patrinos
2004).

Measurable effects of reforms, in terms of growthand productivity, can take a long time to materialize. Even in the short-term, however, reforms
can have a considerable effect on activity. Policies could be implemented to ease the short-termtransition cost, for example by assisting workers
to move to new jobs and speeding up the repairof the capital bases of lending institutions. Someof the possible effects on activity are as follows:

G L O B A L EC O N O M I C PR O S PECT S | J U N E 2 0 1 5

•

•

•

Reforms that involve capital investment (e.g.,
to address infrastructure needs) can stimulatedomestic demand in the short-term.
Labor market reforms, especially those thatreform social benefits, can increase the labor
supply (e.g., older workers), even though inthe short-run they may imply lower real incomes (Blanchard and Giavazzi 2001; Krebs
and Scheffel, 2013). Even if associated withshort-term disruptions, labor market reforms
can be critical complements to other reforms.
For example, labor market flexibility can amplify growth benefits from deregulation andproduct market reforms (Aghion et al. 2008).
Product market reforms (such as increasing
competition or removing implicit and explicit subsidies) that result in unwinding excess capacity in inefficient firms (e.g., somestate enterprises) can cause unemployment in
the short run, as workers are laid off, and asbanks’ new lending capacity is impaired by
the need to write off nonperforming loans.

References

chapter 1

FIGURE 1.30 Fuel subsidies
Fuel subsidies typically benefit high-income households more than lower-income
ones. In contrast, conditional cash transfers can be better targeted to low-income
households.
A. Distribution of subsidy benefits
by consumption quintile
Percent
50

30
20
10
0

Percent of income
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
South and
Other All Regions
0
CentralRegions
Bottom 2 3 4AmericadecileBottom40

AfricaB. Benefit incidence of social
expenditures vis-à-vis electricity
subsidy

2

3

4

Conditional cashtransfers
Electricity subsidy

Top

5

6

8

9 Top
decileA. Values are share of the total benefit from different fuel price subsidies for households grouped byconsumption levels.
B. The conditional cash transfers program (previously Opportunidades, now Prospera) is a Mexican governmentsocial assistance (welfare) program founded in 2002. It was designed to target poverty by providing cash
payments to families in exchange for regular school attendance, health clinic visits, and nutritional support.

Badel, A., and J. McGillicuddy. 2015. “Oil Prices:
Is Supply or Demand behind the Slump?” Federal
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SPECIAL FEATURE 1

HOPING FOR THE BEST,PREPARING FOR THE WORST:
Risks around U.S. Rate Liftoff
and Policy Options

GLOBAL ECONOMIC PROSPECTS | JUNE 2015

S P E C I A L F E AT U R E 1“We face a risk that longer-term interest rates will rise sharply at some point.”(Ben S. Bernanke, March 1, 2013)1“Long-term interest rates are at very low levels, and that would appear toembody low term premiums, which can move, and can move very rapidly…”(Janet Yellen, May 6, 2015)2
The U.S. Federal Reserve is expected to begin to gradually raise policy interest rates in the near term. Given thatit has been anticipated for some time and will take place against the backdrop of an ongoing U.S. recovery andhighly accommodative monetary policy by other major central banks, the launch of a series of U.S. rate increases(“liftoff”) is likely to proceed smoothly. The risk remains, however, that the liftoff or subsequent rate increases could
lead to abrupt changes in market expectations regarding monetary conditions that could, in turn, prompt a spikein U.S. long-term interest rates, volatility in global financial markets, and a sharp increase in borrowing cost for
emerging markets—similar to the way initial discussions of U.S. monetary policy normalization triggered the“taper tantrum” of May-June 2013. If, in response to the liftoff, U.S. long-term bond yields were to jump 100
basis points (as they did during the taper tantrum), capital inflows to emerging markets could decline by 0.8–1.8
percentage points of GDP. The change in external conditions driven by the liftoff or subsequent rate increases could
potentially combine with domestic factors to spark a sudden stop in capital inflows in some emerging markets,
especially those where vulnerabilities have increased, where there has been uncertainty about policy direction, or
where growth prospects have deteriorated significantly. In anticipation of such a risk, emerging markets should
prioritize monetary, financial, and fiscal policies that reduce vulnerabilities and strengthen credibility, and structural reform agendas that improve growth prospects.

Introduction
The exceptionally accommodative monetary policy
stance of major central banks since the global financial crisis has helped support global liquidity, bolster
asset valuations, and reduce risk premia. It has been
instrumental in lowering long-term interest rates in
the United States and other advanced economies,
and has contributed to the increase in capital inflows to emerging market countries as investors
search for higher yields. As a result, borrowing conditions in emerging markets have remained particularly favorable.
As the U.S. economy improves, the U.S. Federal
Reserve (Fed) is expected to begin to gradually raise
policy interest rates in the near term, an event widelyreferred to as “liftoff”.3 The liftoff and the subseThe main authors of this Special Feature are Carlos Arteta, Ayhan
Kose, Franziska Ohnsorge, and Marc Stocker, with inputs from Derek
Chen, Raju Huidrom, Ergys Islamaj, Eung Ju Kim, and Tianli Zhao.
Research assistance was provided by Trang Nguyen and Jiayi Zhang.
1Bernanke (2013b).
2Yellen (2015b).

3In a recent speech, Federal Reserve Chair Janet Yellen (2015c)
articulated her position on the timing of the rate hike: “If the economy
continues to improve as I expect, I think it will be appropriate at somequent tightening cycle are expected to proceedsmoothly, leading to only modest downward pressures on capital inflows to emerging market countries (Fischer 2015). However, the “taper tantrum”
episode of May–June 2013 is a reminder that evenan event long anticipated by markets can surprise inits specifics and generate significant financial market
volatility and shifts in capital flows.
The potential impact on capital flows to emerging
and developing countries depends on both “push”
factors (global economic and financial conditions)and “pull” factors (country-specific prospects, vulnerabilities, and policies).4·

Push factors. As growth prospects improve in advanced countries relative to emerging markets,
investment returns are likely to rise and advanced country monetary policies will become

point this year to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy. To support
taking this step, however, I will need to see continued improvement inlabor market conditions, and I will need to be reasonably confident that
inflation will move back to 2 percent over the medium term.”
4Several recent studies have examined the links between capital
flows to emerging and developing countries and “pull” and “push” factors, including U.S. monetary policy and global risk aversion (Koepke
2015a).

65

66

S P E C I A L F E AT U R E 1

gradually less accommodative. Although positive growth spillovers from advanced countries
would support activity in emerging markets,
higher interest rates would likely shift the relative return differential on financial assets in favor of advanced countries.
·

Pull factors. While emerging markets as a group
continue to grow faster than advanced economies, prospects have softened and several emerging market countries face significant vulnerabilities. In some of them, uncertainty about policy
direction is elevated and weighing on investor
sentiment. These factors increase the likelihoodof a sudden market reappraisal of the inherent
riskiness of emerging market financial assets.

This Special Feature analyzes the changes in thepush and pull factors since the taper tantrum, risksof disruptions around the liftoff, and potential implications for emerging markets and possible policy
options. Specifically, it addresses the following
questions:•

How have growth prospects and policies inadvanced countries changed since the taper
tantrum?

•

What are the major risks around the liftoff?

•

What are possible implications of the liftoff foremerging markets?

•

What are the major lessons for emerging markets from the taper tantrum?

•

How have growth prospects and vulnerabilities
for emerging markets changed since the taper
tantrum?

•

What policy options are available to prepare forrisks around the liftoff?

How Have Growth Prospects
and Policies in Advanced
Countries Changed since
the Taper Tantrum?
Advanced country growth, monetary policy, andbroader financial conditions are key global push factors driving capital flows to emerging markets. The
economic and policy context in advanced countries
has evolved notably since the taper tantrum in MayJune 2013 (Figure SF1.1).

GLOBAL ECONOMIC PROSPECTS | JUNE 2015•

Lower global interest rates. Despite a recent pickup, interest rates in major economies are still
exceptionally low, and in some cases negative(Box 1.1). The low rates are accompanied byprospects of a significant expansion of balance
sheets by the European Central Bank (ECB)
and the Bank of Japan. These monetary stimulus measures will continue to shore up global
liquidity and help keep interest rates low aroundthe world.

•

Improved activity in advanced economies, including the United States. Since 2013, growth in advanced countries has picked up markedly, and is
projected to reach 2 percent in 2015. In the
United States, in particular, labor markets have
improved significantly since the taper tantrum(Chapter 1), suggesting that fulfillment of the
Fed’s “full employment” mandate does not standin the way of a nearing liftoff (Yellen 2015c).

Going forward, a rise in U.S. long-term yields could
reflect either continued improvements in the U.S.
economy or highly anticipated U.S. monetary policy changes, or both. Continued improvements in
U.S. activity (a favorable “real shock”), especially if
surprising strongly and repeatedly on the upside,
could bolster equity valuations and would reduce
the need for the current highly accommodative
monetary policy stance. In tandem with rising returns on equity, bond yields could rise on market
expectations of nearing monetary tightening.
Alternatively, financial markets could be surprised byeven a modestly less accommodative stance of monetary policy: it could appear as an accelerated tightening
to investors if their views about the U.S. economy differ from the Fed’s (an adverse “monetary shock”). Similarly, if disappointing economic data were to reveal
supply-side challenges to potential growth, it could
lead to a faster-than-anticipated increase in (actual or
expected) inflation. This could in turn warrant fasterthan-expected monetary policy tightening.5
A structural vector autoregression (VAR) model is
employed to disentangle the contribution of such real
5There remains considerable uncertainty on supply-side constraints
affecting the U.S. economy, including the underlying pace of productivity growth (Gordon 2014; Hall 2014; Fernald and Wang 2015) andlabor participation (Aaronson et al. 2014; Council of Economic Advisers 2014), as both have remained unusually low in the post-crisis
period. Signs of emerging supply-side constraints could raise inflation
expectations, leading market participants to anticipate a faster normalization of policy rates in the short term.

GLOBAL ECONOMIC PROSPECTS | JUNE 2015

Since the taper tantrum, however, monetary shocks,
reflecting both domestic and external factors, haveturned increasingly favorable. In late 2014, they began
to push yields below May 2013 levels. Despite steadily
shrinking Fed asset purchases between December
2013 and October 2014, financial conditions remained highly accommodative. Following ECB President Mario Draghi’s speech in Jackson Hole in August
2014, market speculation intensified and was eventually proven right about the use of ECB’s quantitativeeasing. The decline in Euro Area long-term bond yields
also spilled over to U.S. long-term bond yields. At thesame time, indications of an increasingly robust labormarkets contributed to positive real shocks that exerted
upward pressure on long-term yields.
If the timing of the liftoff and the subsequent pathof policy rates are accurately reflected in market expectations, the normalization of U.S. policy rates
amid robust growth prospects for the U.S. economy
will be part of a smooth transition for global financial markets. U.S. long term yields will rise only
modestly and the U.S. yield curve will flatten
slightly, as in some earlier liftoff episodes (FigureLong-term interest rates remain at historic lows, especially in the Euro Area, and global
financial markets have been bolstered by exceptionally accommodative monetary
policies of the European Central Bank and Bank of Japan. The recovery in advanced
countries is gathering momentum, benefiting growth in emerging markets. In the UnitedStates, labor markets are healing as the recovery is continuing.
A. Long-term interest rates

B. Central bank balance sheets

Percent
6G3 long-term interest rates
U.S. long-term interest rates
5

Index = 100 in January 2010
400
Euro Area
350

4

300

3

Japan

200

2

150

1
0

United States

250

100
50
0
2010 2011 2012 2013 2014 2015 2016

C. GDP growth in G4 countries

D. U.S. labor market conditions

Percent
2.5

Percent
Index=100 in Jan 2015
Unemployment rate
107
11
Employment level (RHS)
10
105
9
103
8

2
Average since 2000

1.5

7

1

99
2015

2014

2013

2012

2015

2011

2014

2010

2013

2009

4
2012

2008

5

0.5
0

101

6

2007

The results suggest that the initial increase in longterm yields after May 2013 largely reflected unfavorable monetary shocks: against the backdrop ofconcerns about the strength of the U.S. economy,
financial markets perceived the taper-talk as signaling an accelerated monetary tightening (Figure
SF1.2). In early 2013, economic data releases surprised on the downside and provided little indication that suggested sufficiently strong U.S. growth
momentum to warrant rising long-term bondyields. As a result, real shocks contributed little tomovements in 10-year U.S. bond yields.

Figure SF1.1 Conditions in advanced countries

Jan-07
Jul-07
Feb-08Aug-08Mar-09Sep-09Apr-10
Oct-10May-11
Nov-11
Jun-12
Dec-12
Jul-13Jan-14Aug-14Mar-15and monetary shocks to movements in the longterm U.S. yields: those associated with changes in
U.S. growth prospects (proxied by the S&P 500
index), and those reflecting changes in market perceptions of U.S. monetary conditions (proxied by
the 10-year sovereign bond yield). The exercise assumes that an adverse monetary shock (such as
perceived accelerated monetary tightening) increases yields and reduces stock prices in the
United States, while a favorable real shock (such as
one reflecting better growth prospects) increases
both yields and stock prices (Matheson and Stavrev
2014; IMF 2014b; see Box SF1.1 for technicaldetails).

67

S P E C I A L F E AT U R E 1

97

Source: Bloomberg, Haver, World Bank.
A. Average of 10-year government bond yields of G3 countries (Euro Area, Japan, and United Kingdom) weighted
by GDP. Blue bar shows the taper tantrum period in May-June 2013. The latest data point is for June 8, 2015.
B. Grey area shows the forecast period.
C. Aggregate GDP growth of G4 countries (United States, Euro Area, Japan, and United Kingdom)
D. Blue bar shows the taper tantrum period in May–June 2013

SF1.3).6 Such a fully anticipated normalization of
U.S. policy rates should not trigger volatility inglobal financial markets or sharp reversals in capital
flows in emerging markets.

What Are the Major Risks
around the Liftoff?
The magnitude of the market reaction during thetaper tantrum of May-June 2013 underlines therisks surrounding the liftoff and subsequent rate
6In previous tightening episodes, the U.S. yield curve generally flattened and term premia rose only modestly, if at all, during the first year of
the first rate increase (Adrian, Crump, and Moench 2013a). The particularly steep 1994 tightening cycle helped stabilize medium-term inflation
expectations, reflected also in a narrowing term spread. The 2004 tightening cycle was accompanied by a narrowing term spread (also dubbed
the “conundrum”), partly reflecting ample global liquidity and declining
medium-term inflation expectations. This tightening episode—which, likethe upcoming liftoff, also started at very low U.S. policy interest rates—
was the most benign for emerging market currencies and capital flows. In
contrast, term spreads initially widened during the tightening cycle that
accompanied the particularly strong recovery in 1999.

68

S P E C I A L F E AT U R E 1

GLOBAL ECONOMIC PROSPECTS | JUNE 2015

Figure SF1.2 Explaining movements in U.S. bondyields: monetary and real shocks
The sudden rise in U.S. long term yields after May 2013 was mainly due to adversemonetary shocks, as markets interpreted taper talk as signaling accelerated monetary
tightening. Since then, favorable financial conditions have been pushing yields down,
offsetting upward pressure from strengthening labor markets and activity.

0.6

U.S. financial markets may currently be vulnerable toa sharp tightening around the liftoff or subsequent
tightening cycle. The term premium is exceptionallylow, expectations about medium-term interest ratepaths diverge between market participants and Federal Open Market Committee (FOMC) members,
and market liquidity conditions are fragile.

0.0•

Low term premium. The term premium in the
United States is exceptionally compressed. 8 The
current low U.S. term premium partly reflectsmodest assessment of inflation risks and strong
global demand for U.S. treasuries as safe assets.9
This has been reinforced by low interest rates for
assets denominated in other reserve currencies,
which in part resulted from quantitative easing
programs by other major central banks (Bernanke 2015). Inherent in the current low term
premium is the risk of a sudden widening, withgreater uncertainty potentially leading to a surge
in long-term yields (Yellen 2015c).10•

Gap between market and FOMC expectations.
Since 2014, expectations for the path of future
policy rates among market participants havebeen considerably (currently more than 100 basis points in 2017 and beyond) below those of

A. U.S. long-term yields and stock
market index

B. U.S. long-term yields—
counterfactual

Percent

Percentage point change since May 21, 2013
1.2

Feb-15May-1515

Feb-15

D. Estimated real shocks
Percent
4

May-15

C. Estimated monetary shocks
Percent25

Nov-14Aug-14

Real shock

Nov-14

Monetary shock-0.6

May-14Feb-15May-15

Nov-14Aug-14Feb-141,500

May-14

1.5

Nov-131,700

Aug-132.0

May-13

1,900

Feb-142,100

2.5

Nov-133.0

Aug-13

2,300

Long-term interest rate
Stock price (RHS)

May-13Index

3.5

tal outflows.7 Although U.S. bond yields have since
fallen back, long-term bond yields in emerging markets remain above those of early 2013.

2

5

Aug-14May-14Feb-14

Nov-13-2

Aug-13

Feb-15May-15

Nov-14Aug-14May-14Feb-14

Nov-13Aug-13May-13-15

May-130-5

Source: Haver, World Bank estimates.
A. Long-term interest rate is the 10-year U.S. Treasury yield and stock price refers to the S&P 500.
B. Based on estimates from the model, identifying monetary and real shocks using sign restrictions. All shocks
except the shock of interest are shut down by setting them to zeros and the model is used to trace out the counterfactual long rate. The exercise is performed separately for monetary and real shocks. The orange (green)counterfactual shows how long rates would have evolved only with the estimated monetary (real) shocks. Numbers shown are in percentage points.
C. D. These are the time series of monetary and real shocks as estimated from the VAR model. Numbers shown
are in cumulative percentages. The shock signs are such that whenever positive, they result in an increase in thelong rate.

increases that could lie ahead. The 2013 episodewas sparked by a statement that became known as“taper talk,” when Fed Chairman Bernanke mentioned the possibility of the Fed slowing its asset
purchases “in the next few meetings” on May 22,2013 (Bernanke 2013b). While financial markets
had expected such an action at some point in the
future, they were surprised by the mention of an
approximate timeframe. Within a couple monthsof the initial taper talk, U.S. 10-year Treasury
yields increased by 100 basis points.
The jump in U.S. yields was quickly followed bya spike in financial market volatility in emerging economies. Specifically, emerging market currencies depreciated, bond spreads rose steeply, foreign portfolio inflows to emerging-market bond and equity funds fell
sharply, and liquidity tightened (Figure SF1.4). This
forced many emerging markets to tighten monetary
policy, intervene in currency markets, and, in somecases, introduce exceptional measures to prevent capi-

7Recent studies—such as Sánchez (2013); Díez (2014); Dahlhaus
and Vasishtha (2014); Ikeda, Medvedev, and Rama (2015); and Koepke(2015b)—emphasize the critical role of expectations in determining
the scale of macroeconomic adjustments in developing countries in theevent of a U.S. interest rate hike. They report that the large macroeconomic adjustments in developing countries during the taper tantrum
reflected the fact that the consequences of Fed tapering had not yet been“priced in.” In contrast, the relatively milder movements in developingcountry financial markets during the actual taper period (December
2013–October 2014) suggested that markets had already adjusted their
expectations accordingly.
8Long term interest rates can be decomposed into expectations
about the future path of real policy interest rates, inflation expectations, and a term premium. The term premium is therefore the extra
return required by investors to hold a longer-term bond instead of
re-investing in successive short-term securities. Typically, the term
premium is positive.
9See Williams (2015), Abrahams et al. (2015), Blanchard, Furceri,
and Pescatori (2014), and Caballero and Farhi (2014) for details onthese observations.
10U.S. term premia are highly correlated with macroeconomic andfinancial uncertainty, reflected in disagreement about future inflation
among professional forecasters, consumer confidence, and implied
volatility in U.S. Treasury markets (Abrahams et al. 2015). Previous
monetary policy surprises and the Federal Reserve’s large-scale asset purchases have been important drivers of U.S. term premia in recent years.

GLOBAL ECONOMIC PROSPECTS | JUNE 2015

members of the FOMC (Figure SF1.3).11 Thisimplies a risk that market perceptions suddenly
adjust upwards. Such a change could, for example, be triggered by a market reassessment of thelikelihood of a protracted period of low growth
or inflation that would be associated with an extended period of monetary accommodation.

Figure SF1.3 A smooth liftoff in light of past episodes?

Fragile market liquidity. Several factors make liquidity conditions more fragile than before theglobal financial crisis, even in deep sovereign
bond markets in advanced countries. The volume of primary dealer trading—which typicallysmoothes liquidity over fluctuations in othermarket participants’ demand and supply—has
fallen relative to outstanding treasury bonds(Figure SF1.5). In particular, bank’s dealer inventories and market-making activities have declined as a result of changing business models,diminished bank risk appetite, and tighter regulatory requirements for liquidity and other buffers (IMF 2015; Committee on the Global Financial System 2014). As a result, the role ofless-regulated, non-bank market intermediaries
has increased since the global financial crisis(Blume and Keim 2012; Fender and Lewrick2015). Traditionally less volatile, long-term focused institutional investors such as pension
and insurance funds may also have become
more procyclical in their behavior.12 While thecomposition and behavior of private debt holders has changed, their overall share in total debt
holdings has also declined from pre-crisis levels
as central bank’s holdings of sovereign bonds
increased with quantitative easing programs.

Percent
4

11This gap reflects uncertainty about prospects for policy rates overthe medium and long run (Williams 2015; Hamilton et al. 2015), withmarket participants expecting them to remain low for a considerable
period of time while FOMC members foresee a gradual rise in coming
years, as post-crisis legacies and uncertainties unwind (Yellen 2015a).
12During the taper tantrum, market liquidity deteriorated rapidly
in U.S. Treasury markets, as primary dealers reduced their inventories
at a time when interest rate risks were re-priced more generally (Adrian
et al. 2013). Liquidity strains spread rapidly across markets, leading toparticularly large adjustments in emerging market asset prices (GarcíaLuna and van Rixtel 2013). Portfolio outflows were concentrated in
the most liquid emerging markets (Eichengreen and Gupta 2014) andwere largely driven by retail investors. In 2013, institutional investors
generally maintained their exposures (World Bank 2014b). However,institutional investors have begun to act less countercyclically and, under acute and persistent market stress, could contribute to a “rush to theexit” (IMF 2014a; Bank of England and Procyclicality Working Group
2014; Opazo, Raddatz and Schmukler 2014; Raddatz and Schmukler
2012). Through their hedging activities, they can also add to exchange
rate pressures (IMF 2013).

If the liftoff proceeds smoothly as expected, the term spread would remain narrow as
happened in some past episodes of first rate hikes in a tightening cycle. However, there
remains a risk of a spike in long-term interest rates, especially since term premia are well
below their historical average and market expectations of future interest rates are below
those of members of the Federal Open Market Committee (FOMC).
A. U.S. yield curve

B. U.S. term spreads aroundprevious U.S. tightening cycles
Basis points; deviations from t = 0
Feb-94Jun-99Jun-0460

Current yield on May 26, 2015
Expected yield on Dec 31, 2015

May-13

20

3

-20
2

-60
-100

1
0

-140
1

2

3

4

5

7 9 10 12 15 20 30
Years

-180

-4

-3

-2

-1 0
1
Quarters

2

3

4

C. U.S. 10-year treasury term
premium

D. Market versus FOMC policy rate
expectations

Percent
6

Percent
5 Market expectations
FOMC-Median
4

5

Historical average(1961-2015)

4
3
1

2013

2009

2005

2001

1997

1993

1989

1985

1981

1977

1973

1969

1965

0

E. Nominal effective appreciation ofdeveloping country currencies
Percent, deviations from t = 0
Feb-94
Jun-042

Jun-99
May-13

0
-2
-4
-6

3

1

Average since 2000

0
-1

FOMC-Max
FOMC-Low

2

2

1961

•

69

S P E C I A L F E AT U R E 1

-3

-2

-1

0
Months

1

2

3

2015

2016

2017

LongerRun

F. C
 apital inflows to developing
countries
Deviations from t= 0, US$ billion
Feb-94
Jun-04
110
80
50
20
-10
-40
-70
-100
-4 -3 -2 -1 0
1
Quarters

Jun-99
May-132

3

4

Source: IMF, Haver Analytics, Bloomberg, Federal Reserve Bank of New York, World Bank, U.S. Fed FOMC.
B. Term spread denotes the difference between 10-year U.S. Treasury and 6-month T-bill yields, four quarters before until four quarters after the launch of the U.S. tightening cycle (t= 0).
C. Term premium estimates are obtained from the model described in Adrian, Crump, and Moench (2013b). Thismodel belongs to the affine class of term structure models which characterize yields as linear functions of a set ofpricing factors.
E. The x-axis shows the number of quarters before and after t = 0, where t = 0 is February 1994, June 1999, June
2004, and May 2013.
F. Excluding China.

Apart from the possibility of broad-based market
volatility, the risks around the liftoff differ in their
specifics from those that materialized during the taper tantrum. In particular, taper talk signaled atightening that directly affected the long end of theyield curve, because it related to Fed purchases oflong-term debt securities and, thus, raised the term
premium. In contrast, the liftoff would be a policy
move at the short end of the yield curve, with only
indirect pass-through into long-term yields.

70

S P E C I A L F E AT U R E 1

GLOBAL ECONOMIC PROSPECTS | JUNE 2015

Figure SF1.4 U.S. bond yields and capital flows during
the taper tantrum
Between 2012 and 2014, emerging market bond yields closely followed U.S. Treasury
10-year yields. The sharp rise in U.S. yields in May-June 2013 was accompanied by amarked fall in capital inflows to developing countries and increased volatility. The volatility in U.S. bond markets coincided with volatility of developing-country bond yields andcapital inflows.
A. Bond yields

B. Bond yields and portfolio flows

Percent
Percent
10-year U.S. Treasury yields
Emerging market sovereign yields (RHS)
4
7

Percent

Jan-1532

5Jan-151
Jul-143

Jan-14Jan-15

Jul-14Jan-14Jul-13Jan-13

Jul-12

3

Jan-12

5

4

7

Jul-13

7

14
12
10
8
6
4
2
0

Index
Standard deviation
10-year U.S. Treasury yields
Emerging market portfolio flows-volatility (RHS)
95Jan-13

9Standard deviation

10-year U.S.Treasury yields-volatility
Emerging market sovereign yields-volatility (RHS)

Jul-12Index

D. Volatility of bond yields andportfolio inflows

Jan-12

Jul-14Jan-14Jul-13Jan-13

Jul-12

Jan-12

C. Bond market volatility

Jan-15-10

Jul-144Jul-13-5

1.0

Jan-14

1.5
Jul-120

5

2

Jan-135

2.0

6

Jan-12

2.5

3

1

3.0

US$, billions
10-year U.S.Treasury yields
Emerging market portfolio flows (RHS)
100

Source: Bloomberg, Emerging Portfolio Fund Research, JPMorgan Chase, CBOE, and World Bank.
Note: Blue bars show the taper tantrum period of May-June 2013.
A. Based on JPMorgan EMBIG sovereign bond yield index.
B. 4-week moving average of net inflows to developing-country bond and equity funds.
C. Volatility index for U.S. Treasury yields refers to the expected volatility of the price of 10-year U.S. Treasury note
futures (CBOE’s TYVIX index). Volatility of developing-country bond yields refers to 30-day rolling standard deviation of JPMorgan EMBIG sovereign bond yield index.
D. Volatility of developing-country portfolio flows refers to 12-week rolling standard deviation of net inflows todeveloping-country bond and equity funds.

What Are Possible
Implications of the Liftoff for
Emerging Markets?
The impact of increasing U.S. yields on emerging
markets depends on the trigger of the increase. Rising U.S. yields that reflect a strengthening U.S.
economy would likely be associated with stronger
growth in emerging markets. In contrast, rising U.S.
yields that reflect a perception of accelerated monetary tightening would likely be accompanied by deteriorating activity and tightening financial conditions and, hence, with financial market volatility inand capital outflows from emerging markets.
Impact on activity and financial markets. A panel
VAR model is employed to examine the diverging
impacts of different types of U.S. shocks on activity
and financial markets in emerging market economies (see Box SF1.1 for technical details). Activity

indicators (industrial production) and financial
market indicators (stock prices, nominal effective
exchange rates, long-term bond yields) for emerging
markets are regressed on the monetary and realshocks identified in the econometric exercise above.
As expected, the results suggest that a U.S. yield increase resulting from a favorable real shock has aconsiderably more benign impact on emerging markets than one resulting from an adverse monetaryshock (Figure SF1.6). An adverse U.S. monetaryshock is associated with falling stock prices, depreciating emerging market currencies, and shrinking
industrial production—all consistent with capitaloutflows. A favorable U.S. real shock, on the other
hand, results in rising stock prices and increasing
industrial production.
Impact on capital flows. As they did during thetaper tantrum, there is a risk that financial market
participants consider the eventual liftoff and thesubsequent tightening cycle—even if “telegraphed”
by the Fed and expected in principle for sometime—as an accelerated tightening of monetaryconditions. As in the taper tantrum, it could beinterpreted by markets as a purely unfavorable
monetary shock, sharply raising U.S. long-termyields. This would likely dampen capital flows to
emerging markets.
A VAR model of capital flows and financial conditions is used to examine the potential role of rising
U.S. bond yields (Lim, Mohapatra, and Stocker2014). Quarterly capital flows, including foreign direct investment, portfolio, and bank flows, are regressed on global interest rates, financial market volatility, and growth in major advanced and emerging
economies (see Box SF1.1 for technical details).
The results indicate that about one-third of quarterly
fluctuations in aggregate capital inflows to emerging
markets since the early 2000s can be ascribed tochanging global financing conditions (Figure SF1.7).
Both short-term and long-term interest rate increases
in major economies tend to dampen capital flows to
emerging markets. In addition, a steepening yield
curve is often associated with higher financial market volatility which, in turn, further reduces capital
flows to emerging markets.13
13Higher U.S. term premia and a steepening yield curve are often
associated with higher financial market volatility and greater risk aversion (Abrahams et al. 2015; Adrian, Crump, and Moench 2013b; Borio
and Zhu 2012; Adrian and Shin 2011; Dell’Ariccia, Laeven and Mar-GLOBAL ECONOMIC PROSPECTS | JUNE 2015

8

6

4

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

0

2005

2

B. Bid-ask spread on emerging market foreign currency bonds
Basis points
Median30

3-month moving average

25
20
15
10

Jan-15

Jul-14Jan-14Jul-13Jan-13

Jul-12

Jan-12

Jul-11

Jul-100

Jan-11

5

C. Bid-ask spread on emerging market local currency bonds
Basis points
Median25

3-month moving average

20

15

10

Jan-15

Jul-14Jan-14Jul-13Jan-130Jul-12

5

Jan-12quez 2013). Greater risk aversion and volatility, in turn, reduce capital
flows to emerging countries further (Fratzscher 2012; Forbes and Warnock 2012; Bruno and Shin 2015; Lo Duca 2012; Ahmed and Zlate
2013; Bluedorn et al. 2013; Rey 2013).
14Based on a variance decomposition, Diebold and Yilmaz (2015)
suggest that long-term interest rates among non-U.S. major advanced
economies co-move (with some lag) with U.S. long-term interest rates.
Hunter and Simon (2005) find that bond market returns and volatility
in the United States lead those of German and Japanese bond markets.

10

Jul-11

No pass-through. Should long-term yields inother major economies remain broadly unaffected, capital flows to emerging markets would
fall considerably less, by about 18 percent orUS$, billions/unit

Jan-11•

Partial pass-through (as in taper tantrum). If
other major economies’ yields adjust in a manner similar to the taper tantrum (when global
yields increased by 70 basis points following an
increase in U.S. yields of 100 basis points), capital flows could fall by about 30 percent, or 1.3
percentage points of GDP.

A. Primary dealer treasury transactions

Jul-10•

Full pass-through. A 100 basis-point increase in
U.S. yields that is accompanied by a similarly
sharp increase in yields in the Euro Area, Japan,
and the United Kingdom would trigger a sudden increase in market volatility and a temporary drop in capital inflows to emerging markets, with the decline peaking after four quarters
at 1.8 percentage points of GDP (corresponding to a 40 percent dip in aggregate capital
flows). The magnitude of the effect is in linewith the estimated impact of a 100 basis-point
real U.S. yield shock found by Adler, Djigbenou, and Sosa (2014) and a 120 basis-point
shock in U.S. yields on portfolio flows found byDahlhaus and Vasishtha (2014).

Shocks can trigger sharp volatility especially in illiquid markets. At the height of theEuro Area crisis and during the taper tantrum, liquidity in some emerging bond markets
dropped off sharply, driving up bid-ask spreads. With shrinking primary dealer transactions, treasury market liquidity conditions have also become more fragile.

Jan-10•71

Figure SF1.5 Market liquidity

Jan-10If market expectations for medium-term interest
rates suddenly adjust upwards around liftoff, U.S.
yields could increase abruptly as seen during the taper tantrum. Significant co-movement between
long-term interest rates across major advanced
countries could contribute to the propagation of theinitial shock.14 Depending on the pass-through toother advanced countries’ interest rates, capital
flows to emerging markets could slow sharply overthe following year. Should U.S. term spreads increase by 100 basis points, the fall in capital flows to
emerging markets could be in the range of 0.8–1.8
percentage points of their combined GDP or a decline between 18 and 40 percent in the level of capital flows (Figure SF1.7).

S P E C I A L F E AT U R E 1

Source: Federal Reserve Bank of New York, Bloomberg, World Bank.
Note: Blue bars show the taper tantrum of May-June 2013.
A. Line shows primary dealer Treasury transactions divided by the Merrill Option Volatility Estimate (MOVE index)(12-week moving average). Merrill Option Volatility Estimate (MOVE) is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options.
B. C. Countries include Brazil, Chile, Colombia, Hungary, Indonesia, the Republic of Korea, Lithuania, Philippines,
Poland, Romania, Turkey, and South Africa. Median bid-ask spreads on 10-year government bonds.

72

S P E C I A L F E AT U R E 1

GLOBAL ECONOMIC PROSPECTS | JUNE 2015

Figure SF1.6 Implications of monetary and real shocks
on activity and financial markets in emerging markets
U.S. bond yield hikes caused by favorable U.S. real shocks have more benign effects
on emerging markets than those caused by adverse U.S. monetary shocks. U.S. bondyield jumps associated with real shocks tend to raise equity prices and production in
emerging markets, and appreciate their currencies. Those caused by U.S. monetaryshocks tend to raise bond yields in emerging markets and depreciate their currencies.
A. Bond yield

B. Stock price

Basis points

Percent change
8.0

35
30

6.0

25
20

4.0

15

2.0

10

0.0

5
0

Monetary shock

Real shock-2.0

Monetary shock

C. Nominal effective exchange rate

D. Industrial production

Percent change

Percent change

1.2

2.0

0.8

1.5

2.5

1.6

1.0

0.4

0.5

0.0

0.0

-0.4
-0.8

Real shock

Under certain conditions, an abrupt increase in U.S.yields could lead to outright sudden stops in capital
flows to some emerging markets, which could take aheavy economic toll.15 The sudden stops in capital
flows during the 1990s and 2000s had significant
economic costs (Claessens and Kose, 2014; Table
SF1.1). For example, about two-thirds of 33 sudden
stop episodes through the 1990s and early 2000s
were associated with output collapses—contractions
in GDP of 4.4 percent from peak to trough (Calvo,
Izquierdo, and Talvi 2006).16 Some sectors are particularly vulnerable to output losses as a result of
sudden stops due to their reliance on debt finance,
including construction, wholesale and retail trade,transport, and communications (Craighead andHineline 2013). Compared with the earlier episodes,
the impact of sudden stops on emerging market asset
prices could be amplified by the increasing role ofthe non-bank sector and bond financing in channeling liquidity to emerging markets (Shin 2013).

-0.5
Monetary shock

Real shock

Monetary shock

Real shock

Source: Haver, Bloomberg, World Bank estimates.
Note: Impulse responses after 12 months from a panel VAR model including emerging markets’ industrial production, long-term bond yields, stock prices, nominal effective exchange rates and bilateral exchange rates against
the U.S. dollar, and inflation, with monetary and real shocks (estimated as in the previous section) as exogenous
regressors. All data are monthly or monthly averages of daily data, for January 2013-March 2015 for 19 emerging
markets. For comparability, the size of the U.S. real and monetary shocks is normalized such that each shockraises developing-country bond yields by 100 basis points on impact.
A. Bond yields refer to the yields on 10-year (or nearest equivalent) government treasury bonds.
B. Stock price indices are the general price indices from Haver.
C. An increase denotes an appreciation. GDP-weighted average of emerging-market exchange rates.

0.8 percentage point of GDP after a year.
Quantitative easing or other monetary policy
easing by other major central banks could insulate their markets from pass-through and reduce the impact of rising U.S. bond yields on
emerging markets.
The magnitude of the potential decline in capital
flows estimated here is both statistically and economically significant, implying considerable challenges for those emerging markets facing moreacute vulnerabilities. However, the overall effect for
emerging and developing countries remains modest
in view of the historical volatility of capital flows. A
decline of 40 percent in capital inflows, or 1.8 percentage points of GDP, would be broadly equivalent
to a decline of one standard deviation in quarterly
flows since the start of the 2000s (compared withthe typical definition of a sudden stop in the literature as a two-standard deviation shock).

What Are the Major Lessons
for Emerging Markets fromthe Taper Tantrum?
The results above pertain to emerging markets asa group. However, tightening financial conditions would likely put emerging markets withweak growth prospects, policy uncertainty, or
lingering vulnerabilities under greater pressure
than their less vulnerable peers with better
growth prospects and policies.
During the taper tantrum, around 12 percent ofemerging market and developing countries experienced sustained declines in capital inflows, especially portfolio inflows (Figure SF1.7). Emerg15Koepke (2015b) reports that Fed tightening cycles coincide withhigher incidence of financial crises particularly in the year of the firstrate hike, and to a lesser extent in the prior and the following year. Escolano, Kolerus, and Ngouana (2014) find the frequency of emerging
market sovereign debt crises increases around episodes of U.S. monetary policy tightening that are associated with widening term spreads.
16Cardarelli, Elekdag, and Kose (2010), examining 109 episodesof large net private capital inflows to 52 countries over 1987–2007,
report that the typical post-inflow impact on GDP growth for episodes
that end abruptly is about 3 percentage points lower than during theepisode, and about 1 percentage point lower than during the two years
before the episode. Claessens et. al. (2014) provide a comprehensive
review of the literature on financial crises, including sudden stops, inlight of recent evidence.

GLOBAL ECONOMIC PROSPECTS | JUNE 2015•

Differentiation depending on country characteristics and policies. Financial market disruptions during the taper tantrum period wereparticularly sizable in countries with weaker
macroeconomic fundamentals, larger financial markets, and less robust policy responses.
Large current account deficits following a period of rapid real appreciation, modest international reserves, and weaker growth prospects were associated with sharper drops incapital inflows and disruptions in financial
markets. Larger and more liquid financial
markets—including as a result of past capital
inflows—also experienced greater exchange
rate pressures, foreign reserve losses, and equity price drops.18 In some countries, these
impacts were mitigated by proactive policy
responses. Liquidity provision, interest rates
hikes, removal of restrictions on capital inflows, and, in some cases, foreign currencyintervention helped stem depreciations, stock
market declines, and bond yield jumps; fiscal
policy announcements appeared to be less effective in mitigating the impact of short-term
financial stress (Sahay et al. 2014).

A. Drivers of capital inflows

B. Global interest rates and capital
inflows

Percent of variance20

Deviation from baseline, percentage points

15

2

10

1

Capital inflows to emerging and developing
countries (percent of GDP)

5Volatility ofequity markets

0
G4 short-term
rates

0

C. Sudden stops: total capital
inflows
Percent of countries
40

1 standard deviation threshold2 standard deviations threshold

30

-1
-2

2015

2016

2017

D. Sudden stops: portfolio inflows
Percent of countries
1 standard deviation threshold2 standard deviations threshold

30

20

20
10

10
0
1997 2000 2003 2006 2009 2012

0
1997

2000

2003

2006

2009

2012

Source: World Bank, Bloomberg.
A. Figure shows the variance decomposition of capital inflows to developing countries after 8 quarters, according
to a six-dimensional VAR model estimated over the period 2000Q1 to 2014Q4. The model links aggregate capital
inflows to developing countries (including foreign direct investment, portfolio investment and other investment asshare of GDP), to quarterly real GDP growth in both developing and G-4 countries (United States, Euro Area,
Japan and the United Kingdom), G-4 short-term interest rates (three month money market rates), G-4 10-year
government bond yields, and the VIX index of implied volatility of S&P 500 options. To compute the variance decomposition, a structural identification was derived from a Cholesky decomposition on the covariance matrix,
using the following order of variables: G-4 GDP growth, developing countries’ GDP growth, G-4 short-term rates,
G-4 long-term rates, VIX and capital inflows to developing countries. Impulse responses show that a shock in G-4
long-term rates has a peak effect on capital flows after 4 quarters, while the impact remains significant at a 90
percent confidence interval up to 6 quarters.
B. The 100 basis point shock on the U.S. term spread was applied to the VAR model assuming a range of passthrough rates to Euro Area, U.K. and Japanese bond yields, from zero to 100 percent. Grey area shows the range of
estimated effects on capital inflows depending on pass-through rates (the lower bound corresponds to a zero passthrough rate implying a 40 basis points shock to global bond yields, while the upper bound corresponds to a 100
percent pass-through rates, or a 100 basis points shock to global bond yields). In the median case, global bond yields
increase initially by 70 basis point, which corresponds to the observed pass-through rate during the taper tantrum.
C. D. Figures show the fraction of 86 emerging and developing countries that experienced a sudden stop. The
methodology used to identify sudden stop episodes at the individual country level is based on Forbes and Warnock (2012), with the threshold being defined as a decline in flows larger than one (or two) standard deviation(s)around a five-year rolling mean. Blue bars show the taper tantrum period of May-June 2013.

•17Dahlhaus and Vasishtha (2014) document the modest shock to
portfolio capital flows to emerging markets during the taper tantrum
that, nevertheless, triggered significant financial market adjustment insome emerging markets. Díez (2014) examines the exchange rate adjustment in emerging markets during the taper tantrum. Lim, Mohapatra, and Stocker (2014) calibrate the possible impact of future policy
tightening to the taper tantrum.
18For details about these observations, see Aizenman, Binici, andHutchison (2014); Chapter 3 of IMF (2014c); Avdijev and Takats(2014); Basu, Eichengreen, and Gupta (2014); Collyns and Koepke(2015); Díez (2014); Mishra et al. (2014); Rai and Suchanek (2014)and Eichengreen and Gupta (2014).

G4 long-term interest rates

Emergingmarket growth

Initial impact versus longer-term impact. The
taper talk initially triggered indiscriminate
capital outflows from emerging markets.
Over time, greater country differentiation
emerged as capital flows returned to somecountries but not to others (Sahay et al.,2014; Lavigne, Sarker, and Vasishtha 2014).

Changing global financial conditions—especially U.S. yields—account for a large part of
movements in capital flows to emerging market and developing countries. A 100 basispoint rise in U.S. 10-year yields could trigger a drop in capital inflows to developing
countries, which could lead to “sudden stops.”

G4 long-term
rates

•

73

Figure SF1.7 Surging U.S. yields and capital inflows to
emerging and developing countries

G4 growth

ing market currencies depreciated, bond spreads
jumped, foreign portfolio inflows to emergingmarket bond and equity funds fell sharply, volatility increased, and liquidity tightened.17 An
extensive literature has identified the following
key factors and policy responses characterizing
the impact of the taper tantrum (Table SF1.2).

S P E C I A L F E AT U R E 1

Differentiation depending on asset classes. The
differentiation by fundamentals, financial
market size, and policies was particularly pronounced for certain types of capital outflows.
For example, cross-border bank flows to anumber of emerging market economies—especially in Latin America—with sizable U.S.
dollar-denominated liabilities fell especiallysharply during the taper tantrum (Avdijev and
Takats 2014; García-Lunaa and van Rixtel2014). In contrast, FDI flows were broadly stable

74

S P E C I A L F E AT U R E 1

GLOBAL ECONOMIC PROSPECTS | JUNE 2015

Figure SF1.8 Growth prospects in emerging anddeveloping economies
Since the taper tantrum in May-June 2013, growth prospects of emerging markets havedeteriorated and credit ratings have worsened.
A. Developing-country growth
Percent
6

B. Developing-country rating byinstitutional investors

Developing Countries (excluding China)
Developing Countries
Average since 2000

43

5
Average since 2000 (excluding China)

42
41

4

40

3
2

Average rating, 100 = United States
44

39
2012

2013

2014

2015

38
2007

2008

2010

2012

2013

2015

C. P
 roductivity growth in developing
regions

D. Fraction of developing countries
with slower growth than 19902008 average

Percent, GDP weighted
5
2003-08
2010-132014-154
1990-08

Percent
100

3

60
40

2

2014

2015-17

2013

2012

2011

2010

2009

2008

2007

2006

EAP LAC ECA SAS SSA MNA DEV

2005

0

2004

20

1
0

80

Source: Haver, World Bank estimates.
B. Unweighted average of 120 developing-country institutional investor ratings. Ratings are based on information
provided by sovereign-risk analysts at global banks and money management and securities firms. The countries
are graded on a scale of zero to 100, with 100 representing the least likelihood of default. Ratings are reported inpercent of the United States’ score. The blue line shows the taper tantrum period in 2013H2.
C. GDP-weighted annual averages. DEV = developing-country average; EAP = East Asia and Pacific; ECA = Europe and Central Asia; LAC = Latin America and the Caribbean; MNA = Middle East and North Africa; SAR =South Asia; SSA = Sub-Saharan Africa.
D. For each year, the fraction of developing countries in which growth is slower than its historical average for 19902008. For 2015-17, the average of three years is shown.

(Basu, Eichengreen, and Gupta 2014), and drops
in equity market valuations were more uniform
across countries (Mishra et al. 2014; Rai and
Suchanek 2014).
Lessons from the taper tantrum episode are consistent with those from the broader literature on sudden stops in capital inflows. Country-specific vulnerabilities not only increase the probability of asudden stop, but also intensify its severity in termsof currency depreciation, private sector credit contraction, and growth declines, and lengthen thetime it takes for growth to revert to its long-term
trend (see also Table SF1.1). A greater reliance on
FDI and equity flows instead of debt flows andcross-border bank loans may reduce the severity ofsudden stop episodes (Levchenko and Mauro 2007).

How Have Growth Prospects
and Vulnerabilities in
Emerging Markets Changed
since the Taper Tantrum?
Country-specific “pull” factors, including macroeconomic fundamentals and policies, play an important role in determining the direction and magnitude of capital flows. Since the taper tantrum,
macroeconomic fundamentals in several emerging
markets have weakened, and as a result, their credit
ratings have on average deteriorated (Figure SF1.8).
Growth prospects have dimmed for emerging markets over the past five years. Specifically, growth inemerging markets has slowed steadily since 2010and has repeatedly fallen short of expectations, including in 2015. Investment growth in emerging
markets has slowed from pre-crisis rates (Chapter1), and it might be further held back by the upcoming tightening in global financial conditions. Export
growth is expected to remain on its weak post-crisis
trend (World Bank 2015).
Although, on average, emerging markets’ macroeconomic and financial vulnerabilities appear manageable, weak growth could reduce their resilience overtime (Figure SF1.9). Government debt levels are, on
average, moderate around 45 percent of GDP.19 Fiscal deficits, while larger than in 2007, amount toabout 4 percent of GDP but are expected to narrowin oil-importing countries as a result of declining
expenditures on fuel subsidies following last year’s
significant drop in oil prices. In oil-importing countries, inflation has fallen, allowing central banks insome countries to reduce monetary policy rates tosupport growth. In contrast, fiscal and monetary
policy room has shrunk in oil-exporting countries as
oil revenue shortfalls weakened fiscal balances (although, on average, from near-balance) and depreciation pressures reduced reserves (although typically from ample levels) or raised inflation.

19In frontier markets, however, government debt has increased since
the global financial crisis, partly reflecting a rapid increase in bond issuance in global capital markets (although from low levels). In some frontier markets, rising government debt has been accompanied by rapidly
growing private sector credit (World Bank 2015).

GLOBAL ECONOMIC PROSPECTS | JUNE 2015

Percent of GDP
100

Inflation has moderated for some oil-importing
countries, but is still at or above formal or informal inflation targets in several of them.

For those countries with significant vulnerabilities, financial market volatility around the liftoff or in the subsequent tightening cycle could potentially combine
20In addition to individual indicators of emerging market vulnerabilities, a number of aggregate indicators have been developed, such as
the index of emerging market vulnerabilities used in the Federal Reserve
Board’s Monetary Policy Report in February 2014, the heat map index
of external vulnerabilities computed by the Institute of International
Finance (2015), or Santacreu (2015). While summary indicators areuseful to illustrate the evolution of aggregate vulnerabilities over time,they tend to blur differences in sources of vulnerabilities.
21Schularick and Taylor (2012) and Bruno and Shin (2013) highlight how currency developments interact with the role of leverage incomplex ways in building financial vulnerabilities.

Government debt:MedianGovernment primarybalance:Median(RHS)

12

8

60
4
40
0

Exporters

Importers

Exporters

2014

2007

2014

2007

2014

0

2007

20

-4

Importers

B. Median inflation
Year-on-year, percent
16
14

Importers

Exporters

12
10
8
6
4

2015

2014

2013

0

2012

2

2011

Despite the general lack of major progress, there areindividual countries that have succeeded in reducing some of their vulnerabilities. For example, Indian financial markets fell sharply during the taper
tantrum, amid macroeconomic conditions that had
weakened in prior years and had left it vulnerable tocapital outflows (Basu, Eichengreen, and Gupta
2014). The Indian economy has since shown notable improvement, particularly in reducing its highcurrent account deficit and inflation.

Government primary balance
(RHS)

80

Private debt has edged up despite slower credit
growth in some countries. Public debt has increased in some emerging markets and primarybalances have deteriorated, particularly among
commodity exporters.
Given the pre-eminent role of the U.S. dollar as
the currency denomination of cross-borderdebt, a dollar appreciation constitutes a tightening of global financial conditions and could
heighten risks associated with liability exposures and dollar shortages (Borio 2014). 21 Foreign currency exposures are elevated, especiallyin several commodity exporters and frontier
and emerging markets that have received large
capital inflows since the crisis (Figure SF1.11).

Percent of GDP

Government debt

2010

•

A. General government debt and balance

2014

•

Fiscal positions in emerging markets have deteriorated since the crisis, but debt anddeficits remain, on average, moderate. Inflation has declined in oil-importing countries,
partly as a result of low oil prices.

2007

•

While there has been an improvement in current
account balances among oil-importing economies, deficits remain elevated for several of them.
Foreign reserves have increased, but for somecountries only modestly, and came under pressure
in some oil-exporting countries in early 2015.

2009

•

75

Figure SF1.9 Debt, deficits and inflation in emerging
markets: Oil exporters vs. oil importers

2008

However, these averages mask considerable differences across countries (Figure SF1.10).20

S P E C I A L F E AT U R E 1

Source: World Bank, International Monetary Fund, Haver Analytics.
A. Bar illustrates interquartile range for developing countries. Dot shows median for developing countries.
B. For developing countries. Hydrocarbon exporters (as proxy for oil exporters) are Algeria, Angola, Argentina,
Azerbaijan, Cameroon, Côte d’Ivoire, Colombia, Chad, Ecuador, Gabon, Indonesia, the Islamic Republic of Iran, Iraq,
Kazakhstan, Libya, Malaysia, Mexico, Nigeria, Papua New Guinea, South Africa, Sudan, Turkmenistan, Uzbekistan,República Bolivariana de Venezuela, Vietnam, and the Republic of Yemen.

with other domestic pressures (for example, a large current account deficit, uncertainty about policy direction,or significant deterioration of growth prospects) into a
perfect storm that leads to a sudden stop. An abruptchange in risk appetite for emerging market assets could
lead to contagion effects affecting capital flows in countries that are highly integrated in international capital
markets. Such contagion may take place even if the affected countries have limited domestic vulnerabilities(Calvo and Reinhart 1996; Kaminsky 2008). For example, investor confidence could be dented by uncertainty about policy direction or deteriorating growth

76

S P E C I A L F E AT U R E 1

GLOBAL ECONOMIC PROSPECTS | JUNE 2015

Figure SF1.10 Evolution of vulnerabilities in emerging
markets since the taper tantrum
Although, on average, current account balances have improved and reserve coverageincreased (partly as a result of lower oil prices), there has been wide variation acrosscountries. Private debt and inflation have, on average, increased and fiscal positions
have deteriorated.

All
All

Brazil

China
All
All

Russian Federation

MexicoThailandIndia

Malaysia

Colombia

TurkeyIndonesia

South Africa

MexicoHungaryAll
All

Hungary

Philippines

China

Malaysia

MexicoColombia

30
25
20
15
10
5
0

C. Inflation

Emerging market policy makers have several options to prepare for the risks associated with thecoming tightening cycle. Foremost among them are
the adoption of policies that reduce vulnerabilities
and the proactive pursuit of structural reform agendas that improve growth prospects.
•

Monetary and financial policies. In several oilimporting countries, inflation is running at ornear the top of formal or informal target bands.
For central banks in these countries, buttressing
monetary policy credibility may be a priority.
Elsewhere, for example in oil-exporting countries where growth has softened but inflation
has been driven up by depreciation, banks withhigh foreign currency vulnerabilities or heavy
reliance on short-term debt may merit closemonitoring or tighter prudential requirements.

•

Fiscal policy. Although emerging market sovereign debt is significantly less than in the early
2000s, fiscal deficits widened rapidly in the aftermath of the global financial crisis and have yet toreturn to pre-crisis levels. Over the medium-term,
several emerging markets need to improve theirfiscal positions (World Bank 2015). Many oil-exporting countries are already tightening fiscal policy, even as growth slows. Although this exacerbates growth slowdowns, it will help preserve
buffers that could be used if risks around the liftoff
materialize. Oil-importing countries that benefit
from savings on lower energy subsidies or higher
energy taxes could seize the opportunity to build
fiscal buffers to regain policy space for effective fiscal stimulus that may be needed in the future.

•

Structural reforms. Given the limited room forfiscal and monetary policy adjustment to reduce
vulnerabilities, the proactive pursuit of structural reforms that improve long-term growthprospects are an integral part of preparing forthe liftoff. Although the benefits of reforms taketime to materialize, decisive moves to implement ambitious reform agendas signal to investors that growth prospects are improving (Koseet al. 2010). In investors’ differentiated views,
this could make the difference between capital

D. Private debt

Percent
11

2013H1

Latest 6 months

Percent of GDP
250

2013H1

2014H2

200

7

150
100

3

Indonesia

India

TurkeySouth Africa

Russian Federation

BrazilThailandHungaryAll
All

Philippines

BrazilTurkeyHungary

Thailand

Colombia

China

2015

Indonesia

South Africa

Russian Federation

MexicoPercent of GDP
3
2013
2
1
0
-1
-2
-3
-4
India

All
All

Indonesia

2015

Russian Federation

TurkeyColombia

Philippines

China

South Africa

Mexico2013

ThailandBrazilMalaysia

India

Hungary

F. Primary balance

Malaysia

E. General government debt
Percent of GDP
100
80
60
40
20
0

China

All
All

China

Malaysia

Thailand

Colombia

Philippines

MexicoIndonesia

HungarySouth Africa

BrazilRussian Federation

India

0

Malaysia

50
Turkey-1

2013H1
Latest 6 months

Months of imports

2014H2

Russian Federation

ThailandIndonesia

India

2013H1

BrazilTurkeySouth Africa

Percent of GDP
9
6
3
0
-3
-6
-9

B. Foreign reserves

Philippines

A. Current accountWhat Policy Options Are
Available to Prepare for
Risks around Liftoff?

Source: Bank for International Settlements, Haver Analytics, World Bank, IMF.
A. “All” refers to the un-weighted average among all listed countries.
B. Foreign reserves include gold.
C. Inflation is the 6-month average of the annual average consumer price inflation.
D. Private debt is defined as the sum of private non-financial sector debt and household debt.
F. Primary balance excludes net interest payments.

prospects. This could turn a manageable slowdown incapital inflows as part of a broader emerging market retrenchment around the liftoff into a sudden stop in inflows and translate into a sharp decline in activity. Even
countries that are not directly exposed to global financial
market shocks could be affected through intraregional
spillovers from their larger, financially more integrated
neighbors. Whereas within-regional financial exposuresoften tend to be limited, trade, remittance, and direct
investment links are strong in some regions.22
22In some cases, official financing could be an additional channel fortransmission of fiscal stress (e.g.; from República Bolivariana de Venezuela
through the PetroCaribe arrangement or from Gulf Cooperation Council countries to countries in the Middle East and North Africa throughbudget support; IMF 2014b). There can also be strong contagion effects
from intraregional volatility of capital flows (Lee, Park, and Byun 2013).

GLOBAL ECONOMIC PROSPECTS | JUNE 2015

2013

Change 07-13

30
20
10

TurkeyRussian Federation

Egypt, Arab Rep.

Hungary

Indonesia

Philippines

VietnamArgentina

PakistanSouth Africa

India

-10

Thailand0

B. Corporate debt of emerging markets
Percent of GDP
120

Emerging market (excluding China)

Emerging market

100
80
60
40
20
0

2005

2006

2007

2008

2009

2010

2011

2012

2013

C. Corporate debt of selected emerging markets
Percent of GDP

2007

175

2014

Change 07-14

145
115
85
55

China

Hungary

Czech Republic

Thailand-5

Indonesia

25

TurkeyTargeted support measures. If financial stressthreatens financial stability, for example because of large foreign currency liabilities, intervention in foreign currency markets throughthe use of international reserve or swap market
operations may be necessary. Liquidity provision in local capital markets may be required
to preserve orderly market conditions. The removal of capital inflow restrictions or—as acomplement to sound macroeconomic policies, financial supervision and regulation, andstrong institutions—the imposition of temporary controls on certain outflows might temper net outflows (IMF 2014d).

2007

Poland•Interest rate increases. Emerging markets concerned about the balance sheet effects of sizable
depreciations may wish to raise monetary policy
interest rates to stem depreciations. This has been
done, to varying degrees, in past U.S. tightening
episodes (Chapter 1). The effectiveness of an interest rate hike in stemming depreciation pressures rests on the credibility of the monetary
policy framework (Eichengreen and Rose 2003).

Percent
40

South Africa•

Exchange rate flexibility. In a significant difference
to the 1990s, most emerging markets now maintain flexible exchange rate regimes. Allowing exchange rates to adjust will be an important buffer
to external shocks in many emerging markets
with limited currency mismatches on corporateand household balance sheets and credible macroeconomic policies (Davies et al. 2014).

A. Foreign currency exposure in emerging markets

India

•

Foreign currency exposures in a number of emerging markets remain high, rendering them vulnerable to sharp movements in their currencies. Corporate debt has also
increased in many countries.

Venezuela, RB

Should risks around the liftoff materialize, emerging
markets need to resort to policy measures to alleviate short-term financial stress. These include, mostimportantly, exchange rate flexibility, targeted measures to ensure market functioning, and measures torestore confidence. Many of these measures appeared to help countries effectively respond to thetaper tantrum (World Bank 2014a).23

Source: Bank for International Settlements, Moody’s, World Bank.
A. Foreign currency exposure is measured as the ratio of total foreign currency deposits in the domestic banking
system to total deposits in the domestic banking system. Latest available data for 2013.
B. GDP-weighted average. List of emerging markets includes China, Czech Republic, Hungary, India, Indonesia,
Mexico, Poland, South Africa, Thailand, and Turkey.
C. The 2007 data of South Africa’s corporate debt is not available and thus replaced by 2008Q1 data.

•
23A rich literature examines policy responses to financial stress andemphasizes various tradeoffs (Frankel and Wei 2004; Claessens et. al.
2014; Forbes and Klein 2015).

77

Figure SF1.11 Foreign currency exposure andcorporate debt

Mexicooutflows and inflows. In addition to raising
long-term growth, some reforms—especiallythose requiring investment in infrastructure
projects—can support cyclically weak demand.

S P E C I A L F E AT U R E 1

Measures to restore confidence. Reforms to improve the credibility of monetary, fiscal, andregulatory policies through changes in the governance of associated policy institutions may

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S P E C I A L F E AT U R E 1

help convince investors of a commitment tosustainable macroeconomic and financial policies. Credible commitments to structural reforms could enhance investors’ perceptions oflong-term growth prospects.
International policy coordination could potentially help limit the risks of financial turmoil around
liftoff and, if they materialize, help emerging market
countries navigate them, and, in turn, avoid spillbacks to advanced countries (Sahay et al. 2014).
Policy coordination could range from heightened
efforts by advanced country central banks to engage
in clear and effective communication to the internalization by central banks of the spillover effects of
their policies, although the latter may be difficult to
operationalize (Rajan 2014).24 More broadly speaking, there may be scope for enhanced global andregional safety nets, including through multilateral
institutions and regional risk-sharing arrangements,
to support emerging markets during periods of financial stress (Carstens 2015).

Conclusion
As the Fed readies for its first policy rate hikeafter almost a decade, financial conditions are on
the cusp of becoming more challenging for
emerging market countries. Most likely, the liftoff will proceed smoothly given that the U.S. recovery appears well entrenched and financial
markets are being bolstered by highly accommodative monetary policies in other major advanced
countries. If the liftoff takes place in line withmarket expectations, U.S. long-term yields will
likely remain well contained, the term premium
will remain narrow, and movements in capital
flows to emerging countries will be modest.
However, as evidenced during the taper tantrum
episode, there is a risk that if market expectations
adjust in a disorderly fashion, financial market
volatility could spill over to emerging markets.
Specifically, low U.S. term premia, diverging
views between markets and Fed policy makers
about the future path of interest rates, and chang24An example of coordination is the introduction of liquidity swap
lines by the Fed to other (mostly advanced country) central banks inthe 2008–09 global financial crisis (Fischer 2014). Dudley (2014) presents a discussion of the impact of U.S. monetary policies on emerging
economies and summary of policy lessons from the taper tantrum.

GLOBAL ECONOMIC PROSPECTS | JUNE 2015

ing conditions in market liquidity all heighten
risks to U.S. financial markets. If the risks aroundthe liftoff and subsequent tightening steps materialize, U.S. interest rates could increase sharply.
This could in turn lead to greater financial market volatility and could significantly reduce capital flows to emerging market countries.
Emerging markets have become more resilient
since the early 2000s: fewer have fixed exchange
rates; most have sounder fiscal positions and better monetary policy frameworks; and the extent
of liability dollarization has declined (Kose andPrasad 2010; Davies et al. 2014). Nevertheless,the taper tantrum is a reminder that emerging
market currencies could depreciate sharply, local
borrowing costs rise steeply, and balance sheets
come under pressure.
During the taper tantrum episode, a jump in U.S.
long-term interest rates led, initially, to financial
stress across the entire spectrum of emerging market assets. Over time, differentiation among
countries increased based on country-specific vulnerabilities, policies, and growth prospects. Since
the episode, growth prospects have weakened andvulnerabilities remain in some emerging market
countries, heightening the risks of another similar shock. Unless appropriate policy measures arein place, the sudden realization of risks aroundthe liftoff could potentially spark a “perfectstorm” in some emerging market economies, inparticular those that need to adjust to the prospects of persistently low commodity prices andtighter financial conditions, or that face domestic
policy uncertainty against the backdrop of lingering vulnerabilities and weaker growth.
In anticipation of the risks surrounding the liftoff,emerging market countries should prioritize monetary and fiscal policies that reduce vulnerabilities
and strengthen policy credibility, and structural
policy agendas that improve growth prospects. In
the event that risks materialize, exchange rate flexibility could buffer shocks in some countries but
may need to be complemented by monetary policy
measures and targeted interventions to support orderly market functioning. International policy coordination could reduce the likelihood that these risksmaterialize and could alleviate their impact on
emerging markets. While emerging economies may
hope for the best from the eventual liftoff of the
U.S. policy rates, they need to prepare for the worst.

GLOBAL ECONOMIC PROSPECTS | JUNE 2015

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BOX SF1.1 Econometric analysis of U.S. yields and spillovers

This box briefly describes the main features of the three
econometric models used to analyze the role of monetary and real shocks in explaining movements in U.S.
yields, the spillovers of such shocks for emerging markets, and the impact of a sudden increase in U.S. yields
on capital flows to emerging market and developing
countries.
Contribution of monetary and real shocks to
U.S. long-term yields
To analyze the drivers of moves in U.S. yields, the firsteconometric model uses a structural vector autoregression (SVAR) framework with sign restrictions todecompose daily movements in yields during January
2013-March 2015 into two components: one reflecting
real U.S. growth shocks and another reflecting U.S.
monetary shocks.a The SVAR follows a similar approach
as Matheson and Stavrev (2014) and the International
Monetary Fund (2014b) based on three U.S. variables:
long-term interest rates, stock prices, and the nominal
effective exchange rate.b For reasons of data availability,
other economic data (e.g. inflation expectations) that
may also be important drivers of the long-term interest
rate are excluded from the model. The sign restrictions
assume that an adverse “monetary” shock (such as an
unexpected real or perceived policy tightening) increases yields and reduces stock prices in the UnitedStates, while a favorable “real” shock (such as reflecting
better growth prospects) increases both yields and stock
prices.c The shocks identified using these restrictions
naturally reflect market perceptions of monetary policy
and growth.
Spillovers from U.S. monetary and real shocks toactivity and financial markets
To assess the spillovers from the shocks driving U.S.
yields on emerging markets, a panel VAR model is­estimated for emerging market country variables, with
monetary and real shocks (estimated as in the above
aDaily (rather than monthly) data is used to ensure that U.S. shocks, inparticular monetary shocks that reflect Fed announcements, and their near
immediate effects on stock prices are well identified.
bThe nominal effective exchange rate is added on technical grounds,
to ensure that the two identified shocks are orthogonal while also ensuringthat the sign restrictions are satisfied. The results are broadly in line with
Matheson and Stavrev (2014) who leave out a third variable.
cSign restrictions are imposed on stock prices and yields. Responses of
exchange rates are unrestricted and turn out to be statistically insignificant.

model) as exogenous regressors. The panel VAR includes six variables for emerging markets: long-termbond yields, stock prices, nominal effective exchange
rates, bilateral exchange rate with the dollar, industrial
production, and inflation. The list of countries is:Argentina, Brazil, Chile, Colombia, the Czech Republic, Israel, Mexico, Poland, South Africa, Turkey, India,
Indonesia, the Russian Federation, China, the Republicof Korea, Malaysia, the Philippines, Saudi Arabia, andThailand.d All data are monthly or monthly averages ofdaily data for January 2013–March 2015. Spillovers arethen evaluated by tracing out the impulse responses ofthese variables due to adverse monetary U.S. shocks
and favorable U.S. real shocks. The size of the U.S.
shocks is normalized such that developing-country
bond yields increase by 100 basis points on impact.
Spillovers from U.S. financial conditions tocapital flows
The effects of moves in U.S. yields on aggregate capital
inflows to emerging markets and developing countries
are modeled using a VAR model, based on Lim, Mohapatra, and Stocker (2014). This model links quarterly
aggregate capital inflows (including foreign direct investment, portfolio investment, and other investment)
to 86 emerging and developing countries (from BPM6
balance of payment data, expressed in percent of grossdomestic product [GDP]) to real GDP growth in both
emerging market and developing countries and G-4
countries (the United States, the Euro Area, Japan, andthe United Kingdom), G-4 short-term interest rates(GDP-weighted average of three month money market
rates for G-4 countries), G-4 long-term interest rates(GDP-weighted average of 10-year government bondyields for G-4 countries), and the VIX index of implied
volatility of S&P 500 options. This captures the response of capital flows to external shocks, and theirpropagation through global uncertainty and growth effects. The feedback between global interest rates andinvestors’ risk appetite is captured by incorporating in
the model the VIX index of implied stock market volatility, which is often used as proxy of risk aversion anddeleveraging pressures (Adrian and Shin 2010 and2012), with significant repercussions for capital flows to
dTo avoid spurious results, the sample is restricted to large emerging
markets that are highly integrated into global financial markets.

79

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BOX SF1.1 (continued)

developing countries (Rey 2013; Bruno and Shin 2013;
Forbes and Warnock 2012).

quarters and remaining significant at a 90 percent confidence interval up to 6 quarters.

To compute impulse responses, the covariance matrix isderived from a Cholesky decomposition. The Cholesky
decomposition is based on the following order of variables (from least to most “endogenous”): G-4 GDP
growth, emerging markets’ GDP growth, G-4 shortterm rates, G-4 long-term rates, VIX, and capital inflows
to emerging markets. Overall, the impact of a 25 basispoints (one standard deviation) shock in long-term interest rate across G-4 economies is estimated to reduce
aggregate capital flows to emerging and developing
countries by 0.45 percent of their combined GDP (10percent drop in flows), with the effect peaking after 4

For robustness, a similar VAR model was computed for
portfolio flows (balance of payment data), with the impact of an interest rate shock estimated to be of similar
magnitude, but peaking earlier and with wider confidence intervals given greater volatility in quarterly
portfolio flows. A 100 basis-point shock to the U.S.
term spread is applied to the model, assuming a rangeof pass-through effects on Euro Area, U.K., and Japanese long-term yields (from zero to 100 percent). In
the median case, global bond yields increase by 70
basis points on impact, roughly comparable to thepass-through rate observed during the taper tantrum.

GLOBAL ECONOMIC PROSPECTS | JUNE 2015

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81

Table SF1.1 Studies on the effects of sudden stops
Authors

Country/data

Methodology

Objectives and results

Becker andMauro (2006)

167 countries/
annual,1970–2001

Event study;
multivariate
probit“Expected” output cost of sudden stops, based on conditional and unconditional probability of sudden stop.
• Cost of sudden stops on median output growth is 1.5% per year for emerging markets.
• Cost of sudden stops are not significant for developing economies

Bordo, Cavalloand Meissner(2010)

20 emerging
markets/annual,
1880–1913

Panel treatment
regression

Impact of sudden stops on trend growth and output gap.
• Sudden stops associated with financial crises widen the output gap, but nottrend growth. Growth appears to resume quickly.
• Sudden stops not accompanied by financial crises reduce trend growth.

Calderón andKubota (2013)

99 countries/
quarterly,
1975–2010

Event study

Probability of inflow- versus outflow-driven sudden stops and their effects on
output and credit.
• Negative effects of capital outflows-driven shocks are less than those of
inflows-driven shocks.

Calvo, Izquierdo
and Mejía (2004)

32 developedand emerging
economies/
quarterly andannual,1990–2001

Event study;
panel probit

Effects of current account reversals on growth and real exchange rate.
• Sudden stops in emerging markets are accompanied by large real exchange
rate devaluations.
• However, the same is not the case in developed countries.

Calvo, Izquierdo
and Mejía (2008)

110 countries/annual, 1990–2004

Event study;
probit panel
regressions

Characteristics and probability of systemic sudden stops.
• They are accompanied by large real exchange rate fluctuations.
• They occur in different countries at the same time, suggesting external
shocks as causes.
• High leverage of tradables absorption and high domestic liability dollarization increases the probability of these events.

Calvo andReinhart (2000)

Non-empiricalpolicy analysis

Case study;
event study

Effects of sudden stops in real economy and policy analysis.
• Sudden stops cause output losses and real exchange rate devaluation via(a) drop in aggregate demand due to nominal rigidities (Keynesian channel),and (b) an increase in non-performing loans due to decrease in the relative
price of non-tradables and a surge in ex-post interest rate faced by domestic producers (Fisherian channel).
• (Partial) dollarization and higher short-term flows increase costs by increasing non-performing loans.
• Sudden stops likely trigger banking crises (but not necessarily currency
crises).
• Flexible exchange rates help by avoiding compression in non-tradables
prices.
• Full dollarization recommended by authors.

Caner,
Koehler-Geib andVincelette (2009)43 developed
and developing
countries/annual,
1993–2006s

Panel regression

Effect of sudden stops on GDP growth.
• Following sudden stops, GDP growth falls by 4-5 percent.

Catao (2007)

16 countries/
annual,1870–1913

Case study;
event study;
panel regressions

Link between sudden stops and currency crashes.
• Not all sudden stops triggered depreciations or currency crises.
• Interesting results because of the time period, during which countries insample were pegged to gold and international spreads were much lower
than in the past few decades.
• Currency crashes were likely not the result of external factors but domestic
frictions, like lobbying linked to the export sector.

Cavallo et al.
(2015)

63 developing
and developed
countries/
quarterly,
1980–2012

Event-based,time series
regression;
pooled regression

Changes in GDP and real effective exchange rates in the 10 quarters before
and after sudden stop.
• Differentiation between sudden stops in net inflows, gross inflows, grossoutflows, and combinations.
• Sudden stops in net flows that coincide with sharp reductions in grossinflows are associated with larger drops in output compared to those thatcoincide with sharp declines in gross outflows.
• The effects of sudden stops on real exchange rates are not robust.

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Table SF1.1 Studies on the effects of sudden stops (continued)
Authors

Country/data

Methodology

Objectives and results

Cowan andRaddatz (2013)45 developed
and developing
countries/annual,
1975–2003

Panel (crossindustry,
cross-country)
regression

Impact of sudden stops on industrial production.
• For average industry, industrial production declines 5%.
• Production in industries that depend on external finance declines by more,
especially in less developed economies.
• Contractions are larger in industries with small comparative advantage.
• The contraction after sudden stops is largest for industries that produce
durable goods, especially in less financially-developed countries. Thissuggests that financial frictions due to sudden stops affect the observed
cyclical behavior of durable goods.
• High international reserves reduce production contractions.
• Expansionary monetary policy dampens the impact of sudden stops inindustry production in emerging and less financially-developed economies.

Edwards (2004)

157 countries/
annual,1970–2001

Simultaneous
regression

Probability of current account reversal and effects of current account reversal
on growth.
• Current account reversals are closely related to sudden stops.
• Current reversals reduce GDP growth by 1.8–5.1%.
• Effects depend on trade openness and exchange rate regime.

Gallego andTessada (2012)

Brazil, Chile,
Colombia,
Mexico/annual,
1978–2001

Panel (crosssector, crosscountry)
regression

Impact of sudden stops on job creation and destruction.
• After sudden stops, job creation tends to decrease more in sectors dependent on external finance.
• After sudden stops, job destruction is higher in sectors with greater liquidity
needs.

Guidotti,
Sturzenegger
and Villar (2004)

122 countries/
annual,1974–2002

Event study

Impact of sudden stops on GDP deviation from trend depending on current
account adjustment.
• Current account adjustment of more than 2 percentage points of GDP is
associated with GDP falling 1.8% below trend.
• Current account adjustment of less than 2 percentage points of GDP is
associated with GDP falling 0.8% below trend

Hutchison andNoy (2006)

24 emerging
markets/annual,
1975–1997

Panel regression

Investigates the effect of crises/sudden stops on GDP growth.
• It includes currency and sudden stop dummies on growth regressions.
• Sudden stops are associated with 6–8% decrease in GDP growth.
• The effects are short-lived and disappear after the second year.

Hutchison, Noy,and Wang (2010)

66 emerging
developing
economies/
annual,1980–2003

Panel regression

Output costs of sudden stops depending on monetary and fiscal policy.
• Monetary and fiscal policy tightening during sudden stops exacerbates
output losses (deviation of output from trend).
• Discretionary fiscal policy is associated with lower output costs (deviation in
output from trend), whereas expansionary monetary policy has no effect.

Ortiz et al. (2009)31 emerging
markets/
quarterly,
1990–2006

Event study;
cross-country
regression

Costs of systemic sudden stops and fiscal/monetary policy• Output falls 7.2% on average from peak to trough.
• Significant variation in output change across country-episodes (lowest:–20%; highest: +6.6%) and fiscal and monetary response.
• Countries that tightened monetary and fiscal policy during sudden stops
experience larger contractions in output.

Rothenberg and
Warnock (2011)24 Emerging
Markets/
quarterly,
1989–2005

Event study

Impact of sudden stop on GDP growth and its components and quarter-onquarter exchange rate movements against the U.S. dollar.
• After a “true sudden stop” (drop in inflows is greater than drop in outflows),
GDP growth falls sharply (even below zero in a couple of quarters); theexchange rate depreciates as much as 40%.
• After a “sudden flight” (drop in outflows greater than drop in inflows), GDP
growth falls (from 5-6% to 2-3%) but does not fall below zero; the exchange
rate depreciates around 10%.
• Investment and, to a lesser degree, imports are the most affected components of GDP.

Zhao et al. (2014)

85 countries/
annual,1980–2012

Event study; logit
regressions

Impact of sudden stops on probability of currency crises.
• Low trade openness, shallow financial markets and current account imbalances increase the probability that sudden stops will be followed by currency crises.

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83

Table SF1.2 Studies on the implications of the taper tantrum
Authors

Country/data

Methodology

Objectives and results

Avdjiev andTakáts (2014)

Both industrial
countriesand emerging
countries/
quarterly

Linear regression:
event study

Drivers of cross-sectional variation in the slowdown of cross-border banklending during the taper tantrum.
• The slowdown of cross-border bank lending during the taper tantrum depended on both the lender’s banking system and the conditions ofborrower emerging markets.
• A rising credit default swap (CDS) spread in lender’s banking system during
the taper tantrum is associated with a more pronounced slowdown in crossborder bank lending.
• A higher current account balance of a borrower emerging market is associated with a milder slowdown in cross-border bank lending during thetapering.
• A higher share of cross-border bank lending denominated in U.S. dollars
is associated with a more pronounced slowdown in cross-border bank lending.

Aizenman, Binici,
and Hutchison(2014)

Emerging
markets/daily

Panel regression

Impact of announcements by senior Fed officials on financial markets inemerging economies.
• Emerging market asset prices respond most to statements from Fed
Chairman Bernanke and much less to statements from other Fed officials.
• Exchange rates (and, to a lesser extent, equity prices and CDS spreads) ofa group of countries with solid macro fundamentals were initially more adversely affected by taper talk than those in the fragile group. This reflected
greater financial market development.
• However, the cumulative effects of taper talk after a month appear to bequite similar for both robust and fragile emerging markets.
• More financially developed emerging economies (according to a classification based on the 2012 value of the World Economic Forum’s Financial
Development Index, which considers factors related to financial development, intermediation, and access to financial services) were more impacted
by taper talk. A plausible interpretation is that more financially developed
economies are more exposed, at least in the short term, to external news
announcements.

Basu,
Eichengreen, andGupta (2014)

India/daily,
weekly, andmonthly

Case study;
linear regression

Response of Indian financial markets to taper talk.
• India was adversely impacted because it had received large capital flows inprior years and had large and liquid financial markets that were a convenient
target for investors seeking to rebalance away from emerging markets.
• India’s macroeconomic conditions had weakened in prior years, which
rendered the economy vulnerable to capital outflows and limited the policy
room for maneuver.
• These results suggest putting in place a medium-term policy frameworkthat limits vulnerabilities in advance, while maximizing the policy space forresponding to shocks. Elements of such a framework include a sound fiscal
balance, sustainable current account deficit, and environment conducive toinvestment.
• India should also continue to encourage stable longer-term capital flows anddiscourage volatile short-term flows, hold a larger stock of reserves, avoid
excessive appreciation of the exchange rate through interventions with theuse of reserves and macro prudential policy, and prepare banks and firms tohandle greater exchange rate volatility.

Dahlhaus andVasishtha (2014)

23 emerging
countries/weekly
and monthly

Vector auto­
regression (VAR)

Impact of U.S. monetary policy normalization on portfolio flows to major
emerging market economies.
• A shock corresponding to an increase in spreads of 120 basis points (bps)is associated with a decline in aggregate capital flows to GDP by 0.5% on
impact.
• The cumulative effect of a policy normalization shock (an increase of
120 bps) on aggregate capital flows is –1.24 percent of GDP after 3 months.
• The cumulative effect of a policy normalization shock (an increase of
120 bps) on aggregate capital flows is –1.83 percent of GDP after one year.

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Table SF1.2 Studies on the implications of the taper tantrum (continued)
Authors

Country/data

Methodology

Objectives and results

Díez (2014)49 emerging
countries/
monthly

Case study;
cross-country­regression
analysisEmerging markets’ financial market responses to taper talk versus actual
tapering.
• Emerging markets generally experienced a significantly larger depreciationin nominal exchange rates during the taper talk period in the summer of2013 than during the actual beginning of the taper period from December
2013 to January 2014. The average depreciation was 3% during the taper
talk period, and 1.5% during the beginning of the actual taper period. Moreover, among those countries that experienced noticeable depreciation, theaverages were 6.6 % during the taper talk period and 3% during the actual
taper period.
• Current account deficits and real exchange rate appreciation were key
factors in explaining the observed cross-country differences in adjustment
across the various emerging markets.
• For seven emerging markets—Brazil, China, India, Indonesia, Russia, South
Africa, and Turkey—12 variables are examined for early warning signals ofa potential crisis period, defined as a sharp drop in the country’s exchange
rate and/or a sharp drop in its international reserves. No strong evidence
predicting a crisis in the near future is reported.

Eichengreen and
Gupta (2014)

53 emerging
countries/
monthly

Cross-country
linear regression

Which countries were most affected by the taper talk and why.
• Emerging markets that experienced real exchange rate appreciation andwidening current account deficits during the prior period of quantitativeeasing saw the sharpest impact.
• A more important determinant of the differential impact was the size ofcountry’s financial market: countries with larger financial markets experienced more pressure on the exchange rate, foreign reserves, and equity
prices. This is interpreted as showing that investors are better able to rebalance their portfolios when the target country has a relatively large and liquid
financial market.

García-Luna andvan Rixtel (2013)

Emerging
countries/
quarterly

Case study;­descriptive
statistics

Impact of taper talk on cross-border credit for emerging markets.
• Cross-border credit to a large number of emerging market economies withsizable U.S. dollar-denominated liabilities fell in the second quarter of 2013.
• Latin American countries were most affected. The drop was largest for Brazil(with a ratio of U.S. dollar liabilities to exports of 99%), but was also quite
sharp for Chile (50%), Mexico (20%), and Peru (50%).
• In other regions, cross-border credit to India and Russian Federation
contracted as well. In contrast, cross-border credit to Turkey and several
emerging Asian economies increased, most notably to Taiwan, China, andIndonesia.

Lavigne, Sarker,
and Vasishtha(2014)

Emerging
markets/weekly
and quarterly

Case study;
descriptive­statistics

Impact of measures related to U.S. quantitative easing (including taper talk) on
capital flows.
• Taper talk in 2013 had a disruptive impact on capital flows to emerging markets; however, after the initial impact subsided, there is some evidence thatmarkets discriminated among countries according to fundamentals.

Lim, Mohapatra,and Stocker(2014)

60 developing
countries/
quarterly

Vector autoregression (VAR)

Gross financial inflows to developing countries between 2000 and 2013, with aparticular focus on the potential effects of quantitative easing policies.
• In a scenario of normalization of unconventional monetary policy over thecourse of 2014–16, simulation results show that capital flows to developing
countries could contract by 0.6 percentage point of GDP by the end of 2016.

Meinusch andTillmann (2015)

United States/
daily (fromTwitter)

Vector auto­
regression (VAR)

Extent to which changing expectations about the timing of the exit fromquantitative easing impact asset prices.
• Shocks to expectations of tapering affect interest rates, exchange rates, andasset prices.
• Given a positive shock to expectations of early tapering (proxied by a 5%
increase of Twitter users foreseeing an early tapering), the long-term interest
rate rises 3 bps at impact and peaks at 4 bps after 6 days.

Mishra et al.
(2014)

21 emerging
markets/daily

Linear regression,
event study.

Market reaction to taper talk and its relationship to economic fundamentals
and financial structures.
• Countries with stronger economic fundamentals, deeper financial markets,and a tighter macro prudential policy stance in the run-up to the tapering
announcements experienced smaller currency depreciations and smaller
increases in government bond yields.
• There was less cross-country differentiation in the response of stock
markets based on fundamentals.

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85

Table SF1.2 Studies on the implications of the taper tantrum (continued)
Authors

Country/data

Methodology

Objectives and results

Park and Um(2015)

Korea, Rep./daily

High-frequency
event-study­approach

Effect of U.S unconventional monetary policy (including tapering) on Koreanbond markets.
• One-day increase of U.S. Treasury yields after the taper announcement were
9 bps for 5-year treasury yields and 6.7 bps for 20-year treasury yields.
• Taper talk had no statistically significant impact on the Korea, Rep. bondyields.
• Taper talk triggered capital outflows from Korea, Rep. For example, taper
talk reduced Korea, Rep.'s foreign net investment by $193 million.

Rai andSuchanek (2014)

19 emerging
countries/
two-day window
around Fed
announcement
dates

Case study;
linear regression

Impact of taper talk on financial markets and capital flows for 19 emerging
markets.
• Emerging markets with strong fundamentals (e.g., stronger growth and current account position, lower debt, and higher growth in business confidence
and productivity), experienced more favorable responses to Fed communications on tapering.
• Initially, countries with less capital account openness experienced morefavorable responses to tapering, but this result diminished in subsequent
tapering announcements.

Sahay et al.
(2014)

Emerging
markets/daily,
monthly, andquarterly

Case study;
descriptive
statistics

Policy lessons from taper talk• The Fed’s monetary policy announcements were strongly correlated withmovements in asset prices and capital inflows in emerging markets, with theeffects being largest during the phase of unconventional monetary policy(post-2008) and when tapering was first discussed.
• On impact, asset prices and capital flows were hit indiscriminately acrosscountries, but over time there was greater differentiation among emerging
markets.
• Good macroeconomic fundamentals helped dampen market reactions to
U.S. monetary policy shocks. Elevated current account deficits, high inflation, weak growth prospects, and relatively low reserves were importantfactors affecting market reaction.
• Where vulnerabilities existed, emerging markets that acted early and decisively generally fared better.
• Clear and effective communication by advanced-economy central banks
concerning exit from unconventional monetary support is important to
reduce the risk of excessive market volatility. The international community
has an important role to play to safeguard global financial stability, suchas efforts to cooperate with regional financial arrangements, enhancecross-border cooperation between central banks and regulators, andestablish stronger global financial safety net, including through adequate
IMF resources.

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SPECIAL FEATURE 2

After the Commodities
Boom—What Next for
Low-Income Countries?

GLOBAL ECONOMIC PROSPECTS | JUNE 2015

S P E C I A L F E AT U R E 2

Growth in low-income countries has accelerated significantly since the early 2000s to its fastest pace in several
decades. For commodity exporters, the improvement has been underpinned by rising global commodity prices anda surge in resource exploration and investment. The first section of this Special Feature explores the role of the commodity boom over the past decade in metal and mineral exporting low-income countries, and analyzes what the
recent decline in commodity prices may imply for growth in these economies. The second part takes a look at recent
economic developments and prospects for near-term growth in low-income countries. In non-commodity exporting
countries, growth will continue to benefit from strong domestic demand. For commodity exporters, however, themedium-term outlook has become increasingly challenging as the importance of the natural resource sector in driving growth diminishes. The ability of these economies to navigate the headwinds will hinge on how well they haveinvested the dividends from the past commodity boom, and on the successes of structural reforms in supporting
other sources of growth.

A. Implications of the Recent
Decline in Commodity Prices
for Commodity-Exporting
Low-Income Countries
Economic activity in low-income countries (LICs)
began to surge in the early 2000s.1 Investment- andexport-driven growth averaged 6.2 percent per year
during 2000-14, double the pace of the previous
three decades (Figure SF2.1). Among metal andmineral exporting LICs (which account for almost
two-thirds of current LICs), the improvement waseven more marked, with growth quadrupling during the 2000s compared with the previous decade.2
A number of factors contributed to the improvement, including better policy environments, a decrease in conflicts, and improvements in macroecoThe authors of this Special Feature are Tehmina S. Khan (Section A)
and Gerard Kambou (Section B).
1As of 1 July 2014, low-income economies are defined as those witha gross national income (GNI) per capita, calculated using the WorldBank Atlas method, of $1,045 or less in 2013; between $1,045 but
less than $12,746 for middle income; and $12,746 or more for highincome. Countries currently defined as low-income include Afghanistan, Bangladesh, Benin, Burkina Faso, Burundi, Cambodia, Central
African Republic, Chad, Comoros, Democratic People’s Republic ofKorea, Democratic Republic of Congo, Eritrea, Ethiopia, The Gambia,
Guinea, Guinea-Bissau, Haiti, Kenya, Liberia, Madagascar, Malawi,
Mali, Mozambique, Myanmar, Nepal, Niger, Rwanda, Sierra Leone,
Somalia, Tajikistan, Tanzania, Togo, Uganda, and Zimbabwe.
2The definition of current metal and mineral commodity exporting
low-income countries is based on that in World Bank (2015a), which
defines these as countries where commodities comprise more than aquarter of total exports. These include for mining exporters Benin,
Burkina Faso, Eritrea, Guinea, Liberia, Mali, Niger, Sierra Leone, Somalia and Zimbabwe; and for oil and gas exporters Chad, Myanmar,and the Democratic Republic of Congo. Countries that have recently
started or are expected to start producing over the medium term due torecent discoveries include Kenya, Madagascar, Mozambique, Tanzania,
and Uganda.

nomic stability. However, for many of today’s LICs
located in Sub-Saharan Africa and some in Central
and South Asia (Myanmar and Tajikistan), rapid
growth was driven by rising commodity prices andrising demand from China (World Bank 2015a).
In addition rising commodity prices also spurred investment in commodity exploration and production. Between 2000 and 2012, investment spendingby global oil, gas, and base-metal mining companies
rose five-fold to record highs. Counting investment
in other mined products, total investment in 2011–12 amounted to over $1 trillion. 3 In Africa, which
is home to most commodity-exporting LICs, mining investment alone amounted to $100 billion in
2011.4 Less is known about the scale of investmentthat flowed into agriculture, but private sector investment increased in agribusiness, in the development of value chains, and in farmland in Africa(FAO 2012). An estimate of foreign direct investment in agriculture and agribusiness in developing
countries for 2006/07 suggests that it was a small
fraction of that in mining.5 For reasons of data availability, the focus in this Feature is on the role ofenergy and mining booms in the LICs.

3Exploration and production spending by oil and gas companies
quintupled to $500 billion in 2012. Investment in base metal mining rose by a similar magnitude to reach $120 billion in 2012. If
investments in other mined products, such as coal, iron ore, precious
metals, diamonds, and uranium is included, total mining investment
is much larger. Figures are not available for 2012, but total mining
investment (base and other metals) is estimated at $676 billion in2011 (ICMM 2012).
4This amounts to 15 percent of global mining investment. The
figure includes North Africa, so actual investments in LIC countries in
Sub-Saharan Africa are much lower. See ICMM Report (2012).
5Total foreign direct investment in agriculture and agribusinessin developing countries was estimated at $13 billion in 2006/07, with
Africa receiving $1 billion (World Bank 2013).

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GLOBAL ECONOMIC PROSPECTS | JUNE 2015

Figure SF2.1 Growth in low-income countries
Growth in low-income countries doubled during the 2000s, compared with the averagefor the previous three decades. For many, particularly those in Sub-Saharan Africa,
faster growth was underpinned by a sharp increase in global commodity prices, a boon
for commodity exporters.

Oil and gas
exporters

2010

2005

C. Global commodity prices

Forecasts

Agriculture
Base Metals
EnergyPrecious Metals

140
120

Metal ore
exporters

Otherminingexporters

D. Commodity-exporting LICs:
Terms of trade effect on GDP

Annual price indices, 2010=100160

2000-07

100
80
60
40
20
0
198019851990199520002005201020152020

Change in trade balances, 2000–11,
as percent of 2010 GDP
80
60
40
20
0
-20
-40

Eritrea
Niger
Sierra Leone
Madagascar
BurundiC. African Rep.
Liberia
MyanmarTajikistan
RwandaGambia, The
Mozambique
Zimbabwe
Tanzania
GuineaTogo
Congo, Dem. Rep.
Chad

2000

1995

1990

1985

GIN
NER
TCD
MMR
MOZ

Average for period

MDG
GIN
GMB
ERI
BDI
LBR
TZA
TJK
RWA
DRC
ZWE
SLE

Percent
12
8
4
0
-4
1990s
-8
2009-14-12

GDP Growth

1980

1975

1970

Percent
8
7
6
5
4
3
2
1
0
-1

B. Commodity-exporting LICs:
GrowthPercent of total exports
120
2013
100
2000
80
60
40
20
0

5

3
Rakhine Basin(Bay of Bengal)

6

Gulf of Mexico

8

Northwest Shelfof Australia

9

Central Asia

Offshore East
AfricaOffshore Brazil

Middle East

13

Offshore West
Africa19

Petroleum andnatural gas

Zimbabwe
Togo
C. African Rep.

Number of giant oil and gas fields discovered
28

Gambia, The
Madagascar
Tanzania
Tajikistan
Zimbabwe
BurundiDRC
Eritrea
Liberia
GuineaRwandaSierra Leone

F. LICs: oil and gas and mining
exports

Liberia
MozambiqueCongo, Dem. Rep.
GuineaMyanmarChad

E. “Giant” oil and gas discoveries:
Major clusters, 2000-09a

30
25
20
15
10
5
0

CAR
TGO
ZWE

A. LICs: GDP growth

Metal oreOtherminingSource: World Bank, World Development Indicators.
E. "Giant" fields are conventional fields with recoverable reserves of 500 million barrels of oil equivalent or more
(Bai and Xu, 2014).

The growing importance of the natural resource sector was reflected in a rising share of exports compared to a decade earlier. Oil and gas exports accounted for a much larger share of exports (morethan 10 percent) in five LICs; metal ore exports innine LICs; and other mining exports in two LICs.
For several LICs, the 2000s also marked a decade of
discoveries, with several major finds that trans-

formed country prospects. For instance, since 2000,
120 “giant” oil and gas fields have been discovered
world-wide, located in seven clusters.6 Two of theseclusters are in Africa, mostly offshore East and West
Africa. In Tanzania alone there have been 13 giant
oil and gas discoveries (alongside other major finds
in Kenya, Madagascar, Mozambique, Uganda), andsix in West Africa in the Gulf of Guinea. Anothermajor frontier for giant oil and gas fields has emergedin the Krishna and Rakhine basins in the Bay of
Bengal in South Asia (Bai and Xu 2014, Basu et al.
2010; Figure SF2.2).7
This section takes a closer look at the role of thecommodities boom in spurring faster growth in
LICs over the past decade and a half, with a particular focus on current and prospective metal and mineral commodity exporting countries. Specifically it
asks the following questions:•

Why did commodity exploration and investment surge in LICs in the 2000s?

•

What was the impact on metal and mineralcommodity exporting LICs?

•

What are the implications of the recent fall incommodity prices?

Why did commodity exploration andinvestment surge in LICs in the 2000s?
The surge in investment and exploration in commodities in Africa was sparked by rising commodity
prices and demand, changes in industry structureand funding, and a global shift in the location ofmining toward to developing countries. These external tailwinds were coupled with better domestic
policies at home, which made investment and exploration more attractive (Arbache and Page 2009).
Higher commodity prices. Starting in the early
2000s, rising commodity demand underpinned asynchronized increase in prices of all major commodity groups. Between 2000 and 2010, base metaland energy prices rose by more than 160 percent,
6“Giant” fields are conventional fields with recoverable reservesof 500 million barrels of oil equivalent or more. Despite the increasing importance of unconventional shale oil and gas fields, current andfuture oil and gas supply is dominated by conventional giant fields (Baiand Xu 2014).
7The 120 giant fields discovered since 2000 are estimated to hold“proved plus probable” reserves of 248.62 billion barrels of oil equivalent. Tanzania in East Africa alone accounts for 6.8 percent of thesereserves (Bai and Xu 2014).

GLOBAL ECONOMIC PROSPECTS | JUNE 2015

New sources of funding. Global mining and oil andgas production has been dominated by large transnational companies; however, the structure of the industry has changed over the past decade. Juniorcompanies have emerged as risk takers at the forefront of exploration, whereas larger developers andoperators have entered projects after the discovery of
8Average annual returns for the top ten global mining companies

are estimated to have risen from $3 billion in 2005 to just under $8 billion in 2010 (UNECA 2011). Returns in the oil and gas sector are evenlarger, since country conditions matter less, transportation (including
in unprocessed form) is easier, and the sector is less dependent on thesometimes unreliable infrastructure such as roads, railways and power
stations (UNECA 2013).
9Mining exploration expenditures in Africa rose to an estimated$4.5 billion in 2012, up from just $0.3 billion in 2000 (UNECA 2011;
Schodde 2014).
10In addition to lower production cost, tax burdens have also been
lower. The share of resource profits accruing to mining companies (rather than governments) in Africa is estimated to have been much larger
than in other regions. This reflects the relatively limited (or recently
initiated) government participation in mining and the general absenceof special resource profits taxes (UNECA 2011).
11Uganda’s oil is of waxy constituency and needs heavy refining before further use (Gelb, Kaiser, and Vinuela 2012).

A. Global crude oil exploration andproduction, and mining capital
expenditures
US$, billions

B. Global mining exploration
expenditures

400

120
100

Thousands

140
Crude oil exploration & production
spending
Base metal companies capital
expenditures (RHS)

500

US$, billions

US$, billions

600

35

1200

15

40

10

100

20

5

0

0

0

1990

1994

1998

2002

2006

2010

C. Advanced economy share of
global production

1000
800
600
400
200
World

Africa0

D. Time from discovery to
production

Percent
55

Number of years
25

50

Copper

Gold

20
15

45

10

40

5

2012

2010

2008

2006

0
2004

2002

Gas

2000

1996

1998

Oil

35
30

Percent increase (RHS) 1600
1400

60

200

Percent
2012

25
20

300

2000

30

80

1994

Higher prices increased the profitability of investments in poorly accessible or high production-cost environments.10 In Uganda, for instance, oil discoveries of a commercial scale werefirst made in 2006. As a landlocked country,
Uganda’s oil is difficult to access and challenging
to process and transport.11 Nevertheless, exploration investments and well appraisals went
ahead, lifting the value of estimated oil reserves
from initial estimates of less than 500 million
barrels to 3.5 billion barrels in 2014 (US EIA2014).

The commodity price rise also triggered a surge in global spending on mining exploration and capital expenditures on oil and gas exploration and production, which rose
to historical highs. With exploration spending increasing in low income countries,
several have emerged as major frontiers for metal and oil and gas discoveries, withsignificant finds in (offshore) East and West Africa and the Bay of Bengal. Globally,lead times from disovery to production in mining are higher in developing than inadvanced countries.

1992

The boom, which came after a long period of
weak or declining prices and cost-cutting in themining industry, increased returns in the mining
and oil and gas industries.8 This stimulated asteep increase in industry spending on mining
and production investments (Figure SF2.2).
Global mining exploration expenditures also roseto an all-time high, more than ten-fold 2000 levels. Out of this, mining exploration spending for
Africa rose fifteen-fold to reach 15 percent of
global exploration spending.9

FIGURE SF2.2 Trends in commodity prices, explorationand discovery

1990

precious metal prices by over 300 percent, andprices of agricultural and other raw materials commodities increased by 103 and 43 percent, respectively (Figure SF2.1C).

95

S P E C I A L F E AT U R E 2Former Soviet
Australia,
Union, E.
Canada, United
Europe andStates, and
Chile
China

Rest of theworld

Source: World Bank, World Development Indicators, Bloomberg, MinEx Consulting, Bai and Xu (2014), IEA,
Basu et. al. (2010)

deposits (UNECA 2011; Gelb, Kaiser and Vinuela2012).12 Spending by junior companies is primarily
driven by the availability of funding and they arelikely to have benefited from easy global financing
conditions in recent years (Schodde 2013).
In addition, China has emerged as a major source of
exploration and development finance in Africa,
broadening choices for governments in the region(Box 2.1). In Eritrea for instance, a $60 million loan
in 2007 from China’s Import-Export Bank was critical for an investment agreement (and financing for
a 30 percent investment stake) with the Canadianmining operator developing the Bisha mine.13

12The share of global mining output of the largest ten companies
amounts to over a third of the total (Raw Materials Group, cited fromUNECA 2011).
13Mukumbira, R. (2007). “Eritrea signs Bisha gold/base metals
mining agreement with Nevsun.” Published on Mineweb. http://www

96

S P E C I A L F E AT U R E 2

GLOBAL ECONOMIC PROSPECTS | JUNE 2015

FIGURE SF2.3 Commodity exploration, spending anddiscoveries in Africa
Africa has attracted a significant share of mining exploration investments reflecting thefact that it is still a relatively unexplored region, with discoveries occurring close to thesurface. In addition, decreasing conflict and improving low-income country policy environments improved the investment climate.
A. G
 lobal mining exploration
expenditures by region, 2012

B. Average depth of cover for
discoveries, 2012

0

3
2
5

10

15

20

25

In mining, exploration in Sub-Saharan Africa wasparticularly attractive because of the region’s relatively unexplored potential and low cost. The valueof known sub-soil assets per square kilometer inthe region is estimated to be barely a quarter ofthat in advanced economies (World Bank 2006,2010). The cost of exploration was lower than elsewhere, in part because African discoveries are occurring closer to the surface than anywhere else
except Latin America (Figure SF2.3). Africa had
the largest discoveries per dollar of exploration cost
during 2003–12: it accounted for 22 percent of
discoveries but only 15 percent of global exploration expenditures (Schodde 2013).
Improved investment climate. The improvementin the business climate was underpinned by several
factors.
•

40

Mali

Niger

Tanzania

Guinea (Conakry)

Zimbabwe

Congo, Dem Rep.

0

Madagascar

20
Latin America

AfricaAustralia

CanadaPolicy Potential Index (100= best)100
2006/200780
2010/201160

Rest of theworld

Percent of world total, 2003–12
30
Exploration spending Discoveries
25
20
15
10
5
0
Pacific/
Southeast Asia
WesternEuropeD. Policy potential index

United StatesC. M ineral exploration spending anddiscoveries, 2003-12

Canada (Alberta)

0122Western Australia

Western Europe

82

Burkina Faso

Rest of the world

98

68

United States(average)

Former Soviet Union & E. Europe

55 32
12

50

7
6
6

United States
Pacific/South East Asia

74

United States

100

204

CanadaCanadaAfricaAustralia

150

Excluding South Africa,
the depth of cover falls
from 55 to 12 meters

Western world
average

China

200

Rest of theWestern world
Pacific/
Southeast Asia

15
14
13
13

Sub-Saharan Africa

Australia

Meters250

21

Latin America

Latin America

Percent of totalcreasingly shifted from advanced countries towards
developing countries, notably frontier regions such
as Africa and the Arctic (ICMM 2012).

Source: World Bank, MinEx Consulting, Fraser Institute Annual Survey of Mining Companies (2011).
A. B. C. “Rest of World” includes Middle East, South West Asia (including India and Pakistan) and Mongolia.
D. The Policy Potential index is a composite index, ranging from 1 (worst) to 100 (best) that measures the effects on exploration of government policies, including uncertainty regarding administration, interpretation andenforecement of existing regulations, environmental regulations, taxation, infrastructure, socieconomic agreements, political stability, labor issues, geological database and security (Fraser Insitute, 2011).

Secular shift of global production to developing
countries. Higher commodity prices reinforced
longer-term global trends underway since the 1980s.
Easily accessible mineral and oil and gas deposits in
the United States and Europe have shrunk. Technological innovations have allowed extraction in previously inaccessible or less-developed regions (including deep-water). The development of large bulk
shipping carriers has facilitated the transportation of
bulk commodities such as iron-ore coal and bauxite(ICMM 2012; Lusty and Gunn 2015). As a result,the location of production and exploration has in.mineweb.com/archive/eritrea-signs-bisha-goldbase-metals-mining-agreement-with-nevsun/

An easing of conflict or internal political tensions (Central African Republic, Democratic
Republic of Congo, Eritrea, Myanmar, andRwanda) provided greater political stability.

•	Debt relief eased fiscal deficits and reduced debt
burdens (World Bank 2015b; IMF 2014a).
•	Economies also grew healthier, with increased
growth and declining inflation, helped by
improvements in policy (Eritrea, Myanmar,
Rwanda).
The improvement in the business climate in several
metal and mineral exporting countries is reflected inmining company assessments of how government
policies affect exploration investment (Fraser Institute 2011).
Anecdotal evidence suggests that where policy makers have been keen to develop their mineral resources,
lead times between discovery and production havebeen shorter than in countries with less-conducive
policy environments.14 A few examples, of both
shorter and longer lead times, illustrate this point.
•

Eritrea: eight years from discovery to production.
Following the end of a border conflict with
Ethiopia in 2000, gold and base metal deposits

14In general, the lead time between discovery and production inmining tends to be long (e.g. up to 10 years for gold and 17 years forcopper), especially in developing countries (Schodde 2103).

GLOBAL ECONOMIC PROSPECTS | JUNE 2015

Change in terms of trade, 2000-11, percent
150
120
90
60
30
0
-30
-60

0 to 2 2 to 4 4 to 6 6 to 8 8 to 10 >10

Average GDP growth rate, percent

C. LICs: Primary sector exports

D. Africa: Value of commodity
production

10

1990

1995

2000

2005

2010

E. Commodity-exporting LICs:
Current account deficits
Percent of GDP
10
Change 2001-07,
5
percentage points
2007
0
-5
-10
-15

F. Commodity-exporting LICs:
Government revenues
Percent of GDP
30
20
10
0
-10
-20
-30

Change 2000–14, percentage points
2014
UGA
TCD
MMR
MOZ
GIN
DRC

0

17.3

50

Metal ore andmining exporters

Oil and gas
exporters

Source: World Bank, Comtrade, UNECA (2013).

15http://www.independent.co.ug/cover-story/9694-uganda-oilnow-for-2020
16Project development costs are estimated at $20-$30 billion, including rail lines needed to provide port access.
17These started with the government decision in 2008 to revoke Rio
Tinto’s rights to mine half of the blocks it had been awarded, assigningthem instead to another company, which in turn sold a portion on toVale, another international miner. Rio Tinto had to pay $700 million
in 2011 to secure the remainder of its concession. Although a new government is investigating the award of past contracts, the ongoing legal
dispute has continued to delay production.

Food

2.1

100

Gas

7.8

20

Constant 2010 US$, billions
Percent
2000
200
2010
Increase 2000-10 (RHS)
150

35
30
25
20
15
10
5
0

Coal

Exports, US$, billions
Petroleum and natural gas
40 Metal ores
Coal
Agriculture, forestry, fishing, and mining
9.3
30

Oil

<0

EritreaTogo
Togo
Comoros
Mozambique
Nepal
Haiti
Benin
Gambia, The
Bangladesh
Niger
Guinea-Bissau
Madagascar
Zimbabwe
Cambodia
Burkina Faso
Tanzania
Kenya
UgandaRwandaSierra Leone
BurundiGuineaCongo, Dem. Rep.
Ethiopia

Number of countries
91990s
2000-078
2009-14
7
6
5
4
3
2
1
0

Mining total

Guinea: at least two decades from exploration to
production. Simandou, a remote mountainous
area in Guinea, is the world’s largest known untapped deposit of high-grade iron-ore, with anestimated mine life of 40 years.16 Explorationrights were first granted in 1997 to Rio Tinto.
However, with the mine subject to protracted
international legal disputes since 2008, production is not expected to start until at least 2019.17

B. Commodity-exporting LICs:
Terms of trade

Iron ore•

Uganda: at least a decade from discovery to production. In Uganda, internal disputes over taxes
and the viability of building a refinery for oil
reserves discovered in 2006 have significantly
delayed the award of production licenses and,
consequently, production.15 Production startdates have been pushed from 2016, as initiallyplanned, to 2018, or later.

A. Commodity-exporting LICs:
Distribution of growth

Copper•Myanmar: two years from new law to active exploration. Following the settlement of a maritime
boundary dispute with Bangladesh in 2012,
Myanmar reformed its foreign direct investment law and provided greater revenue incentives for international company investments in2012. It has since issued oil and gas exploration
licenses for 20 blocks in the Rakhine Basin in
2014, where giant gas discovery was first madein 2002 . Bangladesh, in contrast, has been significantly slower in inviting exploration bids,
with only five offshore blocks allocated for exploration in 2014.

The acceleration in growth in commodity exporting low income countries has beenbroad based. The large positive terms of trade shock between 2000 and 2011 wasreflected in surging exports and a signficant increase in the production of commodities. With imports also rising, partly reflecting mine development capital goods, current account deficits widened in some countries. Rising commodity sector revenues
boosted public sector receipts.

ERI
SLE
CAF
RWA
TZA
GMB
TGO
LBR
TJK

•

FIGURE SF2.4 Impact on growth, production, andexports

GuineaBenin
Tanzania
C. African Rep.
Tajikistan
Niger
Gambia, The
Guinea-Bissau
Eritrea
BurundiKenya
Congo, Dem. Rep.
Ethiopia
Sierra Leone
Burkina Faso
Mali
UgandaRwandaTogo
Mozambique
Cameroon
Malawi
Liberia

were discovered at Bisha in 2003. Mine construction began in 2008 and was completed by
2010. Gold production started in 2011, transitioning to commercial copper production in2013 (Economist Intelligence Unit 2013).

97

S P E C I A L F E AT U R E 2What was the impact of the boom on metal
and mineral commodity exporting LIC
economies?
The commodity boom boosted investment and exports, and resulted in a broad-based improvementin growth. Rising revenues from the commodity
sector meanwhile enabled increases in growthenhancing government investment (Figure SF2.4).
This led to increased employment and incomes,

098

S P E C I A L F E AT U R E 2

GLOBAL ECONOMIC PROSPECTS | JUNE 2015

FIGURE SF2.5 Impact on investment
Investment growth accelerated significantly in LICs relative to previous decades,
reflected in a rising share of GDP. In some resource rich countries, cumulative mining
investments between 2000 and 2011 amounted to over 20 percent of GDP.
A. LICs: Investment growth

B. LICs: Contribution to GDP growth

Percent
20

Percentage points
10
Investment
Net exports
8
Private consumption
Government consumption
6
GDP growth (percent)4

15

Investment growth

10
5

Average for period

0

2
0

-5

-2
2000

2010

1970s

1980s

1990s

2000s 2010-14

D. Cumulative investments inmining, 2000–11
Percent of GDP
500
400
300
200

Guinea100
Liberia (RHS)

Ghana

Congo, Dem. Rep

ZambiaTanzania

Niger

Burkina Faso

Afghanistan
Burkina Faso
Mali
Madagascar
Benin
MalawiTajikistan
Guinea-Bissau
Cambodia
BurundiHaiti
C. African Rep.
Sierra Leone
Kenya
Togo
UgandaCameroon
Bangladesh
Nepal
Congo, Dem. Rep.
Comoros
RwandaMozambique
Ethiopia
MyanmarGambia, The
Tanzania
Niger

Percent of GDP
Percent of GDP
Change relative to average level in 2000-03
60 Level in 201430 120Lower estimate
100
Upper estimate
40
20
80
60
20
10
40
0
0
20
-20
-10
0

Mauritania

C. LICs: Investment, 2014

-4

Mozambique

1990

Namibia

1980

Sierra Leone

-10
1970

0

E. Selected metal and mineral exporting countries: FDI inflows

Quarterly FDI inflows, US$, billions
4.0
3.5
3.0
2.5

UgandaTanzania

Tajikistan

Mozambique

MyanmarMadagascar

2.0
1.5
1.0
0.5
0.0
2002

2004

2006

2008

2010

2012

Source: WDI, McMahon and Moreira (2012), World Bank, IFS.
D. Comprises investment in both mining construction and exploration.

which encouraged consumption spending. However, on the negative side, it tended to cause an appreciation of real exchange rate, and hence a loss ofcompetitiveness for non-resource based activity (theDutch Disease syndrome).
Terms of trade: A marked improvement occurred in
the terms of trade of commodity exporters, with implied improvements in trade balances estimated atover 50 percent of GDP in some countries (Figure
SF2.1.D). The expansionary growth impacts from
commodity based terms-of trade shocks is well doc-

umented, including for Africa (Deaton and Miller
1996, Awel 2012, Raddatz 2007).18 Model simulations of a 10 percent shock to commodity prices
result in an approximately 1 percent increase in
GDP per capita in Africa (Raddatz 2007). Overall
growth impacts from terms-of-trade improvements
and increasing commodity exports to China havealso proven to be significant in a number of commodity-producing countries in Africa (Busseet al. 2014).
Output and exports: Between 2000 and 2010,
commodity production in Africa increased by about
one-quarter, albeit with considerable variation
across different metals and hydrocarbons (UNECA
2013). Separate data is not available for global LIC
output; however exports can be used as a proxy for
production given the limited domestic use. Metal
and hydrocarbon exports of LICs rose fifteen-foldduring 2000–13 (Figure SF2.5); and the contribution of exports to growth doubled over this period.
Investment. Investment growth accelerated sharply(Figure SF2.5), with its contribution to growth rising from less than one-fifth in the 1990s to over onehalf over the past decade. Mining investment wasparticularly substantial in 2000–11 in several LICs;
cumulative spending over this period amounted tomore than 20 percent of 2010 GDP in the Democratic Republic of Congo, Sierra Leone, Mozambique, and Guinea (McMahon and Tracy 2012), insome countries reflecting substantial FDI inflows.
Rising revenues from the mineral sector also liftedpublic investment spending, especially spending onenergy and transport infrastructure for accessing export markets (IMF 2014a, 2014b).
Jobs and consumption and gains in poverty reduction. Although natural resource sectors tend tobe capital intensive, the rapid growth of mining
activity—more so than oil and gas—has been an
important source of job creation. For instance,
greenfield FDI into natural resource sectors in Africa overall created some 600,000 jobs between
2003 and 2012, of which 400,000 were in mining.
For every million U.S. dollars of investment, themining sector is estimated to have generated threejobs – about ten times as many in the oil and gas
sector (UNECA 2013). The opening of new mines
18For example, see Go et. al. (2013); Izquierdo, Romero and Talvi(2008); De Gregorio and Labbé (2011); Céspedes and Velasco (2012)
and Cavalcanti et al. (2015)

GLOBAL ECONOMIC PROSPECTS | JUNE 2015

Shrinkage of agriculture, growth of informal
urban sectors. Despite the expansion of extractive industries, agriculture still employs the majority of workers in commodity-exporting low
income countries. Although there has been a significant shift out of agriculture, exiting workers
have been mainly absorbed by informal and low
productivity urban service sectors (McMillan andHarttgen 2014).

A. Commodity-exporting LICs: Artisanaland small scale-mining

B. Commodity-exporting LICs:
Extreme poverty rates
2012 or latest

GuineaSierra Leone
C. African Rep.
Eritrea
Mali
Niger
Ethiopia
Madagascar
Zimbabwe
Tanzania

Tajikistan
Gambia, The
Chad
Niger
Tanzania
Togo
Sierra Leone
Mozambique
C. African Rep.
RwandaBurundiLiberia
Madagascar
Congo, Dem.…

Thousands
Thousands Percent
1,600
10,0002000 or earliest
100
Number of dependents (RHS)
8,000
1,200
80
6,000
60
800 Number of artisanal andsmall-scale miners
4,000
40
400
2,000
20
0
0
0

Source: UNECA (2011). World Development Indicators
B. Extreme poverty rates are the share of the population living on $1.25 or less per day (PPP-adjusted, 2005 U.S.
dollars).

FIGURE SF2.7 Public sector receipts and spending
Government revenues in commodity exporting LICs have been bolstered by rising
receipts from the mineral sector. Prior to the global financial crisis, most countries
appeared to have contained spending pressures. Since then however, spending has
increased significantly as a share of GDP in some countries.
A. Commodity-exporting LICs:
Government revenues

B. Commodity-exporting LICs:
Government spending

Percent of GDP

Percent of GDP
80

30
20

60

10
0

-30

2014

Change, 2000-07
Change, 2009-14
2014

Metal ore andmining exporters

Oil and gas
exporters

20
0

Metal ore and mining
exporters

Source: World Bank, IMF.

Cyclicality of fiscal policies. Compared with earlier commodity price booms, macroeconomic policies in Sub-Saharan Africa were less procyclical,
during much of the 2000s (World Bank 2009).
Whereas during the commodities boom in the
1980s, government expenditure growth in countries dependent on primary commodities outpaced
GDP growth, between 2000 and 2007 it was
broadly in line or even significantly less (Eritrea,
Guinea, Mozambique, Sierra Leone; Figure SF2.7).
Since 2007 however, government spending has increased faster than GDP in some commodity exporters. In part this reflects fiscal stimulus employed

UGA
TCD
MMR
DRC
GIN
MOZ

-20

2007

ERI
CAR
SLE
TGO
TZA
RWA
TJK
GMB
LBR

-10

2000

40

UGA
MMR
GIN
MOZ
TCD
DRC

Real exchange rate appreciation and Dutch Disease. In oil-exporting LICs in the CFA franczone, rapid growth of natural resource sectors has
been associated with real appreciations, andweakened competitiveness of other tradables activity (Trevino 2011). For example, real exchange
rate appreciation in African economies associatedwith rising exports to and investment flows from
China, may have hampered industrial diversification (Guillaumont Jeanneney and Hua 2015) andbuoyed activity in non-tradable services sectors.
In several African commodity-exporting countries, services sector growth is stronger than incountries with similar per capita income levels(Timmer et. al. 2012).

Widespread artisanal and small scale mining in Sub-Saharan Africa is likely tohave helped support private consumption. Poverty rates have fallen in commodityexporting LICs, but overall rates remain extremely high.

Chad
Liberia
Mozambique
UgandaBurkina Faso

It should also be noted that mining activity inmany Sub-Saharan LICs includes wide-spread direct local employment by artisanal and small-scale
mining operations, as well those of international
corporations (Figure SF2.6, UNECA 2011). Thishas helped support incomes, private consumption
and welfare in the area. For instance, the openingof a new large-scale mine is found to changes economic outcomes, such as access to employment
and cash earning, with evidence pointing to increased household expenditure on housing and energy, and lower infant mortality (Chuhan-Pole et.
al. 2014). That said, although sustained growth
and rising demand for non-tradable services havecontributed to a decline in poverty rates, at 43 percent, the average poverty headcount in resource
exporters remains high (Figure SF2.6).

99

FIGURE SF2.6 Employment and poverty

ERI
CAF
RWA
GMB
LBR
TZA
TGO
TJK
SLE

has brought structural shifts in local employment,
raising employment and non-seasonal work opportunities for women that tend to last beyond thelife of the mine (Kotsadam and Tolonen 2015). In
addition, for every mining job, there 0.5 to 3 additional jobs in supporting activities; (McMahon
and Tracy 2012; McMahon and Remy 2001; Kapstein and Kim 2011).

S P E C I A L F E AT U R E 2

Oil and gas
exporters

100

S P E C I A L F E AT U R E 2

GLOBAL ECONOMIC PROSPECTS | JUNE 2015

by some (Kenya, Tanzania and Uganda) in the aftermath of the global crisis and greater spending on
growth-enhancing infrastructure spending.19
What are the implications of the recent fall incommodity prices?
Given heavy dependence on commodities for export
earnings and fiscal revenues, commodity exporting
LICs are especially vulnerable to commodity pricemovements. Since their peak in February 2011, energy and metals prices have declined sharply (seeChapter 1). Prices of copper, iron ore, and oil havedeclined by 38–63 percent reflecting oversuppliedmarkets and weaker global demand, including from
China. The deterioration in the terms of trade since2011 has been large (Figure SF2.8). Since 2014, theterms of trade decline in Chad has amounted to
19Kasekende et al. (2010).

FIGURE SF2.8 Commodity dependence: An Achilles heel
The terms of trade shock since 2011 associated with the decline in commodity prices
has been large. With a substantial share of fiscal revenues derived from the extractive
sector, fiscal pressures have increased. The number of oil rigs has begun to decline,
suggesting that oil and gas investment is beginning to slow. Manufacturing sectors
remain small in most, suggestive of Dutch Disease effect.
A. Commodity exporting LICs: Termsof trade since 2012
Change in terms of trade from maximum
value in 2010–12 vs. 2014, percent
20
10
0
-10
-20
-30

B. Commodity exporting LICs:
Growth-enhancing expenditures

Mali
Guinea-Bissau
GuineaBurundiEthiopia
Burkina Faso
Comoros
Cambodia
Sierra Leone
Madagascar
Tanzania
South Africa
UgandaRwanda
Togo
Benin
Kenya
Nepal
Malawi
Gambia, The
Zimbabwe
Haiti
Mozambiqe
Bangladesh
Eritrea

UgandaC. African Republic
Gambia, The
Benin
Sierra Leone
Congo, Dem. Rep.
Guinea-Bissau
GuineaNiger
Madagascar
Togo
RwandaMalawiBurundiLiberia
Tanzania
Mozambique

Percent of GDP
25
2000 or earliest available
20
2013 or latest available
15
10
5
0

C. Rig counts

D. Commodity exporting LICs: Sizeof manufacturing

Zimbabwe

Congo, Dem. Rep.

Tajikistan

Mozambique

Togo

BurundiTanzania

Madagascar

Myanmar

Niger

Eritrea

Liberia0

Rwanda4
C. African Rep.

2009

2007

2005

South America
2003

0

33

The fall in commodity prices complicates the task ofmacroeconomic management, as pressures on public
sector balance sheets and exchange rates mount inseveral LICs at a time when growth is slowing (seefollowing section). Although many commodityexporting LICs have made progress in enhancing
transparency in the resource sector—eleven are compliant with the Extractive Industries Transparency
Initiative (EITI) standards—only nine have fiscal
rules or stabilization funds in place to act as buffers
to cope with adverse shocks (IMF 2013). Revenue
dependence on the commodity sector, meanwhile,remains high. If governments are forced to scale backspending on social services and critical public infrastructure projects as resource-revenues fall, gains inpoverty reduction could be lost, and prospects for
future growth could be damaged by growing infrastructure deficiencies and bottlenecks.
Over the medium term, persistently low commodity prices may reduce the attractiveness of mining
and oil and gas investment. Mining investment ishighly cyclical and, after discovery, mining and energy projects typically require several years (andsometimes decades) to be developed to production.
Since 1980, there have been four major “boom-andbust” cycles in metal prices, with spending declining, on average, by 45 percent during the downturn.
With the industry now entering what may be a fifth
down-cycle (Schodde 2013) and given the signs ofoversupply for some commodities (especially, oiland iron ore), companies may wait several years un-

8

Chad

100

Percent of GDP
20
2000
16
2013 or latest
12

Sierra Leone

200

2015

300

2013

400

Number of rig counts
180
160
140
120
100
80
60
40
Africa (RHS)
20
0
2011

Number of rig counts
500

nearly 40 percent, and between 10–20 percent in the
Democratic Republic of Congo, Guinea, Liberia
and Sierra Leone (World Bank 2015a). This setsback growth, as export and commodity-related fiscal
revenues fall.20 These negative effects will be likely be
reinforced by rising volatility in commodity terms oftrade (Blattman et. al. 2007, Cavalcanti et al. 2012).
Indications are that volatility in prices, particularlybase metals and oil, is also increasing (World Bank
2015a, 2015d).

Source: World Bank, IMF (2013), Baker Hughes Incorporated,various Extractive Industries Transparency Initiative(EITI) reports

20Separate research for Latin America and the Caribbean (LAC)
region suggest that the average LAC economy will grow at a significantly slower pace even in a context of high but non-increasing commodity prices. More precisely, if prices were to remain stable at their2013 average levels, average annual GDP growth over the medium term
(2014–19) would be almost 1 percentage point lower than in 2012–13
and more than 1½ percentage points lower than over 2003–11. If commodity prices were to evolve as implied by commodity futures as ofearly 2014, average output growth would be even lower, by roughly
another ¾ of a percentage point (Gruss 2014).

GLOBAL ECONOMIC PROSPECTS | JUNE 2015

til the next upswing in prices to resume investment.
In addition, in a riskier environment, with interest
rate increases in the United States on the horizon,
the rising financing cost for smaller explorationcompanies could curtail their ability to carry out exploration. Rising financing costs and low commodity prices may sharply curtail exploration and development activity.
Sharp commodity price declines have disrupted
new foreign investments and in some cases production in extractive-based industries. The number ofoil rigs—for on-land oil drilling—has already declined from its peak in the fourth quarter of lastyear, by 15 percent in South America, and 11 percent in Africa. In Sierra Leone, falling iron ore
prices have lowered profits and reduced the market
value of the iron ore companies operating in the
country (the collapsed London Mining and African
Minerals). This has led not only to lower foreign
investments in the sector but also to the shutdownof operations in Tonkolili (the second largest ironore mine in Africa and one of the largest magnetite
deposits in the world). In Sub-Saharan Africa, projects considered to be most at risk include the expensive ultra-deepwater and pre-salt projects inWest Africa, and the liquefied natural gas projects
in East Africa (BMI 2015).
As rents decline, country specific factors will likely
become more important, including changes in domestic mineral policy regimes. For example, newmining taxes, or tighter ownership and exploitation
rules, or delays in licenses will add to production
costs (Guinea, Uganda, Zimbabwe). In some regions rising conflict or security risks are an increasingly serious issue (e.g., Mali). A decline in resourcerelated investment is likely to be associated withdeclining investment in auxiliary projects, especiallytransport infrastructure.
Finally, Dutch Disease associated with the commodity boom means that, for many commodity-exporting LICs, shifting growth away from a shrinking
natural resource sector may prove hard. Rising infrastructure investment in some countries in East Africa, assisted by growing investment and aid flows
from China, could offset some of the headwinds
from slowing commodity sectors (see Box 2.1).
However, for many LICs, non-resource tradable sectors have atrophied to a point where they will be difficult to revive, and in some cases service sectors have

S P E C I A L F E AT U R E 2

been unduly inflated. It is difficult therefore to see
how other sectors could, over the medium term,
fully pick up the slack left by declining exports andinvestment spending.
Conclusion and policy recommendations
The commodity boom has been pivotal in raising
growth, exports and investment in metals and minerals in commodity-producing LICs. However, improvements in poverty reduction, and in higher productivity employment, are less clear. Looking ahead,
the sheer size of recent commodity discoveries insome countries will continue to bode well for longterm growth prospects in some countries, notably in
East Africa. However, over the medium term, theglobal economic environment will be less favorable
to growth in commodity-exporting LICs than it has
been over the past decade and a half. Prospects arefor a protracted adjustment to lower and more volatile commodity prices, weaker demand for exports,
and reduced resource investment and production in
the next few years.
The ability to navigate these headwinds will crucially depend on the extent to which policymakers
have saved the windfalls from the commodity boom
over the past decade, or used them for growthenhancing investments (Gill et al. 2014). Amongcountries that are highly dependent on natural resource sectors, those with low policy and reserve
buffers, and large fiscal or current account deficits,
face potentially disruptive adjustments. In othercountries, with more diversified economies, such as
Kenya, Tanzania and Uganda, the emergence of alarge, vibrant, middle-class should help to support
private consumption (McKinsey 2011).
Going forward, policy will continue to play a critical role. Policies that improve the conditions to dobusiness and ease supply side and infrastructure
constraints will increase the return on capital inboth the resource and the non-resource sectors. Policy makers should refrain from trying to offset headwinds from the turn in the commodity cycle withdemand stimulus that would also deplete buffers.
Instead, in the interests of more stable growth in the
future, they should focus on structural reforms that
support the non-commodity sectors. This would include building infrastructure, and sound institutions (Gill et al. 2014). Evidence for Africa showsthat better institutions encourage low inflation, as

101

102

S P E C I A L F E AT U R E 2

GLOBAL ECONOMIC PROSPECTS | JUNE 2015

FIGURE SF2.9 Drivers of growth in low-income countries
Although several low-income countries are heavily dependent on the natural resource
sector for exports and fiscal revenues, many low-income country economies have large
agricultural sectors and receive significant remittance inflows.
A. LICs: Commodity exports, 2013

B. LICs: Commodity revenues, latest
available

Percent of total exports
100

Percent
Percent
20 Percent of GDP
80
Percent of government revenues (RHS)
15
60

80
60

EnergyMetalsAgricultural

Nepal

Chad

RwandaLiberia

GuineaCongo, Dem. Rep.

Tajikistan

0

RwandaNiger
Kenya
Afghanistan
Benin
UgandaGuinea-Bissau
Mali
Bangladesh
Togo
Gambia, The
Liberia
Comoros
Haiti
Nepal
Tajikistan

10

Tanzania

20

Malawi30

Uganda40

GuineaPercent of GDP
40
35
30
25
20
15
10
5
0
Bangladesh

D. LICs: Agriculture, 2012

Percent of GDP
50

Zimbabwe

C. Remittances, 2014

Mozambique

Mali

Niger

Mozambique

Burkina Faso

Chad
BurundiRwandaLiberia
Myanmar
Ethiopia
UgandaSierra Leone
Guinea-Bissau
Mozambique
Togo
Kenya
Congo, Dem. Rep.
Tanzania
Gambia, The
MalawiNiger
Benin

Madagascar*

0

Togo

0

Tanzania

200

Afghanistan*40

5Sierra Leone

10

20

40

Source: WDI, Comtrade, World Bank, IMF, various Extractive Industries Transparency Initiative (EITI) reports
B. Extractive industry sector payments (taxes, royalties, dividends) to the government from EITI reports from2011–2013.

well as FDI inflows, and output growth stability(Ahmed and Suardi, 2009; Poelhekke and van der
Ploeg, 2013).

B. Recent Developments
and Near-Term Outlook in
Low-Income Countries
Thus far, large agricultural sectors, remittances,and public investment have cushioned the impact
of sharply weaker terms of trade in commodityexporting LICs (Figure SF2.9, World Bank 2015a,
2015b). Growth in LICs was flat in 2014, but is
expected to pick up in 2015 and remain robust during 2016–17 (Figure SF2.10). Declining commodity prices, however, are likely to increasingly put
pressure on fiscal and current account balances of
LICs that rely heavily on exports of energy and­metals.21 Several commodity-exporting LICs have
limited buffers to absorb this deterioration. Oilimporting LICs, on the other hand, are expected tobenefit from shrinking vulnerabilities as current account balances improve on falling oil import costs.
Political uncertainty has mounted in some LICs.
Elections are scheduled for October 2015 in Tanzania and Afghanistan. Afghanistan is in the midst ofa political and security transition, partly related to
the withdrawal of U.S. troops, which is taking a tollon the economy. Bangladesh is experiencing significant supply chain disruptions related to politicalunrest. This is weighing on garment exports, whichmake up 80 percent of total exports, and is contributing to the emergence of a current account deficit.
Exchange rates have come increasingly under pressure, in commodity-exporting and -importing
countries alike. This has reflected partly the broadbased strengthening of the U.S. dollar since mid2014, and partly a reassessment of country risks andvulnerabilities.22 The currencies of metal-exporting
countries and the currencies of countries with large
current account or fiscal deficits (Tanzania, Kenya),
have depreciated particularly sharply against the
U.S. dollar.
Depreciations partly offset the disinflationary impact of lower oil prices. Cheaper fuel helped lower
inflation and improve current account deficits (Kenya) and fiscal deficits (Bangladesh) in some net-oil
importing LICs in the first quarter of 2015. In several countries, inflation moved back within (Bangladesh, Kenya) or towards (Malawi) target ranges,
allowing central banks to keep interest rates on holdor to raise them at a slower pace than otherwise. In
other countries, however, inflation increased as a result of currency depreciation (Haiti, Tajikistan, Tanzania, Uganda).
For 2015–17, growth in LICs, on average, is expected to remain above 6 percent, reflecting continuing strong output growth in several large LICs,
supported by sustained investment in public infrastructure (Ethiopia) and mining (Democratic Republic of Congo). Consumer spending should be
21Countries with oil, gas, and metals exports in excess of 5 percent
of total exports include Ethiopia, Kenya, Madagascar, Mozambique,
Nepal, Niger, Rwanda, Uganda, Zimbabwe.
22The depreciations in LICs in the CFA franc zone reflected theircurrencies’ peg to the euro. Low-income CFA franc zone countries include Benin, Burkina Faso, Central African Republic, Chad, GuineaBissau, Mali, Niger, and Togo.

GLOBAL ECONOMIC PROSPECTS | JUNE 2015

S P E C I A L F E AT U R E 2

103boosted (Bangladesh, Uganda), by growth in remittances, even if this growth is down from 2014
(Bangladesh).

FIGURE SF2.10 Growth prospects

Despite lower commodity prices, the forecast is formining output to rise in a number of countries as
past investments come on stream (e.g., gold andcopper in Democratic Republic of Congo, coal in
Mozambique) and other mining investments proceed, albeit at a slower pace (Mozambique, Tanzania). Several governments are prioritizing infrastructure projects, including in the energy sector, in someas part of recent regional agreements to upgrade regional energy grids (Kenya, Rwanda). Elsewhere,
heavy government infrastructure investment is supported by Chinese financing (Côte d’Ivoire andEthiopia; BMI 2015).

A. LICs: Growth prospects

B. LICs: Exchange rate depreciation
against the U.S. dollar, mid-2014
to March 2015

Percent
9
8
7
6
5
4
3
2
LIC oil and metal exporters
1
LIC others0

Percent
35
30
25
20
15
10
5
0
-5

FIGURE SF2.11 Vulnerabilities
Risks are increasingly on the downside. Government spending has risen sharply in somecountries, and deficits may prove hard to finance. Current account deficits are large insome countries and reserve buffers low.
A. Fiscal deficits, 2014

B. LICs: Current account deficits, 2014

Percent of GDP
0
-2
-4
-6
-8
-10
-12
-14

Percent of GDP
10

0
-10
-20
-30
-40

The outlook is subject to significant and increasing
downside risks.

C. LICs: International reserves, 2014

•

6

•

Lower oil prices would also cause a more protracted recession than anticipated in Russia anddampen growth in Tajikistan through lower remittances and exports.

Mozambique
Liberia
Zimbabwe
GuineaNiger
BurundiGambia, The
RwandaCambodiaTanzania
Guinea-Bissau
DRC
Kenya
Tajikistan
Ethiopia
Chad
Benin
Mali
Sierra Leone
UgandaMyanmarTogo
Burkina Faso
Haiti
MalawiCameroon
Eritrea
Bangladesh
Nepal
Afghanistan

Risks to the outlook

Months of imports
7
5
4
3
2

Source: World Bank, IMF
Note: Reserve buffers are from latest publicly available IMF staff reports.
B. DRC denotes Democratic Republic of Congo.

•

Conflict could intensify again in fragile states(e.g., al-Shabab in Kenya, or insurgencies inMali).

•

A sudden adjustment of market expectations tothe upcoming tightening of monetary policy in
the United States could put pressures on capital

Chad

Ethiopia

Congo, Dem.
Rep.

Mozambique

Malawi

Sierra Leone

MyanmarBurundiTanzania

RwandaUgandaKenya

Gambia, The

0

Togo

1
Liberia

A further decline in commodity prices would
sharply lower revenue in oil-exporting countries, requiring them to undertake deeper fiscal
adjustments, with sharper expenditure cuts. It
may prompt some commodity extraction companies to delay or even cancel planned investments in 2015 (Guinea, Mozambique, Tanzania, Uganda). Given the importance of artisanaland small-scale mining in LICs, domestic private consumption may also prove weaker than
expected in the baseline.

Madagascar
Comoros
CFA Franc zone
Mozambique
UgandaTanzania
Malawi
The Gambia
Kenya
Ethiopia
Haiti
GuineaNepal
DRC
Bangladesh
Sierra Leone
Eritrea
BurundiRwanda

2016
2017

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

Source: IMF World Economic Outlook, IMF staff reports, World Bank, Haver Analytics.

EritreaGambia, The
Mozambique
Kenya
Haiti
Togo
Malawi
Niger
Cameroon
Liberia
GuineaMyanmarChad
Mali
UgandaTanzania
RwandaBurundiSierra Leone
Bangladesh

In several fragile countries (Madagascar, Malawi,Mali), growth should pick up as investment rises on
the back of increased political stability. Rising politicaluncertainty will, however, dampen growth somewhat
in Bangladesh in the near-term, although domestic demand should remain supported by resilient remittances. In Nepal, strong remittance inflows should
help support domestic demand and post-earthquake
reconstruction. Recovering activity in Guinea, Liberia,
and Sierra Leone as the effects of the Ebola crisis wane
should also help to support growth in these countries.

Growth should remain supported by resilient remittances, public investment, and strong
harvests. However, risks remain on the downside.

104

S P E C I A L F E AT U R E 2

GLOBAL ECONOMIC PROSPECTS | JUNE 2015

account inflows, and exchange rates, and on debt
service costs of countries that have tapped international capital markets since the crisis (Tanzania, Kenya, Rwanda, Mozambique, Ethiopia).
LICs continued to have limited buffers to absorb
stresses should risks materialize. Current accountdeficits, and government borrowing requirements
are large in many LICs (Figure SF2.11). Reserve coverage of imports in several countries is below threemonths of imports (Chad, Ethiopia, Democratic
Republic of Congo). Notwithstanding the spending
restraint applied by commodity-exporting LICs until 2007, the sharp post-global crisis expansion ingovernment spending has reduced fiscal space. As aresult, several now have large twin deficits, with fiscal
and current account deficits in excess of 5 percent of
GDP (Guinea, Kenya, Mozambique, Niger).

References
Ahmed, A., and S. Suardi. 2009. “Macroeconomic
Volatility, Trade and Financial Liberalization in Africa.” World Development Review, 37 (10).

Table SF2.1 Low-income country growth forecasts(Real GDP growth at market prices in percent, unless indicated otherwise)00-10a

2011

2012

2013

2014e

2015f

2016f

2017f

5.7

6.1

6.5

6.2

6.2

6.2

6.6

6.6

Afghanistan

12.8

6.1

14.4

3.7

2.0

2.5

5.0

5.1

Bangladeshb

6.1

6.5

6.0

6.1

5.6

6.3

6.7

6.7

Benin

3.9

3.3

5.4

5.6

5.5

4.6

4.6

4.7

Burkina Faso

6.0

4.2

9.5

6.5

4.5

5.0

6.2

6.5

Burundi

3.3

4.2

4.0

4.6

4.7

4.8

5.0

5.2

Cambodia

8.0

7.1

7.3

7.4

7.0

6.9

6.9

6.8

Chad

10.7

0.1

8.9

4.0

7.3

9.0

4.7

5.6

Comoros

2.9

2.6

3.0

3.5

3.2

3.4

3.7

3.8

Congo, Dem. Rep.

4.7

6.9

7.1

8.5

9.0

8.0

8.5

9.0

Eritrea

0.9

8.7

7.0

1.3

2.0

1.5

2.0

2.2

Ethiopiab

8.6

11.2

8.6

10.5

10.3

9.5

10.5

8.5

Gambia, The

4.6

-4.3

5.9

4.8

-0.2

3.0

5.1

6.1

Guinea

2.6

3.9

3.9

2.3

0.4

-0.3

2.3

2.5

Guinea-Bissau

2.5

9.0

-2.2

0.3

2.5

4.2

3.9

4.0

Haiti

0.1

5.5

2.9

4.2

2.7

1.7

3.2

3.1

Kenya

4.4

6.1

4.5

5.7

5.3

6.0

6.6

6.5

Madagascar

2.6

1.5

3.0

2.4

3.0

4.6

4.8

5.0

Malawi

4.5

4.3

1.9

5.0

5.7

5.1

5.6

5.9

Mali

5.7

2.7

0.0

1.7

6.8

5.6

5.1

5.2

Mozambique

7.7

7.4

7.1

7.4

7.4

7.2

7.3

7.3

Myanmar

10.3

5.9

7.3

8.3

8.5

8.5

8.2

8.0

Nepalbc

3.9

3.4

4.9

3.8

5.5

4.2

4.5

5.5

Niger

4.6

2.3

11.0

4.1

6.2

4.5

5.5

7.7

Rwanda

7.9

7.9

8.8

4.7

7.0

7.0

7.0

7.5

Sierra Leone

8.9

6.0

15.2

20.1

6.0

-12.8

8.4

8.9

Tajikistan

8.3

7.4

7.5

7.4

6.7

3.2

4.4

5.2

Tanzania

7.0

6.4

6.9

7.0

7.2

7.2

7.1

7.1

Togo

2.0

4.9

5.9

5.1

5.5

5.1

4.9

4.7

Uganda

7.8

4.7

3.6

4.8

5.2

5.5

5.7

5.8

Zimbabwe

-4.7

11.9

10.6

4.5

3.2

1.0

2.5

3.5

Low-income country

Source: World Bank.
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from thosecontained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time. Central African Rep., Korea, Dem
Rep., Liberia, and Somalia are not forecasted owing to data limitations.
a. GDP growth rates over intervals are compound average over the period.
b. GDP growth based on fiscal year data.
c. Nepal forecasts are preliminary.

GLOBAL ECONOMIC PROSPECTS | JUNE 2015

Arbache, J.S., and J. Page. 2009. “How Fragile Is Africa’s Recent Growth?” Journal of African Economies.
Bai, G, and Y. Xu. 2014. “Giant Fields Retain Dominance in the Reserves Growth.” Oil and Gas Journal
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Basu, P., R. Verma, R. Paul, and K. Viswanath. 2010.
“Deep Waters of Rakhine Basin - A New Frontier.”
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Economist Intelligence Unit. 2013. “Copper Expansion Project at Bisha is Completed.” http://country.
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FAO, 2012. Proceedings of a Technical Workshop
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fao.org/fileadmin/user_upload/tcsp/docs/workshop%20final.pdf
Fraser Institute. 2011. “Annual Survey of Mining
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Blattman, C., J. Hwang, and J. G. Williamson.
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Gelb, A., K. Kaiser, and L. Vinuela. 2012. “How
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BMI Research. 2015. “After the Commodity Boom:The New Growth Path.” Economic Analysis. A Fitch
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Gill, I. S., I. Izvorski, W. Van Eeghen, and D. De
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Busse, M., C. Erdogan, and H. Muehlen. 2014.
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Cavalcanti, T. V. d. V., K. Mohaddes, and M. Raissi.
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Céspedes, L.F., and A. Velasco. 2012. “Macroeconomic Performance During Commodity Price
Booms and Busts,” NBER Working Papers 18569.
Chuhan-Pole, P., A. L. Dabalen, A. Kotsadam; A.
Sanoh, and A. K. Tolonen. 2015. “The Local Socioeconomic Effects of Gold Mining: Evidence from
Ghana.” Policy Research Working Paper; No. WPS
7250. Washington, DC.
De Gregorio, J., and F. Labbé. 2011. “Copper, theReal Exchange Rate and Macroeconomic Fluctuations in Chile,” Working Papers Central Bank ofChile 640.
Gruss, B. 2014. “After the Boom–Commodity Prices
and Economic Growth in Latin America and the Caribbean.” IMF Working Paper WP/14/154.
Deaton, A., and R. Miller. 1996. “International
Commodity Prices, Macroeconomic Performanceand Politics in Sub-Saharan Africa,” Journal of African Economies 5 (3).

Go, D. S., S. Robinson, K. Thierfelder, and R. H.
Utz. 2013.”Dutch Disease and Spending Strategies
in a Resource-Rich Low-Income Country: The Caseof Niger.” World Bank Policy Research Working Paper No. 6691.
ICMM. 2012. “Trends in the Mining and Metals
Industry.” InBrief Publication.
IMF. 2013. Fiscal Rules Dataset. International Monetary Fund.
______. 2014a. “Macroeconomic Developments in
Low-Income Developing Countries.” IMF Policy
Paper. September 18, 2014.
______. 2014b. “Public Expenditure Reform: Making Difficult Choices.” Fiscal Monitor.
Izquierdo, A., R. Romero, and E. Talvi, 2008,“Booms and Busts in Latin America: The Role of External Factors,” Research Department Publications
4569. Washington, DC: Inter-American Development Bank.
Guillaumont Jeanneney, S., and P. Hua. 2015. “China's African Financial Engagement, Real Exchange
Rates and Trade between China and Africa.” Journalof African Economies 24 (1): 1-25.
Kapstein, E., and R. Kim. 2011. “The Socio-Economic Impact of Newmont Ghana Gold Limited,”
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Kasekende, L., Z. Brixova, and L. Ndikumana.
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Kotsadam A. and A. Tolonen. 2015. “African Mining, Gender, and Local Employment.” World Bank
Policy Research Working Paper 7251, April 2015.
Lusty, P.A.J., and A. G. Gunn. 2015. “Challenges to
Global Mineral Resource Security and Options for
Future Supply.” Geological Society, London, Special
Publications Vol. 393, Issue 1.
McKinsey. 2010. “Lions on the Move: The Progress
and Potential of African Economies”. McKinsey
Global Institute.
McMahon, G., and B. Tracy. 2012. “Firm and Sector Level Mining Benefits in Zambia.” Mimeo, Oil,Gas and Mining Department. World Bank, Washington, DC.

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The Economist. 2014. “Crying Foul in Guinea.” Article published December 18, 2014.
Timmer, M. P., G.J. de Vries, and K. de Vries. 2014.
“Patterns of Structural Change in Developing Countries.” GGDC research memorandum 149. University of Groningen. Available at http://www.ggdc.net/
publications/memorandum/gd149.pdf.
Trevino, J. 2011. “Oil-Price Boom and Real Exchange Rate Appreciation: Is There Dutch Disease in
the CEMAC.” IMF Working Paper. WP/11/268.
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______. 2013. “African Economic Outlook: Structural Transformation and Natural Resources. Special
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AFDB,
OECD,
UNDP
and
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McMahon, G., and F. Remy (eds.). 2001. “Large
Mines and the Community. Socioeconomic and Environmental Effects in Latin America, Canada andSpain,” published jointly by the International Development Research Center, Ottawa, and the World
Bank, Washington, DC.

US EIA. 2013. “Uganda Country Analysis Note.”
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www.eia.gov/countries/country-data.cfm?fips=ug.

McMillan, M. S., and K. Harttgen. 2014. “What Is
Driving the ‘Africa Growth Miracle’?” NBER Working Paper No. 20077, April 2014.

______. 2009. Global Economic Prospects: Commodities at the Crossroads. Washington, DC: World Bank.

Mukumbira, R. 2007. “Eritrea Signs Bisha Gold/Base
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Naoussi, C. F., and F. Tripier. 2013. “Trend Shocks
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Poelhekke, S., and Frederick van der Ploeg. 2013.
“Do Natural Resources Attract Non-resource FDI?”The Review of Economics and Statistics 95 (3).
Raddatz, C. 2007. “Are External Shocks Responsible
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Schodde, R. 2013. “The Impact of Commodity
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Schodde, R. 2014. “Key Issues Affecting the Time
Delay Between Discovery and Development.”
MinEx Consulting Presentation.

World Bank. 2006. Where Is the Wealth of Nations?
Measuring Capital for the 21st Century. Washington,
DC: World Bank.

______. 2010. The Changing Wealth of Nations:
Measuring Sustainable Development in the Millennium. Washington, DC: World Bank.
______. 2015a. Africa Pulse. April 2015. Vol. 11.
Washington, DC: World Bank.
______. 2015b. Global Economic Prospects: Having
Fiscal Space and Using It. January 2015. Washington,
DC: World Bank.
______. 2015c. “Migration and Development Briefing.” April 2015. World Bank, Washington, DC.
______. 2015d. “Commodity Markets Outlook.
April 2015.” Washington, DC: World Bank.
Wall Street Journal. 2015. “Guinea’s Simandou Auction to Test Appetite for Iron Ore.” Published February 11, 2015.
Villoria, N. 2009. “China's Growth and the Agricultural Exports of Sub-Saharan Southern Africa.” European Journal of Development Research. 21.

CHAPTER 2

Regional
Outlooks

EAST ASIA and
PACIFIC
Regional growth is expected to ease further to 6.7 percent in 2015 and remain flat thereafter. This reflects a continued slowdown in China that is offset by a pickup in the rest of the region. As a net hydrocarbon importer, theregion is expected to benefit from low fuel prices. In 2015, headwinds from tighter fiscal policy (Malaysia, Vietnam) and macroprudential regulation (China, Malaysia, and Thailand) are expected to be largely offset by
gradual recovery of investment and manufacturing exports associated with a global recovery and continued low
financing cost. Softer commodity prices have affected commodity exporting countries like the Lao People’s Democratic Republic and Indornesia. Risks to this outlook remain tilted to the downside. Policy makers, especially ineconomies with a high share of U.S. dollar-denominated debt, will find it increasingly challenging to balance theneeds of supporting growth and preserving export competitiveness against maintaining financial stability amidst
an appreciating U.S. dollar and prospects of rising U.S. interest rates.

Recent Developments
Growth in the East Asia and Pacific (EAP) region
slowed, as expected, by 0.2 percentage points to 6.9
percent in 2014 (Figure 2.1 and Table 2.1). Fiscal
and macroprudential policy tightening in the major
regional economies, political problems in Thailand,monetary tightening and election-related uncertainty in Indonesia, and budget execution bottlenecks in the Philippines (World Bank 2015a) contributed to weaker economic activity. Investment
continued to ease from the credit-fueled high ratesof the post-crisis years. The main offset to these negatives came from consumption, on the back of tightlabor markets and accommodative monetary policies. Rising exports to recovering high-income
countries, especially to the United States, are providing additional support.
In China—where policy measures guided a gradualdecline of growth to 7.4 percent in 2014—economic activity continues to slow in 2015, althoughcontinued policy easing has moderated the deceleration. Investment remains constrained by overcapacity in heavy industries, an on-going decline in the
housing sector, and regulatory tightening of nontraditional lending. Data on industrial prices, imports (particularly of commodities), and lead indiThe main author of this section is Ekaterine Vashakmadze.

cators of manufacturing activity point to further
weakness. The size of stimulus programs to support
activity has gradually declined. Policy support has
become more cautious and increasingly implemented by conventional tools—monetary policy
easing, through targeted cuts in required reserve ratios and in policy rates, and fiscal support for infrastructure projects. Low fuel prices and stronger
global demand provided a boost, offsetting some of
the weakness in investment. The on-going shift
from industry to services (including private services)
continues to support dynamic job creation and robust consumption growth.1 While low oil prices
have reduced inflation, core inflation remained stable in the first quarter of 2015, reflecting robust private consumption and policy easing.
China’s current account surplus remains at around
1.8 percent of GDP, helped by a sustained improvement in terms of trade. However, net capital inflows
have reversed. Since the second quarter of 2014,
portfolio and other capital outflows have increased
sharply and were only partially offset by record high
FDI inflows into the services sector. Capital out1From 2007 through 2012, private enterprises and household businesses added a total of 41.5 million jobs in the services sector, morethan four times the jobs that state-owned firms added during this period (Rutkowski 2015).

109

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Figure 2.1 East Asia and Pacific: Regional growth andperformance in China(iv) 	capital flight related to the ongoing antigraft campaign.

Growth in East Asia and Pacific region slowed by a modest 0.2 percentage points to
6.9 percent in 2014, as expected, largely because on a continued slowdown in China.
China’s growth decelerated further in the first quarter of 2015. Beyond China, growthin the first quarter of 2015 slowed in Indonesia, Malaysia, and Thailand reflecting continued adjustment to lower commodity prices, weak external demand, and still weak
confidence in Thailand.

C. C hina: Stock price and REER
indices (2010=100), and EMBI
spreads
Index 2010 = 100
180

4Philippines

Malaysia

Indonesia

0

Thailand2
China

Thailand6

Basis points Percent of GDP
350 10 Capital Account, FA & Net Errors & Omissions
Current Account300 8 Reserves
6
250
4
200 2
150 0
-2
100
-4
50
-6
0

2014 Q4

2014 Q3

2014 Q2

2014 Q1

2013 Q4

2013 Q3

2013 Q2

2013 Q1

2012 Q4

2012 Q3

2014

2013

2012

80

2012 Q2

100

2012 Q1

120

2011

2015Q1

D. China: Balance of payments

2015

140

2010

2014Q48

Stock Market Index
REER Index
EMBI spreads (RHS)

160

60

2014Q3

10

Solomon Islands

Malaysia

Philippines

Papua New Guinea

EAP (excl. China)

VietnamIndonesia

Lao PDR

Mongolia

Percent, quarterly change, saar
12

EAP

Percent change, year-on-year
2013
2014
16
14
2015-17 (average)
2001-12 (average)
12
10
8
6
4
2
0
Cambodia

B. Selected countries: Real GDP growth

China

A. Real GDP growth

Sources: World Bank, Haver, CEIC, IMF IFS, J.P. Morgan, Bloomberg.
C. J.P. Morgan Emerging Market Bond Index global sovereign spreads.

flows have been driven by changing domestic andexternal conditions. These include:(i)	a move toward two-way exchange-rate fluctuations and receding expectations of persistent renminbi appreciation;2(ii) 	a narrowing interest rate differential to theUnited States as a result of domestic policy
easing and expectations of policy tightening
by the Fed, and greater volatility in crossborder flows;(iii) 	improved global growth prospects, in contrast to weakening growth and a housing
price correction in China; and possibly
2Corporations are increasingly holding on to their foreign currency
proceeds (both onshore and offshore) and hedging their foreign currency exposures.

Foreign-currency reserves declined by an estimated
US$263 billion (7 percent of total) between June2014 and March 2015. This was largely driven byvaluation effects (about 2/3 of the decline).3 Notwithstanding this decline, China’s foreign exchange
reserves remain solid (about 38 percent of GDP and
24 times monthly imports). The renminbi depreciated sharply in mid-March against the U.S. dollar,
after several months of steady appreciation. This signaled the PBC’s intention to deter speculators who
had been betting on one-way appreciation of theChinese currency. Nevertheless, in real effective
terms, the renminbi has appreciated by around 6
percent since end-2014, and by 27.4 percent since2010.
Despite the slowdown in China, economic activity
elsewhere in the region accelerated sharply in thelast quarter of 2014, partly helped by lower fuelprices and more accommodative policies. For 2014as a whole, growth was 4.7 percent, in line with the
Global Economic Prospects (GEP) projection in
January 2015, but nevertheless lower than in 2013(5.2 percent). Domestic demand, especially consumption, remains the main driver of regional
growth. Lower fuel prices, dynamic capital and labor markets, robust inflows of remittances and capital, and accommodative monetary policies boosted
growth. Implementation of large public projects
provided additional support to growth in Malaysia
and the Philippines in the last quarter of 2014
(World Bank 2015b), but investment in general remains much weaker than in earlier periods.
Low oil prices, tighter macrofinancial policies, andstronger exports, have contributed to improving current account balances, except in commodity-exporting countries (Figure 2.2). Current account surpluses
continue to widen, especially in the Philippines andThailand. In contrast, earlier large surpluses have unwound in fuel-exporting Malaysia. In Indonesia, thecurrent account remains in deficit as the economy
adjusts to a 40 percent drop in the prices of key export commodities from their 2011 peaks (WorldBank 2015c). In Indonesia, and Mongolia, externalfinancing requirements remain elevated as a result of
3Related to the weakening of non-US$ currencies (including euro
and yen depreciation, which account for about 40 percent of China’s
foreign exchange reserves) (Miner 2015).

G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5

Credit growth in the region appeared to recover, but
the pace remains far below earlier elevated levels (Figure 2.4). Borrowing has slowed, reflecting tighter
lending policy in Indonesia and stricter prudential
measures in Malaysia. Domestic debt-to-GDP ratios(across all sectors) exceed pre-crisis levels in several
countries, and are above 150 percent in China, Malaysia, and Thailand. The post-crisis debt build-up
4In Malaysia, external financing requirement is related to the shortterm debt refinancing needs.
5External debt includes non-resident holdings of locally-denominated debt securities. In Malaysia total external debt, including nonresident holdings of local currency denominated debt was estimated at
69.6 percent of GDP at end-2014, while debt to GDP ratio excluding
non-resident holdings stood at 34.3 percent of GDP.
6Quantitative easing in Japan has significantly less impact on crossborder capital flows due to its inward orientated nature.
7 In Mongolia, a sizeable share of external debt represents intracompany debt.

D. Fuel trade balance, 2013

Percent of total export market

Share of GDP
5

Dev. ASEAN & Pacifics
China
EU
100%

Japan & NIEs
USA

Vietnam

EAP average

-10

60%

-15

40%

-20

20%
0%

0
-5

80%

PhilippinesFiji

C. Export market destinations, 2013

Thailand

Malaysia

Mineral fuels & oils
Palm oil
Ores, slag and ash
Rice
RubberWood

Lao PDR

MyanmarIndonesia

PNG

Mongolia

100
80
60
40
20
0

Timor Leste

Gas

Coal

CopperTin

Philippines
MyanmarIndonesia

Other

NickelPercent of total exports

Aluminium

Percent of global exports
90
Thailand80
Vietnam70
Malaysia
60
50
China
40
30
20
10
0
Wood

B. Commodity share in total exports,
2013

-25
Malaysia

China

Indonesia Philippines Thailand

MYS
IDN
MNG
VNM
PNG
CHN
VUT
LAO
PHK
FSM
PLW
KHM
WSM
FJI
TON
THA
SLB
TUV
KIR

With the notable exception of Malaysia, capital
flows to the region have rebounded in 2015, reflecting quantitative easing in the Euro Area, and lingering demand for higher-yielding, emerging markets
debt.6 Malaysia is at risk of further portfolio outflows due to a narrowing current account surplus
because of declining fuel prices, sizable short-termbank external debt, and significant foreign holdingsof local-currency denominated government debt.

A. Share of EAP countries
commodity exports in global
exports, 2013

Natural rubber

The majority of regional currencies depreciatedagainst the U.S. dollar, but appreciated against theeuro and yen and in real effective terms, affecting
export competitiveness. Those countries with external debt above 50 percent of GDP and deteriorating
terms of trade (Malaysia, Mongolia, and Papua New
Guinea) saw their currencies depreciate strongly overthe past 18 months.5 The strengthening U.S. dollar
creates significant balance-sheet pressures for corporations with large dollar-denominated liabilities.

EAP countries are the world’s largest producers of palm oil, rice and natural rubber andhave significant global market shares in other commodities. Some are heavily dependent on exports of a few commodities. Except for Indonesia and Malaysia, all are net fuelimporters. The largest trading partner is Japan, followed by China and the United States.

Rice

Headline inflation (core inflation plus food and energy costs) has dropped to very low levels in several
countries (Malaysia and Thailand, Figure 2.3). However, there is little risk of deflation, except perhaps inThailand where the core and headline rates are well
below the official target rate. In contrast to othercountries in the region, the high rate of inflation inIndonesia remains a challenge for policymakers.

111

Figure 2.2 Key exports

Palm oil

persistent fiscal and sizeable current account deficits.4 However, reserve coverage of imports andshort-term debt remains solid in most countries in
the region.

C h a p t e r 2 | E AS T AS I A a n d PAC I F I C

Sources: UN Comtrade, World Bank.
B. Includes coal and petroleum gases.
C. NIE are Newly Industrialized Economies. Dev. ASEAN (Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar,
Philippines, Thailand, Vietnam) and Pacifics (Fiji, PNG, East-Timor, other smaller Island States; here also includes
Australia and New Zealand).
D. Includes hydrocarbons and coal. Excludes Timor-Leste, which has large positive fuel trade balance.

was particularly marked in the non-financial corporate sector and increasingly driven by bond financing—a shift away from more traditional bank borrowing. Although emerging and developing countriesof the region have increasingly relied on domestic
credit markets for finance, private external debt exceeds 30 percent of GDP in Lao PDR, Papua New
Guinea, and Mongolia.7
Most countries made efforts to reduce fiscal deficits
in 2014. Fiscal balances improved particularly in
Malaysia (to 3.4 percent of GDP in 2014, from 6.7
percent in 2009), Lao PDR (to 4.3 percent of GDP
in 2014, from 6 percent in 2013), and the Philippines. Despite reforms to rationalize fuel subsidies
and raise fuel taxes, deficits continued to rise in Indonesia, largely because of weak revenue. In Mongolia
and Vietnam, fiscal deficits remain elevated, whereas

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Figure 2.3 Inflation and real exchange rates
Lower oil prices have reduced headline inflation but core inflation has remained stable
and, in Indonesia, elevated. In real trade-weighted terms, most currencies have appreciated against the U.S. dollar, while strong capital inflows into the region.
A. Headline inflation

B. Core inflation

Percent, year-on-year
Indonesia
10 China
Malaysia
Vietnam8

Percent, year-on-year
6

ThailandPhilipines

6

5
4

4

C. Selected countries: Real effective
exchange rates
Index, Jan 2010 = 100
China
Thailand
Vietnam
120
130

2015

2014

2013

D. Gross capital inflows

US$, billions

Indonesia
Malaysia
Philippines

2012

2011

0

2011

2015M04

2014M12

2014M08

2014M04

2013M121
2013M08

2-2

2013M04

0

2010

3

2

100
80

100

60

90

40

80
2015

2014

2013

2012

2011

2010

20
0

2009

2010

2011

2012

2013

In China, growth is projected to moderate to 7.1 percent in 2015 and 6.9 percent in 2017, reflecting policy efforts to achieve a more sustainable growth path.
Continuing measures to contain local government
debt, curb shadow banking, and tackle excess capacity may reduce investment and industrial output.
Measures aimed at curbing energy consumption andreducing pollution may have the same effect. Low oil
prices will soften the impact of these reforms, andtargeted policy measures are expected to be applied asneeded to ensure a gradual slowdown.
In the region excluding China, the forecast is for
growth to reach 4.9 percent in 2015 and 5.4 percent
in 2017, driven by the large ASEAN economies(Table 2.2).

Equity issue
Bond issue
Bank lending

120

110

70

China
Indonesia
Thailandfuel prices, but the impact will vary across countries,
reflecting the magnitude of net fuel imports, energy
intensity of production, and the share of oil and gas
in energy consumption.

2014

Sources: Haver, IMF IFS, BIS, World Bank WDI, Dealogic.
B. Excludes food and energy prices.
C. CPI-deflated real effective exchange rates. An increase denotes an appreciation.

Cambodia and Lao PDR are making progress toward
debt reduction, despite declining donor grants. In Pacific Island countries, fiscal positions generally improved, reflecting strong revenues from taxes on tourism and from donor grants. Across the region, tax
revenue collection remains relatively low. Government spending in several countries (especially Indonesia and Malaysia) have tended to be correlated with
commodity-related exports (Figure 2.5) reflecting
also the earlier relatively large fuel subsidies.

Outlook
Regional growth is expected to ease to 6.7 percent in2015 and remain stable thereafter. The continued
slowdown in China should be gradually offset by apickup in the rest of the region, which is benefitingfrom the strengthening recovery in advanced countries, low energy prices, improved political stability,
and ample liquidity in global financial markets despite an expected gradual tightening in the UnitedStates. EAP countries will mostly benefit from low•	In Indonesia, which continues to adjust tolower commodity prices, growth will moderate
further to 4.7 percent in 2015 before picking
up to 5.5 percent in 2016-17, supported by arecovery of investment and stronger exports.
•	In Thailand, real GDP growth is projected at 3.5
percent in 2015, with exports picking up slightly.
However, domestic demand will remain weak,despite increased social stability. Growth is expected to strengthen in 2016-17 to 4 percent, as
commodity prices remain low and the recovery
in high-income economies strengthens.
•	In Malaysia, growth will likely slow to 4.7 percent in 2015, as low oil prices dampen investment in the oil and gas sector and credit growthcontinues to slow. In addition, private consumption will moderate as a result of the introduction of the Goods and Services Tax (GST, avalue-added tax) in April 2015 (World Bank
2015d). Capital expenditures in the oil and gas
sector, a key driver of strong investment growthin the past three years, will be delayed by lower
oil prices. An acceleration in growth to 5 percent is expected in 2016-17, as some normalization occurs.
•	In Vietnam, GDP growth is forecast at 6 percent in 2015, rising gradually to 6.5 percent in2017 on the back of continued strong performance of the manufacturing sector, exports,
and foreign investment.

G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5

Risks
Risks, both external and internal to the region, remain tilted to the downside, but less so than in January. Although the probability is low, the risk of a
hard landing in China remains. Since the region’s
economies are very open, they are vulnerable totrading partner slowdowns and large exchange rate
shifts, including further U.S. dollar appreciation.

8 Debt levels in China, Malaysia, and Thailand are now at thelevel of some advanced economies (averaging 280 percent of GDP,
compared with 121 percent for developing countries). Credit is vital for economic activity and high levels of debt in the EAP region
largely reflect financial deepening and better demographic and growthprospects than in other developing regions. However, policies should
remain focused on maintaining prudent frameworks and financial stability objectives given a very rapid build-up of debt in the region andthe previous boom-bust episodes.

2015

2014

2013

2012

2011

D. Selected countries: Household,non-financial corporate, andgovernment debt

Percent of GDP
300
250
200
150
100
50
0
-50

Percent of GDP
270

External
Domestic
Change during 07-13

HouseholdNon-financial corporate

220

General government

170

70

2014

2014

2007

2014

2007

2014

2007

2014

20
-30

2007

Solomon Islands

Indonesia

Philippines

Lao PDR

CambodiaFiji

VietnamThailand120
Papua New Guinea

Malaysia

C. Selected countries: Total
domestic and external debt, 2013

2007

2010

0
-10

Cambodia

10

120
100
80
60
40
20
0

Foreign currency exposure
Foreign currency vulnerability indicator

Mongolia

20

Percent

Indonesia

ThailandPhilippines
VietnamPhilippines

Percent, year-on-year
Indonesia
50
Malaysia
40
China
30

B. Foreign currency exposure andforeign currency vulnerability
indicators, 2013

Vietnam

A. Real growth of bank credit

Mongolia

Growth in the smaller Pacific Island countries will besupported by rising trade, tourism, and remittances,and generally positive country-specific developments. In Papua New Guinea, however, growth will
decline sharply after a temporary 16 percent spike in2015. The economic gains from liquefied natural gas(LNG) exports, which began in May 2014 and increased rapidly, will more than offset the completionof LNG-related construction work. In Timor-Leste,
government spending is expected to help non-oil
growth to gradually strengthen to 7 percent by 2017,
while low prices dampen oil output.

Despite a recent slowdown, debt remains significantly above 2007 levels and in China,
Malaysia, and Thailand more than 150 percent of GDP. A modest share of non-financial
corporate and household debt is denominated in U.S. dollars.

2009

Growth will decelerate in several smaller economies
due to low oil prices and measures to unwind financial
vulnerabilities. In Mongolia, weak world prices forcopper and coal will reduce mining production. In
Cambodia, growth will remain slightly below 7 percent in 2015–17, reflecting weaker prices for agricultural commodities and slower improvements in crop
yields, constrained garment exports amid real currency
appreciation and competition from new entrants, andconcerns whether the recent rapid growth in tourism
will continue. In Lao PDR, growth will ease to 6.4
percent in 2015 due to lower public spending and efforts to reduce credit growth, and recover to 7 percent
over the medium term, led by electricity exports, withmining production remaining flat.

Figure 2.4 Debt

China

•	Growth in the Philippines is projected to remain strong, benefitting from a recovery in Japan and from low fuel prices.

113

C h a p t e r 2 | E AS T AS I A a n d PAC I F I CIndonesiaPhilippines Thailand Malaysia China

Sources: Moody’s Statistical Handbook. Haver, IMF IFS, BIS, World Bank WDI, Debt database, McKinsey.
B. Foreign currency exposure is measured as total foreign currency deposits in the domestic banking system/
total deposits in the domestic banking system. Foreign currency vulnerability indicator is defined as (total foreign
currency deposits in the domestic banking system)/(official foreign exchange reserves + foreign assets ofdomestic banks).
C. Includes both public and private-sector debt. Includes local currency denominated debt held by foreigners(large part of external debt in Malaysia). Ratios for Malaysia will improve with the rebased GDP. In Mongolia, alarge share of external debt represents intra-company debt.

Low fuel prices, if sustained, present an upsiderisk for the regional outlook.
Financial market volatility or sharply tightening
financing conditions pose significant risk to theoutlook. This may take the form of asynchronous monetary policy tightening in major economies, or geopolitical risks. Abrupt increases inbond yields and exchange rate volatility could
result, as investors reassess growth prospects andpolicies. Debt stands at high levels in several
countries. Although it remains predominantly
local currency-denominated, corporations haveborrowed large amounts in foreign currencies.
High debt stocks expose countries to risks fromrising borrowing costs, or credit shut-offs.8 Exchange rate adjustments may cause balance sheet
strains in some countries. The combination ofhigh debt levels and currency mismatches creates

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Figure 2.5 Policy issues
Across the region, tax revenue collection remains low by advanced country standards,
and dependence on commodity/fuel related exports cause procyclical fiscal pressuresin several countries (e.g. Indonesia, Malaysia).
A. Tax revenue, 2014

B. Ease of Doing Business: Distanceto frontier score, 2015
Index
80
60
40

Lao PDR

Cambodia

Indonesia

China

VietnamThailand0

Malaysia

Indonesia

Cambodia

20
Philippines

Thailand

Malaysia

Lao PDR

China

Vietnam

Percent of GDP
40
OECD average
35
30
U.S.
25
20
15
10
5
0

Source: WDI. OECD. IMF, Fiscal Monitor, WEO. World Bank. Doing Business indicators.
B. The distance to frontier score aids in assessing the absolute level of regulatory performance and how it
improves over time. This measure shows the distance of each economy to the “frontier,” which represents thebest performance observed on each of the indicators across all economies in the Doing Business sample
since 2005. This allows users both to see the gap between a particular economy’s performance and the best
performance at any point in time and to assess the absolute change in the economy’s regulatory environment
over time as measured by Doing Business. An economy’s distance to frontier is reflected on a scale from 0 to100, where 0 represents the lowest performance and 100 represents the frontier. For example, a score of 75 in
DB 2014 means an economy was 25 percentage points away from the frontier constructed from the best performances across all economies and across time. A score of 80 in DB 2015 would indicate the economy isimproving. In this way the distance to frontier measure complements the annual ease of doing business ranking, which compares economies with one another at a point in time.

Finally, as the surge in China’s stock market continues, the financial and economic consequencesfrom a possible correction will increase. Should
it materialize, a sharp slowdown in China could
usher in a prolonged period of slow growth as the
economy heals, and would have regional andglobal spillovers (World Bank, 2014a). A onetime 1 percentage point decrease in China’s
growth relative to the baseline (a 2 percentage
point decrease in investment growth) would reduce growth in the region by approximately 0.2
percentage points (World Bank, 2014a). The impact would vary across countries, with commodity exporters with less diversified economies andregional supply chain economies affected themost (Ahuja and Nabar, 2012). Nevertheless,
China is in a strong fiscal position with policy
buffers that appear adequate to contain risk related to financial sector distress.

Policy Challenges
systemic risk and the possibility of sharp increases in country risk premiums.
A weaker-than-expected recovery in high-income
countries, especially in the United States, theEuro Area, Japan, and the Newly Industrialized
Economies would weaken global and regional
trade and impair the region’s exports. High-income country exports account for about 60 percent (Thailand) to 90 percent of the region’sexports.
A sharp slowdown in China, while unlikely,
would have spillover effects on regional trading
partners and commodity exporters. A hard landing could originate from:••a steep decline in property prices that forcesdevelopers and banks to deleverage quickly
and investment in real estate to contract
sharply;a sharp slowdown in infrastructure investment following the implementation of thelocal government debt framework;•

bankruptcies in primary and heavy industries (now suffering from overcapacity); or•a decline in shadow banking activity thatcauses a sharp cutback in credit availability.

In China, the key policy challenge is to put growth
on a sustainable path, while improving financial stability. The authorities have initiated several programs
to implement the comprehensive structural reform
agenda announced in November 2013 (World Bank,
2014a). The objective is to increase the role of markets and to facilitate resource reallocation to sectors
with high returns. The key policy challenge is to shift
growth towards more sustainable sources in the medium-term, while avoiding a sharp slowdown, or financial distress, in the short-term. A couple of areas
stand out as candidates for early action:•

fiscal reforms to place local government finances
on a more solid footing and facilitate a shift
from investment to consumption; and•financial sector reforms to improve resource allocation, strengthen market discipline, andcontain a further buildup of financial sector
vulnerabilities.

Next in line would be reform of state-owned enterprises, land ownership, and labor markets. Suchchanges would help maintain growth and lift employment (World Bank and Development ResearchCenter of the State Council, the People’s Republicof China, 2014).

G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5The authorities have made some progress in implementing their comprehensive reform agenda. Increasingly, the business tax is being replaced withvalue-added taxation (e.g. in railways from January
2014; in telecommunications from June 2014), environmental taxes have been increased, and the introduction of a reformed national property tax isplanned (Lam and Wingende 2015). A revised budget law and new rules on local borrowing were introduced to swap local government debt into lowercost government bonds. Pilot property tax systems
have been rolled out in a few cities. The deposit rateceiling was raised and deposit insurance (a prerequisite for further interest rate liberalization) was introduced on May 1, 2015. The exchange rate band was
widened from 1 to 2 percent, and the ShanghaiHong Kong Stock Connect program is promotingsome international capital flows. Specifics of gradualreforms to the hukou system were announced, including the granting of some social benefits to some
100 million migrant workers over the next sevenyears and a relaxation of residency requirements insmaller towns.9 A pilot program was started underwhich farmers can turn their land-use rights intoshares in farming enterprises or cooperative societies. This pilot is part of a series of reforms to privatize the land rights to protect farmers’ interests. The
process of documenting farmers’ land use rights has
been initiated. China accelerated administative reform, including by streamlining and centralizing
preconstruction approvals, and simplifying court
proceedings to facilitate contract enforcement.
Falling world fuel prices create an opportunity toeliminate fuel subsidies, which have strained publicfinances and weakened current accounts in both
fuel exporters and importers. Energy taxes should
also be reformed for the same purposes. Recent
steps to reduce such distortions have gathered momentum, which now needs to be sustained. Broadening the revenue base and improving the effectiveness of public spending remains a priority acrossmuch of the region. In most large economies, expenditures could be rationalized to focus on effective productivity-enhancing or poverty-reducing
programs. Some countries have no option but toconsolidate to control a buildup of debt (Mongolia,
Lao PDR, Vietnam) or safeguard fiscal buffers
9A hukou is a record in the system of household registration
required by law in China.

C h a p t e r 2 | E AS T AS I A a n d PAC I F I C(Myanmar). The Pacific Island countries face significant medium-term fiscal sustainability challenges.
Monetary and exchange rate policies have to adjust
to soft commodity prices and to the likelihood ofsomewhat tighter global financial conditions (Indonesia, Mongolia, Papua New Guinea). Strong regulation and supervision to protect financial stability
may also require proactive use of macroprudential
policies to moderate the effects of the financial cycleon asset prices, credit, and aggregate demand (IMF
2015a). In Malaysia, the GST, introduced in April,will broaden the base of federal revenues and diversify it away from volatile oil and gas revenues. The
vast majority of the budget subsidies have been eliminated. Policies should focus on building the mechanisms to avoid re-introducing subsidies when oil
prices go up. In Indonesia, moderate fiscal consolidation should be underpinned by a broadened tax
base. In Thailand, fiscal support may be appropriate
in the short-term to boost the economy. However,support measures should be framed within a medium-term fiscal plan to strengthen revenue, increase investment, and bolster fiscal institutions.
Across the region, structural reforms are required tomitigate the effects of slowing productivity growth,and aging populations. Development of humancapital and physical infrastructure remains a key
medium-term priority. In Thailand, for example, reforms to state enterprises, rice and rubber price-support schemes, infrastructure procurement, and tax
administration and expenditures would improvetransparency, investor confidence, and fiscal sustainability. For hydrocarbon producers like Indonesia
and Malaysia, the decline in fuel prices underscores
the need to enhance fiscal institutions to better
manage volatile natural-resource rents. Furthermore, the accumulation of foreign assets during
good times can prevent currencies from appreciating to the point that non-energy activities become
non-competitive. Other measures to promote economic diversification include ensuring high-quality
education, increasing the integration and depth ofdomestic financial markets, providing infrastructure
to remove bottlenecks, and creating competition regimes that remove special privileges for establishedsectors or enterprises. Energy importers have an opportunity to enact efficiency-promoting changes.
Finally, a more supportive trade and investment climate would expand the export base, stimulate job
creation, and raise potential growth.

115

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Chapter 2

Increasing competitiveness in services through further regional integration will be necessary for
ASEAN economies to sustain growth in the longrun. Recognizing this, the ASEAN members havecommitted to liberalizing and integrating their services markets, in the context of the formation of theASEAN Economic Community at end-2015. How-G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5

ever, progress has been modest so far, and ASEAN
remains among the most restrictive regions in theworld with respect to trade in services. Correcting
this will require a focus on promoting regulatory cooperation and coordination through harmonization
or mutual recognition, together with the development of regulatory capacity (World Bank 2015b).

G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5

C h a p t e r 2 | E AS T AS I A a n d PAC I F I C

117Table 2.1 East Asia and Pacific forecast summary(Annual percent change unless indicated otherwise)
GDP at market pricesb

00-10a
9.0

2011
8.3

2012
7.4

2013
7.1

2014e
6.9

2015f
6.7

2016f
6.7

2017f
6.6

(Average including countries with full national accounts and balance of payments data only)c
GDP at market pricesc

9.0

8.3

7.4

7.1

6.9

6.7

6.7

6.6

GDP per capita (units in US$)

8.2

7.6

6.7

6.5

6.2

6.1

6.1

6.1

PPP GDP

8.8

8.1

7.3

7.0

6.7

6.6

6.6

6.5

6.7

9.1

7.7

6.7

6.8

7.4

7.6

7.6

Public consumption

8.4

8.9

8.3

7.9

6.5

7.4

7.5

7.4

Fixed investment

11.9

8.6

9.4

8.7

6.7

6.7

6.8

6.7

Exports, GNFSd

11.5

9.8

5.8

7.4

6.5

7.7

7.3

7.0

Imports, GNFSd

11.3

11.2

7.4

8.7

6.6

8.3

8.1

8.3

0.4

–0.1

–0.3

–0.2

0.1

0.0

–0.1

–0.3

Consumer prices (annual average)

2.6

5.6

2.8

3.0

2.6

…

…

…

Fiscal balance (percent of GDP)

–1.6

0.2

–0.3

–1.3

-2.3

-2.5

–2.5

–2.5

East Asia excluding China

5.1

4.8

6.3

5.2

4.7

4.9

5.4

5.4

China

10.5

9.3

7.7

7.7

7.4

7.1

7.0

6.9

Indonesia

5.3

6.2

6.0

5.6

5.0

4.7

5.5

5.5

Thailand

4.5

0.8

7.3

2.8

0.9

3.5

4.0

4.0

Private consumption

Net exports, contribution to growthMemo items: GDP

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 differ at any given moment in time.
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 2010 U.S. dollars.
c. Sub-region aggregate excludes Fiji, Myanmar and Timor-Leste, 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).							Table 2.2 East Asia and Pacific country forecasts(Real GDP growth at market prices in percent, unless indicated otherwise)00-10a
8.0

2011
7.1

2012
7.3

2013
7.4

2014e
7.0

2015f
6.9

2016f
6.9

2017f
6.8

China

10.5

9.3

7.7

7.7

7.4

7.1

7.0

6.9

Fiji

1.6

2.7

1.7

4.6

3.8

2.5

2.4

2.6

Indonesia

5.3

6.2

6.0

5.6

5.0

4.7

5.5

5.5

Lao PDR

7.1

8.0

8.0

8.5

7.5

6.4

7.0

7.0

Malaysia

4.4

5.3

5.5

4.7

6.0

4.7

5.0

5.1

Mongolia

6.5

17.5

12.4

11.6

7.8

4.4

4.2

3.9

Myanmar

10.3

5.9

7.3

8.3

8.5

8.5

8.2

8.0

Philippines

4.8

3.7

6.8

7.2

6.1

6.5

6.5

6.3

Papua New Guineab

3.5

10.7

8.1

5.5

7.5

16.0

5.0

2.4

Solomon Islands

2.9

10.7

4.9

3.0

0.1

3.5

3.5

3.5

Thailand

4.5

0.8

7.3

2.8

0.9

3.5

4.0

4.0

Timor-Lestec

4.3

14.7

7.8

5.4

6.6

6.8

6.9

7.0

Vietnam

6.8

6.2

5.2

5.5

6.0

6.0

6.2

6.5

Cambodia

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. The start of production at Papua New Guinea Liquefied Natural Gas (PNG-LNG) is expected to boost GDP growth to 16 percent and shift the current account to a surplus in 2015.
c. Non-oil GDP. Timor-Leste’s total GDP, including the oil economy, is roughly four times the non-oil economy, and highly volatile, sensitive to changes in global oil prices and local production levels.

EUROPE andCENTRAL ASIA
Regional growth is expected to decelerate to 1.8 percent in 2015 from an already weak 2.4 percent in 2014.
Plunging oil prices and geopolitical tensions, and related spillovers, including from the Russian Federation, areonly partly offset by a moderate recovery in the Euro Area and the benefits from low fuel prices to net fuel importers. Recently, confidence has improved slightly, reflecting the stabilization of oil prices, the peace agreement reachedin Ukraine, and policy measures implemented in several economies. Assuming a marginal recovery of oil prices in
2016-17, continued implementation of stabilization measures, and no major deterioration in geopolitical tensions, growth is expected to strengthen to an average of 3.5 percent in 2016-17. Key risks include a deepening
recession in the Russian Federation and Ukraine, declining oil prices, and abrupt tightening of global financial
conditions.

Recent Developments
After slowing to 2.4 percent in 2014 from 3.7 percent in 2013, regional growth weakened further inearly 2015. This reflected spillovers from the oil
price decline and geopolitical tensions, which morethan offset the benefits from the moderate recovery
in the Euro Area. In the eastern part of the region(Eastern Europe, South Caucasus, and CentralAsia), growth slowed sharply to 1.5 percent in 2014
(one-fifth of the average in 2000–10), reflecting recessions in the Russian Federation and Ukraine, anddownturns in oil-exporting economies. In contrast,
growth accelerated modestly in the western part of
the region, supported by tailwinds from the recovering Euro Area.1
Growth in Russia continued to slide in 2015 (a 1.9
percent contraction 2015Q1), following a modest
0.6 percent expansion in 2014. This reflected theimpact of sharply lower oil prices (oil accounts for
The main authors of this section are Ekaterine Vashakmadze and Allen
Dennis with contributions from Jungjin Lee.
1The eastern part of the region comprises Eastern Europe (Belarus,
Moldova, and Ukraine), South Caucasus (Armenia, Azerbaijan andGeorgia), and Central Asia (Kazakhstan, Kyrgyz Republic, Tajikistan,
Turkmenistan, and Uzbekistan). The western part of the region includes
Central and Southeastern Europe (Bulgaria, Hungary, and Romania)
and the Western Balkans (Albania, Bosnia and Herzegovina, the Former
Yugoslav Republic of Macedonia, Montenegro, Serbia), and Turkey.

54 percent of Russia’s exports) and the adverse impact of sanctions amid an ongoing trend growth
slowdown related to structural bottlenecks (Figure2.6). A plunge in export revenues, a sharp devaluation of the ruble, and trade restrictions on food imports in Russia lifted inflation into double-digits.
The contraction of real incomes and purchasing
power weighed on consumer spending, which had
been the single largest contributor to growth since2012.2 Investment also shrank on falling business
confidence, tightened financing conditions, and restricted access to international capital markets as aresult of sanctions.
Decisive policy actions and resources from the Reserve Fund have cushioned the contraction in Russia in 2015 (World Bank 2015f ), but resulted insignificantly eroded buffers. Key stabilization policy
measures included the switch to the free-float on
November 10, 2014, a policy rate hike in December
2014 which helped to bolster confidence in currency markets, and the swift bank recapitalization
program in December 2014.3 Trade and current account balances improved, helped by the weaker ru2The share of consumption in GDP increased from 62.3 percent in2001 to 83.3 percent in 2014.
3Net capital outflows from Russia slowed to US$32.6 billion in thefirst quarter of 2015, compared to US$77.4 billion in 2014Q4, andUS$48 billion in 2014Q1.

119

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Figure 2.6 Russian Federation: Growth and oil price
A sharp decline in oil prices and the impact of sanctions have dampened activity in
Russia.

Percent2

US$ per barrel
120

0

100

-2

80
2015 growth forecast(consensus forecast)
Growth (YTD, y/y)-460

Oil Price (RHS)-6

May-14

Sep-14Jan-15May-1540

Source: World Bank and Consensus Forecasts.

Figure 2.7 Selected economies, EMBI spreads
Confidence has improved and spreads eased on a peace agreement in Ukraine, stabilization of oil prices and policy actions.

Basis points
800
Russian Federation

Kazakhstan

Basis points
5000

Ukraine (RHS)

4000

600

3000

400

2000

200

Apr-15Jan-15Oct-14Jul-14Apr-14Jan-140

1000
0Source: Bloomberg; J.P. Morgan; Haver.
Note: J.P. Morgan Emerging Market Bond Index global sovereign spreads.

ble, related decline in imports and expansion of exports, despite a 34 percent decline in the nominal
value of oil exports. Beginning in February, the ruble and asset prices recovered some of their earlier
losses, monthly inflation eased, and interest rate
spreads declined to their October 2014 levels (Figure 2.7). The fiscal deficit is projected to increase to
3.5 percent of GDP in 2015, from 1.3 percent in2014, even though proposed amendments to the2015 federal budget imply some consolidation of
expenditures, and could severely deplete the Reserve
Fund (currently equal to 4.7 percent of GDP).
In Kazakhstan, growth declined to 4.3 percent in2014, half of the average rate in 2000-10, and continued to ease in 2015, despite fiscal stimulus mostly

financed from the country’s oil fund.4 This reflects
the combination of falling oil prices (crude petroleum oil accounts for about 70 percent of exports),
recession in Russia (exports to Russia accounted foraround 7 percent of exports in 2010–14), declining
confidence and lower capital inflows. Unlike Russia,
Kazakhstan relied heavily on foreign exchange reserves to defend the exchange rate peg after a 19
percent devaluation implemented in February 2014.
This was done to mitigate depreciation-induced inflation, and to buffer corporate and household balance sheets with large liabilities denominated in
U.S. dollars. Despite weaker domestic demand andslower import growth, the current account surplus
has narrowed, as a result of the sharp drop in commodity exports. Fiscal balances have deteriorated
significantly. A 3 percent deficit is projected in2015, largely reflecting lower revenues from oil exports (World Bank 2015g). Spreads eased from December 2014 peaks, but as of April 2015 are higher
than in Russia.
In Azerbaijan, growth decelerated to 2.8 percent in2014, reflecting low oil prices, interruptions in oil
sector output, and a sharp deceleration of non-oil
GDP growth due to declining public investment.
Both current account and fiscal surpluses declined
sharply. The current account surplus is projected to
decline to 3.9 percent of GDP in 2015, from 14.1
percent in 2014, despite a 34 percent devaluation of
the manat in February 2015.
In Ukraine, output contracted by 6.8 percent in2014, reflecting a deep decline in the conflict-affected East and a moderate recession in the rest of
the country. Exports fell sharply, as exports to Russia(one-quarter of exports in 2010–14) dropped by
one-third. Despite a drawdown of official reserves to
1.6 months of imports (January 2015), the exchange
rate of the hryvnia against the U.S. dollar tripled between end-December 2013 and end-February 2015.
Depreciation and administered price increases contributed to an increase in inflation to 60.9 percent inApril 2015 (Figure 2.8). Banks have come underconsiderable stress, facing worsening asset quality(with nonperforming loans exceeding 30 percent of
4Additional fiscal resources—amounting to about 7 percent ofGDP, to be implemented over the period 2015-19, from the oil fundand international financial institutions—have been allocated to cushion
the impact of lower oil prices on activity in the medium term.

G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5

5Estimates of nonperforming loans vary significantly from 19 per-cent of total loans (WDI, National bank of Ukraine, IMF Financial
Stability Indicators) to 40 percent (pre-2008 definition).
6The IMF estimated as part of the Extended Fund Facility (EFF)
program that Ukraine faces a financing gap of about US$40 billion(one-third of 2014 GDP) for 2015-18 and identifies sources to meetthe financing gap (IMF 2015b).
7Despite this improvement, Ukrainian spreads are still among thehighest globally.

Despite a drawdown of official reserves, the hryvnia depreciated sharply and inflation
spiked above 45 percent.

US$ per Hryvnia

Percent, US$, billions
80
60
40

0.14
0.12

Inflation (y/y, %)Foreign Reserves (EOP, US$, billions)Exchange rate (RHS)

0.10
0.08

20

0.06

0

0.04

-20
Apr-12

Apr-130.02
Apr-15

Apr-14

Source: World Bank and Haver Analytics.

Figure 2.9 Selected economies: Exports by selected
destinations (average 2011–14)
Almost all economies in the region have been affected by spillovers from oil exporters
in the region through trade.

Russia (Services)
Azerbaijan and Kazakhstan (Goods)
Selected Europe (Goods)
China (Goods)
United States (Goods)
Russia (Goods)

Percent of total exports
60
40

Montenegro

Georgia

Tajikistan

SerbiaMoldova

Ukraine

Kyrgyz Rep.

Turkey0

Armenia

20

Uzbekistan

Almost all economies in the region, have been negatively affected by the spillovers from the recession in
Russia and Ukraine, weakening confidence related
to the on-going geopolitical tensions, and growth
slowdown in oil-exporting Azerbaijan and Kazakhstan, to various degrees. Only Uzbekistan and Turkmenistan, two relatively closed, resource-rich economies with strong buffers and linkages with the Eastand South East Asia regions, were reportedly lessaffected by the commodity price declines and regional headwinds. In the eastern part of the region,these regional headwinds had significant negative
repercussions on the region’s oil-importing economies through trade, investment, and remittances(Figures 2.9, 2.10, and 2.11), which more than offset the benefits of low oil prices. Activity weakened
and exchange rate pressures increased in Armenia,
Belarus, Georgia, the Kyrgyz Republic, Moldova,
and Tajikistan. Exports slowed in Armenia, Belarus,
and Georgia, as did remittance flows to Georgia, theKyrgyz Republic, Moldova, and Tajikistan. With
most imports invoiced in U.S. dollars, and foreignexchange receipts in rubles, the slide of the ruble
and the strengthening of the U.S. dollar triggered adeterioration in the terms of trade. The resulting depreciation of local currencies raised inflation in several countries, despite lower oil prices. Central
banks have responded to depreciation pressureswith interest rate hikes (Armenia, Belarus, the Kyrgyz Republic, Moldova, and Tajikistan; see Figures

121

Figure 2.8 Ukraine: Recent developments

Belarus

total loans), weakening profitability and large deposit withdrawals amounting to one-quarter of deposits (12 percent of GDP) since January 2014.5
Following the ceasefire agreement signed in February, the IMF approved a four-year support programfor Ukraine in March 2015.6 This, together with theimmediate disbursement of the first US$5 billion
tranche in March, led to stabilization of Ukrainian
hryvnia and easing of spreads from their February
peaks.7

C h a p t e r 2 | E U R O P E A N D C E N T R A L AS I A

Source: World Bank; IMF; Bank of Russia.
Note: Average does not capture the structural shifts (e.g. in Georgia, Moldova, Ukraine). Selected Europe includes
ten largest European importers including Germany, France, UK, Italy, Belgium, Spain, Switzerland, Austria andSweden.

2.12 and 2.13) further dampening domestic demand and activity.
In the western part of the region, a stronger-thanexpected recovery in the Euro Area offset other headwinds, reflecting closer integration with the Euro
Area. Growth accelerated to 2.8 percent in 2014
from 2.4 percent in 2013, led by Hungary and several high-income countries (Czech Republic, Poland,
the Slovak Republic and Slovenia). The nascent recovery has reflected a pick-up in consumer and business confidence and has been supported by lower
fuel and food prices, and accommodative policies.

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Figure 2.10 Selected economies: Remittances inflows,
2014
Several smaller oil-importing countries have been affected by spillovers from oil exporters through falling remittances.

Percent of GDP
50

Remittance inflow from the EU and ROW

40

Remittance inflow from Russia

30
20

UkraineAlbania

SerbiaMontenegro

Uzbekistan

Bosnia &Herz.

Georgia

Armenia

Moldova

Kyrgyz Rep.

0

Tajikistan

10

Source: World Bank; national central banks, and national statistic agencies.

Figure 2.11 Selected economies: Remittances inflows
from Russia
Remittances slowed sharply in the last quarter of 2014.

Uzbekistan
Moldova
Armenia

Percent change
30

UkraineTajikistan
Kyrgyz Republic

0

-30

-60

13Q4

14Q1

14Q2

14Q3

14Q4

Source: World Bank; Central Bank of Russia.

Figure 2.12 Selected economies: Central bank policy
rates
Local currencies in the affected economies came under pressure, prompting central
banks to hike interest rates.

End-2013

Percentage point
30

Latest20

Source: Central Bank News.
Note: "Latest" values are policy rates as of May 26, 2015.

Hungary

Romania

Azerbaijan

Georgia

Kazakhstan

SerbiaTajikistan

Uzbekistan

Armenia

Kyrgyz Rep.

RussianFederation

Moldova

Belarus0

Ukraine10

Headline inflation has fallen to near zero in several
countries thanks to lower energy prices (Figure2.14). With output well below potential levels, core
inflation also remains generally low. The recovery has
been uneven across the sub-region, held back bylegacies of the global financial crisis, especially stillstretched balance sheets (Bulgaria, Serbia and to alesser extent Romania). Investment has remained
subdued, as high corporate debt overhangs, nonperforming loans, and weak demand have continued
to constrain lending to the corporate sector, notwithstanding lower interest rates. The Former Yugoslav Republic of Macedonia has performed relatively
better than its neighbors over the past few years,
thanks to foreign direct investments in its free technological zones, and public investment stimulus. For
some economies in the region, investor confidence
has also been dented by the conflict between Russia
and Ukraine, and economic and financial stress in
Greece. The contribution from net exports has been
weak, despite the better than expected recovery in
the Euro Area (Figure 2.15). This reflects stronger
competitive pressures from the economies that haveundergone sharp devaluations and a contraction inexports to Russia. Country-specific factors, such as abanking sector turmoil in Bulgaria in mid-2014, theafter-effects of floods in Serbia, and high unemployment in the Western Balkan economies, account for
the weakness in economic activity.
Turkey’s economy has slowed, gaining little support
from lower oil prices and tailwinds from the global
recovery. Softer-than-expected activity reflects tighter
macroprudential measures and policy uncertainty,
compounded by weak investor confidence as reflected in widening five-year credit default swaps
spreads, rising yields of 10-year Turkish government
bonds, and capital outflows (World Bank 2015h).
Inflation declined from its mid-2014 peak in linewith the decline in oil prices, but remains abovetarget as a result of capacity constraints and depreciation. Weak domestic demand, low oil prices, andresilient exports have improved the current accountbalance. However, vulnerabilities remain, especiallythe large share of the current account deficit (still
above 5 percent of GDP) financed by volatile portfolio flows.

G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5

Ukraine’s economy is projected to contract by 7.5
percent in 2015. The prospects for a recovery in
2016–17 are highly uncertain, hinging upon a continued ceasefire and eventual peaceful resolution of
the conflict in the East, a closing of the large financing gap, and continued implementation of the reform agenda under the IMF program. The conflicthas destroyed or damaged sizeable parts of the production and export base in the eastern regions of
Ukraine, disrupted trade and investment links, andPercent, year-on-year
15

Range (last 3 years)

Latest10
5

Azerbaijan

Georgia

Kazakhstan

Armenia

Moldova-5

Tajikistan

0

Source: World Bank and Haver Analytics.
Note: “Latest” values are for April 2015 except for Kyrgyz Rep. (March) and Tajikistan (February).

Figure 2.14 Selected economies: Inflation
In the western part of the region, more closely integrated with the Euro Area, inflation fell
sharply with lower oil prices.

Percent, year-on-year
15

Range (last 3 years)

Latest10
5

Bosnia& Herz.

Albania

KosovoBulgaria

FYR Macedonia

Montenegro-5

Romania0

Hungary

In Russia, a contraction in economic activity by 2.7
percent this year is expected to be followed by amodest recovery in 2016, supported by policies
which will continue to facilitate the adjustment of
the economy to a new low oil price environment.
Growth should strengthen to 2.5 percent in 2017 asinvestment recovers. However, it will remain below
potential, at about half of the average in 2000–10,
held back by remaining structural bottlenecks. Thisoutlook is highly uncertain and assumes a modest
recovery in oil prices and no major deterioration ingeopolitical tensions. For the other oil exporters in
the region, prospects also remain closely tied to oil
prices. The modest strengthening of prices expected
over the forecast horizon should gradually support
activity in these economies. In Kazakhstan, growthis projected to decline to 1.7 percent in 2015 as production delays in the Kashagan oil field persist, but
strengthen to an average of 3.5 percent in 2016–17.
Lower oil prices are expected to result in a current
account deficit in 2015, for the first time since2009. In South Caucasus and Central Asia (including Kazakhstan), growth is expected to bottom out
in 2015 and gradually strengthen to 2.9 percent and4.9 percent in 2016-17, respectively, as conditionsin the regions normalize.

Inflation spiked, reflecting sharp depreciation of local currencies.

Kyrgyz Rep.

The outlook for the region has deteriorated markedly, with growth in developing Europe and Central
Asia expected to drop to 1.8 percent in 2015 despite
the on-going global recovery. The main factors are
spillovers from low oil prices, geopolitical tensions, andrecessions in Russia and Ukraine (World Bank 2015i).
Assuming slightly stronger oil prices in 2016–17(World Bank 2015j), effective macroeconomic andgrowth-stabilizing policy actions, and no further deterioration of the geopolitical climate, regional growth isexpected to strengthen to an average 3.5 percent in
2016–17.

123

Figure 2.13 Selected economies: Inflation

SerbiaOutlookC h a p t e r 2 | E U R O P E A N D C E N T R A L AS I A

Source: World Bank and Haver Analytics.
Note: “Latest” values are for April 2015 except for Montenegro (February).

Figure 2.15 EU-Central and Southeastern Europe:
Drivers of growth
The recovery in the western part of ECA was helped by a pick-up in consumer andbusiness confidence.

Percent
20

Percent
50

Export volume (RHS)
Industrial production
Retail sales

10

25

0

0

-10
Mar-12Mar-13Mar-14-25
Mar-15

Source: World Bank and Haver Analytics.
Note: The figure reflects growth rates of 3 month moving averages. Weighted average of available series for Albania, Bulgaria, Bosnia and Herzegovina, Hungary, Kosovo, FYR Macedonia, Montenegro, Romania, and Serbia.

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Chapter 2

reduced medium-term potential growth. Domestic
demand will be dampened by fiscal consolidation
measures, including cuts in pensions and utility
subsidies. Some price and structural reforms—including sizable energy tariff increases, bank restructuring, governance reforms of state-owned enterprises, and legal changes aimed at combating
corruption and strengthening the rule of law—are
underway. They are necessary for restoring macroeconomic stability, boosting investor confidence,
and anchoring inflation expectations but are likely
to weigh on growth in the short-term.
The western part of the region is expected to see
growth remaining flat in 2015 (2.8 percent).
While a significant improvement from the previous two years, it remains below the region’s potential and is insufficient to significantly reducehigh and persistent unemployment. Activity is
projected to strengthen gradually to 3.3 percent
in 2016–17. Domestic demand is expected tocontinue to recover, as household real disposable
incomes rise, energy cost remains low, and low
inflation allows further monetary policy rate
cuts. As activity in the Euro Area gains momentum, exports are expected to pick up. Somecountries in the region should also benefit substantially from EU structural funds (Croatia, Romania, and Slovenia). Nonetheless, at least overthe short term, high non-performing loans(NPLs) and a heavy debt burden, will continue
to limit credit growth. Elevated government debt
will limit room for fiscal support to growth (Albania, Croatia, Hungary, FYR Macedonia, Montenegro, and Serbia). The nature and impact ofthese financial constraints varies considerablyacross countries. In Bulgaria, for example, the effects of the 2014 domestic banking turmoil linger. Growth in the Western Balkans is expected
to be a modest 1.5 percent in 2015 (up from 0.4
percent in 2014), as a pick-up in net exports is
expected to offset slowing investment and consumption. The Western Balkans remain weighed
down by the lack of new credit and non-performing loans are the highest in the ECA region(above 16 percent).
In Turkey, activity is expected to be subdued in
the first half of 2015, but growth is projected at
3 percent in 2015. Households and corporations
are expected to postpone spending due to policy
uncertainty and in advance of the June elections.

G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5

Fiscal policy is expected to remain accommodative until June. Private spending is expected torecover after the June elections, assuming thatpolitical uncertainty is resolved. Soft fuel prices
and robust exports will contribute to a further
reduction in Turkey’s trade deficit. External financing requirements are expected to decline by
US$20 billion (to about US$200 billion) in2015. Maturing external debt totaling US$166
billion in 2015 will be rolled over.

Risks
The risks for the region remain tilted to the downside. Key risks include further declines in oil prices,
escalation of geopolitical tensions, and abrupt tightening of global financial conditions. A weaker-thanexpected global recovery and unfavorable resolutionof problems between Greece and its creditors present additional risks to the outlook.
Should oil prices decline or geopolitical tensions in
the region escalate, the consequence could be a
deeper recession in the Russian Federation in 2015
which could also extend to 2016, growth slowdownin other major oil exporters, and a delayed recovery
in Ukraine—and a sharp slowdown in regional
growth. Policy changes related to the establishmentof the Eurasian Economic Union, specifically the
restrictions on migrant workers to the Russian Federation from non-member states may lead to a significant number of labor migrants returning to Tajikistan and Uzbekistan. Net energy exporters in theregion would struggle to adjust to further falls in oil
prices. For the region’s oil importers, the windfall tohouseholds via higher disposable incomes and tofirms via lower production costs would accelerate
the tailwinds of a recovery, but this will not fully
offset the opposing forces.
Any faltering in the global economic recovery, especially in the Euro Area, would pose risk to the region’s predicted expansion (Chapter 1). It would
impact exports and undermine business confidence.
With investment already constrained by deeprooted structural factors (including high NPLs, elevated debt, and weak competitiveness), domestic
demand alone will be insufficient to bolster growth.
A disorderly adjustment in global financial markets
to the anticipated tightening of U.S. monetary pol-

G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5

In two relatively large oil-exporting economies of
the region, Azerbaijan and Kazakhstan, policy
flexibility has been constrained by elevated inflation and balance sheet concerns (Figures 2.16
and 2.17). Efforts to stem currency depreciationsin these countries resulted in some losses of reserves and slow external adjustments (current account balances are expected to deteriorate inboth countries in 2015). Russia, where externalpressures were stronger, allowed greater exchange
rate flexibility. This facilitated current accountadjustments, but contributed to higher inflationand increased financial stability risks because of
the large share of foreign currency-denominateddebt. In general, such debt has risen considerably
in the region since 2011 and poses a significant
Figure 2.16 Selected economies: Real effective
exchange rates
Exchange rates helped absorb external shocks in Russia, but policy flexibility has been
constrained by elevated inflation and balance sheet concerns in other oil-exporting
economies, particularly Kazakhstan.

Index (Jan. 2014=100)
150
Russian Federation

Germany

Kazakhstan

Azerbaijan

125
100

50

Source: World Bank and Haver Analytics.
Note: Decline denotes depreciation.

Apr-1575

Jan-15fer to mitigate short-term volatility and pressures on periphery banks andsovereign debt issuers; the new bank resolution system could help insulate
sovereign debt issuers from banking system stress; the new single supervisorysystem and the 2014 asset quality review have improved confidence in EuroArea banks and removed uncertainties about Greek debt holding.
9Germany has replaced Greece as Bulgaria’s main export destination,with exports to Germany accounting for 6.3 percent of GDP. Greece is now
the fifth largest export destination for Bulgaria’s exports after Germany, Turkey, Italy, and Romania.

Spillovers from the plunge in oil prices and geopolitical tensions have complicated monetary
policies in the eastern part of the region, but
eased monetary policy constraints in the west.

Oct-148The €500 billion European Stability Mechanism may serve as a buf-

Monetary policy challenges

Jul-14

Recent floods in Bosnia and Serbia, which destroyed
about 15 percent of Bosnia’s output and 2 percent ofSerbia’s, point to the wider vulnerabilities unfavorable
weather conditions pose to the region. Many of thecountries in the region are facing warmer temperatures, a changing hydrology, and more extreme climatic conditions (droughts, floods, heat waves andPolicy Challenges

Apr-14

Economic and financial stress in Greece presents anadditional risk to the regional outlook, although theexposures of other parts of the Euro Area have diminished since 2010. Foreign bank exposures to
Greek sovereign and non-sovereign debt have declined sharply. The ECB’s quantitative easing program, which began in March, has shielded sovereign
bonds in other peripheral countries from contagion
risks. Several new institutional mechanisms could
help contain contagion.8 Finally, the Euro Area has
emerged from recession, with recoveries gatheringstrength in Spain, Portugal, and (especially) Ireland.
There are pockets of vulnerabilities among developing countries, however. Banking systems in Albania,
Bulgaria, FYR Macedonia, Romania, and Serbia remain vulnerable to contagion through sizeable local
subsidiaries of Greek banks. In Bulgaria and Albania, for example, a respective 23 percent and 18 percent of banking assets are held by Greek banks, presenting risks of spillovers from potential banking
system stress in Greece. Bulgaria’s exposure to
Greece through trade has declined over the past few
years, but is still significant. Exports to Greece declined from 4.1 percent of GDP in 2008 to 3.6 percent of GDP in 2014, the highest share of any country in the ECA region.9 Albania receives remittancesfrom Greece equivalent to 3.7 percent of its GDP.

125

forest fires) with increased frequency. In addition to theimpact on crops and livestock, the changing seasonality of river flows undermines hydropower production,a particularly important sector in Albania.

Jan-14icy could disrupt financial markets in the region.
Turkey and other economies in Central Asia remain
particularly exposed as their economies are relatively
more reliant on dollar inflows than those in theCentral and South Eastern Europe region, whichcarry more euro or Swiss franc liabilities on theirbalance sheets.

C h a p t e r 2 | E U R O P E A N D C E N T R A L AS I A

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Figure 2.17 Foreign currency exposure and foreign
currency vulnerability indicators, 2013
In oil-importing economies, high dollarization constrains policy flexibility.

Percent
100

Foreign currency exposure
Foreign currency vulnerability indicator

80
60
40

Azerbaijan

Hungary

Moldova

RussianFederation

Lithuania

Romania

Kazakhstan

Armenia

Georgia

Bosnia &Herz.

TurkeyAlbania

Serbia0

Ukraine20

Sources: Moody’s Statistical Handbook.
Note: Foreign currency exposure is measured as total foreign currency deposits in the domestic banking system/
total deposits in the domestic banking system. Foreign currency vulnerability indicator is defined as (total foreign
currency deposits in the domestic banking system)/ (official foreign exchange reserves + foreign assets of domestic banks). Belarus’s dollarization was 62.2, its dollarization vulnerability 193.7 in 2013. Alternative estimates show
dollarization in Azerbaijan at 50%, in Kazakhstan around 55%, in Georgia above 60%, and in Armenia above 70
percent. The World Bank team estimates dollarization vulnerability in Belarus at 82.6% on the net basis.

challenges to policy makers. Tightening global financial conditions over the medium term will intensify these challenges. With commodity prices
expected to remain low, diversification will benefit
from greater exchange rate flexibility and stricter
macroprudential regulations will help contain risks
related to private sector balance sheets.
In contrast, in the western part of the region, low
oil prices contributed to lower inflation and improved trade and current account deficits, andeased constraints on monetary policy. In many
countries in Europe (Hungary, Croatia, FYR
Macedonia, Montenegro, and Slovenia), lower
oil prices have added to the deflationary pressures. Central banks in a number of countries cut
policy rates to support activity in 2015 (Hungary, Romania, Serbia, and Turkey). Interest ratecuts in oil-importing countries (especially thosewith a rapidly rising stock of external debt such
as Turkey), however, may have to end once thegradual normalization of U.S. monetary policy
gets under way.
Need to reassess fiscal policies
Many economies affected by regional spillovers relaxed fiscal policies to avoid sharp slowdowns. Oilimporting countries not affected by the regional
spillovers took the opportunity to reform energy
taxes, and to build fiscal space.

Almost all oil-exporting countries in the region havesignificant buffers in the form of foreign assets. This
has allowed them to avoid steep spending cuts, despite significant loss in oil revenues, or implement
countercyclical expenditure increases. Fiscal breakeven oil prices are estimated to remain at or over
US$90 per barrel (Kazakhstan and Azerbaijan), andconsiderably above the US$58–64 projected for
2015-16 to cover government spending, which has
increased in recent years in response to rising socialpressures and infrastructure development goals. As aresult of the oil price decline, all countries in theregion are expected to run fiscal deficits in 2015 except Turkmenistan and Uzbekistan. With buffers
eroding rapidly, and lower oil prices expected to persist for a prolonged period, most countries will needto re-assess medium-term spending plans and willneed to adjust gradually to the new realities in the
global oil market (IMF 2015c).
Oil-importers with close economic ties to oil exporters may need to tighten fiscal policy in the medium-term to ensure the sustainability of high government or quasi-government debt, despite slowing
growth (Armenia, Georgia, Kyrgyz Republic, andMoldova). In contrast, for oil-importers not affectedby the regional spillovers, the fall in oil prices could
generate substantial fiscal savings: In this way, thetailwinds of low oil prices provide an opportunity
for these countries to either build fiscal space, which
would allow an effective counter-cyclical response
during the next cyclical slowdown, or to invest in
critical infrastructure or human capital.
Structural reforms
As growth in high-income countries picks up, convergence of GDP per capita between high-income
and developing countries of the region is expected
to slow. Sustained lower oil prices will reduce real
incomes and purchasing power in many oil-exporting economies and the economies closely linked tothem. Unemployment in oil-importers, particularlyin the Western Balkans, remains high (Figure 2.18).
To accelerate growth and job creation, and to avoid
a significant widening of the income gap, requires
stepping up the implementation of structural reforms in the entire region.
Many countries in the ECA region remain well below the frontier of best practices with regard to creating a business environment conducive to productiv-

G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5

Current low commodity prices are also a reminder
to commodity-exporting countries of the importance of diversification. Diversification efforts could
include efforts to build institutions that reduce economic volatility, change incentives away from nontradables, encourage export diversification, andbuild human capital (see Chapter 1 for additional
discussion).
Some reforms can take a long time to feed intohigher productivity and sustained growth. However,some reforms can have a considerable effect on economic activity even in the short term. For example,
policies can ease short-term transition costs by assisting workers to move to new jobs, or they can
speed up the repair of capital bases of lending institutions (see Chapter 1 for additional discussion).

Despite the nascent recovery, output remains below potential and unemployment rates
high in the western part of the region.

Percent of labor force
30
20
0

Moldova
Belarus
UkraineKazakhstan
Kyrgyz Rep.
Turkmenistan
Tajikistan
Uzbekistan
Romania
Hungary
Bulgaria
TurkeyRussian Federation
Czech Rep.
Slovenia
PolandSlovak Rep.
Croatia
Azerbaijan
Georgia
Armenia
Albania
Montenegro
SerbiaBosnia & Herz.
FYR Macedonia
Kosovo10

EasternEuropeCentralAsia

Central& SE
EuropeHighincome
ECA

South
Caucasus

Western
Balkans

Source: World Bank. Haver Analytics. Eurostat. Kosovo Agency of Statistics.
Note: Informal sector (often large) may not be included in the data. ILO definition. May differ from the official estimates, particularly for Belarus.

Figure 2.19 Non-performing loans (NPL) ratios
Comprehensive financial sector reforms are needed to strengthen bank balance
sheets.

Percent of total loans
40

NPL ratio 2014

NPL ratio max 2009-2014

30
20

FYR
Macedonia

Moldova

Azerbaijan

Bosnia & Herz.

Romania

Hungary

Bulgaria

Montenegro

UkraineTajikistan

0

Albania10
SerbiaA cross cutting theme for the region is the need for
a comprehensive financial sector reforms to clean
up bank balance sheets. Although bank capital andprovisioning are above regulatory minimums, highnon-performing loans (Figures 2.19) continue toweigh on growth—despite recent improvements in
Hungary and Romania—by reducing the profitability of banks and constraining new lending for
productive activities. High foreign liabilities pose
additional risks to the banking sector (Figure2.20). This could result in significant contingent
liabilities to the public sector (IMF 2015d). Measures to improve bank balance sheets could include
better collateral enforcement, fostering more outof-court debt restructuring, strengthening insolvency frameworks, and clearing bottlenecks inoverloaded court systems.

127

Figure 2.18 Unemployment, 2013

Kazakhstan

ity growth. Barriers to open markets and access tofinance are well above-average in Azerbaijan, theKyrgyz Republic, and Ukraine (World Bank 2015k).
Reducing these barriers would spur productivity andincrease resilience to external shocks. While reform
needs are country specific, they fall into a few categories. These include shifting the composition of
growth away from consumption (Georgia, Turkey,
and Ukraine), or natural resources (Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan); easing
infrastructure bottlenecks; improving education; reforming labor markets; enhancing competition andeasing administrative burdens; improving access to
private and multilateral financing; reducing barriers
to trade and facilitating regional integration; and reforming energy subsidies.

C h a p t e r 2 | E U R O P E A N D C E N T R A L AS I A

Source: IMF, Financial Soundness Indicators.
Note: Alternative estimates (using strict definitions) for Ukraine assess nonperforming loans at around 32 percent
of total loans in 2014.

In Ukraine, which faces extraordinary challenges,
the reform agenda should focus on governance reforms, including anti-corruption and judicial measures, deregulation and tax administration reforms,
and reforms of state-owned enterprises to improve
corporate governance and reduce fiscal risks. Broader
energy sector reforms will increase energy efficiency
and foster energy independence.
Finally, recent floods in Bosnia and Serbia, which
destroyed about 15 percent of Bosnia’s output and 2
percent of Serbia’s, point to the wider vulnerabilities
unfavorable weather conditions pose to the region.
Many of the countries in the region are facing

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Figure 2.20 Net foreign liabilities, 2014

warmer temperatures, a changing hydrology, andmore extreme climatic conditions (droughts, floods,
heat waves, forest fires, earthquakes), some of themwith increased frequency. In addition to the impact
on crops and livestock, the changing seasonality ofriver flows undermines hydropower production, aparticularly important sector in Albania, the Kyrgyz
Republic, and Tajikistan. Planning for extreme
weather events will help to support preparedness fora variety of other emergencies.

High foreign liabilities pose risks to the banking sector.

Percent of GDP
120

80

Albania

UkraineBosnia& Herz.

FYR Macedonia

Romania

Hungary

Moldova

Armenia

Kyrgyz Rep.

Bulgaria

Serbia0Georgia40

Source: World Bank and IMF International Financial Statistics.
Note: Latest data available for Albania, Bosnia and Herzegovina, Bulgaria, Kyrgyz Republic, Romania, Serbia,
and Ukraine is for 2013.

G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5

C h a p t e r 2 | E U R O P E A N D C E N T R A L AS I A

129Table 2.3 Europe and Central Asia forecast summary(Annual percent change unless indicated otherwise)00-10a
2011
2012
2013
2014e
2015f
4.6
6.1
1.9
3.7
2.4
1.8
Developing ECA, GDP at market prices, excl. Ukraine
4.6
6.2
2.1
4.1
3.2
2.6
(Average including countries with full national accounts and balance of payments data only)
Developing ECA, GDP at market prices
4.6
6.2
1.9
3.7
2.4
1.8
GDP per capita (units in US$)
4.1
5.4
1.2
3.0
1.7
1.2
PPP GDP
4.8
5.9
2.0
3.6
2.2
1.5
Private consumption
5.2
7.0
2.3
5.1
2.1
2.4
Public consumption
3.1
2.7
4.1
3.8
4.3
3.9
Fixed investment
6.1
10.2
–0.7
1.4
1.8
0.1
Exports, GNFSc
5.9
8.4
4.7
2.0
3.0
4.3
Imports, GNFSc
6.6
11.0
2.3
4.7
1.5
4.6
Net exports, contribution to growth
–0.3
–1.2
0.8
–1.1
0.5
–0.2
Consumer prices (annual average)
13.9
8.2
8.7
6.2
7.3
…
Fiscal balance (percent of GDP)
–4.3
0.7
–0.6
–1.2
–1.8
–2.2
Memo items: GDP
Broader geographic regiond
4.6
4.8
2.2
2.2
1.8
0.3
EU, Central and Southeastern Europe, West Balkans,
3.7
4.9
1.0
2.4
2.8
2.8
and Turkeye
EU-Central and Southeastern Europe
3.5
2.8
0.4
1.2
2.8
2.8
5.1
5.6
0.6
0.6
–4.1
–6.1
Eastern Europef
Western Balkansg
3.8
1.9
–0.3
2.5
0.4
1.5
South Caucasush
12.0
1.8
3.5
5.1
3.2
1.5
Central Asial
8.2
8.1
5.9
6.8
5.5
3.4
Russian Federation
5.1
4.3
3.4
1.3
0.6
–2.7
Turkey
3.9
8.8
2.1
4.2
2.9
3.0
Ukraine
4.3
5.5
0.2
0.0
–6.8
–7.5
Developing ECA, GDP at market pricesb

2016f
3.4
3.5

2017f
3.6
3.7

3.3
2.7
3.3
3.5
3.5
2.6
5.0
5.6
–0.4
…
–1.7

3.6
3.0
3.6
3.8
3.7
3.1
5.0
6.4
–0.7
…
–1.5

2.3

3.1

3.3

3.4

3.0
1.1
2.5
2.7
4.4
0.7
3.9
2.0

3.2
2.4
2.9
3.1
5.4
2.5
3.7
3.0

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 differ at any given moment in time.
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 2010 U.S. dollars.
c. Exports and imports of goods and non-factor services (GNFS).
d. Broader geographic region includes developing ECA and 6 recently transitioned high-income countries (Croatia, Czech Republic, Poland, Russian Federation, Slovak Republic, and Slovenia.)
e. EU: Croatia, Czech Republic, Poland, Slovak Republic, Slovenia. Central and Southeastern Europe: Bulgaria, Hungary, Romania.
f. Eastern Europe: Belarus, Moldova, Ukraine.
g. Western Balkans: Albania: Bosnia and Herzegovina; FYR Macedonia; Montenegro; Serbia.
h. South Caucasus: Armenia; Azerbaijan; Georgia.
l. Central Asia: Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, Uzbekistan.

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Table 2.4 Europe and Central Asia country forecasts(Real GDP growth at market prices in percent, unless indicated otherwise)

Albania
Armenia
Azerbaijan
BelarusBosnia and Herzegovina
Bulgaria
Georgia
Hungary
Kazakhstan
KosovoKyrgyz Republic
FYR Macedonia
Moldova
Montenegro
Romania
SerbiaTajikistan
TurkeyTurkmenistan
UkraineUzbekistan

00–10a
5.2
7.9
14.9
7.4
4.0
4.0
6.2
2.1
8.3
6.1
4.1
1.6
5.1
3.6
4.1
3.6
8.3
3.9
13.6
4.3
6.9

2011
2.5
4.7
0.1
5.5
1.0
2.0
7.2
1.8
7.5
4.4
6.0
2.3
6.8
3.2
1.1
1.4
7.4
8.8
14.7
5.5
8.3

2012
1.6
7.2
2.2
1.7
–1.1
0.5
6.2
–1.5
5.0
2.8
–0.1
–0.5
–0.7
–2.5
0.6
–1.0
7.5
2.1
11.1
0.2
8.2

2013
1.4
3.5
5.8
1.0
2.5
1.1
3.3
1.5
6.0
3.4
10.9
2.7
9.4
3.3
3.5
2.6
7.4
4.2
10.2
0.0
8.0

2014e
1.9
3.4
2.8
1.6
0.4
1.7
4.8
3.6
4.3
2.5
3.6
3.5
4.6
1.5
2.9
–1.8
6.7
2.9
10.3
–6.8
8.1

2015f
3.0
0.8
1.5
–3.5
2.0
1.1
2.0
2.4
1.7
3.0
1.7
3.5
–2.0
3.4
3.0
–0.5
3.2
3.0
8.0
–7.5
7.6

2016f
3.5
2.7
2.6
–1.0
2.3
2.0
3.0
2.5
2.9
3.5
3.2
3.8
1.5
2.9
3.2
1.5
4.4
3.9
9.0
2.0
7.8

2017f
3.5
3.0
2.7
1.0
2.9
2.7
5.0
2.7
4.1
3.7
4.0
4.0
4.0
2.9
3.5
2.0
5.2
3.7
9.0
3.0
8.0

00–10a

2011

2012

2013

2014e

2015f

2016f

2017f

2.5
3.2
3.8
5.1
4.8
2.7

–0.3
2.0
4.8
4.3
2.7
0.6

–2.2
–0.8
1.8
3.4
1.6
–2.6

–0.9
–0.7
1.7
1.3
1.4
–1.0

–0.4
2.0
3.4
0.6
2.4
2.6

0.5
2.4
3.6
–2.7
2.4
1.7

1.2
2.5
3.6
0.7
2.7
2.5

1.5
2.8
3.6
2.5
3.2
2.0

Recently transitioned to high-income countriesb
Croatia
Czech Republic
PolandRussian Federation
Slovak Republic
Slovenia

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. The recently high–income countries are based on World Bank’s reclassification from 2004 to 2014.

LATIN AMERICA and
THE CARIBBEAN
Facing lower prices for oil and other commodities, challenging domestic business climates and widespread droughts,
growth in Latin America and the Caribbean slowed to 0.9 percent in 2014. South America, deeply affected by
the oil price decline, was also impacted by domestic macroeconomic challenges among its largest economies. In
contrast, developing Central and North America, along with the Caribbean, benefited from the strengthening
United States, and saw an acceleration of activity. The ongoing recovery among advanced countries is expected tosupport external demand in the medium-term, lifting growth to an average of 1.7 percent in 2015–17. A deeper
and more protracted decline in commodity prices, or a slower-than-expected recovery of the Euro Area, represent
major downside risks.

In addition to the weakened terms of trade resulting
from lower commodity prices, domestic macroeconomic challenges also contributed significantly tothe slowdown in South America, as several large
economies slowed down markedly, or even conThe main author of this section is Derek Chen.

Growth slowed in 2014, with divergence among sub-regions.

Percent
8

2013

2014

6
4

Dominican Republic

The Caribbean

MexicoCentral & North
America0Brazil2South America

Amidst deteriorating terms of trade, challenging domestic business climates and widespread droughts,
growth in Latin America and the Caribbean slowed
to 0.9 percent in 2014 from 2.7 percent in 2013—
the slowest in 13 years apart from the Great Recession of 2009. There were marked differences among
the sub-regions: almost no growth in South America
contrasted with robust expansion in developing
Central and North America and the Caribbean (Figure 2.21). This divergence partly reflected the more
extensive trade exposure of Central and North
America and the Caribbean to the United States,
compared to the heavy reliance of South America oncommodity exports (Figures 2.22 and 2.23). Pricesof key commodities for the region (oil, soy beans,gold, copper, and maize) declined through the second half of 2014, and remained soft in the first halfof 2015. Domestic demand growth weakened. An
increase in net exports largely reflected weak imports,
although a bumper soy harvest in Argentina, strong
gas exports from Bolivia, and large gold shipmentsfrom the Dominican Republic were positive factors.

Figure 2.21 Regional GDP growth

Latin America & the
Caribbean

Recent Developments

Source: World Bank.

tracted. In Argentina, modest growth was led bygovernment consumption, while double-digit inflation rates weighed on private consumption, andweak soy bean prices dented export earnings. A sovereign rating downgrade dampened investor confidence. Despite the tourism receipts and capital investments associated with the FIFA World Cup,
Brazil, the region’s largest economy, stagnated. Political uncertainty surrounding the presidential election, a corruption scandal, large fiscal deficits, China’s slowdown, accelerating inflation, monetary
tightening and lower prices of key exports (iron ore
and soy) all contributed to denting consumer andinvestor confidence. An extended drought led tofurther uncertainty surrounding water and electric131

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Figure 2.22 Prices of key commodity exports

growth increased from 3.8 percent in 2013 to
5.5 percent in 2014.

Weakness in commodity prices from 2014 carried over to 2015.

Percent change, year-on-year
10

2014

2015

2016

0
-10
-20
-30

Gold

CopperIron Ore

Wheat

Soybeans-50

Crude Oil-40

Source: World Bank.

Figure 2.23 Export shares of key commodity exports,
2013
Commodities constitute significant shares of exports.

Percent
100
80
60
40

Venezuela, R.B.
(oil)

Peru (copper)

Ecuador (oil)Dominican
Republic (gold)

Colombia (oil)Brazil (soy)Brazil (iron ore)

Bolivia (gas)0Belize (oil)20

Source: Economist Intelligence Unit.

ity supplies. In República Bolivariana de Venezuela,
where oil constitutes more than 90 percent of exports, and around half of government revenue, activity contracted yet again as a result of the oil priceplunge. The challenging business climate includes
rampant inflation; a disorderly currency market
with an overvalued official rate and dearth of foreignexchange; and pervasive price controls, which havecreated widespread shortages of consumer items andintermediate goods.
In contrast, growth in developing Central andNorth America accelerated to 2.4 percent. Led
by Mexico, the sub-region saw stronger exports
supported by U.S. demand that continues togather momentum. Record-high tourism and robust mining exports lifted the Dominican Republic and other Caribbean economies, where

Despite the drop in world energy and foodprices, inflation remained high in some of thelarge economies of South America. Annual inflation reached about 65 percent in República Bolivariana de Venezuela in the second half of 2014.
In Argentina, annual inflation was 15.8 percent
as of April 2015. In Brazil, both headline andcore inflation have risen as a result of several factors: depreciation of the real, increases in regulated prices, a tight labor market, and a prolonged drought that has led to a potential energy
shortage as water at hydroelectric dams reaches
low levels. A sharp depreciation also contributed
to an increase in inflation in Colombia, where it
has breached the central bank’s upper target
limit. Core inflation rose in most countries (except in Costa Rica, the Dominican Republic,
Mexico, and Paraguay). However, partly due tofalling oil and food prices, headline inflation has
declined across the region, especially in oil-importing countries (Figure 2.24). On average,
compared to rates in 2014, headline inflation
rates in developing Central and North America
have fallen by a third, while those in the Caribbean have nearly halved.
After a robust first half of 2014, overall grosscapital flows to the region weakened after July
(Figure 2.25). International bond issuance continues to dominate these inflows. In contrast, equity flows remain small, while bank lending has
been volatile, especially in recent months. Despite the weakening in overall flows, international bond issuance by regional debtors stillreached a new record in 2014, 10 percent above
2013 levels, as investors pursued yields, amidst
ample global liquidity. Governments, oil and gas
firms, and financial institutions accounted forthe majority of issues. A surge in sovereign issuance to cover 2015 budgets (Chile, Colombia,
Mexico, and Peru) outweighed the negative impact of Argentina’s credit rating downgrade to
selective default in July. Issuance slowed in the
fourth quarter and early 2015 on concerns surrounding a corruption scandal in Brazil, the firstpost-crisis interest rate increase in the UnitedStates and the financial risks to Latin American
borrowers from an appreciating U.S. dollar (EIU,
2015). U.S. dollar-denominated transactions

G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5

C h a p t e r 2 | L AT I N A M E R I CA A N D T H E CA R I B B E A N

133

continued to account for the vast majority of total issuance, posing exchange rate risks from U.S.
dollar appreciation.

Figure 2.24 Average annual inflation—headline and core

Many international banks have been reluctant tolend during the balance sheet restructuring ofrecent years. In 2015, however, cross-borderbank lending appears to be gaining some ground,with more attractive pricing and terms for borrowers. At a 10-year low in 2014, equity issuance volumes are likely to remain weak going
forward, as many of uncertainties that affected
the region persist, notably sharply lower oil
prices, which undercut prospects for regionalenergy producers.

Percent, year-on-year

Most currencies in the region depreciated in nominal terms against the U.S. dollar. Nominal depreciations were particularly persistent in Argentina, Brazil, and Peru where soft commodity prices and/or
challenging business environments have weakened
the growth outlook (Figure 2.26). However, relatively high inflation rates in in a number of countries across the region caused their currencies to appreciate in real terms in 2014.
In an effort to stem depreciations, a number oflarge central banks intervened in the foreign exchange market. República Bolivariana de Venezuela attempted to maintain the exchange rate of
the bolivar to the U.S. dollar through controls,
which have led to shortages of imports, growing
unofficial markets for foreign exchange, and multiple exchange rates. Since August 2013 until recently, the Brazilian central bank was using local
currency swaps in the foreign-exchange markets
to stem depreciation. The Bank of Mexico began
in March selling up to $52 million dollars a day.
The move is in addition to the automatic auction
introduced last December of $200 million a dayin the event of a depreciation of the peso/dollar
exchange rate by more than 1.5 percent in a day.
This was accompanied by several monetary policy
rate hikes in Brazil and Colombia since mid-2014(Figure 2.27). In contrast, easing inflation andmodest depreciations have provided some central
banks room to lower policy rates in support ofgrowth (Guatemala, Honduras, and Peru).
In the wake of decreased oil revenues and increased fiscal pressures, oil exporters have been
compelled to implement a procyclical fiscal tightening, whereas oil-importers have seen their defi-

El Salvador

PanamaDominican Rep.

GuatemalaParaguay

Headline-H2 2014
Core-H1 2014
Core-YTD H1 2015

Peru

MexicoCosta Rica

Honduras

EcuadorColombia

Headline-H1 2014
Headline-YTD H1 2015
Core-H2 2014

Jamaica

Bolivia

Nicaragua

9
8
7
6
5
4
3
2
1
0
-1

BrazilHeadline inflation edged down in 2015, especially among oil importers.

Source: Haver Analytics, World Bank.
Note: Core inflation excludes volatile food and energy prices.

Figure 2.25 Monthly gross capital flows to LAC region
Regional capital inflows weakened after July 2014.

US$, billions
30

Bank lending

Bond

Equity

25
20
15
10
5
0
Jan-13Jun-13

Nov-13Apr-14

Sep-14

Source: Dealogic.

cits narrow. Mexico expects to increase revenues
from gasoline sales taxes. With oil income accounting for around 17 percent of total fiscal revenue, Colombia has announced government
spending cuts and tax increases to offset revenue
shortfalls.1 In their 2015 budgets, Ecuador andMexico have effected spending cuts in response to
the decline in hydrocarbons-related revenues. Ecuador will also undertake sizeable external borrowing,along with new taxes and import tariffs, in an effort
to sustain planned investment.

1Colombia’s proposed tax increases pertain to the extensions of thewealth tax and the debit transaction tax that expired at end-2014. In
addition, a commission has been established to recommend additionaltax reforms.

Feb-15

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OutlookFigure 2.26a Exchange rate against U.S. dollar
Depreciation against the U.S. dollar intensified in the second half of 2014.

Percent change over period10
H1 20145

H2 2014YTD 2015

0-5-10BrazilParaguay

Colombia

Argentina

Peru

Honduras

MexicoJamaica

GuatemalaNicaragua

Dominican Rep.

Haiti

El Savador

Bolivia-20

Cost Rica-15

Source: Haver Analytics
Note: Local currency spot exchange rates (increase denotes appreciation)

Figure 2.26b Real effective exchange rates
Most regional currencies appreciated in real effective terms.

Percent change over period45

H1 2014

H2 2014YTD H1 2015

30
15

MexicoNicaraguaBrazilColombia

Paraguay

GrenadaDominican Rep.

Costa Rica

Dominica

St. Lucia

BelizeGuyanaEcuador

Bolivia

St. Vincent-15

Venezuela, RB

0

Source: Haver Analytics and IMF
Note: Increase denotes appreciation.

Figure 2.27 Central bank policy rates
With some exceptions, regional central banks eased to support growth.
Percentage
pointsBrazil
Costa Rica
14
GuatemalaMexico12Paraguay

Colombia
Dominican Republic
Honduras
Peru

10
8
6

Source: Haver Analytics.

May-15Mar-15Jan-15

Nov-14

Sep-14Jul-14May-14Mar-142

Jan-144

Despite a strengthening recovery in the advanced
economies, growth in the LAC region is expected
weaken further to 0.4 percent in 2015. Low commodity prices, tepid investment growth in challenging business environments, and fiscal consolidation
are the main negative factors. As economic activity in
the United States, the Euro Area, and Japan picks up,
commodity prices gradually strengthen, and investor
sentiment improves on better policies, growth is expected to rebound to 2.0 percent in 2016, and to 2.8
percent in 2017 (Figure 2.28). However, there is adivergence among the sub-regions, with prospects forCentral and North America and the Caribbean being
relatively brighter than in South America.
South America is projected to contract in 2015 as
low commodity prices are expected to persist, fiscal
consolidation remains a priority, and investor confidence continues to be dampened. In Brazil, in particular, output will contract as investment slumps inpart due investigations surrounding a corruption
scandal, concerns with inflation and fiscal sustainability, and slowing infrastructure investment. Inadequate infrastructure remains a key bottleneck for
production. The baseline projects a gradual recovery
in 2016 and 2017 on the following assumptions:the government implements fiscal reform to attain amore sustainable budget, inflation is brought down
to within the targeted band, and investor confidence
returns in response. With the already weak economic environment exacerbated by continued low
oil prices, economic activity in República Bolivariana de Venezuela will most likely continue contracting in 2015 and 2016, before recovering in 2017.
However, this hinges on the country making necessary macroeconomic adjustments such as undertaking additional currency devaluations and lifting import restrictions so that production chains can bere-established. Argentina will see modest growth
this year, but economic activity is expected to pickup in 2016 and 2017 on a stronger macroeconomic
environment and regained access to international
capital markets. More generally across South America, broadly stabilized prices of oil and other commodities, renewed investor confidence, and slowing
fiscal consolidation should raise growth to 1.5 percent in 2016, and to around 2.5 percent in 2017.
Developing Central and North America is expected
to expand 2.8 percent in 2015, picking up to 3.5

G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5

Percent
6

2014

2015

2016

2017

4
2
0
-2

Latin America &the Caribbean

South America

Developing
Central & North
America

Caribbean

Source: World Bank.

Figure 2.29 Share of regional merchandise exports to
the U.S., EU, and China, 2013
The U.S. remains a key regional export destination.

Percent of total exports
100

U.S.

EU

China

Others

80
60
40
20
0

Source: IMF Direction of Trade.

Figure 2.30 FDI into selected countries by source
country, 2012
The U.S. accounts for a significant share of FDI into LAC.

Percent of total FDI
100

U.S.

E.U.

LAC

Others

MexicoDespite some moderation, growth prospects are stillrobust for a number of economies in the mediumterm. Peru, for example, suffered a slowdown in2014 due to weak copper and gold prices, but is
expected to see a solid rebound in 2015 and further
strengthening in 2016, on stimulus measures andthe gradual implementation of new infrastructure
and mining projects. Bolivia faces a medium-term
slowing, reflecting weaker energy and commodity
prices. However, growth will be robust in coming
years thanks to public investment projects and Brazilian and Argentinian demand for natural gas. Capital infrastructure projects, including investment in
the private ports system, will lift Panama’s growth
rates among the highest in the region.

Regional growth is projected to strengthen from 2016 onwards.

Dominican
Republic

U.S. growth is critical for LAC growth (IMF
2007). Around 40 percent of the region’s merchandise exports in 2013 were shipped to the UnitedStates and, for a large majority of LAC economies,
the United States is the among the five largest export destinations (Figure 2.29). The United States
also remains one the main investors in Latin
America (ECLAC 2012). In 2012, United Statestransnationals accounted for around 20 percent of
FDI flows to the region (Figure 2.30). As a resultof this close trade and financial integration, thebusiness cycles of the United States and that of the
LAC region, especially Central America, tend tomove together (Roache 2008). The growing momentum of the U.S. economy lifts prospects for theregion.

80
60
40

Source: UNCTAD.

Colombia

0

BrazilThe balance of risks in LAC leans heavily towards
the downside. The downside risks, which are both
external and internal to the region, include thefollowing.

20
Argentina

Risks

135

Figure 2.28 Regional medium-term growth outlook

Haiti
MexicoDominican Rep.
El Salvador
EcuadorLAC Region
Costa Rica
GuatemalaHonduras
Venezuela, RB
Colombia
Jamaica
BelizeGuyanaNicaragua
PanamaPeru
Suriname
St. Lucia
BrazilBolivia
Antigua & Barbuda
GrenadaArgentina
St. Vct. & Gren.
Paraguay
Dominica

percent in 2016–17 on higher export demand fromthe United States. In Mexico, as the reforms approved in 2013–14 are implemented and gain traction, investment should strengthen, and offset thedrag from lower oil prices. Mitigating weak domestic demand growth, stronger external demand andcontinued tourism growth are expected to support
growth in the Caribbean of about 3.7 percent in
2016–17, while being mitigated by stronger external demand and continued tourism growth, which
saw record highs in 2014.

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Figure 2.31 Consensus forecasts six years ahead,
2009–15
Six-year-ahead growth projections for selected LAC countries have been declining.

Percent
7

BrazilMexicoColombia

Peru

6
5
4
3
2

2009

2010

2011

2012

2013

2014

2015

Source: Consensus Forecasts.

Figure 2.32 Federal Reserve Board Vulnerability Index,
2014
LAC countries show elevated levels of vulnerability.

Index
14
12
10
8
6
4

RussianFederation

South Africa

India

TurkeyKorea, Rep.

China

Malaysia

Philippines

ThailandIndonesia

Chile

MexicoBrazil0

Colombia

2

Source: U.S. Federal Reserve Board.

Insufficient macroeconomic adjustment among
the largest economies. The return to economic expansion is predicated on the implementation ofmacroeconomic policy adjustments among the region’s largest economies. Insufficient progress on
this front would weigh on growth in these countries
as well as prospects at the regional level.
Financial Volatility. Monetary policy tightening in
the United States, expected to begin later in 2015,
has the potential to attract capital flows away from
Latin America, as investors re-evaluate country-specific, long-term growth prospects and risks. Medium-term growth prospects have deteriorated in

2IDB 2015 shows that the U.S. dollar remains the preferred cur-rency of financing for regional economies and this preference has notbeen sensitive to dollar-euro spreads.

several countries (Figure 2.31), with Mexico being
an exception. If capital outflows and a reassessment
were to trigger a further sharp depreciation of local
currencies against the U.S. dollar, borrowers’ balance sheets could be strained, since much region’s
debt is denominated in U.S. dollars2. LAC countries show elevated levels of vulnerability to a U.S.
interest rate increase (Figure 2.32).
Lower commodity prices. Although a boost for oil
importers, the recent slump in oil prices, if prolonged, will also pose significant challenges for oil
exporters in the region. Spillovers from weaker activity in the region’s oil-exporting countries would
mitigate some of the benefits from lower oil prices
in oil-importing countries. Similarly, larger-thanexpected declines in commodity prices will further
deteriorate terms of trade, dent export earnings andworsen current account balances of regional commodity exporters. FDI into commodity sectors will
also be affected.
Slower-than-expected recovery in the Euro Area.
Although there are indications of a broad-based recovery in the Euro Area, it is still fragile. Euro Area
growth is projected to remain subdued in the medium term, and is subject to significant downside
risks from financing stress in Greece, and from geopolitical tensions surrounding Ukraine. For several
countries, the Euro Area accounts for a significant
share of exports, remittances, tourism, and FDI(Figures 2.29 and 2.30).
Hard landing in China. China has become a key
source of FDI, financing, and trade for Latin America (World Bank 2015k). China is expected to decelerate gradually to a more sustainable long-term
growth path. Although a low-probability scenario,
there is a risk that financial vulnerabilities could
cause growth to slow more sharply than expected. A
sharp slowdown in China would likely reduce FDI
into the region, as well as global demand and prices
for several commodities that are key export products
for Latin American countries. This would further
deteriorate terms-of-trade and erode export earnings of regional commodity exporters.

Policy Challenges
Policy makers face several challenges: a nearing interest rate increase in the United States, uncertainty
surrounding the fragile recoveries in the Eurozone

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C h a p t e r 2 | L AT I N A M E R I CA A N D T H E CA R I B B E A N

and Japan, less rapid growth in China, and adjustment to lower commodity prices and more broadly
the end to the commodity super-cycle.

Figure 2.33 Overall fiscal balance as a share of GDP

While there are cyclical elements to the ongoingslowdown in the region, the key concern for the region is how it adapts to the end of the double tailwind era when China’s economy was surging andcommodity prices were booming (World Bank.
2015l). Currently, with the slowdown in China andlower commodity prices, both expected to be sustained at least in the medium-term, the region needs
to find new sources of growth and address longerterm structural impediments that are holding backpotential growth.

Percent of GDP

Most countries have limited room to support
growth with countercyclical fiscal and monetary
policies. Fiscal deficits and fiscal space have deteriorated and remain considerably weaker than before
the Great Recession (Figure 2.33, World Bank.
2015k). The deterioration has been most pronounced in countries where commodity-based revenues account for large shares of total revenues(Figure 2.34). This limits room for fiscal stimulus
to support activity. Similarly, the effectiveness of
expansionary monetary policies has weakened inrecent years (IDB 2013; Aastveit et al. 2013). Further, given that the less conducive global conditions are expected to hold in the medium-term,
fiscal and monetary tools are only appropriate tosmooth the transition to the new lower equilibrium, rather than to change it. In this regard, exchange rate flexibility has helped and could further
help some countries, such as commodity exporters,
adjust to the new equilibrium. Structural reform
measures are therefore needed to enhance longterm economic prospects.
Sound reforms could promote development, more
efficient labor markets, and social equity. Priority
areas are education, product market competition,
tax systems, and regulatory frameworks. Financial
sector reform could help improve financial stability,
while at the same time increasing the flow of savings
into productive investment (IDB 2013).
Labor market reform could reduce economic distortions, such as inefficient allocation of labor, andraise productivity. It could also encourage a shift
from informal employment and activity into formally organized structures. Informality is associatedwith a high proportion of small, less-efficient firms,

137

Fiscal balances have deteriorated.

2007

2014

Change50-5PanamaVenezuela, R.B.

Costa Rica

Haiti

EcuadorHonduras

Peru

MexicoDominican Rep.

Paraguay

Argentina

El Salvador

NicaraguaBrazilBolivia

GuatemalaJamaica-15

Colombia-10

Source: IMF World Economic Outlook April 2015, Paraguay Ministry of FinanceNote: General government net lending/borrowing.

Figure 2.34 Share oil/gas revenue in total government
budget, 2013
Oil and gas revenues account of significant shares of government revenues

Percent
40

30

20

10

0

Bolivia

Colombia

MexicoSource: Latest IMF staff reports.

high worker turnover, a less-educated and lesstrained workforce, the likelihood of illegal practices,and reduced access to credit (Busso, Madrigal, andPagés 2012). Thus, measures to reduce informality,
through improved incentives to move into formal
activity, could lift growth.
The region also suffers from a significant gap in thequantity and quality of infrastructure services, with
low investment in this sector, resulting in low international rankings among regional economies (Figure 2.35). While public-private partnerships do notnecessarily increase aggregate investment, they may
offer a way to enhance existing regulatory or institutional arrangements (IDB 2013). International ex-

Chapter 2

G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5

Figure 2.35 Global rankings on quality andextensiveness of infrastructure, 2014–15

perience suggests that increases in domestic savings
together with improvements in regulatory institutions could yield benefits in terms of infrastructure
provision and growth (Engel, Fischer, and Galetovic
2013). To enhance investment rates, countries could
deepen long-term domestic savings by streamlining
regulations of financial institutions that serve residents. Similarly, pension, social security, and tax
reform could have major impacts on savings levels(IDB 2013).

Source: World Economic Forum (2014).
Note: Rankings out of 144 economies.

Haiti

Paraguay

Venezuela, R.B.

Bolivia

GuyanaHonduras

Nicaragua

LAC average

Dominican Rep.

Peru

Argentina

Colombia

Suriname

BrazilJamaica

Costa Rica

MexicoPanamaRanking
140
120
100
80
60
40
20
0

Guatemala

Regional economies suffer from a gap in the quantity and quality of
infrastructure.

El Salvador

138

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139

Table 2.5 Latin America and the Caribbean forecast summary(Annual percent change unless indicated otherwise)00-10a
2011
2012
2013
2014e
2015f
3.3
4.7
2.9
2.7
0.9
0.4
(Average including countries with full national accounts and balance of payments data only)c
GDP at market pricesc
3.3
4.7
2.9
2.7
0.9
0.4
GDP per capita
1.9
3.0
1.4
1.5
–0.2
–0.7
PPP GDP
3.2
4.4
2.7
2.8
1.2
0.8
Private consumption
3.6
5.1
4.1
3.2
1.1
0.2
Public consumption
3.3
3.0
4.1
2.8
2.1
0.0
Fixed investment
4.8
7.9
1.7
2.4
–1.6
–2.7
Exports, GNFSd
2.8
6.9
3.1
1.0
1.7
4.0
Imports, GNFSd
5.7
11.2
4.6
3.3
1.1
1.0
Net exports, contribution to growth
–0.4
–0.9
–0.3
–0.5
0.1
0.6
Consumer prices (annual average)
7.0
7.5
6.7
9.8
14.7
…
Fiscal balance (percent of GDP)
–2.6
–3.1
–3.6
–3.7
–5.7
–5.7
Memo items: GDP
Broader geographic region
3.3
4.8
3.0
2.8
1.0
0.5
(incl. recently high income countries)e
f
3.7
4.9
2.5
3.0
0.3
–0.6
South America
Developing Central and North Americag
2.0
4.2
4.1
1.8
2.4
2.8
Caribbeanh
3.4
2.8
2.0
3.8
5.5
4.2
Brazil
3.6
3.9
1.8
2.7
0.1
–1.3
Mexico
1.8
4.0
4.0
1.4
2.1
2.6
Argentinai
3.8
8.4
0.8
2.9
0.5
1.1
GDP at market pricesb

2016f
2.0

2017f
2.8

2.0
1.0
2.3
1.8
–0.1
2.3
4.9
3.2
0.3
…
–5.5

2.8
1.8
2.9
2.3
1.5
3.7
5.3
3.9
0.3
…
–5.1

2.1

2.8

1.5
3.4
4.1
1.1
3.2
1.8

2.5
3.6
3.2
2.0
3.5
3.0

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 differ at any given moment in time.
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 2010 U.S. dollars.
c. Sub-region aggregate excludes Cuba, Grenada, and Suriname, 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. Recently high-income countries include Chile, Trinidad and Tobago, and Uruguay.
f. South America: Argentina, Bolivia, Brazil, Colombia, Ecuador, Guyana, Paraguay, Peru, Venezuelag. Developing Central & North America: Costa Rica, Guatemala, Honduras, Mexico, Nicaragua, Panama, El Salvador.
h. Caribbean: Belize, Dominica, Dominican Republic, Haiti, Jamaica, St. Lucia, St. Vincent and the Grenadines.
i. Preliminary for long-term average. Data was recently rebased; missing data up to 2003 was spliced with the earlier data.

140

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Table 2.6 Latin America and the Caribbean country forecasts(Real GDP growth at market prices in percent, unless indicated otherwise)

Argentinab
BelizeBolivia
BrazilColombia
Costa Rica
Dominica
Dominican Republic
EcuadorEl Salvador
Guatemala
GuyanaHaiti
Honduras
Jamaica
MexicoNicaraguab
PanamaParaguay
Perub, c
St. Lucia
St. Vincent and the Grenadines
Venezuela, RB

00-10a
3.8
4.0
3.8
3.6
4.1
4.4
2.6
4.9
4.1
1.9
3.3
2.4
0.1
4.1
0.5
1.8
2.8
6.3
3.4
5.6
1.8
3.5
3.1

2011
8.4
2.1
5.2
3.9
6.6
4.5
0.2
2.9
7.8
2.2
4.2
5.4
5.5
3.8
1.7
4.0
5.7
10.9
4.3
6.5
1.2
–0.5
4.2

2012
0.8
3.8
5.2
1.8
4.0
5.2
–1.4
2.6
5.2
1.9
3.0
4.8
2.9
4.1
-0.6
4.0
5.0
10.8
–1.2
6.0
–1.6
1.2
5.6

2013
2.9
1.5
6.8
2.7
4.9
3.4
–0.9
4.8
4.6
1.7
3.7
5.2
4.2
2.8
0.6
1.4
4.6
8.4
14.2
5.8
–0.4
1.7
1.3

2014e
0.5
3.6
5.3
0.1
4.6
3.5
1.5
7.3
3.8
2.0
4.2
3.6
2.7
3.1
0.4
2.1
4.7
6.2
4.4
2.4
–1.0
1.5
–4.0

2015f
1.1
2.5
4.8
–1.3
3.5
3.4
1.3
5.2
1.9
2.2
4.0
3.7
1.7
2.9
1.5
2.6
4.2
6.2
4.2
3.9
–0.6
2.6
–5.1

2016f
1.8
2.6
4.2
1.1
3.9
4.2
1.5
4.8
3.0
2.5
3.9
3.8
3.2
3.3
2.2
3.2
4.3
6.4
4.1
5.0
0.8
2.9
–1.0

2017f
3.0
2.7
4.1
2.0
4.2
4.4
1.6
3.4
4.2
2.6
3.9
4.0
3.1
3.5
2.5
3.5
4.2
6.5
4.1
5.0
1.4
3.4
1.1

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.
b. Preliminary for long-term average. Data was recently rebased; missing earlier data was spliced with the previous series.
c. Incorporates country data through May 20, 2015.

00-10a

2011

2012

2013

2014e

2015f

2016f

2017f

4.1
5.7
2.9

5.8
–2.6
7.3

5.5
1.2
3.7

4.2
1.6
4.4

1.9
0.8
3.5

2.9
1.8
2.6

3.3
2.0
3.1

3.5
2.2
3.2

Recently transitioned to high-income countriesb
Chile
Trinidad and Tobago
Uruguay
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.
b. The recently high-income countries are based on World Bank’s country reclassification from 2004 to 2015.

MIDDLE EAST andNORTH AFRICA
After an easing in tensions in early 2014, the Middle East and North Africa region is again experiencing major—
and increasing—security challenges. In addition, since mid-2014, it is also adjusting to the oil price drop. This isa particular challenge for oil-exporting countries, many of which also face severe security issues. For oil-importing
countries, the potential positive effect of lower oil prices is partially offset by spillovers from within the region, including through lower remittances and security problems, and by long-standing constraints on growth potential.
Growth is expected to average about 2.2 percent in the developing countries of the region in 2015, and to pick up
modestly in 2016-17. Risks remain tilted to the downside, more so than in other regions. Policy makers face thechallenges of adjusting to lower oil prices and coping with security risks in the short-run, and bolstering growth,
employment, and fiscal positions in the long-run.

Recent Developments
Regional growth rebounded to 2.2 percent in 2014
(from 0.5 percent in 2013) due to some easing insecurity risks (the Arab Republic of Egypt and Lebanon); strong, credit-fueled domestic demand growth(Algeria); public investment and sanctions relief under two interim nuclear agreements (the Islamic Republic of Iran); and a rebound in oil production insome oil-exporting countries (Libya, Iraq, and theIslamic Republic of Iran).1
In the first half of 2015, security challenges intensified in oil-producing developing countries. Rebel
forces toppled the government in the Republic of
Yemen, prompting aerial intervention by Saudi Arabia. Various rebel groups, most notoriously the militant group the Islamic State of Iraq and the Levant(ISIL), advanced into new territory in the Syrian
Arab Republic. Conflicting factions in Libya havetargeted oil installations to seize or destroy revenue
streams. Associates of ISIL joined fighting in Yemen
and Libya. ISIL fighters are reportedly massing at
the Syrian border with Lebanon and clashing with

The main author of this section is Franziska Ohnsorge with contributions from Damir Cosic.
1This chapter covers low- and middle-income countries of the
Middle East and North Africa region while high-income Gulf Cooperation Council (GCC) countries are excluded. The developing countries
are further divided into two groups: oil-importers and oil-exporters.

Lebanese security personnel. In Tunisia, terrorist attacks have targeted tourists.
Growth in the region’s oil-exporting developing
countries2 averaged 1.9 percent in 2014, a recovery
from the 0.8 percent contraction in 2013. Oil production stabilized at around 8.2 million barrels
per day (mbd) towards the end of 2014—25 percent below the pre-Arab Spring average (Figure2.37)—but has since fallen again. Libya was hit
hard in the latest quarter as its oil infrastructure
came under attack; production fell from 0.7 mbd
in 2014Q4 to 0.3 mbd in 2015Q1. The Islamic
Republic of Iran remains under sanctions, with acap on oil exports of 1.1 mbd. This limit may beeased if the international negotiations on Iran’s
nuclear program are successful. The Islamic Republic of Iran would then contribute an additional 0.7–1.0 mbd to an already oversuppliedmarket, keeping prices low, potentially, for a considerable period.
Iraq, Libya, and the Republic of Yemen rely heavily on the oil sector for government revenues(Figure 2.36). As a result of security challenges
and falling oil prices, they suffered large revenue
declines and widening fiscal deficits. This led to
sharp cuts spending and difficulties maintaining
2Developing oil-exporting countries are: Algeria, the Islamic Republic of Iran, Iraq, Libya, and the Republic of Yemen. Syrian Arab
Republic is excluded due to data limitations.

141

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G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5

Figure 2.36 Oil production
Oil production is rising modestly in high income oil exporting countries.

Millions barrels per day
12

2014

10

2015Q18
6
4
2
0

Yemen, Oman
Rep.

Libya

Qatar

KuwaitIraq

Iran,
United Saudi
Islamic Arab Arabia
Rep. Emirates

Source: International Energy Agency.

Figure 2.37 Oil revenues, 2014
Fiscal revenues are highly dependent on oil.

Percent of total revenues
100
90
80
70
60
50
40
30
20
10
0
SyrianYemen, Rep.
Arab
Republic

Algeria

Iraq

Libya

Source: IMF (2014a and b); IMF (2013a and b); IMF (2010).
Note: For Syria, data is for 2010.

basic state functions. In the Republic of Yemen,
growth continued to be positive in 2014, but in
Iraq, the economic disruptions of the ISIL insurgency, and flat government expenditures, contributed to a contraction in 2014. Algeria saw strong
domestic demand and activity in non-oil sectors,
partly as a result of double-digit credit growth.
Growth in oil-importing developing countries wasbroadly flat at 2.8 percent in 2014.3 Growth in
Egypt (on calendar year basis), Lebanon and Jordan
picked up in 2014. In Egypt, the economy benefited
from a rebound in tourism, public spending, and a
return of confidence, as a result of political stabiliza3Developing oil-importing countries are: Djibouti, the Arab Re-

public of Egypt, Jordan, Lebanon, Morocco, Tunisia, and West Bankand Gaza.

tion. In Lebanon, a mid-year lull in violence, rapid
credit growth, and an inflow of refugees supported
domestic demand (World Bank 2014c; Ianchovichina and Ivanic 2014). In Jordan, growth pickedup slightly to 3.1 percent. Disruptions to transportroutes limited the expansion, as did capacity constraints as Jordan absorbed a large inflow of refugees
from Syria that began in 2013. In contrast, growthslowed sharply in Morocco to 2.6 percent due to acontraction in agricultural output after a bumper
crop in the previous year and weak exports to theEuro Area.
Growth momentum appeared to be faltering in several oil-importing economies in early 2015. In
Egypt, fragile export growth and higher costs of inputs (after a step depreciation in January) have heldback industrial production and dented confidence.
In Tunisia, tourist arrivals weakened even before theterrorist attacks in March. In contrast, on somewhat
improved security, industrial production and tourism in Lebanon (especially from Arab countries) appears to have expanded in January and February.
The impact of trade-weighted U.S. dollar appreciation since mid-2014 on exchange rates and inflationdiffered depending on country circumstances, including the exchange rate regime. Both oil-importing as well as oil-exporting countries continued to
face depreciation pressures. To maintain competitiveness, central banks in Algeria, Egypt, Morocco,
and Tunisia allowed their currencies to depreciate by
4-8 percent against the U.S. dollar in the first threemonths of 2015. In trade-weighted terms, their exchange rates depreciated modestly. In contrast, pegs
against the U.S. dollar in Iraq, Jordan, and Lebanoncaused a significant trade-weighted appreciation(Figure 2.38).
Currency depreciations and the prevalence of administered fuel prices have limited the impact oflower global food and energy prices on domestic
consumer prices (Figure 2.39). As a result, inflation
has remained elevated in Algeria, Egypt, and Tunisia, and increased in Morocco. In contrast, in Lebanon, Jordan, and Iraq, which maintain exchange
rate pegs against the appreciating U.S. dollar, inflation slid to near-zero (Jordan) or has turned negative (Lebanon, Iraq).
Fiscal deficits widened markedly in 2014 in oilexporting developing countries, but narrowed marginally in oil-importing ones. For oil exporters,

GLOBAL ECONOMIC PROSPECTS | JUNE 2015

sharp oil revenue losses and rapid spending growthon public sector wages and subsidies have widened
deficits to 5.2 percent of GDP from 2.7 percent of
GDP in 2013. In oil-importing countries, fiscal balances have improved somewhat, as spending pressures from subsidies eased with falling oil prices, andas fuel and food subsidies were cut. Despite this improvement, fiscal deficits in oil-importing countries
remain high at around 10 percent of GDP in 2014,
and government debt around 90 percent of GDP.
Egypt has financed its deficit with loans from theGulf Cooperation Council (GCC), while Jordan
and Tunisia have relied on official assistance.
Lower commodity prices have helped narrow current account deficits of oil importers by 1–2 percentage points of GDP, while current account balances declined in oil exporters. Despite intensified
fighting in Libya, and tightened migrant regulationin Saudi Arabia, remittance receipts grew 8 percent
in 2014. This partly reflects a rebound of remittances from GCC countries to Egypt, as politicaluncertainty in Egypt has settled.
Countries that regularly tap international financial
markets (Egypt, Lebanon, Jordan, Morocco, and Tunisia) continued to receive capital inflows, with attimes strong domestic and foreign investor demand(Lebanon and Tunisia). Bank lending was particularly robust in the energy sectors of Egypt and­Jordan, amid improving growth prospects and expectations of medium-term oil price increases. International banks were also active in Lebanon’s sovereign bond issuance.

Outlook
Much will depend on developments in the security
situation, and—partly linked—to global oil prices.
The baseline scenario assumes that the security situation in the region will remain fragile during 2015,
and improve only gradually afterwards. Security
concerns will dampen the outlook not only in theaffected countries, but also neighboring countries
where security risks will discourage tourism and reduce remittances because of the return of migrants.
Growth has been revised downward and is expected
to remain flat at 2.2 percent in 2015. Lower oil
prices have been a setback to oil-exporting countries
that are already struggling with security risks, butthey have so far failed to significantly lift prospects

MIDDLE EAST AND NORTH AFRICA

143

Figure 2.38 Nominal effective exchange rates
Exchange rates have appreciations in countries with exchange rates pegged to the
U.S. dollar.

Percent change, Dec. 2014– Apr. 2015
13
11
9
7
5
3
1
-1
-3

LebanonIraq

Tunisia

Iran,
Islamic
Rep.

MoroccoAlgeriaEgypt,
Arab Rep.

Source: World Bank Global Economic Monitor, JPMorgan.
Note: A negative number denotes a nominal effective depreciation.

Figure 2.39 Inflation
Depreciation has helped reduced inflation in countries with fixed exchange rates.

Percent, year-on-year20

Jun-14Apr-15

15
10
5
0
-5

Djibouti Algeria Egypt, Iran,Arab Islamic
Rep. Rep.

Iraq

Jordan LebanonMorocco Tunisia

Source: World Bank.

in oil-importing countries, which are facing various
headwinds of their own. For 2016–17, growth is expected to rebound to 3.7 percent on improving external demand, strengthening confidence in someoil-importing countries, and the assumed gradualstabilization of security.
Political, social, and security stabilization in Egypt is
expected to lift investor sentiment in the energy,transport (including investment related to the Suez
Canal expansion), and tradable goods sectors. As aresult, growth is expected to rise to 4.5 percent in2015–17, on average. Elsewhere, economic gains
will be supported by public infrastructure investment (Jordan), additional consumption demand
from a large refugee population (Lebanon), and a
return to normal agricultural output and successful
diversification reform efforts (Morocco). Additional

144

Chapter 2

positive factors include higher real household incomes from low oil prices and rising external demand as the Euro Area recovery gains traction. Resilient, albeit slowing, remittance growth is also
expected to support activity. Improving investor
confidence should attract capital inflows, especiallyinto Egypt and Lebanon. Official financing is expected to remain robust, both to finance budgets in
Egypt and Lebanon and to support refugee needs
across the region. In Tunisia, however, the attacks in
March are expected to set back tourism; growth isexpected to remain weak at 2.6 percent in 2015.
Due to continued security challenges and low oil
prices, growth is expected to nudge downwards
in oil-exporting countries to 1.1 percent on average in 2015. However, as oil prices stabilize andrecover and security concerns gradually ease,
growth is expected to rebound to 3.3 in 2017. In
Iraq, an agreement between the central government and that of the Kurdish region is expected
to allow for an expansion in oil production. For
the Islamic Republic of Iran the baseline scenario
assumes sanctions relief in line with the interim
steps taken so far. In Libya, the baseline scenario
assumes that oil output will expand very gradually amid a challenging security situation. If,
however, a comprehensive political agreement isreached, oil exports could quickly resume and
GDP rebound by more than 50 percent in 2016.
The decline in oil prices will have major, and enduring, effects on fiscal and external positions in
oil-exporting and oil-importing countries alike.
Exporters will continue to rein in spending in a(procyclical) effort to offset sharp falls in oil revenues. Nevertheless, their fiscal deficits are expected to widen to 8.2 percent of GDP in 2015.
In contrast, deficits in oil importers should narrow to about 8.7 percent of GDP in 2015, as aresult of lower costs of fuel subsidies. By 2017,
improving growth and adjustment measures
should help narrow deficits for both oil-importing and -exporting countries by an average ofabout 6 percent of GDP.
Current account balances are expected to improve in oil-importing countries and deteriorate
in oil-exporting countries. In some oil-exporting
countries, however, where new oil production is
expected to be available for export, current account balances are expected to improve (Algeria,

G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5

Iraq). Still-robust growth in GCC countries,
driven by government spending that benefits sectors that heavily employ migrants, as well as
strengthening Euro Area growth, will raise remittance inflows especially in Egypt, Jordan, Tunisia,
and Yemen.

Risks
Risks remain tilted to the downside—more so thanin other regions—as a result of security challenges.
The key risks remain an escalation of violence andoil price volatility.
Security risks loom large across the whole region.
Violence could escalate in countries that are currently experiencing conflict, and could spread toneighboring countries, as demonstrated in the terrorist attacks in Tunisia. Even if violence does not
permanently disrupt economic activity, it could disrupt or sever transport links that are critical for thesmall, open economies in the region (Ianchovichina
and Ivanic 2014). Activity in the tourism sector
would contract and domestic and external investor
confidence would weaken. This would especiallydampen FDI in non-natural resource sectors. Although FDI in the natural resource sector tends tobe less sensitive to security risks, it may also decline
if oil prices fall further, or do not gradually recoveras currently expected (Burger, Ianchovichina, andRijkers 2015; Witte et al. 2015).
If violence damages oil installations and disrupts oil
production on a large scale, oil prices could spike
sharply for an extended period. The economic disruption would outweigh any benefit from higher oil
prices for the region as a whole, although some oilexporting countries unaffected by the disruption
may benefit. Oil-importing countries, however,would see spikes in inflation, fiscal and externalpressures. These could be accompanied by sharp
slowdowns or reversals in capital inflows. Since virtually all countries in the region (except the Islamic
Republic of Iran) have current account deficits inexcess of 5 percent of GDP, a disruption or reversalof capital inflows could cause large exchange ratepressures. Conversely, a further fall in oil prices
would intensify the external and fiscal pressures currently faced by oil exporters, while growth in oil importers could continue to be held back by structural
impediments to growth. Long-standing problems,GLOBAL ECONOMIC PROSPECTS | JUNE 2015

Policy Challenges
Policy makers face a dual challenge: adjusting tolower oil prices and dealing with security risks in the
short run, and bolstering growth and employment
in the long run. Fixed or heavily managed exchangerate regimes, and the large role played by governments in these economies, make economic adjustment more difficult.
In countries with some exchange-rate flexibility,
central banks are often caught between the desire tostem depreciation to preserve financial stability (orcontain inflation), versus the need to support weak
activity (Algeria, Morocco, and Tunisia) or a nascent
recovery after several years of low growth (Egypt).
This trade-off is of particular concern in countries
where inflation is expected to remain high, as recent
currency depreciation passes through to prices(Algeria, Egypt, and Tunisia).

EU

Percent
80

GCC

70
60
50
40
30
20
10
0

Tunisia

Algeria

LebanonJordanYemen, Rep.

Source: UN Comtrade.
Note: The GCC includes Bahrain, Kuwait, Qatar, Oman, Saudi Arabia, and United Arab Emirates.

Figure 2.41 Public debt and deficits, 2014
Debt and deficits remain elevated in oil-importing countries.

Percent of GDP

120
80

LebanonJordanEgypt, Arab
Rep.

MoroccoYemen, Rep.

Tunisia

Djibouti

Iraq

40
Iran, Islamic
Rep.

0
-2
-4
-6
-8
-10
-12
-14
-16

Percent of GDP
Fiscal Deficit
160

Public Debt (RHS)

Algeria

The GCC countries and the Euro Area are theregion’s largest trading partners and the outlook
is subject to downside risks to growth in both
(Figure 2.40). In GCC countries, low oil prices
may induce a slowdown in government spendingin areas where many migrant workers (e.g. construction) or a broad-based reduction in importdemand amid slowing growth. Although the recovery appears to be strengthening in Europe, it
is fragile and could be derailed. As the euro depreciates with quantitative easing of the ECB,
countries with U.S. dollar pegs are especially vulnerable to losing competitiveness and growth
momentum (Iraq, Jordan, and Lebanon).

The slowdown in oil-exporters in the region dampens activity in trading partners.

Oman

One significant upside risk is a possible permanent agreement between the Islamic Republic of
Iran and the international community. If signed
and implemented, economic recovery in thatcountry would be substantial, with growth rates
in excess of 6 percent per year in the latter partof the forecast period. This would raise the regional growth rate by 2–2.5 percentage points
per year as well.

Figure 2.40 Share of exports to GCC and Euro Area
countries, 2013

Saudi Arabia

including high unemployment, especially among
youth and women, and the poor quality of basic services, such as education and health, remain unsolved(World Bank 2015k).

MIDDLE EAST AND NORTH AFRICA

Source: World Bank, IMF

Fragile security in Iraq, Libya, Syria, and the Republic of Yemen is causing sizeable refugee flows. For
example, Lebanon’s population has increased by 19
percent and Jordan’s by 8 percent since 2013 (Abdih
and Geginat 2014). The need to provide basic services to the refugees is placing pressures on government budgets in Iraq, Jordan, Lebanon, and Tunisia—all countries with substantial fiscal financing
needs, government debt, and fiscal deficits (Figure2.41). Fulfilling government functions while maintaining sustainable fiscal balances will require newrevenues and/or streamlining inefficient expenditures, including fuel and food subsidies.
Fiscal deficits, although declining in the forecast period, are expected to remain high in oil importing
countries of the region in the medium-term. In particular, there is a need to ensure that the fiscal windfall from lower oil prices is channeled to efficient,

0

145

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G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5

growth-enhancing public investment, or towards
debt reduction, as warranted. In the past, this windfall was spent on higher current spending, namely
salaries and subsidies. In addition, these fiscal windfalls could also be used to tackle difficult reforms
where some upfront expenditures may be required,for example on cash transfers to mitigate reform
costs or recapitalization of financial sectors.

Figure 2.42 Unemployment rate and employment
growth, 2013
Unemployment remains high and above the developing country average.

Percent
20

Unemployment rate

Employment growth

15
10
Average= 5.4

5
0
-5
-10

AlgeriaEgypt, Arab
Rep.

JordanMoroccoTunisia

Source: Haver Analytics.
Note: The orange line is the weighted average unemployment rate of all developing countries in 2013.

Figure 2.43 Business climate: distance to frontier
The business environment remains challenging in most MENA countries.

Index

Yemen, Rep.

Libya

2015

West Bank andGaza

Tunisia2014

Morocco

Iraq

2013

Lebanon2012

Jordan2011

Iran, Islamic Rep.

Egypt, Arab Rep.

2010

Algeria

80
70
60
50
40
30
20
10
0

Source: Doing Business 2015, World Bank.

Figure 2.44 Growth in tourism arrivals
Tourism a key service export, remains weak.

Percent, year-over-year,
4-quarter moving average
30
20
10
0
-10
-20

Source: UN World Tourism Report.

2014Q4

2014Q3

2014Q2

2014Q1

2013Q4

2013Q3

LebanonTunisia
2013Q2

2013Q1

2012Q4

2012Q3

2012Q2JordanMoroccoEgypt, Arab Rep.
2012Q1

2011Q4

2011Q3

2011Q2

2011Q1

2010Q4-40

2010Q3-30

Unemployment remains high across the region despite some easing in Algeria, Egypt, and Jordan (Figure 2.42). As a result of an uncertain political andsecurity situation in several countries, there has been
little progress in structural reforms. Yet these remain
critical to generating job-rich growth in a difficult
environment. Labor market reforms need to tilt incentives away from public employment; reforms tolevel the playing field and increase competition between firms are needed; and a significant strengthening in institutional quality is required (WorldBank 2015k, Figure 2.43).
Another long-term challenge is that the development model that dominated in the region—where
the state provided free health and education, subsidies for food and fuel, and jobs in the public sector—has reached its limits. While this model delivered high school enrollment rates, basic health careand public sector jobs, it failed to provide quality
education, health care, or jobs in the private sector(Devarajan and Mottaghi 2015). To generate private-sector jobs and quality public services, a new
development model is needed in which the state facilitates competition in domestic markets in orderto generate private sector jobs, and organizes public
services in ways that enable citizens to hold officials
accountable.

GLOBAL ECONOMIC PROSPECTS | JUNE 2015

MIDDLE EAST AND NORTH AFRICA

147

Table 2.7 Middle East and North Africa forecast summary(Annual percent change unless indicated otherwise)00-10a

2015f

2016f

2017f

GDP at market prices, developing economiesb,c
4.5
-0.1
1.3
0.5
2.2
2.2
GDP at market prices, geographic regionb
4.6
3.5
3.7
2.6
3.0
3.0
(Average including economies with full national accounts and balance of payments data only)d
GDP at market prices, developing countriesc,d
4.8
2.6
-1.1
0.9
3.3
2.4
GDP per capita (units in US$)
3.1
1.1
-2.6
-0.5
1.8
1.0
4.8
2.5
-1.0
1.0
3.3
2.5
PPP GDPe
Private consumption
4.7
4.7
3.3
3.0
3.4
3.5
Public consumption
3.2
2.5
2.4
1.5
5.1
3.7
Fixed investment
7.0
0.1
-8.0
-1.1
1.1
2.4
5.3
1.4
-5.0
-0.2
1.8
4.6
Exports, GNFSf
8.2
0.4
1.3
-1.9
3.7
5.3
Imports, GNFSf
Net exports, contribution to growth
-0.6
0.3
-2.0
0.6
-0.7
-0.4
Consumer prices (annual average)
7.1
12.0
13.8
19.2
10.9
…
0.1
-4.0
-3.8
-5.9
-7.2
-8.3
Fiscal balance (percent of GDP)g
Memo items: GDP

2011

2012

2013

2014e

3.7
3.6

3.8
3.8

3.3
2.0
3.4
3.5
2.9
6.8
4.8
6.2
-0.7
…
-6.4

3.5
2.2
3.6
3.5
2.9
4.2
5.1
6.7
-0.8
…
-5.6

Developing Economies, ex. Libya

4.5

3.0

-0.6

1.1

3.1

2.3

3.5

3.6

High Income Oil Exportersh
Developing Oil Exporters
Developing Oil Importers
Egypt
Fiscal Year Basis
IranAlgeria

4.6
4.2
5.0
4.8
4.9
5.0
3.9

7.7
-1.8
2.6
2.0
1.8
3.9
2.8

6.1
0.5
2.5
2.1
2.2
-6.6
3.3

4.6
-0.8
2.6
2.1
2.1
-1.9
2.8

3.8
1.9
2.8
3.2
2.2
3.7
4.1

3.8
1.1
3.9
4.3
4.2
1.0
2.6

3.5
3.3
4.3
4.7
4.5
2.0
3.9

3.8
3.3
4.6
4.8
4.8
2.0
4.0

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 differ at any given moment in time.
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 2010 U.S. dollars.
c. Geographic region includes developing and the following high-income countries: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates.
d. Sub-region aggregate excludes Djibouti, Iraq, Libya, Syria and West Bank and Gaza, for which data limitations prevent the forecasting of GDP components or Balance of Payments details.
e. GDP measured at PPP exchange rates.
f. Exports and imports of goods and non-factor services (GNFS).
h. Includes all developing economies, except Syria for which data is not available.
i. High Income Oil Exporting Countries: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates.

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Table 2.8 Middle East and North Africa economy forecasts(Real GDP growth at market prices in percent, unless indicated otherwise)

Algeria
Djibouti
Egypt, Arab Rep.
Fiscal Year BasisIran, Islamic Rep.
Iraq
JordanLebanon
Libya
MoroccoTunisia
Yemen, Rep.
West Bank and Gaza00-10a

2011

2012

2013

2014e

2015f

2016f

2017f

3.9
3.9
4.8
4.9
5.0
-0.4
6.3
5.9
4.3
4.9
4.7
4.3
3.3

2.8
4.5
2.0
1.8
3.9
10.2
2.6
2.0
-62.1
5.0
-0.5
-12.7
12.2

3.3
4.8
2.1
2.2
-6.6
10.3
2.7
2.2
104.5
2.7
3.7
2.4
5.9

2.8
5.0
2.1
2.1
-1.9
4.2
2.8
0.9
-13.7
4.4
2.3
4.8
2.2

4.1
6.0
3.2
2.2
3.7
-0.5
3.1
2.0
-24.0
2.6
2.3
0.3
-0.8

2.6
6.5
4.3
4.2
1.0
-1.0
3.5
2.5
0.5
4.6
2.6
-2.8
0.9

3.9
7.0
4.7
4.5
2.0
5.5
3.9
2.5
15.0
4.8
3.4
2.8
4.3

4.0
7.1
4.8
4.8
2.0
5.9
4.0
2.5
10.9
5.0
4.5
3.4
4.1

00-10a

2011

2012

2013

2014e

2015f

2016f

2017f

3.3
5.1

-1.1
10.0

7.1
6.8

3.9
5.1

4.1
4.3

3.7
4.6

3.6
4.1

3.5
4.3

Recently transitioned to high-income countriesb
Oman
Saudi Arabia

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. Data for Syria are excluded due to uncertain political situation.
a. GDP growth rates over intervals are compound average; current account balance shares are simple averages over the period.
b. The recently high-income countries are based on World Bank’s country reclassification from 2004 to 2014.

SOUTH ASIA

Growth in the South Asia region rose to 6.9 percent in 2014 and is expected to continue firming over the forecast
period, led by a cyclical recovery in India and supported by a gradual strengthening of demand in high-income
countries. The decline in global oil prices has been a major benefit for the region, driving improvements in fiscal
and current accounts, enabling subsidy reforms in some countries, and facilitating the easing of monetary policy.
Macroeconomic adjustments in India since 2013 have reduced potential vulnerability to headwinds from thetightening of monetary policy in the U.S. Risks to the outlook are balanced, and depend on the implementationof structural reforms, including those that help to delink fiscal balance sheets from global energy prices. Politicaluncertainty, stressed bank balance sheets, and the ability to maintain fiscal discipline are some of the other key risks
to the region.

In the rest of the region, activity and growth haveremained robust, owing to healthy remittances, theThe main author of this section is Tehmina Khan.

GDP revisions show the downturn has been sharper and the subsequent recovery
stronger than initially estimated.

Percent change, year-on-year
14

RevisedOriginal

12
10
8
6
4

Q3-14

Q1-14

Q3-13

Q1-13

Q3-12

Q1-12

Q3-11

Q1-11

Q3-10

Q1-10

Q3-09

Q1-09

Q3-08

Q1-08

Q3-07

Q1-07

0

Q3-06

2
Q1-06

Aggregate growth in South Asia (SA) rose to 6.9 percent in 2014, its fastest pace in three years. Further
momentum is expected in 2015 in line with the cyclical recovery in India, the largest regional economy.
Revised GDP data for India show a faster reboundthan initially estimated (Figure 2.45), with growth
rising to 7.3 percent in the recently-completed fiscal
year (FY2014–15, ending in March). The upwardrevisions—deriving mainly from improvements indata sources used to compute GDP alongside baseyear revisions to better capture the changing structure of the economy—show strengthening manufacturing and strong growth in government consumption
offsetting weakness in external demand over the past
year. Higher frequency activity data show that thedomestic recovery is picking up (Figure 2.46): momentum in industrial output has picked up strongly
since the start of the year and while business sentiment data are pointing to a sustained acceleration in
the service sector. Meanwhile, earlier tightening ofmonetary policy and domestic policy measures suchas limited increase in mandated minimum procurement prices for grains has sent inflation tumbling,increasing real household disposable incomes.

Figure 2.45 India: Real GDP growth

Q3-05

Recent Developments

Sources: Haver Analytics and World Bank.

fall in global oil prices, strong tourist inflows (Bhutan, Maldives, Nepal, and Sri Lanka), good harvests(Afghanistan, Bangladesh and Pakistan), the construction of major hydropower projects, and a relaxation of credit controls (Bhutan). These factors havehelped to compensate for sluggish export growth(Figure 2.47). In Nepal, the earthquake in April andassociated aftershocks have taken a huge toll in termsof human life lost, but also severely damaged infrastructure and affected activity. In Pakistan, an easingof political tensions toward the end of last year has
helped already strong service sector growth, and therecent trade and investment agreements with China
worth $28 billion in infrastructure and energy proj149

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Figure 2.46 India: Industrial production and credit
High frequency data show industrial production gaining momentum but weak external
demand and slow credit growth.

Percent, 3m-on-3m saar

Year-on-year,percent, 3-monthmoving average
16

60
40

12

20
0

8

-20
-40
-60
Jan-13

4

Industrial production
Nominal credit (RHS)
Jul-13Jan-14Jul-14Jan-150

Sources: IFS, Haver Analytics, and World Bank.
Note: SAAR refers to seasonally adjusted and annualized data.

Figure 2.47 Export growth
Regional exports have struggled to build momentum since the second half of last year.

Percent, quarter-on-quarter saar
60
Bangladesh
India
40

Pakistan

Sri Lanka

20
0
-20
-40
-60
Jan-14Apr-14Jul-14Oct-14Jan-15

Apr-15

Sources: IFS, Haver Analytics, and World Bank.
Note: SAAR refers to seasonally adjusted and annualized data.

ects to connect China’s western regions with Pakistan’s Gwadar port have buoyed investor confidence,with current 5-year CDS spreads some 400 basis
points lower than in December 2014.
Remittances inflows have been particularly strongin Pakistan, amounting to $13.3bn in the first threequarters of FY2014–15 (a 15 percent increase froma year earlier), helping shore up consumption in theface of energy bottlenecks that have hampered production and exports. Flows to Sri Lanka and Bangladesh have also remained strong, in the latter,
helping to blunt the impact on the economy of recent political tensions and a transport blockade in
February that affected garment exports. In Nepal,
the outflow of migrants has continued to be strong
after a period of massive growth (with the stock ofmigrants increasing from about 1 million in 2010 toaround 2 million in 2013). However, remittances
growth decelerated in 2014, possibly reflecting lessuse of formal transfer channels. Remittances to India were broadly flat during 2014 and may reflect
the diversion of investment-oriented remittances
towards the higher returns offered by Indian stock
markets under a simplified portfolio investment regime for the diaspora introduced in late 2013.
Lower oil prices have improved the terms of tradeand helped narrow regional trade deficits (Figure2.48). Trade deficits in Bhutan, Maldives, Pakistan,and Sri Lanka, should see the largest improvements,
given evidence of stronger short-term response ofimports to oil price movements. Although India is amajor (net) oil importing economy, the improvement is expected to be relatively more modest as
diesel and other petroleum products comprise a significant share of exports (World Bank, 2015m).
Nevertheless, with lower inflation expectations
curbing demand for imported gold as a hedge, India’s trade deficit is improving and this has helped
narrow the current account deficit to 1.4 percent of
GDP in 2014, down from 5.0 percent in
mid-2012.
External balances in the region have also been supported by strong remittance inflows. In the case of
Pakistan, remittances have been a key factor in helping contain the current-account deficit at an estimated 1.2 percent of GDP in FY2014/15. Together
with the strong economic prospects of some economies, strong capital inflows, and healthy or improving current account balances, local currencies havebroadly held their value against the U.S. dollar (Figure 2.49). However, the Rupee has come undersome pressure in late April and early May, in partreflecting reduced foreign investor appetite for equities and bonds in response to unexpected tax bills
that India imposed late last year. On a tradeweighted basis, though, currencies have appreciatedslightly in recent months (Figure 2.50) implying aloss of price-competitiveness at a time when export
momentum is already negative.
Inflation has fallen to record or multi-year lows in
the region (Figure 2.51). Partly reflecting favorable
base effects and the impact of lower energy and foodprices, the disinflation trend has been further reinforced by relatively strong local currencies, and has
facilitated policy easing in India and Pakistan, andG L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5

most recently in Sri Lanka. In India, lower inflation
has primarily been driven by a sharp deceleration infood prices, although improvements in the monetary
policy framework may have also begun to help anchor inflation expectations. Core inflation has also
eased in line with inflation expectations.

C h a p t e r 2 | s o u t h as i a

Figure 2.48 Goods trade balance
A lower oil import bill is helping curb trade deficits.

US$, millions, 3-month moving average
Bangladesh
Pakistan0

Sri Lanka

India (RHS)-500

In India, although diesel prices were liberalized, periodic increases since November in excise taxes ondiesel and petrol to bolster government revenues
and meet fiscal targets, have meant that domestic
fuel prices have been relatively slow to fall. The
extent of pass-through from international oil
prices in India is estimated at 33 and 20 percent
for diesel and gasoline respectively, but is higher
in Pakistan and Sri Lanka (World Bank, 2015m),
where reductions in (administered) fuel prices
have helped to push inflation to multi-year or record lows. Inflation has eased somewhat in Bangladesh, but remains relatively elevated, partly
owing to limited spare capacity in the economy
and recent transport disruptions. In addition, administered energy prices have not changed since2013, mainly reflecting efforts to recoup losses at
the national energy company.

-1,000The decline in global oil prices is also helping support fiscal consolidation efforts in the region.
The general government deficit in India narrowed to 6.7 percent in FY 2014–15 (ending
March), from close to 8 percent in FY 2011–12,
reflecting savings from the elimination of diesel
subsidies, higher fuel excise duties, and underperformance in capital spending. In Pakistan, thegovernment has remained focused on fiscal tightening as part of conditions attached to the IMF’s
Extended Fund Facility loan program. The decline in global oil prices is helping reduce spending on subsidies and contingent liabilities atstate-owned companies, and has enabled adjustments in administered energy prices to the benefit of consumers. Nevertheless, deficits remain
large and debt levels high in Pakistan and in several countries in the region (Figure 2.52), in partreflecting poor tax policy and weak tax administration. Together, these have contributed to someof the lowest tax-GDP ratios among developing
countries and weakened long-term fiscal sustainability (World Bank 2015k). Afghanistan, meanwhile, is in the midst of a fiscal crisis, with declining revenues and higher security and social

100-5,000-10,000-1,500-2,000-15,000-2,500-3,000Jan-100Jul-11

Jan-13-20,000

Jul-14

Sources: Haver Analytics and World Bank.

Figure 2.49 Exchange rates against the U.S. dollar
Regional currencies have only depreciated marginally against the US dollar...

LCU vs. US$, index 100 = January 2013
130

Bangladesh
Pakistan

125

India
Sri Lanka

120
115
110
105
95
90
Jan-13

Jul-13Jan-14Jul-14Jan-15

Sources: Haver Analytics and World Bank.
Note: Increase denotes depreciation.

Figure 2.50 Nominal effective exchange rates...but are appreciating in trade-weighted terms.

Index 100 = January 2014
120
Bangladesh
Pakistan
115

India
Sri Lanka

110
105
100
95
Jan-14May-14

Sep-14Jan-15

Sources: Haver Analytics and World Bank.
Note: Increase denotes appreciation.

benefit spending resulting in a large unfinanced
fiscal gap of $500 million in 2014.
The policy environment is gradually improving
in the region, notably in India, where coordina-May-15151

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G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5

Figure 2.51 Inflation
Inflation has fallen to multi-year or record lows.

Percent, year-on-year
14

Bangladesh
Nepal
Sri Lanka

12

India
Pakistan

10
8
6
4
2
0
Jan-13

Sep-13May-14Jan-15

Sources: Haver Analytics and World Bank.

Figure 2.52 Government finances
Deficits remain large in several countries and debt levels high.

Percent of GDP, 2014
6

Percent of GDP, 2014160

Fiscal deficit

Public debt (RHS)

2

120

-2

80

-6

40

Afghanistan*

BhutanSri Lanka

Maldives

India

Pakistan-14

Bangladesh

-10
Nepal

152

Reforms are also underway elsewhere in the region,
albeit at a slower pace. In Pakistan, an ambitious but
piecemeal privatization program has been launched.
Severe energy shortages in January 2015 exposed
the slow progress thus far on energy reforms. However, almost half ($15.5 billion) of recent investments agreed with China in April are estimated to
be channeled into coal, nuclear, renewable energy
and hydropower projects in the next few years.
These are expected to add some 10,000mw in electricity generation to the national grid (about half ofcurrent installed capacity) by 2017, which should
help ease energy constraints. Nepal introduced reforms to the subsidy system in 2014Q4, including
the liberalization of petroleum product prices.
However, progress on rationalizing prices and dismantling subsidies for liquefied petroleum gas(LPG) has been slower despite a large fiscal cost. In
Sri Lanka, policy actions by the newly-elected government include a one-off tax increase for large corporates, a cut in infrastructure spending, and a substantial increase in public sector salaries. These
actions have added to investor uncertainty ahead ofupcoming parliamentary elections in June.

0

Sources: World Bank.
Note: Asterisk denotes that data is not available for public debt.

tion in monetary and fiscal policy has strengthened. On the fiscal side, this is reflected in the
improvement in the quality of fiscal consolidation
planned in the latest government budget (albeit at
the cost of a slower pace of fiscal tightening) that
includes an expansion in public investment, simpler
and lower corporate taxes offset by higher excise
taxes on fuel. Legislation is also pending on a goods
and service tax (GST), which would replace the existing system of multiple (and distortionary) local
and state taxes with a single unified national GST,
but this will likely take time to pass. Regarding monetary policy, the adoption of a formal inflation target
has boosted the independence of India’s central bankand provides a clear anchor for inflation expectations. Other key reforms in India include the elimination of diesel subsidies in 2014 and, more recently,
an increase in foreign shareholding limits in the insurance sector, which should boost FDI.

Outlook
Regional GDP growth is expected to remain firm atjust over 7 percent during 2015, and rise at a moderate pace toward 7.5 percent in 2017, in line with theongoing recovery in India and broadly stable growthin the rest of the region. In the baseline, stronger
regional growth is underpinned by strengthening
public investment. Private investment should also
improve, but at a slower pace as high levels of NPLs
on banking sector balance sheets in Bangladesh,
Bhutan, India, and Pakistan hold back the recovery
in credit growth.
Tailwinds from the fall in global commodity prices
and falling inflation should support real incomes andconsumer spending in the early part of the forecast
period, as should relatively stable growth in remittance inflows, which are a substantial share of GDP
in the region (World Bank 2015k). Although there
are risks that the recent fall in global oil prices could
adversely impact remittances from oil-producing
Gulf economies (a major destination for migrants
from SAR), there are several offsetting trends. These
include large fiscal and sovereign wealth fund buffers

G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5

in Gulf Cooperation Council (GCC) countries thatshould help to support activity there alongside on­going large scale construction activities (including
preparations for the 2022 FIFA World Cup in Qatar), and improving economic prospects in the U.S.
and Euro Area. Most governments are expected toremain focused on rebuilding fiscal space and curbing fiscal deficits through a mix of expenditure andrevenue measures (notably the introduction of GSTs
or VATs in India and Bangladesh).
Accordingly, growth will be driven primarily by domestic demand during the early part of the forecast
period, with a rising contribution from external demand in later years as growth in advanced economies
picks up. Although imports should rise as the investment strengthens, current account balances should
remain manageable, reflecting macroeconomic adjustments in recent years (in India, partly in response
to currency pressures during the “taper tantrum” in
mid-2013), domestic fiscal consolidation efforts, andlower oil import bills. As a large, financially-open
emerging market economy, India remains exposed tovolatility in global financial markets and shifts inglobal portfolio allocations that may follow policy
rate hikes in the United States, expected later thisyear. However, the substantial reduction in current
account deficits since 2013, record-high foreign exchange reserves, and improvements in the policy environment should also help contain such risks.
•India is expected to continue on its path of recovery, with growth expected to reach 8 percent
in FY2017–18, from 7.5 percent in FY2015–
16. The improvement in the outlook hinges on
steady progress on key reforms, including removing bottlenecks in public-private partnerships, the GST bill, and input market reforms(land, labor and finance) which are needed toease supply side and energy constraints. The
GST would help create a single markets forgoods and broaden the tax base. Fiscal discipline elsewhere would help public capital expenditures to rise as announced in the recent
budget, and potentially attract private investment, which has been extremely weak in recent
years. The slower pace of fiscal consolidation
over the next few years means that fiscal tightening will prove less of a drag, while lower corporate taxes and base-broadening measures

C h a p t e r 2 | s o u t h as i ashould also help support business confidence
and lift private investment.
•

Energy shortages in Pakistan, which haveweighed on investment, and activity in recent
years, are expected to diminish gradually as investment in energy projects increases supply.
Credit growth is also expected to pick up,
helped by fiscal consolidation. Coupled withsolid growth in remittances, and recovering
manufacturing and service sector growth,
GDP growth is forecast to rise from 3.7 percent in 2015–16 to 4.5 percent in 2017–18.

•

In Bangladesh, the growth forecast for
FY2015 has been revised down on accountof recent political tensions. The forecast is
now 5.6 percent, compared with 6.4 percent
in the previous forecast and 6.1 percent in
FY2014. As tensions settle, growth shouldpick up in line with a recovery in exports andinvestment. Consumption should also remain supported by resilient remittance inflows, particularly following the resumptionof migration of Bangladeshi workers to Saudi
Arabia. With the economy running at capacity, growth is expected to remain at close topotential over the forecast period.

•

Among the smaller economies of the region,
the severe earthquake in April will weigh on
growth in Nepal this year. However activity
should rebound as reconstruction efforts are
stepped up, and should also remain supported by relatively healthy service sector
growth and private consumption spending(with remittances expected to increase). Both
Bhutan and Nepal, whose currencies are
pegged to the Indian rupee, should also benefit from strengthening growth and lower inflation in India over the forecast period. In
Bhutan, the construction of major hydropower projects and the relaxation of credit
controls are expected to lift growth over 7
percent over the forecast period, and evenhigher once hydro-electricity exports to India begin to rise. Growth in Sri Lanka is expected to decelerate gradually to its potential
growth rate, as the government reassesses theinvestment-led growth model, partially offset by increases in consumption, and strong
tourism and remittance inflows. In Afghani-

153

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stan, growth is projected to rise from 2.5
percent in 2015 to 5 percent over the forecast period if political uncertainty diminishes and the security environment improves.
However, the fiscal revenue shortfall is expected to persist if reforms to improve revenues
continue to stall.

Risks and Policy Challenges
The key risks for the region are balanced and mainly
domestic in nature. They relate to whether investment growth—which has stalled in recent years inIndia, continues to decline in Pakistan (Figure2.53), and has weakened in Bangladesh more recently—strengthens as forecast. External risks include potential headwinds from financial market
volatility as monetary policy is tightened in the
U.S., although these are mitigated by a significant
improvement in current account balances in the region. Slower growth in the Gulf region or a disruption of oil trade (due to conflicts in the MENA region) could affect remittance inflows and lift oil
prices, with repercussions for the region. Upsiderisks include a faster pace of reforms in India andother countries, better-than-anticipated growth inhigh-income countries, and a fall in oil prices below
current baseline projections.
The regional growth outlook is predicated on theability of governments to deliver on reforms and ona pickup in domestic investment, both of which areessential to ease infrastructure bottlenecks over the
medium term. In India, there is a risk that the pasFigure 2.53 Investment
Investment as a share of GDP has trended lower in Pakistan in recent years to extremely
low levels.

Percent of GDP
40

Bangladesh

India

Pakistan

2008

2010

Nepal

35
30
25
20
15
10
2000

2002

2004

Sources: Haver Analytics and World Bank.

2006

2012

2014

sage of key legislative bills pending in parliament(land acquisition reforms and GST) is delayed
which could dampen investor sentiment and weighon infrastructure spending plans. Energy remains a
key constraint, and the fall in oil prices over the past
year represents a rare opportunity to rationalize energy prices as well as undertake wide-ranging energy
sector reforms. To the extent that credible reform
agendas boost investor sentiment, they will also
help create a virtuous cycle of stronger investment(including foreign investment) and output growthin the short term. If, however, reforms stall, this
could result in significantly lower investment andgrowth than projected in the baseline.
Political uncertainty remains an important risk factor
in Afghanistan, Bangladesh, Nepal, and Pakistan. In
addition to delaying or distracting attention fromlegislative reforms, it could hold back broader investment sentiment and spending. In Pakistan, promised
Chinese investments are contingent on improvements in security and the fulfillment of institutional,
regulatory, logistical and other commitments by thegovernment. In Bhutan, delays in the construction ofhydropower projects, and in Nepal uncertainty overthe extent to which FDI commitments translate intohydropower investments remain key risks. The recent
natural disaster in Nepal has added to these risks,with policy makers likely to be focusing attention on
disaster relief and reconstruction.
In addition, stressed banking sectors and corporate
balance sheets are key downside risks in several
countries in the region. Corporate leverage in India
is among the highest among major emerging market
economies, and foreign currency debt in the form of
external commercial borrowings has been steadily
increasing over the past decade (Lindner and Jung,2014). In both India and Bangladesh banking sector
strains are largest in state-owned banks. In Pakistan,
the heavy reliance of the government on the banking
sector for budgetary borrowing is crowding out private sector credit growth. In the absence of measures
to address problem loans on banking sector balance
sheets (Figures 2.54 and 2.55), rising global funding
costs (as U.S. policy rates rise) could impede alreadyweak credit growth (Figure 2.56) and a strengthening of investment. In Nepal, significant damage tophysical infrastructure (private and public) may
present short to medium term risks to financial sector stability from potential runs on the banking sector that trigger a liquidity crisis, and if banks see

G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5

1Indiahas deregulated diesel prices, increased excise duties on
petroleum and diesel, and under the Direct Benefit Transfer scheme,
begun to deposit entitled subsidies directly into the bank accounts ofconsumers for the purchase of market-priced LPG cylinders. See WorldBank (2015m) for more details.

9

Restructured loans

NPL ratio

7
5
3

Sep-14FY2014FY2013

FY2012FY2011FY2010-1

FY20091

Sources: IMF, Haver Analytics and World Bank.

Figure 2.55 Non-performing loans
NPLs are high across the region ...

BhutanPakistan

Q3 2014 or latest

Bangladesh

Percent of total assets
18
16
2012
14
12
10
8
6
4
2
0

India

Finally, greater regional integration and further
trade opening will yield important benefits. Although most countries in SAR have substantiallyliberalized trade and investment regimes in recent
decades, most economies remain highly protected,
vis-à-vis intra-regional trade and trade with respect
to other developing or high-income regions (Fukase
and Martin, 2015). A comparison of import duty
(as a share of goods imported) in South Asia suggests that tariff barriers are much higher in the region compared to ASEAN countries (Ding and Masha, 2012). Deeper economic ties and a reduction in

Percent of total assets
11

Afghanistan

Moreover, the recent decline in oil prices provides amajor opportunity to permanently decouple fiscal
balances from international oil price movements.
Although progress is being made in India on thisfront1, there has been limited pricing reform in
Bangladesh and Pakistan. In Pakistan, energy pricing reforms are particularly important given the
country’s heavy dependence on imported oil in electricity generation, and heavily subsidized electricity
tariffs that cost 1.2 percent of GDP in FY 2013–14(World Bank, 2015m).

Bank asset quality has deteriorated in India in recent years.

FY2008Other key risks and policy challenges include theability to maintain fiscal discipline. In India, fiscal
consolidation has been relaxed in an attempt to raise
public investment. However, even this relaxation in
fiscal targets could prove hard to meet if asset divestment and subsidy targets are not met. In Pakistan,in the absence of concerted tax policy reforms thatsuccessfully raise tax revenues (particularly direct
taxes), the ability to meet fiscal deficit targets islikely to depend on the ability of the government to
restructure and privatize loss-making enterprises.
Similarly, in Sri Lanka, the quality of fiscal consolidation underway has deteriorated, and the government could potentially overshoot its fiscal targets inthe short term. Nepal’s budget surplus is likely toshrink reflecting the impact of the earthquake onrevenue collection and rising government spending
on relief and reconstruction.

Figure 2.54 India: Impaired loans

Sri Lanka

their capital buffers eroded by the physical destruction of real estate pledged as collateral or a surge in
NPLs (as income streams of debtors are disrupted).

C h a p t e r 2 | s o u t h as i a

Bangladesh

Nepal

India

Pakistan

Sources: IMF
Note: Data for India includes restructured loans

Figure 2.56 Credit growth…which has weighed on bank lending.

Nominal, year-over-year,
percent, 3-month moving average
60
50
40
30
20
10
0
2006

2008

2010

2012

2014

Sources: IFS, World Bank

trade barriers would provide opportunities to benefit from technological spillovers, improve access to
the large U.S. market, and stimulate more productive growth in domestic industries.

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Table 2.9 South Asia forecast summary(Annual percent change unless indicated otherwise)

GDP at market pricesb,eGDP per capita (units in US$)PPP GDPc
Private consumption
Public consumption
Fixed investment
Exports, GNFSd
Imports, GNFSd
Net exports, contribution to growth
Consumer prices (annual average)
Fiscal balance (percent of GDP)
Memo items: GDP at market pricese
South Asia excluding India
India
Pakistan
Bangladesh

00–10a
6.7
5.1
6.7
5.9
6.5
9.6
13.1
10.9
–0.3
6.2
–7.4

2011
7.0
5.5
7.0
8.3
6.2
11.1
15.0
17.7
–1.8
9.8
–7.6

2012
5.4
3.9
5.4
6.0
3.5
3.2
7.9
8.1
–0.7
9.4
–7.2

2013
6.3
4.8
6.3
5.6
6.6
2.5
6.5
–2.9
2.6
10.1
–6.9

2014e
6.9
5.5
7.0
6.3
9.0
5.0
2.3
–0.2
0.7
6.6
–6.7

2015f
7.1
5.7
7.1
6.5
8.4
7.0
3.2
4.2
–0.4
…
–6.5

2016f
7.3
6.0
7.3
6.3
7.2
11.3
4.8
6.8
–0.8
…
–6.0

2017f
7.5
6.2
7.5
6.2
6.5
13.0
6.9
8.5
–0.8
…
–5.8

5.0
7.4
4.2
6.1

5.0
6.6
2.7
6.5

5.1
5.1
3.5
6.0

5.7
6.9
4.4
6.1

5.8
7.3
5.4
5.6

5.7
7.5
6.0
6.3

5.8
7.9
3.7
6.7

5.9
8.0
4.5
6.7

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 differ at any given moment in time.
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 2010 U.S. dollars.
c. GDP measured at PPP exchange rates.
d. Exports and imports of goods and non-factor services (GNFS).
e. 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, and Pakistan, and April 1 through March 31 in India. Due to reporting practices, Bangladesh and Pakistan report FY2012/13 data in CY2013, while India reports FY2012/13 in
CY2012. 2014 data for Bangladesh show growth in 2014-15.

Table 2.10 South Asia country forecasts(Real GDP growth at market prices in percent, unless indicated otherwise)

00–10a

2011

2012

2013

2014e

2015f

2016f

2017f

Calendar year basisb
Afghanistan
Bangladesh
Bhutanc
India
Maldivesd
Nepal
Pakistan
Sri Lanka
Fiscal year basisb

12.8
6.2
8.7
7.2
7.0
3.8
4.2
5.2

6.1
6.3
7.9
7.5
6.5
4.1
3.1
8.2

14.4
6.1
2.0
5.5
1.3
4.3
4.0
6.3

3.7
5.9
5.7
6.4
4.7
4.6
4.9
7.3

2.0
6.0
6.9
7.1
5.0
4.8
5.7
7.4

2.5
6.5
7.9
7.4
5.3
4.4
4.8
6.9

5.0
6.7
8.4
7.8
5.0
5.0
4.1
6.6

5.1
6.7
7.0
8.0
5.0
5.5
4.5
6.5

Bangladeshe
Indiag
NepalfPakistan

6.1
7.4
3.9
4.2

6.5
6.6
3.4
2.7

6.0
5.1
4.9
3.5

6.1
6.9
3.8
4.4

5.6
7.3
5.5
5.4

6.3
7.5
4.2
6.0

6.7
7.9
4.5
3.7

6.7
8.0
5.5
4.5

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. Historical data is reported on a market price basis.National income and product account data refer to fiscal years (FY) for the South Asian countries with the exception of Afghanistan, Maldives and
Sri Lanka, which report 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, and April 1 through March
31 in India. Due to reporting practices, Bangladesh, Bhutan, Nepal, and Pakistan report FY2012/13 data in CY2013, while India reports FY2012/13 in CY2012. GDP figures presented in calendar years(CY) terms for Bangladesh, Nepal, and Pakistan are calculated taking the average growth over the two fiscal year periods to provide an approximation of CY activity. Historical GDP data in CY terms for
India are the sum of GDP in the four calendar quarters.
c. GDP data for Bhutan is on a CY basis.
d. Data for Maldives is GDP data at basic prices (i.e excluding taxes and including subsidies).
e. 2014 data for Bangladesh show growth in 2014-15.
f. Nepal forecasts are preliminary.
g. Data for Fiscal Year 2000-2012 is old GDP series (base year is FY 2005). Subsequent data is revised GDP series (base year FY 2012.)

SUB-SAHARAN
AFRICAGDP growth in Sub-Saharan Africa rose from 4.2 percent in 2013 to 4.6 in 2014, supported by domestic demand. The World Bank forecast has the region expanding at a slower pace in 2015, with growth averaging 4.2
percent, a downward revision of 0.4 percent relative to the January 2015 Global Economic Prospects (GEP).
Prospects in Angola and Nigeria have deteriorated because of the sharp drop in the price of oil, and in South
Africa because of the ongoing difficulty in overcoming electricity problems. Risks to the outlook remain tilted tothe downside. On the domestic front, risks associated with elections, the Boko Haram insurgency, the Ebola crisis,
and fiscal vulnerabilities dominate. China’s slowdown, tightening of monetary policy in the United States, andthe fragility of the recovery in Europe, remain as key external risks.

Recent Developments

Figure 2.57 Fiscal vulnerability

GDP growth in Sub-Saharan Africa improved to an
average of 4.6 percent in 2014, up from 4.2 percent
in 2013, but weaker than the average of 6.4 percent
during 2002–08, supported by infrastructure investment and consumer spending. Growth softened
around the turn of the year owing to headwinds
from the plunge in the price of oil. Sub-SaharanAfrica’s oil exporters, which account for nearly halfof the region’s GDP, are experiencing a major adverse shock1. Their economies depend heavily on
oil for revenues and foreign reserves (Figure 2.57).
Between June 2014 and January 2015, oil prices declined by nearly 50 percent, more than the prices ofother commodities, and have remained low despite
the recent uptick (Figure 2.58). This has put substantial pressures on the fiscal and current accountbalances of oil exporters.

Oil accounts for up to 90 percent of fiscal revenues for the region’s oil exporters.

The oil exporters in Sub-Saharan Africa are less resilient to the price shock than many other oil-exporting
countries because of their much more limited policy
buffers. In Nigeria, the Excess Crude Account, a sovereign wealth fund, totaled just $2.0 billion at theend of 2014. Gross international reserves fell 20 per-

The main author of this section is Gerard Kambou.
1The region’s main oil exporters include Angola, Cameroon, Congo(Republic), Chad, Equatorial Guinea, Gabon, and Nigeria. Of these,
Nigeria and Angola are the largest; they are also the region’s first andthird largest economies.

Oil as percent of fiscal revenues
100
80
60
40

Ghana

Congo, Dem. Rep.

Cameroon

Gabon

Nigeria

AngolaCongo, Rep.

0

Equatorial Guinea

20

Source: IMF Country reports. Note: Latest available from latest IMF Article IV reports.

cent to $34.25 billion (6.0 percent of GDP), drawn
down by the central bank in its attempt to support
the naira. In March, Standard & Poor’s downgraded
Nigeria’s credit rating from B+ to BB-.
Several of the region’s oil exporters have started toadjust. In Angola, the oil price assumption in the2015 budget was revised down to $40/bbl from theoriginal assumption of $81/bbl. In Nigeria, it was
reduced to US$53/bbl from the earlier forecast of$65/barrel. The corresponding downward revisionin expected revenues induced plans to cut public
spending. In Angola, Parliament approved a 25 percent reduction in spending from the original planfor 2015. The cuts cover public investment projects
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Figure 2.58 Commodity prices

February 2015 was more than 20 percent (Figure2.59). In response, the central bank ended its managed float exchange-rate regime, closing down the
Dutch Auction System window. The exchange rate
is now set in the interbank market. The naira rebounded in March and was stable through April,
as successful elections helped improve market sentiment, but remained weak (Figure 2.60).

Since June 2014 oil prices have declined by more than 40 percent.

Percent change of nominal indices,
2010=100, June 2014–April 2015
0
-10
-20
-30

Tea

Cocoa

CoffeePlatinum

CopperIron ore

Oil

Natural gas

-50

Gold

-40

Source: World Bank.

Figure 2.59 Nigerian naira
Oil prices continue to weigh on the Nigerian naira.

LCU/US$
150

US$ per barrel
120
110

160

100

170

90
80

180

70

190

Apr-15Mar-15

Feb-15

Dec-1450
Nov-14Oct-14Aug-14Jul-14Jun-14May-14Mar-14Jan-14Feb-14

Nigeria exchange rate against US$
Crude oil price (RHS)

200
210

60
40

Source: Bloomberg. Note: Decrease denotes "depreciation".

and current expenditures, including subsidies. In
Nigeria, the 2015 federal government budget passedby the Senate indicates sharp reductions in capital
expenditures. With the lower government spending,the non-oil economy in many of these countries isfaltering, especially in the least diversified economies(Angola and Equatorial Guinea). Nigeria’s non-oil
output growth slowed to 5.6 percent in year-on-year
terms in the first quarter of 2015, down from 6.4
percent in the fourth quarter of 2014.
Sharp currency depreciations, and foreign reserve
losses, prompted adjustments in monetary andexchange rate policies. The Central Bank of Nigeria raised the policy rate from 12 to 13 percent inNovember. However, with oil prices declining, thenaira continued to depreciate against the U.S. dollar. The overall depreciation between June 2014 andIn Angola, the central bank hiked its key interest
rate by 50 basis points, to 9 percent, in the fourth
quarter, to anchor inflation expectations. Following
a gradual weakening of the Angolan kwanza, in early
June, the central bank adjusted the official exchange
rate, leaving the kwanza 14 percent weaker than at
the start of 2015. Several of the region’s oil exporters (Cameroon, Chad, Congo Republic, Equatorial
Guinea, and Gabon) share a common currency, the
CFA franc, which is pegged to the euro. With theeuro depreciating against the dollar, the CFA franc
has also depreciated against the dollar. This hashelped smooth adjustment to the oil-price shock forthese countries, by boosting export earnings in domestic currency.
In contrast to oil exporters, the oil-price plunge
has provided cyclical support to real incomes in
oil-importing countries. Cheaper fuel helped lower
inflation and improve current accounts in the firstquarter of 2015. In Kenya and South Africa, inflation rates moved back within their target range, allowing central banks to keep interest rates steady.
By contrast, the naira devaluation added to pricepressures in Nigeria, while Ghana continued to battle double-digit inflation, at 16.8 percent in April(Figure 2.61). Against the broad-based strengthof the U.S. dollar, even the currencies of oilimporting countries faced downward pressures,
with, for example, the Zambian kwacha falling
sharply. In trade-weighted terms, most of the region’s currencies have remained broadly stable,with the exception of the naira and the Ghanaian
cedi (Figure 2.62). Despite the nominal depreciation against the U.S. dollar the naira has appreciated considerably in real effective terms since 2011,
which may hurt exports.
Growth in South Africa, the region’s largest oilimporting economy, was stronger than expected in
the fourth quarter of 2014, supported by a reboundin the goods-producing sectors, after slowing earlier
in the year. This rebound failed to carry into the firstG L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5

C h a p t e r 2 | S U B - S A H A R A N A F R I CA

quarter of 2015, however. Growth was held back byenergy shortages, output contraction in agriculture,
weak investor confidence, policy uncertainty, and theanticipated gradual tightening of monetary and fiscal
policy. Elsewhere, the economies of Guinea, Liberia,
and Sierra Leone, the countries most affected by the
Ebola outbreak, remained weak as activity in mining,
services, and agriculture continued to contract.

Figure 2.60 Exchange rates

Spreads on sovereign credit-default swaps rose
sharply in a number of commodity exporters, suggesting that investors are discriminating among theregion’s frontier markets based on their economic
outlook. The sovereign spreads for the oil exporters
Angola, Gabon, Ghana, and Nigeria have remained
high, well above the 2013 “taper tantrum” peak(Figure 2.63). The spreads for Zambia have also
remained elevated, reflecting investors’ concerns
about soft copper prices, and uncertainty over government policy.

-30

LCU/US$, percent change, year-to-date
10
0
-10
-20

Apr-15Mar-15

Feb-15

Dec-14

Nov-14

Nigeria

Oct-14

Kenya
ZambiaAug-14May-14Jul-14

Ghana
South Africa

Mar-14Feb-14

AngolaUgandaJan-14-50

Jun-14-40

Source: Bloomberg.

Figure 2.61 Inflation
With the exception of Ghana price pressures look contained in the region.

Year-on-year, percent
35

Sub-Saharan Africa
AngolaGhana
Kenya
NigeriaSouth Africa
UgandaZambia
World

30
25
20
15
10

Jan-15

Jul-14Jan-14Jul-13Jan-13

Jul-12

Jan-12

Jul-11

Jan-11

0Jul-105
Jan-10At the same time, many of the region’s frontier markets are taking advantage of the very low global interest rates, and have issued Eurobonds to financeinfrastructure projects. Eurobond issuance in theregion has remained robust (Figure 2.64), as financing costs in the Euro Area have fallen sharply following the European Central Bank’s introduction of an
ambitious program of quantitative easing in March.
Frontier markets’ increased access to international
capital markets was demonstrated by Ethiopia’s oversubscribed debut 10-year US$1 billion bond, issued
in December 2014, and Côte d’Ivoire’s return tothe market in February. Debt-to-GDP ratios for thecountries with increased bond market access (Côted’Ivoire, Ghana, and Mozambique) have picked up
in recent years. While debt burdens remain manageable, continuing currency depreciations against the
U.S. dollar could lead to a rapid increase in the valueof foreign-currency debt for these countries.

The region’s major currencies continue to depreciate against the U.S. dollar.

Source: World Bank

Figure 2.62 Real effective exchange rates
With the exception of the Nigerian naira, REERs have remained broadly stable.

Year-on-year, percent
140
Ghana
South Africa
130
Zambia120

Nigeria
UgandaSub-Saharan Africa

110
100
90

Outlook80

Growth in Sub-Saharan Africa is projected to slow to 4.2
percent on average in 2015 from 4.6 percent in 2014,
a downward revision of 0.4 percentage points relative to
the January 2015 GEP. The revisions reflect the reassessment of prospects in Angola, Nigeria, and South Africa.
Growth in the region is expected to pick up in 2016 to an
average of 4.6 percent and to accelerate to 5.0 percent in2017 (Table 2.11). The increase in growth will be driven

60

Source: World Bank.
Note: Decrease denotes “depreciation”.

by domestic demand, supported by continuing infrastructure investment and private consumption fueled
by lower oil prices. External demand is also expected toJan-15

Jul-14Jan-14Jul-13Jan-13

Jul-12

Jan-12

Jul-11

Jan-11

Jul-10Jan-10

70

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Figure 2.63 Sovereign bond spreads

5.0 percent in 2015 and 5.6 percent in 2016–17, a fasterpace than several other developing regions (Figure 2.65).

Sovereign spreads of oil exporters rose sharply.

Basis points
1,300

Sub-Saharan Africa
Emerging markets
AngolaGabon
Ghana
NigeriaSouth Africa
Zambia

1,100
900
700
500

100

Jun-11
Aug-11
Oct-11
Dec-11
Feb-12
Apr-12
Jun-12
Aug-12Oct-12
Dec-12
Feb-13Apr-13Jun-13Aug-13Oct-13
Dec-13
Feb-14Apr-14Jun-14Aug-14Oct-14
Dec-14Feb-15
Apr-15300

Source: Bloomberg.

Figure 2.64 Eurobond issuance
Eurobond issuance in the region is set to rise further.

Total value of Eurobonds
issued since 2009, US$, millions
14,00012,00010,000
8,000
6,000
4,000
2,000
0

2009

2010

2011

2012

2013

2014

Source: Bloomberg.

Figure 2.65 GDP growth outlook
Growth is expected to slow in the region in 2015 and pick up moderately in 2016-17.

Percent
8

Sub-Saharan Africa excluding South Africa
Sub-Saharan Africa
Developing countries excluding China

7
6
5
4
3
2
1
0

2007

08

09

10

11

12

13

14

15

16

17

Source: World Bank.
Note: The shaded area represents forecasts.

support growth, because of stronger prospects in highincome economies. Excluding South Africa, GDP
growth for the rest of the region is projected to average

Consumption dynamics will differ for oil exporters and importers. Private consumption growth isexpected to slow in the oil exporters as cuts to subsidies to alleviate pressure on the budget result inhigher fuel costs. Purchasing power is also expected
to decline due to currency weakness, which would
push up the cost of imports in local currency. By
contrast, lower fuel prices are expected to contributeto lower inflation in the oil importers, which should
help boost consumers’ purchasing power and support domestic demand. The price level impact of
currency depreciation could, however, offset someof these effects. Meanwhile, remittance inflows in
the region are projected to decelerate in 2015, reflecting in part the appreciation of the U.S. dollar,
before picking up gradually in 2016–17.
China’s investment slowdown, and low commodity prices, suggests that FDI flows may not provide
much support to growth. Furthermore, government
plans in oil exporting countries to reduce the budget deficit are likely to hit capital expenditure morethan current expenditure, as governments seek tolimit cuts in public-sector wages or social spending.
However, governments in most oil-importing countries, especially the low-income, non-oil commodity
exporters, are expected to continue to expand public
investment in priority sectors such as electricity androads. Frontier markets are expected to continue to issue Eurobonds to finance key infrastructure projects.
The fiscal policy stance is expected to remain tightthroughout 2015 in oil-exporting countries. The
revised budgets in Angola and Nigeria indicate thatwhile capital expenditures will bear the brunt of expenditure measures, recurrent expenditures will also
be reduced. Despite these adjustments, fiscal deficits
in these countries are likely to remain high because of
low revenues. Fiscal deficits are also expected to remain elevated in oil-importing countries, as spending
on goods and services and wages continues to expand.
Net exports are projected to make a marginally negative contribution to real GDP growth. Low commodity prices will depress export receipts, especiallyamong oil exporters, even as export volumes rise insome countries. The current account surpluses inAngola and Nigeria are expected to turn into a deficit as their terms of trade have deteriorated sharply.
Among oil importers, current account balances areG L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5

expected to improve, although import growth willremain strong, driven by capital goods imports.
• In the baseline country forecasts (Table 2.12),
Nigeria grows at a slower pace in 2015, as fiscal
policy tightens in response to lower oil prices anddomestic demand contracts. Growth picks up in2016 as the fiscal drag moderates, helping boost
activity in the non-oil sector, and the new government implements structural reforms to enhance
productivity. Output remains modest in Angola,reflecting its vulnerability to lower oil prices, aspurchasing power declines, and lower government
revenue leads to cuts or delays in capital expenditures. Growth improves only moderately in South
Africa, as the ongoing difficulty of resolving theelectricity supply constraint continues to hamper
economic activity, labor relations remain tense,
investor confidence declines, and fiscal consolidation reduces government spending.
••Among frontier-market economies, Côte
d’Ivoire, Kenya, and Senegal are expected to
grow at a robust pace, supported by strong infrastructure investment. In Ghana, the agreement reached with the IMF will help stabilize
the cedi, but fiscal consolidation and high inflation will weigh on growth. In Zambia, growth
will remain flat in 2015, owing to soft copper
prices and fiscal consolidation, before picking
up in 2016–17 as improvements in the regulatory environment enhance the outlook for investment, especially in the mining sector.
Growth should remain robust in most low-income countries, driven by infrastructure (Ethiopia, Rwanda), mining (Democratic Republic ofCongo, Mozambique, Tanzania) investment,
consumer spending (Uganda), and agriculture(Ethiopia), although continued weaknesses in
the prices of their main exports (base metals) willtend to offset the benefits of the oil-price decline.
Countries that export agricultural commodities
have experienced a smaller deterioration in theirterms of trade (World Bank, 2015n). In Guinea,
Liberia, and Sierra Leone, the Ebola crisis willcontinue to constrain economic activity. Although the danger has receded, the risks of renewed spread and necessary controls on activities will continue to exert downward pressure on
economic growth.

C h a p t e r 2 | S U B - S A H A R A N A F R I CA

Risks
Risks to the outlook remain tilted to the downside. On thedomestic front, political factors associated with elections
in a number of countries, and Boko Haram insurgencies
in several others, are key risks for the region in 2015. The
Ebola epidemic remains a concern. Banking sector weakness has emerged as a potential contingent liability
for governments in the region’s oil exporting countries.
On the external front, a sharper-than-expected slowdown in China, a further decline in oil prices, a stallingof the recovery in Europe, or a sudden deterioration in
global liquidity conditions are the main risks.
Domestic risks
Postponed once for security concerns, Nigeria’s presidential election was held, and power was transferred,without a major outbreak of violence. Presidential
elections, scheduled in Burundi, Côte d’Ivoire, South
Sudan, Tanzania, and Togo, are likely to be contentious and could lead to political instability if the outcomes are contested. Several countries in the region(Cameroon, Chad, and Niger) have joined forces
with Nigeria to contain Boko Haram. In spite ofrecent successes, the conflict may escalate again andforce these governments to divert budgetary resourcesfrom infrastructure investment to security, which
would have a negative impact on long-term growth.
The banking sector in some oil-exporting countries
has emerged as a potential contingent liability for theirgovernments. Nigeria’s banking sector, in particular,
is heavily exposed to oil price declines. About 25 percent of total bank loans were extended to the oil sector
through December 2014, as the government sought toincrease the presence of Nigerian firms in the sector.
With oil prices having declined sharply, some companies may struggle to service these loans. Additionally,to the extent that bank assets consist of foreign currency-denominated domestic lending, a depreciationof the naira will increase financing cost. Non-performing loans may rise, requiring capital injections.
There has been a widespread drop in new cases ofEbola in 2015, suggesting that the vigorous efforts
to bring the epidemic under control have been successful. However, severe economic consequences arestill being felt in Guinea, Liberia and Sierra Leone,
and heightened fears of Ebola could undermine
confidence, investment, and travel in these andneighboring countries for some time.

161

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Chapter 2External risks
Slower-than-expected growth in China would
weigh on demand for the region’s commodities,
driving prices down. A further decline in the alreadydepressed price of metals would lead to a significant
drop in export revenues in many countries. A scaling
down of operations and new investments in thesecountries in response to the lower prices would reduce output in the short run, and slow growth momentum over an extended period of years. A further decline in oil prices would also sharply lower
revenue in oil-exporting countries, requiring themto undertake deeper fiscal adjustments with sharper
expenditure cuts. Some oil companies may delay oreven cancel planned investments in 2015.
It is important for Sub-Saharan Africa in generalthat the recovery in Europe maintains momentum,
as this could help boost investment and exports andsupport growth in the region. Risks are that the recovery might stall as a result of renewed instability
in the Euro Area or because of premature tighteningof policies.
A sudden adjustment of market expectations tothe upcoming tightening of monetary policy in
the United States could adversely affect the region’s
emerging and frontier markets, especially countries
that receive substantial portfolio inflows, such as
South Africa. However, quantitative easing in theEuro Area should contribute to continued attractive
borrowing conditions on Eurobond markets, allowing frontier-market governments to maintain market access. Recent episodes of capital market volatility suggest that countries with large macroeconomic
imbalances would face strong downward pressure
on the exchange rate, and hence an increased risk of
inflation, further constraining policy.

Policy Challenges
GDP growth in Sub-Saharan Africa is expected topick up moderately in 2016–17, after slowing in
2015, helped in part by a boost to private consumption from lower oil prices. However, growth continues to be weaker than during the pre-crisis years.
Sustaining high GDP growth therefore remainsa policy priority for most countries in the region.
As policymakers pursue growth objectives, it will
be important to pay attention to macroeconomic
constraints.

G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5

For oil exporters with inadequate buffers to allow
for a gradual adjustment of public spending to
the lower oil prices, currency depreciation will be
the main means available to cushion the impact of
the oil-price plunge on their economies. However,countries may need to tighten their macroeconomic
stances and strengthen their monetary policy frameworks to prevent inflation induced by currencydepreciation from becoming a constant threat. For
many countries, strengthening fiscal positions andrestoring fiscal buffers to increase resilience against
exogenous shocks will also be necessary. The oilprice shock highlights the need for oil exporters todiversify their economies. This will require policies
to remove impediments to private sector activity,
and to improve the business environment.
For policy makers throughout the region, the fall inoil prices provides a window of opportunity. Falling oil prices reduce the need for fuel subsidies ormake room for higher energy taxes. Fiscal resources
released by lower subsidies could be saved, used torebuild fiscal space, or reallocated towards programs
better targeted than fuel subsidies to assist poor
households (World Bank, 2015n).
In most economies, structural reforms are neededto ignite and sustain rapid productivity growth. As
elaborated in the January 2015 GEP, an acute infrastructure deficit is evident, especially in electrical
power and transport. In particular, it will be criticalthat improvements in public investment management systems are accompanied by efforts to ensurethat resources are allocated to the most productive
ends. Reform efforts should aim at strengthening
project selection, execution, and monitoring, andencourage transparency and accountability in the useof public resources. In addition, reforms will need
to focus on improving product and labor markets,
easing constraints on trade and investment, and fostering human capital accumulation (McMillan andHarttgen, 2014).

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BOX 2.1 Linkages between China and Sub-Saharan Africa

China’s engagement with Sub-Saharan Africa has expanded greatly over the past decade, to cover all aspects ofdevelopment. The engagement has spurred growth in theregion. Stronger domestic policies will help countries in
Sub-Saharan Africa increase the gains from this growing
partnership.
China’s economic ties with Sub-Saharan Africa (SSA)
have expanded greatly over the past decade. Trade increased from negligible levels in 2000 to more than$170 billion in 2013. Chinese direct investment in
SSA has grown more than six-fold. China’s official development assistance to SSA expanded from $0.5 billion in 2000 to $3.2 billion in 2013.
The relationship is a complex one, involving multiple
and diverse state actors in China, often (but not always) coordinating with state-owned and private corporations in a range of sectors across countries in SSA(Bräutigam 2009; Fijalkowski 2011). Although commodities and associated infrastructure projects havetended to dominate the relationship, Chinese investment in other sectors is also increasing, notably in
manufacturing. In recent years, the Chinese government has increasingly provided assistance for social development projects, and has engaged in peacekeeping
and security operations (Hanauer and Morris 2014;
Fijałkowska 2011).

Figure B2.1.1 Growth in Sub-SaharanAfrica’s trade flows, by partner, 2000–13
The region’s trade with China has grown at a faster pace than withother countries.
Percent change annualized, 2000-13
60
Exports to SSA
170.7
50
Imports from SSA

40

Total value of trade in 2013 (M+X),
US$, billions

30

81.4

20

61.2

10
0

China

BRICs excl. United States
China

210.7

EU

Source: UN Comtrade mirror data.

partner in 2009; in 2013, trade flows with China accounted for 22 percent of the region’s total trade withthe rest of the world. Official data on Chinese foreign
investment and development financing are sparse, butflows to SSA appear to have grown substantially.
Trade

What is the nature of China’s involvement in SSA?

Sub-Saharan Africa’s trade with China is dominated bycommodities. Oil, gas, and metals, sourced from a few
countries, account for the bulk of SSA’s exports to
China (Figure B2.1.2), although the region’s exports to
the United States, the European Union, and major
emerging market economies are even more concentrated in commodities (Figure B2.1.3). In contrast, theregion’s imports from China are diverse. About onethird comprise capital goods, including vehicles, generators, telecommunications equipment, and factorymachinery. Consumer and manufacturing goods account for the remainder (Figure B2.1.2) and are about
three times as large as imports from the United States
and the European Union.

China has become a prominent trade and financial
partner for SSA. Trade with China is growing much
faster than that with the United States and the European Union (Figure B2.1.1). China surpassed theUnited States to become the region’s largest trading

China is the largest developing country foreign investor
in Africa (UNCTAD 2013). The relationship started in
the early 1980s, as part of concerted diplomatic efforts
promoting Chinese economic cooperation with Africa.

This box examines China’s involvement in SSA and its
impact on the region. The focus is on the following
four questions:•

What is the nature of China’s involvement in SSA?

•

What has been the impact on growth in SSA?

•

What does the slowdown in China mean for theregion?

•How can the region increase the gains from its
growing partnership with China?

The author of this box is Tehmina S. Khan with contributions from
Jiayi Zhang and Raju Huidrom.

Investment

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BOX 2.1 (continued)
Figure B2.1.2 Sub-Saharan Africa’s tradeflows with China, 2013
Sub-Saharan Africa exports to China are dominated by commodities.

Percent of total
100

Other

90
80
70
60
50

Footwear
ApparelOther

Machineryandtransport

Manufact.
goods
Fuel andchemicals

40
30

Manufact. goods

20
10
0

The stock of Chinese FDI to Sub-Saharan Africa has doubled since
2009.

US$, billions
25
20
15
10

Metal
comm.

Fuel and chemicals
SSA imports from China

Figure B2.1.4 Cumulative Chinese foreign
direct investment in Sub-Saharan Africa

5

SSA exports to China
0

Source: UN Comtrade mirror data.

2009

2012

Source: Government of China 2013.

Figure B2.1.3 Sub-Saharan Africa’s
commodity exports to major trading partners,
2013... but commodities are an even larger share of exports to other major
trading partners.

Percent of total Sub-Sarahan Africa exports to partner
100
90
80
70
60

69

77

77

EU

UnitedStates

87

59

50
40
30
20
10
0

China

World

BRICs
excl. China

Source: UN Comtrade.
Note: Commodities comprise food and beverages; inedible crude materials; mineral
fuels, lubricants, and other related materials; animal and vegetable fats; and chemicals
and related products

Initial investments were small, amounting to $51.9
million for 102 projects (about $500,000 per project)between 1979 and 1990, with Chinese businesses relying heavily on government-sponsored assistance projects to gain a foothold in local African markets (Government of China 2013; Chun 2013). The distinction
between foreign direct investment (FDI) and official
assistance may at times be ambiguous. For example, in-vestments by Chinese state-owned enterprises can be
included in definitions of official flows of development
assistance, if they receive subsidized state financing suchas export credits (Hanauer and Morris 2014).
In any event, private investment flows are rising fast(Gu 2009) and, to the extent they are channeled via tax
shelters, are likely to be underreported (Sun 2014).
The officially reported stock of Chinese FDI in Africa
was estimated at $21 billion in 2012, a doubling since2009 (Figure B2.1.4).1 Reported flows are similar inmagnitude to flows from the United States (figure
B2.1.5), with the largest share directed toward the resource sector, notably in Angola, Chad, Niger, Nigeria,
Sudan, and Zambia.2
Chinese investment in other sectors is substantial, especially in manufacturing (Figure B2.1.6). This is seenin the gradual development of manufacturing clusters
in Ethiopia (glass, fur, footwear, and automobiles),Mali (sugar refineries), and Uganda (textiles and steel
pipe manufacturing). Although partly driven by growing business opportunities in Africa, the shift toward
1FDI data for China are available only for Africa as a whole rather than
SSA specifically. According to the Chinese Ministry of Commerce, by theend of 2009, 88 percent of the FDI stock in Africa was located in SSA (citedfrom GAO Report 2013).
2Chinese Ministry of Commerce statistics from http://www.chinaafricarealstory.com/p/chinese-fdi.html.

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BOX 2.1 (continued)
Figure B2.1.5 Chinese and U.S. foreign
direct investment in Africa

Figure B2.1.7 SSA manufacturing exports
to China

Chinese and US FDI flows to Africa are broadly comparable.

Exports to China have grown rapidly.

US$, billions
12
China flows to Africa

Percent of total
14

United States net flows toAfrica10

8

US$ 0.4 billions

8

6

6

4

3.7
2.5

2

4
2

Sources: Ministry of Commerce, China; OECD Statistics on FDI.

Figure B2.1.6 Chinese foreign direct
investment in Africa, by sector, 2012
The largest share of Chinese FDI to Africa has been directed to theresource sector.
Manufacturing$3.4bn,16%
Financial sector$3.9bn,18%
Agriculture$0.8bn, 4%$13.1bn,
62%
Other (inc. minerals,
infrastructure, transport)
Source: Government of China 2013.

manufacturing is also indicative of Chinese firms’ efforts to develop global value chains as domestic laborcosts increase relative to lower-cost Africa (Hanauer
and Morris 2014). African firms in turn have gained
growing access to Chinese markets; since 2012, China
has given some 30 countries in SSA zero-tariff treatment (covering about 60 percent of their exports) andis importing a growing share of manufactures from theregion (Figure B2.1.7).3
3Government of China (2013). Growing market access is also reflectedin rising SSA manufacturing exports to China. According to Comtradedata, these comprised 11 percent of total exports to China in 2013 compared with 7 percent in 2000.

0

2000

2013

Source: UN Comtrade.

Development finance
Africa is the largest recipient of Chinese development
financing and its share is increasing. Africa received
nearly half of the cumulative $54 billion provided by
China in global foreign aid through 2012 (Figure
B2.1.8), significantly more than any other region(Government of China 2011, 2014).
Chinese official development assistance has been, by
and large, complementary to aid from Organisation for
Economic Co-operation and Development (OECD)
countries. Chinese and OECD official development asFigure B2.1.8 Distribution of aid anddevelopment financing flows from China
Africa is one of the largest recipients of Chinese aid.
50
45
40
35
30
25
20
15
10
5
0

Percent of cumulative aid disbursed by China
until 2012
US$, billions

Source: Government of China 2011, 2014.

Africa

2011

Asia

2009

Latin America andthe Caribbean

2007

Others2005

Oceania0

US$ 12.2 billions

12

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BOX 2.1 (continued)
Figure B2.1.9 Chinese development
assistance and bilateral aid from OECD
countries to Sub-Saharan Africa

Figure B2.1.10 Development assistance to
Sub-Saharan Africa…but is much smaller in size.

Chinese assistance has grown at a faster pace than bilateral aid form
the OECD in recent years…

US$, billions
30

Percent change
50

25

Chinese external assistanceOECD bilateral
disbursements

15
5

10

0

0
-10
-20
-30

2005

2007

2009

2011

2013

Sources: OECD; Chinese Statistical Yearbook; MOFCOM. Cited from http://www.china
africarealstory.com/p/chinese-aid.html.
Note: OECD = Organisation for Economic Co-operation and Development.

sistance differ substantially in scale, nature, and degreeof concessionality (Bräutigam 2011b; Strange et al.
2013).4 Although Chinese assistance increased rapidly
as OECD disbursements declined (Figure B2.1.9),
Chinese aid remains well below the OECD’s, amounting to $3.2 billion in 2013 compared with the $26 billion disbursed by OECD countries in the same year
(Figure B2.1.10). Chinese development assistance isfrequently packaged into agreements that mix grants
and investment, and concessional and non-concessionalloans (Bräutigam, 2011a, 2011b).5
China is also increasingly channeling development assistance through multilateral institutions, including a$2 billion co-financing fund between the People’s Bank
4Key differences include definitions, the degree of concessionality, andconditionalities. Official development assistance is defined by the OECD
as concessional funding given to developing countries and to multilateral
institutions primarily for the purpose of promoting welfare and economic
development in the recipient country. China is not a member of the OECDand does not follow its definition or practice on development aid. By thismeasure, the bulk of Chinese financing in Africa falls under the category ofdevelopment finance, but not aid (Strange et al. 2013).
5There has been a longstanding debate over how the concessionalityof these loans is defined. The 2014 White Paper on Aid by the Chinese
government offers some clarification, indicating that “the difference between the concessional interest rates and the benchmark interest rates of thePeople’s Bank of China is subsidized by the government’s budget.”

China(b)10

20

United States(a)30

20

ODA lending by
OECD countries

40

WB IDA lendimg

166

Source: World Bank 2013 Annual Report .
a. 2012 OECD Development Assistance Committee statistics.
b. Chinese Statistical Yearbook and MOFCOM. Cited from http://www.chinaafricarealstory.com/p/chinese-aid.html.

of China and the African Development Bank in 2014.6
Finally, OECD country development assistance is typically accompanied by greater conditionality on social
development projects and policy reforms. As a result,almost two-thirds of OECD assistance to Sub-SaharanAfrica flows to the social infrastructure in health, education, water, and sanitation, or toward emergency relief and food aid (Figure B2.1.11). In contrast, half ofChinese assistance is for infrastructure.7
What has been the impact on growth in SSA?
Growth has accelerated strongly in the region over the
past two decades, coinciding with the expansion in economic ties with China. There has been a direct impact
6The World Bank has also signed two Memoranda of Understanding
recently, one with China Eximbank in September 2013, and the other with
China Development Bank in June 2013, to help co-finance projects.
7China is also increasingly engaged in combating ebola and in peacekeeping and security operations in Sub-Saharan Africa, supported by
growing political relations. An example is the dispatch of combat troops
under the UN mandate in Mali—a first for China, which has previously
dispatched only noncombat personnel. In part, the increased engagement
reflects a desire to reduce the impact of political instability on its supply
chain. Thus, the mediation efforts undertaken by China, between government and rebel forces in South Sudan in 2013, and the expanded naval cooperation with Djibouti to secure the Gulf of Aden, may be seen in the lightof China’s imports of oil from South Sudan. In the first 10 months of 2013,
these amounted to 14 million barrels, twice those from Nigeria (Sun 2014).

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BOX 2.1 (continued)
Figure B2.1.11 Bilateral aid from OECD
countries to Sub-Saharan Africa, by sector,
2013

Figure B2.1.12 Contributions to growthin gross domestic product in Sub-SaharanAfricaOECD aid is concentrated in the social sector.

Investment and exports have underpinned faster growth in
Sub-Saharan Africa since the 2000s.

Percent of total bilateral commitments by OECD countries
Social infrastructureand services*
Humanitarian aid
and food aid
Economic infrastructureservices**
Agriculture, forestry,
and fishing
Multisector

Action related to debt

Percent
6
5

GDP growth
Investment (cont'n, %pts)
Exports (cont'n, %pts)
GDP growth: average 1980-2013

4
Sub-Saharan Africa
Developing countries

Other program assistanceIndustry, mining,
construction

0 China;
10OECD20
30on FDI.
40
50
Sources: Ministry of Commerce,
Statistics
Note: OECD = Organisation for Economic Co-operation and Development.
* Includes education, health, water and sanitation, and other such services.
** Includes transport and communications and energy.

(via rising trade, investment aid, and flows) and an indirect one (via China’s demand for and impact on theprices of global metals and minerals). These impacts
have been reflected in a quadrupling of the contributionof exports and investment to growth in gross domestic
product in SSA since the 1990s (Figure B2.1.12).
Significant Chinese investment and development finance have been channeled into infrastructure. This isparticularly important for SSA, given that transportand energy infrastructure deficits are severe and the returns to investing in infrastructure are large.8 Improved
infrastructure contributed more than half of Africa’s
improved growth performance in the pre-2008 decade(Foster and Briceno-Garmendia 2010). Between 2003
and 2009, FDI from China contributed almost 2 percentage points to growth in Zambia, about 1 percentage point in the Democratic Republic of Congo andNigeria, and 0.5 percentage point in Madagascar(Whalley and Weisbrod 2011).
Indirect spillovers from growth in China have also
been significant, especially for resource exporters.
Drummond and Liu (2013) report that a 1 percentage
point increase in China’s domestic investment growth
8Simulations by Foster and Briceno-Garmendia (2010) suggest that if
all African countries were to catch up with Mauritius (the country in SSA
with the densest road network), per capita growth in the region could increase by 2.2 percentage points

3
2
1
0
-1

1980s

1990s

2000s

2002-2007 2010-2013(pre-crisis (post-crisis
period)period)Source: World Bank.

is associated with an average 0.6 percentage point increase in SSA export growth, with a larger impact on
resource-rich countries, especially oil exporters.9 Renard (2011) points to an additional benefit of China’s
growth, through reduced consumer and investment
prices, as cheaper Chinese manufactures and capital
goods displace imports from the United States and theEuropean Union. These may be partially offset by thedisplacement of local industries through imports from
China (e.g., apparel in South Africa and Madagascar;
Ademola, Bankole, and Adewuyi 2009).
What does slower, more balanced growth in China
mean for the region?
In the near term, slower, more balanced growth inChina, coupled with a shift toward more consumption
and less investment, is weighing on demand and prices
for commodities, especially industrial commodities
such as iron ore and copper. These effects have been afactor in the negative terms-of-trade shock to metaland mineral-exporting SSA countries over the past year
(World Bank 2015). This situation may help to un9Busse, Erdogan, and Muehlen (2014) find a positive growth impact
from terms-of-trade effects in resource-rich economies (but no impact from
Chinese FDI).

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BOX 2.1 (continued)

wind some Dutch disease pressures—stemming fromreal appreciation against the renminbi and weakening
the competitiveness of African manufacturing—towhich China’s demand for raw materials had contributed over the past decade (Jeanneny and Hua 2015).
In addition, tightening financial conditions in China
may lead to higher funding costs for banks, which
could slow Chinese companies’ investment abroad, including in SSA (IMF 2014).10
Over the medium to long term, Chinese economic engagement should continue to grow, as reflected in recent proposals by the Chinese government to invest in
regional rail networks, eventually linking five East African countries.11 In part, this undertaking reflects
growing opportunities in SSA, as well as China’s growing strategic (political, economic, and security) interests in the region (Sun 2014). In the mining sector, forinstance, SSA is one of the two major regions (alongside the Arctic) that have been less well-explored. The
African market share is expected to grow, given thedepletion of easily accessible mineral deposits in advanced countries and improvements in technology(ICMM 2012). Accordingly, although investments ininfrastructure and mining are likely to slow, given the
recent decreases in global commodity prices, Chinese
investment should continue to add to the domestic demand for goods and services in SSA.
10To illustrate the possible short- and medium-term effects that a slowdown in China could have, a structural vector autoregression model was
estimated for South Africa with data from 2000Q2–2014Q2.The key variables are the rest of world’s gross domestic product (GDP) growth, global
interest rates (proxied by the U.S. federal funds rate), China’s GDP growth,South Africa’s GDP growth. All variables are seasonally adjusted and transformed into log differences (quarter-on-quarter). The identification is basedon a Cholesky decomposition with the variables ordered as listed, which
is based on the presumed exogeneity or predetermination of variables. For
instance, global GDP and global interest rates are presumably more exogenous than China’s GDP in the vector autoregression system, and henceordered before China’s GDP. A 1 percentage point reduction in China’s
growth results in a 0.37 percentage point decline in output growth in South
Africa at the end of a horizon of two years (figure B2.1.13), consistent withestimates in other studies (Houssa, Mohimont, and Otrok 2015).
11In May 2014, China signed a deal to build a US$3.8 billion rail link
between Mombasa and Nairobi in Kenya, the first phase of a line that will
eventually link Burundi, Rwanda, South Sudan, and Uganda. Under thedeal, the Exim Bank of China will provide 90 percent of the cost to replace the decades-old British colonial-era line with a 609.3 kilometer (379mile) standard-gauge link, while Kenya will fund the balance of 10 percent.
http://news.xinhuanet.com/english/china/2015-02/24/c_134014338.htm.

Figure B2.1.13 Effect of slower growth inChina on South Africa
Slower growth in China could dampen growth in Africa.
Percentage point impact on GDP growth froma 1 percentage point reduction in Chinese GDP growth
0.2
Confidence bands
Median
0
-0.2
-0.4
-0.6
-0.8

1

2

3
4
5
Number of quarters

6

7

8

Source: World Bank.
Note: Results from a structural vector autoregression model with the following variables:
South Africa’s GDP, China’s GDP, rest of the world’s GDP, and global interest rates (proxiedby the U.S. federal funds rate).

How can the region increase the gains from its
growing partnership with emerging markets?
China’s increasing presence in SSA has supported
growth—somewhat similar to the impact of Japan’s
growing presence on East Asia in the 1960s. China’s
engagement has filled important infrastructure gaps
and encouraged supply chain integration.
China is only one of several major emerging economies
with an interest in SSA, the others being Brazil, India,12
the Republic of Korea, the Russian Federation, andTurkey. And traditional OECD partners remain important—the magnitude of their aid, investment, andtrade flows is (in aggregate) larger than that from China.
But to benefit fully from the opportunities presented
by trading partners (including China), countries in
SSA need to focus on improving domestic policies toreform institutions, increase transparency (especially inmining), improve business environments (the cost ofcorruption is heavy; World Bank 2015), and promote
12With $52 billion in announced projects, greenfield investment in Africa by India actually surpassed the $45 billion by China during 2003–12. Itcovered a wider range of sectors, including agro-processing, energy (including
renewables), consumer goods, and financial services (OECD 2013). Greenfield FDI is where a parent company constructs new operational facilities.
In addition to the boost from the investment itself, the hiring of staff to run
these facilities creates new long-term jobs.

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169

BOX 2.1 (continued)

the development of human capital. Closer economic
cooperation among African countries—for instance,
harmonizing laws and facilitating cross-border business and collaboration—could allow Africa to leverage
the benefits of commerce with the major emerging
market economies (OECD 2013; Jacoby 2007). This
would also help lower the costs of bureaucracy and improve competitiveness. Improvements in regional infrastructure would encourage investment (domestic
and foreign). Since natural resource wealth will remain

important for the region’s growth prospects, better integration of the mineral sector into development andmacroeconomic policy would help shield resource-exporting countries from volatility in commodity prices
and assist with more sustainable, longer-term socioeconomic development (UNECA 2011). A higher degreeof processing of agricultural and raw materials would
take better advantage of preferential access to Chinese,
U.S., and European Union markets and would mean
more exports and jobs.

Table 2.11 Sub-Saharan Africa forecast summary(Annual percent change unless indicated otherwise)

GDP at market pricesb

00–10a
5.7

2011
4.3

2012
4.1

2013
4.2

2014e
4.6

2015f
4.2

2016f
4.6

2017f
5.0

(Average including countries with full national accounts and balance of payments data only)c
GDP at market pricesc
GDP per capita (units in US$)PPP GDPc
Private consumptiond
Public consumption
Fixed investment
Exports, GNFSe
Imports, GNFSe
Net exports, contribution to growth
Consumer prices (annual average)
Fiscal balance (percent of GDP)
Memo items: GDP
SSA excluding South Africa
Broader geographic region(incl. recently high income countries)f
Oil exportersg
CFA countriesh
South Africa
Nigeria
Angola

5.7
3.1
5.8
5.8
7.3
9.8
4.8
8.4
–0.7
8.4
–0.6

4.3
1.7
4.4
3.3
7.9
2.0
10.2
8.0
0.7
10.1
–1.1

4.1
1.6
4.2
2.4
5.7
9.2
1.0
1.3
–0.1
11.1
–1.7

4.2
2.4
5.0
12.2
3.6
5.6
–7.3
6.4
–4.3
8.1
–2.9

4.6
2.1
4.9
4.2
3.9
6.7
3.4
2.7
0.1
9.0
–2.4

4.2
1.7
4.4
4.0
3.6
6.7
2.8
3.0
–0.1
…
–2.2

4.6
2.1
4.8
4.2
3.7
7.3
3.1
3.1
–0.1
…
–2.2

5.0
2.5
5.2
4.5
3.8
7.8
3.3
3.2
0.0
…
–2.1

6.7

4.6

4.7

6.0

5.7

5.0

5.4

5.8

5.7

4.3

4.1

4.8

4.5

4.1

4.5

5.0

7.6
4.2
3.5
8.8
11.3

3.5
2.3
3.6
4.9
3.9

3.9
6.0
2.5
4.3
8.4

6.0
4.5
1.9
5.4
6.8

5.8
5.4
1.5
6.2
4.4

4.6
3.8
2.0
4.5
4.5

5.0
5.5
2.1
5.0
3.9

5.6
6.0
2.4
5.5
5.1

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 differ at any given moment in time.
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 2010 U.S. dollars.
c. Sub-region aggregate excludes Liberia, Somalia, Central African Republic, São Tomé and Principe,and South Sudan. Data limitations prevent the forecasting of GDP components or Balance of Payments details
for these countries.
d. The sudden surge in Private Consumption in the region in 2013 is driven by the revised and rebased NIA data of Nigeria in 2014.
e. Exports and imports of goods and non-factor services (GNFS).
f. Recently high-income countries include Equatorial Guinea.
g. Oil Exporters: Angola, Côte d Ivoire, Cameroon, Congo, Rep., Gabon, Nigeria, Sudan, Chad, Congo, Dem. Rep.
h. CFA Countries: Benin, Burkina Faso, Central African Republic, Côte d Ivoire, Cameroon, Congo, Rep., Gabon, Guinea Bissau, Equatorial Guinea, Mali, Niger, Senegal, Chad, Togo.

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G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5

Table 2.12 Sub-Saharan Africa country forecasts(Real GDP growth at market prices in percent, unless indicated otherwise)

AngolaBenin
Botswana
Burkina Faso
BurundiCabo Verde
Cameroon
Chad
Comoros
Congo, Dem. Rep.
Côte d’Ivoire
Eritrea
Ethiopia
Gabon
Gambia, The
Ghana
GuineaGuinea-Bissau
Kenya
LesothoMadagascar
MalawiMali
Mauritania
Mauritius
Mozambique
Namibia
Niger
Nigeria
RwandaSenegalSierra Leone
South Africa
Sudan
Swaziland
Tanzania
Togo
UgandaZambiaZimbabwe

Recently transitioned to high-income countriesb
Equatorial Guinea

00–10a
11.3
3.9
4.2
6.0
3.3
5.7
3.3
10.7
2.9
4.7
1.1
0.9
8.6
2.0
4.6
5.8
2.6
2.5
4.4
4.0
2.6
4.5
5.7
3.9
3.8
7.7
4.7
4.6
8.8
7.9
4.1
8.9
3.5
5.8
2.3
7.0
2.0
7.8
7.4
-4.7

2011
3.9
3.3
5.2
4.2
4.2
4.0
4.1
0.1
2.6
6.9
–4.4
8.7
11.2
7.1
–4.3
14.0
3.9
9.0
6.1
2.8
1.5
4.3
2.7
4.0
3.9
7.4
5.1
2.3
4.9
7.9
2.1
6.0
3.6
–3.3
–0.7
6.4
4.9
4.7
6.4
11.9

2012
8.4
5.4
5.0
9.5
4.0
1.2
4.6
8.9
3.0
7.1
10.7
7.0
8.6
5.6
5.9
9.3
3.9
–2.2
4.5
6.5
3.0
1.9
0.0
7.0
3.3
7.1
5.2
11.0
4.3
8.8
3.5
15.2
2.5
–10.1
1.9
6.9
5.9
3.6
6.8
10.6

2013
6.8
5.6
5.4
6.5
4.6
0.5
5.6
4.0
3.5
8.5
8.7
1.3
10.5
5.9
4.8
7.3
2.3
0.3
5.7
5.5
2.4
5.0
1.7
6.7
3.3
7.4
5.1
4.1
5.4
4.7
2.8
20.1
1.9
–6.1
2.8
7.0
5.1
4.8
6.7
4.5

2014e
4.4
5.5
4.7
4.5
4.7
1.3
5.0
7.3
3.2
9.0
8.0
2.0
10.3
5.0
–0.2
4.2
0.4
2.5
5.3
2.0
3.0
5.7
6.8
6.4
3.2
7.4
5.3
6.2
6.2
7.0
4.5
6.0
1.5
3.0
1.7
7.2
5.5
5.2
5.6
3.2

2015f
4.5
4.6
4.3
5.0
4.8
3.0
4.0
9.0
3.4
8.0
8.0
1.5
9.5
4.0
3.0
3.5
–0.3
4.2
6.0
4.0
4.6
5.1
5.6
5.5
3.5
7.2
5.5
4.5
4.5
7.0
4.8
–12.8
2.0
2.6
2.0
7.2
5.1
5.5
5.6
1.0

2016f
3.9
4.6
4.2
6.2
5.0
3.4
4.6
4.7
3.7
8.5
7.7
2.0
10.5
5.2
5.1
5.9
2.3
3.9
6.6
4.5
4.8
5.6
5.1
5.7
3.7
7.3
5.3
5.5
5.0
7.0
5.0
8.4
2.1
3.5
1.8
7.1
4.9
5.7
6.2
2.5

2017f
5.1
4.7
4.2
6.5
5.2
3.5
5.0
5.6
3.8
9.0
7.5
2.2
8.5
5.5
6.1
7.8
2.5
4.0
6.5
4.5
5.0
5.9
5.2
5.6
3.7
7.3
5.1
7.7
5.5
7.5
5.2
8.9
2.4
3.9
1.6
7.1
4.7
5.8
6.9
3.5

00–10a

2011

2012

2013

2014e

2015f

2016f

2017f

14.7

5.0

3.2

–4.8

–3.1

–15.4

3.6

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. The recently high-income countries are based on World Bank’s reclassification from 2004 to 2014.

G L O B A L E C O N O M I C PR O S PE C T S | J U N E 2 0 1 5

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statistical
appendix
Additional statistical data can be found online atwww.worldbank.org/gep

176

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G LOBAL E C O N O M I C P R O S P E C T S | J U N E 2 0 1 5

Table A.1 GDP growth
Quarterly growthb
Annual estimates and forecastsa

Constant 2010 US Dollars
World
High-Income Countries
Euro Area
OECD Countries (All)Non-OECD Countries (High-income only)
Developing Countries
East Asia and the PacificCambodia
China
Fiji
Indonesia
Lao PDR
Malaysia
Mongolia
Myanmar
Papua New Guinea
Philippines
Solomon Islands
Thailand
Timor-Leste
Vietnam
Europe and Central Asia
Albania
Armenia
Azerbaijan
BelarusBosnia and Herzegovina
Bulgaria
Georgia
Hungary
Kazakhstan
KosovoKyrgyz Republic
Macedonia, FYR
Moldova
Montenegro
Romania
SerbiaTajikistan
TurkeyTurkmenistan
UkraineUzbekistan
Latin America and the Caribbean
Argentinae
BelizeBolivia
BrazilColombia
Costa Rica
Dominica
Dominican Republic
EcuadorEl Salvador
Guatemala
GuyanaHaiti
Honduras
Jamaicad
MexicoNicaraguae
PanamaParaguay
Perue
St. Lucia
St. Vincent and the Grenadines
Venezuela, RB

00-10c
2.8
1.8
1.1
1.6
4.7
6.1
9.0
8.0
10.5
1.6
5.3
7.1
4.4
6.5
10.3
3.5
4.8
2.9
4.5
4.3
6.8
4.6
5.2
7.9
14.9
7.4
4.0
4.0
6.2
2.1
8.3
6.1
4.1
1.6
5.1
3.6
4.1
3.6
8.3
3.9
13.6
4.3
6.9
3.3
3.8
4.0
3.8
3.6
4.1
4.4
2.6
4.9
4.1
1.9
3.3
2.4
0.1
4.1
0.5
1.8
2.8
6.3
3.4
5.6
1.8
3.5
3.1

2011
3.1
1.9
1.7
1.8
5.2
6.1
8.3
7.1
9.3
2.7
6.2
8.0
5.3
17.5
5.9
10.7
3.7
10.7
0.8
14.7
6.2
6.1
2.5
4.7
0.1
5.5
1.0
2.0
7.2
1.8
7.5
4.4
6.0
2.3
6.8
3.2
1.1
1.4
7.4
8.8
14.7
5.5
8.3
4.7
8.4
2.1
5.2
3.9
6.6
4.5
0.2
2.9
7.8
2.2
4.2
5.4
5.5
3.8
1.7
4.0
5.7
10.9
4.3
6.5
1.2
-0.5
4.2

2012
2.4
1.4
-0.7
1.3
3.8
4.9
7.4
7.3
7.7
1.7
6.0
8.0
5.5
12.4
7.3
8.1
6.8
4.9
7.3
7.8
5.2
1.9
1.6
7.2
2.2
1.7
-1.1
0.5
6.2
-1.5
5.0
2.8
-0.1
-0.5
-0.7
-2.5
0.6
-1.0
7.5
2.1
11.1
0.2
8.2
2.9
0.8
3.8
5.2
1.8
4.0
5.2
-1.4
2.6
5.2
1.9
3.0
4.8
2.9
4.1
-0.6
4.0
5.0
10.8
-1.2
6.0
-1.6
1.2
5.6

2013
2.5
1.4
-0.4
1.3
2.6
5.1
7.1
7.4
7.7
4.6
5.6
8.5
4.7
11.6
8.3
5.5
7.2
3.0
2.8
5.4
5.5
3.7
1.4
3.5
5.8
1.0
2.5
1.1
3.3
1.5
6.0
3.4
10.9
2.7
9.4
3.3
3.5
2.6
7.4
4.2
10.2
0.0
8.0
2.7
2.9
1.5
6.8
2.7
4.9
3.4
-0.9
4.8
4.6
1.7
3.7
5.2
4.2
2.8
0.6
1.4
4.6
8.4
14.2
5.8
-0.4
1.7
1.3

2014e
2.6
1.8
0.9
1.7
2.2
4.6
6.9
7.0
7.4
3.8
5.0
7.5
6.0
7.8
8.5
7.5
6.1
0.1
0.9
6.6
6.0
2.4
1.9
3.4
2.8
1.6
0.4
1.7
4.8
3.6
4.3
2.5
3.6
3.5
4.6
1.5
2.9
-1.8
6.7
2.9
10.3
-6.8
8.1
0.9
0.5
3.6
5.3
0.1
4.6
3.5
1.5
7.3
3.8
2.0
4.2
3.6
2.7
3.1
0.4
2.1
4.7
6.2
4.4
2.4
-1.0
1.5
-4.0

2015f
2.8
2.0
1.5
2.3
0.9
4.4
6.7
6.9
7.1
2.5
4.7
6.4
4.7
4.4
8.5
16.0
6.5
3.5
3.5
6.8
6.0
1.8
3.0
0.8
1.5
-3.5
2.0
1.1
2.0
2.4
1.7
3.0
1.7
3.5
-2.0
3.4
3.0
-0.5
3.2
3.0
8.0
-7.5
7.6
0.4
1.1
2.5
4.8
-1.3
3.5
3.4
1.3
5.2
1.9
2.2
4.0
3.7
1.7
2.9
1.5
2.6
4.2
6.2
4.2
3.9
-0.6
2.6
-5.1

2013
2016f
3.3
2.4
1.8
2.5
2.4
5.2
6.7
6.9
7.0
2.4
5.5
7.0
5.0
4.2
8.2
5.0
6.5
3.5
4.0
6.9
6.2
3.4
3.5
2.7
2.6
-1.0
2.3
2.0
3.0
2.5
2.9
3.5
3.2
3.8
1.5
2.9
3.2
1.5
4.4
3.9
9.0
2.0
7.8
2.0
1.8
2.6
4.2
1.1
3.9
4.2
1.5
4.8
3.0
2.5
3.9
3.8
3.2
3.3
2.2
3.2
4.3
6.4
4.1
5.0
0.8
2.9
-1.0

2017f
3.2
2.2
1.6
2.2
3.2
5.4
6.6
6.8
6.9
2.6
5.5
7.0
5.1
3.9
8.0
2.4
6.3
3.5
4.0
7.0
6.5
3.6
3.5
3.0
2.7
1.0
2.9
2.7
5.0
2.7
4.1
3.7
4.0
4.0
4.0
2.9
3.5
2.0
5.2
3.7
9.0
3.0
8.0
2.8
3.0
2.7
4.1
2.0
4.2
4.4
1.6
3.4
4.2
2.6
3.9
4.0
3.1
3.5
2.5
3.5
4.2
6.5
4.1
5.0
1.4
3.4
1.1

Q3
3.6
2.7
0.7
2.7
2.7
5.9
9.0
..
9.9
..
5.1
..
6.8
10.2
..
..
4.3
..
3.8
..
..
2.3
-9.6
..
..
1.7
..
2.7
3.4
4.5
10.1
..
..
..
..
..
4.1
..
..
1.6
..
-7.4
..
2.3
2.6
..
6.5
0.4
4.0
6.0
..
..
6.4
..
1.2
..
..
..
..
4.6
..
..
3.2
5.1
..
..
..

2014
Q4
2.7
2.0
1.0
1.9
3.4
4.4
6.5
..
6.9
..
5.5
..
6.9
7.0
..
..
5.3
..
0.8
..
..
4.2
10.8
..
..
-4.8
..
2.6
16.8
4.1
5.2
..
..
..
..
..
4.4
..
..
3.0
..
17.2
..
1.1
-1.0
..
9.0
0.3
5.5
0.8
..
..
2.7
..
2.2
..
..
..
..
1.2
..
..
0.1
6.3
..
..
..

Q1
1.9
0.8
0.9
0.9
1.1
4.6
6.0
..
6.6
..
4.4
..
5.5
-6.9
..
..
7.0
..
-3.0
..
..
3.2
1.6
..
..
13.9
..
0.5
2.9
3.2
..
..
..
..
..
..
1.3
..
..
6.4
..
-13.6
..
1.9
-2.6
..
1.6
2.6
5.2
0.8
..
..
-0.2
..
4.0
..
..
..
..
2.0
..
..
13.0
-1.3
..
..
..

2015
Q2
2.1
1.4
0.4
1.4
1.1
3.9
6.2
..
6.4
..
5.0
..
6.7
4.9
..
..
10.2
..
1.7
..
..
-2.3
0.2
..
..
-3.5
..
1.2
-3.0
4.1
..
..
..
..
..
..
-2.5
..
..
-1.8
..
-11.6
..
-1.2
2.2
..
2.1
-5.4
2.4
7.4
..
..
6.5
..
10.5
..
..
..
..
3.7
..
..
-2.8
-2.3
..
..
..

Q3
3.5
2.3
0.7
2.3
2.0
6.7
8.7
..
9.8
..
4.9
..
3.3
..
..
..
0.0
..
4.8
..
..
1.7
3.3
..
..
3.9
..
1.8
4.8
2.4
..
..
..
..
..
..
8.8
..
..
2.2
..
-11.0
..
1.6
0.5
..
11.6
0.6
3.6
4.5
..
..
5.9
..
2.5
..
..
..
..
2.1
..
..
6.9
4.7
..
..
..

Q4
2.5
1.8
1.3
1.9
1.1
4.0
6.6
..
6.7
..
5.7
..
7.3
..
..
..
9.5
..
4.6
..
..
0.2
4.5
..
..
-6.0
..
1.6
2.2
3.6
..
..
..
..
..
..
3.0
..
..
2.8
..
-22.3
..
1.7
0.1
..
..
1.3
2.9
-0.5
..
..
1.9
..
0.9
..
..
..
..
2.7
..
..
7.3
2.8
..
..
..

Q1
1.8
1.3
1.7
1.3
..
..
4.8
..
5.3
..
3.3
..
4.7
..
..
..
1.4
..
1.4
..
..
..
..
..
..
-3.5
..
..
..
2.4
..
..
..
..
..
..
..
..
..
..
..
-24.5
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
1.6
..
..
..
2.2
..
..
..

G L O B AL EC O N O M IC P R O SPECTS | J U NE 2 0 1 5

s tat i s t i c a l a p p e n d i x

177

Table A.1 GDP growth (continued)
Quarterly growthb

Annual estimates and forecastsa

Constant 2010 US Dollars
Middle East and North Africa
Algeria
Djibouti
Egypt, Arab Rep.d
Iran, Islamic Rep.
Iraq
JordanLebanon
Libya
MoroccoTunisia
Yemen, Rep.
West Bank and GazaSouth Asia
Afghanistan
Bangladeshd
IndiadMaldives
Nepald f
Pakistand g
Sri Lanka
Sub-Saharan Africa
AngolaBenin
Botswana
Burkina Faso
BurundiCameroon
Cabo Verde
Chad
Comoros
Congo, Dem. Rep.
Côte d'Ivoire
Eritrea
Ethiopia
Gabon
Gambia, The
Ghana
GuineaGuinea-Bissau
Kenya
LesothoMadagascar
MalawiMali
Mauritania
Mauritius
Mozambique
Namibia
Niger
Nigeria
RwandaSenegalSierra Leone
South Africa
Sudan
Swaziland
Tanzania
Togo
UgandaZambiaZimbabwe00-10c
4.5
3.9
3.9
4.9
5.0
-0.4
6.3
5.9
4.3
4.9
4.7
4.3
3.3
6.7
12.8
6.1
7.4
7.0
3.9
4.2
5.2
5.7
11.3
3.9
4.2
6.0
3.3
3.3
5.7
10.7
2.9
4.7
1.1
0.9
8.6
2.0
4.6
5.8
2.6
2.5
4.4
4.0
2.6
4.5
5.7
3.9
3.8
7.7
4.7
4.6
8.8
7.9
4.1
8.9
3.5
5.8
2.3
7.0
2.0
7.8
7.4
-4.7

2011
-0.1
2.8
4.5
1.8
3.9
10.2
2.6
2.0
-62.1
5.0
-0.5
-12.7
12.2
7.0
6.1
6.5
6.6
6.5
3.4
2.7
8.2
4.3
3.9
3.3
5.2
4.2
4.2
4.1
4.0
0.1
2.6
6.9
-4.4
8.7
11.2
7.1
-4.3
14.0
3.9
9.0
6.1
2.8
1.5
4.3
2.7
4.0
3.9
7.4
5.1
2.3
4.9
7.9
2.1
6.0
3.6
-3.3
-0.7
6.4
4.9
4.7
6.4
11.9

2012
1.3
3.3
4.8
2.2
-6.6
10.3
2.7
2.2
104.5
2.7
3.7
2.4
5.9
5.4
14.4
6.0
5.1
1.3
4.9
3.5
6.3
4.1
8.4
5.4
5.0
9.5
4.0
4.6
1.2
8.9
3.0
7.1
10.7
7.0
8.6
5.6
5.9
9.3
3.9
-2.2
4.5
6.5
3.0
1.9
0.0
7.0
3.3
7.1
5.2
11.0
4.3
8.8
3.5
15.2
2.5
-10.1
1.9
6.9
5.9
3.6
6.8
10.6

2013
0.5
2.8
5.0
2.1
-1.9
4.2
2.8
0.9
-13.7
4.4
2.3
4.8
2.2
6.3
3.7
6.1
6.9
4.7
3.8
4.4
7.3
4.2
6.8
5.6
5.4
6.5
4.6
5.6
0.5
4.0
3.5
8.5
8.7
1.3
10.5
5.9
4.8
7.3
2.3
0.3
5.7
5.5
2.4
5.0
1.7
6.7
3.3
7.4
5.1
4.1
5.4
4.7
2.8
20.1
1.9
-6.1
2.8
7.0
5.1
4.8
6.7
4.5

2014e
2.2
4.1
6.0
2.2
3.7
-0.5
3.1
2.0
-24.0
2.6
2.3
0.3
-0.8
6.9
2.0
5.6
7.3
5.0
5.5
5.4
7.4
4.6
4.4
5.5
4.7
4.5
4.7
5.0
1.3
7.3
3.2
9.0
8.0
2.0
10.3
5.0
-0.2
4.2
0.4
2.5
5.3
2.0
3.0
5.7
6.8
6.4
3.2
7.4
5.3
6.2
6.2
7.0
4.5
6.0
1.5
3.0
1.7
7.2
5.5
5.2
5.6
3.2

2015f
2.2
2.6
6.5
4.2
1.0
-1.0
3.5
2.5
0.5
4.6
2.6
-2.8
0.9
7.1
2.5
6.3
7.5
5.3
4.2
6.0
6.9
4.2
4.5
4.6
4.3
5.0
4.8
4.0
3.0
9.0
3.4
8.0
8.0
1.5
9.5
4.0
3.0
3.5
-0.3
4.2
6.0
4.0
4.6
5.1
5.6
5.5
3.5
7.2
5.5
4.5
4.5
7.0
4.8
-12.8
2.0
2.6
2.0
7.2
5.1
5.5
5.6
1.0

2013
2016f
3.7
3.9
7.0
4.5
2.0
5.5
3.9
2.5
15.0
4.8
3.4
2.8
4.3
7.3
5.0
6.7
7.9
5.0
4.5
3.7
6.6
4.6
3.9
4.6
4.2
6.2
5.0
4.6
3.4
4.7
3.7
8.5
7.7
2.0
10.5
5.2
5.1
5.9
2.3
3.9
6.6
4.5
4.8
5.6
5.1
5.7
3.7
7.3
5.3
5.5
5.0
7.0
5.0
8.4
2.1
3.5
1.8
7.1
4.9
5.7
6.2
2.5

2017f
3.8
4.0
7.1
4.8
2.0
5.9
4.0
2.5
10.9
5.0
4.5
3.4
4.1
7.5
5.1
6.7
8.0
5.0
5.5
4.5
6.5
5.0
5.1
4.7
4.2
6.5
5.2
5.0
3.5
5.6
3.8
9.0
7.5
2.2
8.5
5.5
6.1
7.8
2.5
4.0
6.5
4.5
5.0
5.9
5.2
5.6
3.7
7.3
5.1
7.7
5.5
7.5
5.2
8.9
2.4
3.9
1.6
7.1
4.7
5.8
6.9
3.5

Q3
1.3
..
..
-0.9
2.2
..
1.9
..
..
2.3
1.3
..
..
6.8
..
..
6.8
..
..
..
8.4
3.6
..
..
3.6
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
5.9
..
..
..
1.2
..
..
..
..
..
..
..

2014
Q4
3.7
..
..
5.4
2.2
..
2.7
..
..
5.5
4.5
..
..
2.5
..
..
2.2
..
..
..
10.3
5.8
..
..
1.7
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
6.6
..
..
..
5.1
..
..
..
..
..
..
..

Q1
5.1
..
..
4.5
10.6
..
4.1
..
..
-10.2
0.1
..
..
6.4
..
..
6.5
..
..
..
4.8
1.8
..
..
1.8
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
4.8
..
..
..
-1.6
..
..
..
..
..
..
..

2015
Q2
4.1
..
..
6.5
0.4
..
2.4
..
..
13.5
5.3
..
..
9.8
..
..
9.9
..
..
..
7.9
4.6
..
..
6.4
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
8.4
..
..
..
0.5
..
..
..
..
..
..
..

Q3
6.4
..
..
10.2
6.2
..
3.2
..
..
2.1
1.1
..
..
13.8
..
..
14.0
..
..
..
7.8
4.2
..
..
12.7
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
5.7
..
..
..
2.1
..
..
..
..
..
..
..

Q4
1.1
..
..
-3.1
2.7
..
3.6
..
..
3.1
4.1
..
..
0.8
..
..
0.7
..
..
..
4.8
5.3
..
..
0.4
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
6.4
..
..
..
4.1
..
..
..
..
..
..
..

Q1
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
-1.8
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
-4.5
..
..
..
1.3
..
..
..
..
..
..
..

Source: World Bank, WDI, Haver Analytics, WEO										Note: Aggregates include countries with full national accounts and balance of payment data only			
a. Annual percentage change											b. Quarter-over-quarter growth, seasonally adjusted and annualized										c. Compound average of the period 2000-10											d. Annual GDP is on fiscal year basis, as per reporting practice in the country									e. Preliminary for long-term average. Data was recently rebased; missing data up to 2003 was spliced with the earlier series.					f. Nepal forecasts are preliminary.											g. GDP data for Pakistan are based on market prices.

ECO-AUDIT
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A World Bank Group
Flagship Report

June 2015

G

lobal growth is expected to be 2.8 percent in 2015,

but is expected to pick up to 3.2 percent in 2016–17.
Growth in developing countries and some high-income
countries is set to disappoint again this year. The

Global Economic Prospects The Global Economy in Transition

prospect of rising borrowing costs will compound thechallenges many developing countries are facing as they
adapt to an era of low commodity prices. Risks to thisoutlook remain tilted to the downside.
This edition of Global Economic Prospects includes twoSpecial Features that analyze the policy challenges raisedby the two transitions in developing countries: the risks
associated with the first U.S. central bank interest rateincrease since 2006 and the implications of persistently
low commodity prices for low-income countries.
Global Economic Prospects is a World Bank Group Flagship
Report that examines global economic developments
and prospects, with a special focus on developing
countries, on a semiannual basis (in January and June).
The January edition includes in-depth analyses of topicalpolicy challenges faced by developing countries while theJune edition contains shorter analytical pieces.

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Advance Edition
JUNE 2015

GlobalEconomic
Prospects
The Global Economy
in Transition