Global
Economic
Prospects

Volume 6 | January 2013

Assuring
growth overthe medium term

The World Bank

Global Economic Prospects
Assuring growth over the medium term

January 20133

© 2013 International Bank for Reconstruction and Development / The World Bank
1818 H Street NW, Washington DC 20433
Telephone: 202-473-1000; Internet: www.worldbank.org
Some rights reserved
1 2 3 4 16 15 14 13This work is a product of the staff of The World Bank with external contributions. Note that The World Bank does
not necessarily own each component of the content included in the work. The World Bank therefore does not warrant that the use of the content contained in the work will not infringe on the rights of third parties. The risk ofclaims resulting from such infringement rests solely with you.
The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The
World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information
shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal
status of any territory or the endorsement or acceptance of such boundaries.
Nothing herein shall constitute or be considered to be a limitation upon or waiver of the privileges and immunitiesof The World Bank, all of which are specifically reserved.
Rights and Permissions

This work is available under the Creative Commons Attribution 3.0 Unported license (CC BY 3.0) http://
creativecommons.org/licenses/by/3.0. Under the Creative Commons Attribution license, you are free to copy, distribute, transmit, and adapt this work, including for commercial purposes, under the following conditions:
Attribution—Please cite the work as follows: The World Bank. 2013. Global Economic Prospects, Volume 6,
January 2013. Washington, DC: World Bank.
Doi: 10.1596/ 978-0-8213-9882-1 License: Creative Commons Attribution CC BY 3.0
Translations—If you create a translation of this work, please add the following disclaimer along with the attribution: This translation was not created by The World Bank and should not be considered an official World Banktranslation. The World Bank shall not be liable for any content or error in this translation.
All queries on rights and licenses should be addressed to the Office of the Publisher, The World Bank, 1818 H
Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org .
ISBN (electronic): 978-0-8213-9882-1
DOI: 10.1596/ 978-0-8213-9882-1
Cover photo: Jonathan Guy; Cover design: Roula I. Yazigi

The cutoff date for the data used in the report was January 9, 2013. Dollars are current U.S. dollars
unless otherwise indicated.

4

Acknowledgments
This report is a product of the Prospects Group in the Development Economics Vice Presidency of the World
Bank. Its principal authors were Andrew Burns and Theo Janse van Rensburg.
The project was managed by Andrew Burns, under the direction of Hans Timmer and the guidance of Kaushik
Basu. Several people contributed substantively to the report. The modeling and data team was led by Theo Jansevan Rensburg, assisted by Trung Thanh Bui, Muhammad Adil Islam, Irina Magyer, and Sabah Zeehan Mirza. The
projections, regional write-ups and subject annexes were produced by Dilek Aykut (Finance, Europe & CentralAsia), John Baffes (Commodities), Damir Cosic (Commodities & Latin America & Caribbean), Allen Dennis (Sub
-Saharan Africa and International Trade), Sanket Mohapatra (South Asia, Middle East & North Africa, Industrial
Production and Exchange Rates), Eung Ju Kim (Finance), Cristina Savescu (Latin America & Caribbean, Industrial Production), Theo Janse van Rensburg (Latin America & Caribbean and High-Income Countries) andEkaterine Vashakmadze (East Asia & the Pacific and Inflation). Regional projections and annexes were producedin coordination with country teams, country directors, and the offices of the regional chief economists and PREM
directors. The short-term commodity price forecasts were produced by John Baffes, Damir Ćosić, and Betty Dow.
The remittances forecasts were produced by Gemechu Ayana Aga and Dilip K. Ratha. Simulations were performedby Irina Magyer and Theo Janse van Rensburg.
The accompanying online publication, Prospects for the Global Economy, was produced by a team comprised ofSarah Crow, Betty Dow, Muhammad Adil Islam, Vamsee Krishna Kanchi, Sabah Mirza, Katherine Rollins, andDana Vorisek, with technical support from David Horowitz, Ugendran Machakkalai, and Malarvishi Veerappan.
Cynthia Case-McMahon, Indira Chand, and Merrell Tuck-Primdahl managed media relations and the dissemination. Hazel Macadangdang managed the publication process.
Several reviewers offered extensive advice and comments. These included Abdul de Guia Abiad, Ahmad Ahsan,
Jorge Araujo, Merli Baroudi, Deepak Bhattasali, Andrew Beath, Zeljko Bogetic, Oscar Calvo-Gonzalez, Kevin
Carey, Mei Leng Chang, Shubham Chaudhuri, Punam Chuhan-Pole, Tito Cordella, Jose Cuesta, Uri Dadush, Augusto de la Torre, Shantayanan Devarajan, Tatiana Didier, Hinh Truong Dinh, Sebastian Eckardt, Olga Emelyanov,
Pablo Fajnzylber, Manuela V. Ferro, Caroline Freund, Bernard G. Funck, Ejaz Ghani, David Michael Gould,
Guenter Heidenhof, Bert Hofman, Zahid Hussain, Elena Ianchovichina, Satu Kristina Kahkonen, Markus Kitzmuller, Auguste Tano Kouame, David Kuijper, Roumeen Islam, Jeffrey D. Lewis, Connie Luff, Ernesto May, Denis
Medvedev, Juan Carlos Mendoza, Claudia Nassif, Antonio M. Ollero, Kwang Park, Samuel Pienknagura, Miria
Pigato, Mohammad Zia Qureshi, Susan R. Razzaz, Christine M. Richaud, Kaspar Richter, Elliot Riordan, David
Rosenblatt, Sudhir Shetty, Carlos Silva-Jauregui, Yvonne M. Tsikata, Cevdet Unal, Mark Roland Thomas, Axel
van Tortsenberg, Sergei Ulatov, Aristomene Varoudakis, Gallina Vincelette, Ekaterina Vostroknutova, Herman
Jorge Winkler, Soonhwa Yi, Juan F. Zalduendo, and Albert Zeufack.

5

6

Table of Contents
Main Text ........................................................................................................................................1
Topical Annexes ...............................................................................................................................
Financial markets .......................................................................................................................33
Industrial production. .................................................................................................................43
Inflation. .....................................................................................................................................49
Global trade ................................................................................................................................59
Exchange rates ............................................................................................................................65
Prospects for commodity markets ..............................................................................................75
Regional Annexes
East Asia & the Pacific...............................................................................................................91
Europe & Central Asia .............................................................................................................103
Latin America & the Caribbean ...............................................................................................115
Middle East & North Africa .....................................................................................................125
South Asia ................................................................................................................................139
Sub-Saharan Africa ..................................................................................................................155

Global Economic Prospects January 2013:
Assuring growth over the medium term
Overview & main messages
Four years after the onset of the global financial
crisis, the world economy continues to struggle.
Developing economies are still the main driverof global growth, but their output has slowed
compared with the pre-crisis period. To regain
pre-crisis growth rates, developing countries
must once again emphasize internal productivity-enhancing policies. While headwinds fromrestructuring and fiscal consolidation will persist
in high-income countries, they should becomeless intense allowing for a slow acceleration in
growth over the next several years.
Financial market conditions have improved
dramatically since June
The cumulative effect of national- and EU-widemeasures to improve fiscal sustainability, andthe augmentation of measures that the European
Central Bank (ECB) would be willing to take in
defense of the Euro have resulted in a significant
improvement in global financial markets. Unlike
past episodes of reduced tensions, when market
conditions improved only partially, many market
risk indicators have fallen back to levels last
seen in early 2010 – before concerns about EuroArea fiscal sustainability took the fore.
The decline in financial market tensions has also
been felt in the developing world.
 International capital flows to developing
countries, which fell by between 30 and 40
percent in May-June, have reached new highs.
 Developing country bond spreads (EMBIG)
have declined by 127 basis points (bps) sinceJune, and are now 282 bps below their longterm average levels.
 Developing country stock markets haveincreased by 12.6 percent since June (10.7
percent for high-income markets)

but the real-side recovery is weak and businesssector confidence low
While signals from financial markets areencouraging, those emanating from the real-sideof the global economy are more mixed. Growthin developing countries accelerated in the third
quarter of 2012, including in major middleincome countries such as Brazil and China,
where mid-year weakness contributed to theglobal slowdown. Early indications for the
fourth quarter point to a continued accelerationin East Asia & the Pacific, Europe & Central
Asia and South Asia; but slowing in Latin
America & the Caribbean.
Among high-income countries, investment andindustrial activity in the United States show
unusual weakness – seemingly due touncertainty over the stance of fiscal policy in the
run up to November‘s elections and the end-of2012 fiscal cliff. In Japan, the economy appears
to be contracting – in part because of politicaltension with China over the sovereignty ofislands in the region and the expiration of
automobile purchase incentives. Activity inEurope ceased to contract at alarming rates in
Q3, but the economy appears to have weakened
again in Q4 — perhaps reflecting weak demandfor capital goods from the United States andJapan.
Prospects are for a modest acceleration of
growth between 2013 and 2015
Overall, the global economic environment
remains fragile and prone to further
disappointment, although the balance of risks is
now less skewed to the downside than it has
been in recent years. Global growth is expected
to come in at a relatively weak 2.3 and 2.4
percent in 2012 and 2013 respectively andgradually strengthen to 3.1 and 3.3 percent in2014 and 2015 (table 1).

Table 1. The global outlook in summary(percent change from previous year, except interest rates and oil price)
2011
Global conditions
W orld trade volume (GNFS)
Consumer prices
G-7 Countries 1,2
United States
Commodity prices (USD terms)
Non-oil commodities
Oil price (US$ per barrel) 3
Oil price (percent change)
Manufactures unit export value 4Interest rates$, 6-month (percent)2012 2013e

2014f

2015f

6.2

3.5

6.0

6.7

7.0

5.3
2.4

-0.6
2.1

-0.1
2.4

0.9
2.5

1.0
2.5

20.7
104.0
31.6
8.9

-9.5
105.0
1.0
-1.9

-2.0
102.0
-2.9
1.9

-3.2
102.2
0.2
2.2

-2.8
102.1
-0.1
1.9

1.1
1.2

1.4
1.5

4.2
4.2
4.1
5.2
4.7
1.6
3.5
4.7

4.2
4.1
4.2
4.8
4.3
1.9
3.4
4.9

3.1
3.9
2.0
2.0
0.9
1.2
2.8
3.8
5.7
7.6
8.0
6.6
4.5
4.0
3.9
4.5
2.2
3.9
4.1
3.6
4.1
3.9
3.8
1.6
3.8
6.4
6.8
4.0
6.2
5.1
3.2
6.4
7.5

3.3
4.1
2.3
2.3
1.4
1.5
3.0
3.8
5.8
7.5
7.9
6.6
4.5
4.3
3.8
5.0
3.0
3.9
4.0
3.6
4.0
4.3
4.7
2.8
4.3
6.7
7.0
4.2
6.5
5.2
3.3
6.3
7.8

0.8
0.5
0.7
1.6
0.2
0.5
€, 6-month (percent)International capital flows to developing countries (% of GDP)
Developing countries
Net private and official inflows
4.9
4.1
4.2
Net private inflows (equity + debt)
4.7
4.1
4.2
East Asia and Pacific
4.9
3.5
3.8
Europe and Central Asia
5.7
4.8
5.3
Latin America and Caribbean
5.5
5.7
5.2
Middle East and N. Africa
1.3
1.1
1.4
South Asia
3.5
3.3
3.4
Sub-Saharan Africa
5.3
5.0
4.7
Real GDP growth 5
World
Memo item: W orld (2005 PPP weights)
High incomeOECD countries
Euro Area
Japan
United States
Non-OECD countries
Developing countries
East Asia and Pacific
China
Indonesia
ThailandEurope and Central Asia
RussiaTurkeyRomania
Latin America and Caribbean
BrazilMexicoArgentina
Middle East and N. Africa 6
Egypt 7
IranAlgeriaSouth Asia

2.7
3.8
1.6
1.5
1.5
-0.7
1.8
5.0
5.9
8.3
9.3
6.5
0.1
5.5
4.3
8.5
2.5
4.3
2.7
3.9
8.9
-2.4
1.8
1.7
2.5
7.4
6.9
3.0
6.7
4.5
3.1
6.7
3.4

2.3
3.0
1.3
1.2
-0.4
1.9
2.2
2.9
5.1
7.5
7.9
6.1
4.7
3.0
3.5
2.9
0.6
3.0
0.9
4.0
2.0
3.8
2.2
-1.0
3.0
5.4
5.1
3.7
6.3
4.6
2.4
6.5
8.1

2.4
3.4
1.3
1.1
-0.1
0.8
1.9
3.5
5.5
7.9
8.4
6.3
5.0
3.6
3.6
4.0
1.6
3.5
3.4
3.3
3.4
3.4
2.6
0.6
3.4
5.7
6.1
3.8
5.8
4.9
2.7
6.6
7.2

India 7, 8
Pakistan 7
Bangladesh 7
Sub-Saharan Africa
South Africa
Nigeria
AngolaMemorandum items
Developing countries
excluding transition countries
6.5
5.2
5.8
6.0
6.0
excluding China and India
4.5
3.3
4.0
4.3
4.4
Source: W orld Bank.
Notes: PPP = purchasing power parity; e = estimate; f = forecast.
1. Canada, France, Germany, Italy, Japan, the United Kingdom, and the UnitedStates.
2. In local currency, aggregated using 2005 GDP weights.
3. Simple average of Dubai, Brent, and W est Texas Intermediate.
4. Unit value index of manufactured exports from major economies, expressed in
USD.
5. Aggregate growth rates calculated using constant 2005 dollars GDP weights.
6. Comparison with the summer 2012 GEP is not included as country coverage
7. 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 onthese countries are calculated using data compiled on a calendar year basis.
8. Real GDP at market prices. GDP growth rates calculated using real GDP atfactor cost, which are customarily reported in India, can vary significantly fromthese growth rates and have historically tended to be higher than market priceGDP growth rates. Growth rates stated on this basis, starting with FY2011-12
are 6.5, 5.4, 6.4, 7.1, and 7.3 percent – see table SAR.2 in the South Asia
regional annex.

2Global Economic Prospects January 2013

Main Text

At an estimated 5.1 percent, GDP growth indeveloping countries during 2012 was among theslowest in 10 years. Improved financial
conditions, a relaxation of monetary policy, andsomewhat stronger high-income country growthis projected to gradually raise developingcountry growth to 5.5 percent in 2013, and to 5.7
and 5.8 percent in 2014 and 2015 — roughly inline with these countries‘ underlying potential.
For high-income countries, fiscal consolidation,high unemployment and very weak consumer
and business confidence will continue to weighon activity in 2013, when GDP is projected once
again to expand a mediocre 1.3 percent. Growth
should, however, begin firming during thecourse of 2013, expanding by 2.0 and 2.3
percent in 2014 and 2015.

would be especially harsh if commodity
prices fell sharply.
 An interruption to global oil supply and a

resurgence in the price of internationallytraded food commodities remain risks,
especially given low maize stocks. Should
local food prices rise markedly, nutrition andhealth outcomes for the very poor could behit.

 On the upside, a rapid resolution to policy

uncertainty in the United States, a decrease intensions in Asia, or an improvement inEuropean confidence could speed the returnof high-income countries to stronger growth— with positive effects for developingcountry exports and GDP.

This modest growth outlook is subject to risks.

Addressing high unemployment and slack
capacity remain priorities for countries indeveloping EuropeFN1 and the Middle-East &North Africa. However, the majority ofdeveloping countries are operating at or close to
full capacity. For them, additional demand
stimulus could be counter-productive – raisingindebtedness and inflation without significant
payoff in terms of additional growth.

 Although the likelihood of a serious crisis ofconfidence in the Euro Area that would leadto a bloc-wide freezing up of financial
markets has declined significantly, continued
progress is needed to improve country-level
finances, and enact plans to reinforce panEuropean schemes for a banking union andsovereign rescue funds. If policy fails tomaintain its reform momentum, some of themore vulnerable countries in the Euro Area
could find themselves frozen out of capital
markets, provoking a global slowdown that
could potentially subtract 1.1 percent or morefrom developing country GDP.

 In the United States, solid progress toward

In what is likely to remain a difficult external
environment characterized by slow andpotentially volatile high-income country growthover the next several years, strong growth indeveloping countries is not guaranteed. To keep
growing rapidly, developing countries will needto maintain the reform momentum that
underpinned the acceleration of growth during
the 1990s and 2000s. In the absence ofadditional efforts to raise productivity throughstructural reforms, investment in human capital,
and improved governance and investment
conditions, developing country growth may wellslow.

 While a progressive decline in China‘sMoreover, given the still uncertain global
environment, many developing countries would
be well advised to gradually restore depleted
fiscal and monetary buffers, so as to ensure that
their economies can respond as resiliently as
they did during the 2008/09 crisis should afurther significant external shock arise.

outlining a credible medium-term fiscal
consolidation plan that avoids periodic
episodes of brinksmanship surrounding thedebt ceiling is needed. Policy uncertainty has
already dampened growth. Should
policymakers fail to agree such measures, aloss of confidence in the currency and an
overall increase in market tensions could
reduce US and global growth by 2.3 and 1.4
percent respectively.
unusually high investment rate over the
medium– to long-term is not expected toperturb global growth, there would besignificant domestic and global consequences
if this position were to unwind abruptly.
Impacts for developing commodity exporters

3

Global Economic Prospects January 2013

Main Text

Figure 1. Substantial progress has been made in reducing fiscal deficits, but debt levels continue to riseFiscal Deficit (% of GDP)

Government Debt (% of GDP)

0

250

-2
200

-4
-6

2009

150

2012

2009

-8

2012

100

-10
-12

50

-14
-16

0

Euro Area

USA

Japan

Middle-income
countries

Low-income
countries

Euro Area

USA

Japan

Middle-income
countries

Low-income
countries

Source: World Bank.

Financial market nerves andconditions have improved markedly

Euro Area countries, which had been rising,seemingly inexorably, since early 2010 are now
below their January 2010 levels (figure 2).
Although CDS rates for high-spread Euro Area
economies remain between 59 and 229 basis
points higher than in January 2010, they havedeclined by between 343 and 1126 basis points
from their two-year maximums. Reflecting thesesame factors, yields on Euro Area sovereign debt
have fallen over a wide-range of maturities –
implying easier access to private-sector capitaland reduced borrowing costs and (assuming the
reductions are durable) improved sustainability.

Conditions in global financial markets haveeased significantly since July reflecting
substantial progress to improve fiscal
sustainability and mutual support mechanisms in
the European Union. Measures have been taken
at the national, pan-Europeaboxn, andinternational levels. These include: fiscal
austerity measures that have reduced deficits inEuro Area economies by an estimated 3.3
percent of GDP since 2009 (figure 1), theagreement to create and provision pan-European
institutions to bail out economies in difficulty,
agreement to create a pan-European bankingsupervision authority and the decision by the
ECB to do whatever is necessary to support
economies in difficulty. At the same time
substantial progress has been made to recapitalize banks in both the United States andEurope.FN2 Finally the decision by the central
banks of the United States, the Euro Area andJapan to engage in a further series of quantitativeeasing have all contributed to an improvement inmarket sentiment at the global level.

Figure 2. Price of risk is down sharply in the Euro
Area
2000

Basis points

1500

Portugal

1000

Ireland

Spain

500

The practical effect of these steps has been a fallin the price of risk worldwide. For example, thecost of insuring against sovereign default on
high-spread European countries has fallen bymore than 500 basis points from their earlier
highs. Credit default swap (CDS) rates for most0
Jan '10EU excluding Greece
Jul '10Jan '11Jul '11

Source: World Bank, Datastream.

4

Jan '12Jul '12Jan '13

Global Economic Prospects January 2013

Main Text

Figure 3. Developing-country CDS rates are below
their 2010 levels in most regions
500

Figure 4. Gross capital flows to developing countries
have rebounded

Basis points

80$ billions

Middle East & N. Africa
400

300

60

Europe & Central Asia

40

200
20

100

Latin America & Caribbean
East Asia & PacificEuro Area (excluding Greece)
0
Jan '10

Jul '10Jan '11Jul '11Jan '12Jul '120

Jan '13Jul '09

Jan '10

New Equity IssuanceJul '10Jan '11

Bond IssuanceJul '11Jan '12Jul '12

Syndicated Bank-Lending

Source: World Bank, Datastream, Dealogic.

Source: World Bank, Dealogic.

Improved sentiment has contributed to arecovery in high-income stock markets, which
are up some 10.7 percent since June and 12.7
percent for 2012. Although a deleveraging cycle
continues among Euro Area banks, there aresigns that it may be easing. In the Euro Area,bank-lending, which fell 0.7 percent between
October 2011 and June 2012 (a period during
which Euro Area banks were required to increase
capital adequacy ratios and mark-to-market theirholdings of Euro Area sovereign debt), has risen
0.24 percent since June, although corporate
lending has shown weakness in recent months.

countries having received 27 upgrades (versus
19 downgrades), which compares with a total of
20 downgrades among high-income countries.FN5
Stock markets in developing countries have also
recovered and are up 12.7 percent since June,and 13.9 percent for 2012 as a whole.
The global decline in the price of risk, coupledwith the additional monetary stimulus provided
by high-income (and many developing-country)
central banks (box 1) helped prompt a reboundin capital flows to developing countries since inthe second half of 2012 (figure 4). Gross capital
flows to developing countries, which fell by 15.5
percent in the second quarter of 2012 amid EuroArea tensions, have rebounded sharply reachingan estimated $170 billion in 2012Q4, the highest
level of inflows since the crisis began in August
2008.

Declines in the price of risk have contributed
to much looser financial conditions indeveloping countries
Perceived credit risk also declined amongdeveloping countries, with CDS rates falling by
about 112 basis points on average since the endof June (figure 3). High-spread developing
countries, such as Romania, Ukraine, andVenezuela, experienced the largest
improvements — although Argentina was anotable exception.FN3

Bond issuance recovered most forcefully, withstate-affiliated investment-grade resource firms(mainly in Latin America and the Europe andCentral Asia regions) the biggest beneficiaries of
the increase in flows. Relatively easy financial
conditions (partly reflecting a search for yield on
the part of investors in high-income countries)
induced a surge of new sovereign and corporate
borrowers entering bond markets for the firsttime. Angola and Zambia, for example, issued
international bonds for the first time ever inAugust and September, respectively. And
Bolivia issued its first overseas bond in 90 years

Bond yield spreads for developing country debt
are now 171 basis points lower than year-earlier
levels and are some 282 basis points lower thantheir average level during the 2000-2010
period.FN4 Indeed, developing country credit
quality continued to improve in 2012 with5

Global Economic Prospects January 2013

Main Text

Box 1. Recent monetary policy developments
Central banks around the world intensified their efforts to stimulate growth through policy rate cuts and liquidity
injections beginning in the second half of 2011 after an earlier period of monetary tightening. Brazil and Turkey
were among the first large developing economies to reduce their policy rates by 50 basis points each in August
2011.BFN1 The majority of other monetary authorities have implemented a series of policy rate cuts since then, including the European Central Bank (ECB) and the central banks of Australia, Brazil, China, Indonesia, Kazakhstan, South Africa and many others (box figure 1.1). By the third quarter of 2012, nominal policy rates worldwide
were actually lower than in 2009 during the worst of the financial crisis. Key policy rates settled at 7.25 percent inBrazil, at 6 percent in China, at 5.75 percent in Indonesia and at 5 percent in South Africa.
Policy rate cuts were complemented by liquidity injections by major economies, where already low level of interest rates prevented further policy-rate cuts. Currently, policy rates remain below one percent in Japan (since September 1995), in the US (since December 2008) and in the UK (since April 2009). Euro Area policy rates dropped
below one percent only more recently — in July 2012. Among the most recent monetary easing actions, a thirdround of quantitative easing (involving central bank purchases of mortgage backed securities) in the United States,
and the European Central Bank‘s commitment to conduct Outright Monetary Transactions if necessary were particularly notable.
Given the weak economic outlook, G3 and other high income countries‘ policy rates are expected to be left loose,and central banks are expected to continue with unconventional monetary policy throughout 2013-2014, and possibly till mid-2015.
Box figure 1.1 Policy rate cuts (peak-less trough), Jan. 2011– Sep. 2012
Key policy rates, selected years
Selected Countries, Policy Rate Cuts, 2011 - 2012

percent

Basis points
450

19

400

17

350

2005

15

2009

300
13

250
200

11

150

9

100

2012

7

50
5

Singapore

Philippines

MexicoPolandSouth Africa

Romania

Indonesia

TurkeyChina

BrazilIndia

3

RussiaChile

Euro Area

SwedenThailandSouth Africa

South Korea

India

NorwayChina

Czech Republic

Indonesia

Romania

Denmark

Hungary

Philippines

Australia

Paraguay

BrazilKazakhstan

Pakistan0

Source: World Bank, Bloomberg, Central Bank News, Central Bank Rates.
BFN1

In Turkey key policy rate used under the inflation-targeting framework is one week repo auction rate. In addition, interest rate corridor and required reserve ratios are also used as policy instruments.

in October. Meanwhile, the governments of
Kenya, Paraguay, Rwanda, Tanzania, andUganda and numerous companies based indeveloping countries are preparing to issue
international bonds for the first time.
Nevertheless, low-risk investment-grade deals
outnumbered riskier issues by a ratio of 3 to 1.

reflects the diminishing impact on new lendingof tighter Euro Area capital requirements thatbanks had to implement between October 2011
and June 2012. Lending to non-investment-grade
borrowers has held up relatively well, with flows
in 2012Q3 equal to inflows the year before, andthese borrower‘s share in long-maturity deals
rising.

International syndicated bank lending todeveloping-world borrowers has recovered aswell, coming in at a post-crisis high of $62bn in2012Q4 (figure 5). The recovery appears to havebegun in the second quarter of 2012 and likely

Western banks have been gradually increasing
their exposures in the developing world.
Although European banks are likely to continue
to rebuild their balance sheets going forward, the6Global Economic Prospects January 2013

Main Text

Figure 5. Bank lending and equity issuance show trend rise, while bond issuance has been more volatile
Quarterly gross capital flows to developing countries, $ billions
Gross Syndicated Bank Lending

Gross New Equity Issues

Gross Bond Issuance

25

25

25

20

20

20

15

15

15

10

10

10

5

5

5

0

2009

2010

2011

2012

0

2009

2010

2011

0

2012

2009

2010

2011

2012

Source: World Bank, Dealogic.

acute phase of deleveraging phase appears tohave ended. This should be of particular benefit
to countries such as Croatia, Bulgaria, Hungary,
Romania, Serbia and Ukraine whose growth has
been particularly affected by slow credit growth.
Overall bank-lending to investment-grade
borrowers may have been held back, as theseborrowers instead took advantage of easy accessand low rates in bond markets.

2012, with some $28 billion flowing into equity
funds during the final quarter of the year
bringing overall, net inflows for the year to an
estimated $50 billion (versus a $47.6 billion
outflow in 2011). Inflows to emerging-market
fixed-income (bond) funds were much lessvolatile. They totaled about $44 billion over thesame period, nearly twice the 2011 inflow andclose to the record high $61.8 billion received
during the same period in 2010 (figure 7).

Partly reflecting the uptick in global uncertainty
in May and June, foreign direct investment (FDI)
inflows to developing countries declined by 15
percent (y/y) during 2012Q2 – the largest drop
since 2009 (FDI data for most developing
countries are only available through Q2). FDI
inflows fell particularly sharply in India andSouth Africa and several Eastern European
countries such as Russia, Latvia and Serbia(mainly due to the economic weakness in EuroArea). In contrast, flows actually strengthened in
Latin American countries.

For the year as a whole, net international capital
flows to developing countries fell an estimated
19.7 percent in 2012, with inflows having
declined 9.5 percent and outflows rising 15.8
Figure 6. FDI inflows to selected developing countries fell in the second quarter
150$ billions

132

114

With the easing of financial market tensions in
the third quarter, FDI flows are likely to havepicked-up in some developing countries. Indeed,available Q3 data shows a rebound in FDI flows
to Russia, supported in part by new privatization
deals (figure 6). For the year as a whole, FDI
inflows to developing countries are estimated tohave fallen 6.6 percent.

96

78

60
Nov '08

Apr '09

Sep '09

Feb '10

Jul '10

Dec '10May '11

Oct '11Mar '12Source: World Bank, national central banks.
Note: Total FDI for Brazil, Bulgaria, Chile, China, India,
Indonesia, Kazakhstan, Latvia, Lithuania, Malaysia, Mexico, Peru, Romania, Russia, South Africa, Thailand, Turkey, Ukraine and Venezuela.

Portfolio investment flows into emerging market
mutual funds also picked up in the second half of7

Global Economic Prospects January 2013

Main Text

Table 2. Net international capital flows to developing countries$ billions
2008

2009

2010

2011

2012e

2013f

2014f

2015f

Current account balance

412.9

240.5

187.5

152.1

12.6

-8.0

-65.4

-80.4

Capital inflows

812.6

701.7

1,219.1

1,112.4

1,007.2

1,134.1

1,250.9

1,351.5

Private inflows, net
Equity Inflows, net
Net FDI inflows
Net portfolio equity inflows

782.2
583.3
636.9
-53.6

620.7
542.0
427.9
114.2

1,145.9
710.8
582.7
128.2

1,082.4
647.8
638.8
8.9

993.1
644.5
600.1
44.4

1,123.4
761.2
693.2
68.0

1,244.2
856.1
756.5
99.6

1,348.4
902.9
783.0
119.9

Private creditors, net
Bonds
Banks
Short-term debt flows
Other private
Official inflows, net
World Bank
IMF
Other official

198.8
-8.6
223.3
-17.1
1.3
30.4
7.2
10.8
12.4

78.7
61.0
-11.9
17.8
11.7
81.0
18.3
26.8
35.9

435.1
129.7
37.2
257.6
10.7
73.2
22.4
13.8
36.9

434.6
123.8
108.2
189.3
13.3
30.0
6.6
0.5
22.8

348.6
143.3
71.5
126.7
7.1
14.1
4.6
-3.9
13.4

362.2
126.1
80.6
146.3
9.2
10.7
..
..
..

388.1
108.4
88.9
180.4
10.4
6.7
..
..
..

445.5
110.5
105.1
220.1
9.8
3.1
..
..
..

Capital outflows-321.4-174.5-310.0-320.0-370.6-373.4-414.3-463.6-211.8
-32.3
-78.3
1.0

-144.3
-75.2
50.7
-5.7

-213.9
-46.5
-57.3
7.7

-213.1
-15.9
-81.0
-10.0

-238.0-17.6-103.0-12.0-275.0
-19.4
-72.0
-7.0

-325.0
-22.3
-61.0
-6.0

-370
-28.6
-56
-9

Net capital flows (inflows + outflows)

491.2

527.2

909.1

792.4

636.6

760.7

836.6

887.9

Net Unidentified Flows/a-78.3-286.7-721.6-640.3-624.0-768.7-902.0-968.3

FDI outflows
Portfolio equity outflows
Private debt outflows
Other outflows

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

percent (table 2). The sharpest declines wereamong bank inflows and short-term debt flowsreflecting mid-year weakness cause bydeleveraging in high-income Europe and theweakness of global trade in 2012. Both areprojected to pick up in 2013 and in the case ofbank lending are already on the rise. Overallbank lending is projected to increase 12.7
percent in 2013 (15.5 percent for short-termdebt). However, the recovery will be only partialand even as late as 2014 net bank flows areprojected to remain below their 2011 levels andless than half of their 2008 levels.

4.1 and 4.2 percent of recipient country GDP in2013 and 2014 (figure 8).

Improved financial conditions have
had only a modest reflection in realside activity
The increase in financial market uncertainty in
May and June of 2012 cut into economic activity
at the global level, ending recoveries in somehigh-income countries and accelerating policyinduced slowdowns that were occurring inseveral middle-income countries that hit capacity
constraints in 2011. Faced with yet anotherround of market uncertainty, firms, andhouseholds cut back on investments and bigticket expenditures – causing global industrial
production, which had been growing at a 5.9
percent annualized pace in the first quarter, toshrink in the second quarter.

In contrast, bond flows are projected to decline
in 2013 because many borrowers have taken
advantage of the current low-interest
environment to pre-finance future borrowing,
and because with reduced deleveraging pressures— some borrowers will return to more
traditional bank-financing. Overall, net private
capital inflows to developing countries areprojected to rise— mainly because of risinglevels of foreign direct investment — reaching

Industrial production started to rebound in thethird quarter of 2012 , but the recovery has beenanemic particularly among high-income

8Global Economic Prospects January 2013

Main Text

Figure 7. Money has come flooding back into developing country mutual funds
6

Figure 8. Net private capital flows to slowly recoverfrom 2012 lows

4-week moving average ($ billion)

1.4% of recipient GDP$ trillion

9
8

1.2
4

7

1

6

2

0.8
5
0.6

0

4
0.4

-2

Inflows into equity funds
Inflows into bond funds

-4

3

0.2

Nov '12

2

0

1

-0.2
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016-6

Oct '07

Jul '08

Apr '09

Jan '10

Oct '10

Jul '11

Apr '12Jan '13

ST Debt%GDP (right axis)

FDI Inflows

Portfolio Equity

Bond Flows

Bank Lending

Source: World Bank, EFPRI.

Source: World Bank.

countries. And, outside of East Asia & Pacific,
the acceleration of activity in developing
countries shows signs of flagging in the fourth
quarter.

discussed) led to an easing of the pace ofcontraction in the Euro Area (GDP shrank at a0.1 percent annualized pace in 2012Q3, versus a-0.6 percent pace in Q2).

Disappointing outturns in high-income
countries partly reflect policy uncertainty

However, prospects for the fourth quarter are
somber. Industrial production declined sharply
in Germany and in the United Kingdom in
October and business sentiment indicators
remain unusually weak.FN6 Despite indicationsof improving sentiment and order books, GDP is
expected to decline further in the fourth quarterand into the first few months of 2013 before thecontinental economy begins expanding once

In the United States, uncertainty over future
policy in the run up to the November elections
and from the so-called fiscal cliff contributed
significantly to the dampening of the recovery in
US growth during the second half of 2012.
Normally, with improving labor market andconsumer demand conditions, business
investment should be growing quickly, instead it
fell at a 1.8 percent annualized pace in the third
quarter. Had it instead expanded as might
normally have been expected (approximately 3.5
percent), GDP growth would have been muchstronger (perhaps growing by 3.4 instead of therecorded 3.1 percent). Initial data for the fourth
quarter suggest that it too will be weak despite
improving retail sales, housing markets, andemployment (orders of capital goods are fallingor very weak, figure 9).

Figure 9. Capital goods orders remain weak in highincome countries
80% change, 3m/3m saar

Japan

60

40

Developing
Countries

20

0

United States-20

Germany-40

In Europe, output slowed sharply in the second
quarter amid heightened financial tensions,related to concerns that policy reform wasoccurring too slowly. In the third quarter,
improved market perceptions (as previously-60

Apr '10

Sep '10

Feb '11Jul '11

Dec '11

May '12

Oct '12Source: World Bank, Datastream.
Note: U.S. capital goods orders exclude defense andaircraft orders.

9Global Economic Prospects January 2013

Main Text

again. Overall, Euro Area GDP is estimated tohave contracted 0.4 percent in 2012.

Figure 10. Industrial production in developing countries outside East Asia continues to strengthen
20

In Japan, the boost to growth fromreconstruction spending in the aftermath of the
Tohoku earthquake and nuclear disaster has
faded, and as a result GDP fell at a 0.1 percent
annualized pace in the second quarter. Politicaltensions between Japan and China, compoundedthese woes in the second half of the year, withthe yen value of Japanese exports to China
falling by 17 percent between June andNovember 2012 — contributing to a 3.5 percent
annualized decline in GDP in the third quarter.

15

China
10

Other developing

Other High-income

50Euro area-5

Prospects for the fourth quarter suggest further
declines. Industrial production in November
continued to weaken, and the export decline
accelerated. For the three months ending
November 2012 industrial production was
declining at an 18.5 percent annualized pace.
Overall, the Japanese economy has slowed
sharply and GDP is estimated to have expanded
only 1.9 percent for the year as a whole 2012.

-10
Jan '11

Apr '11Jul '11

Oct '11Jan '12

Apr '12Jul '12

Oct '12Source: World Bank, Datastream.

widely available, also accelerated and grew at a
5.3 percent annualized pace in the third quarter.
While the improvement in developing country
performance was widespread (figure 11), it wasmost marked among those Sub-Saharan Africancountries for which data are available (reflecting
extractive-industry related investments and thecoming on-stream of new capacity generated byearlier investments). In South Asia the
improvement was relative, with industrial
production stabilizing after strong declines in thesecond quarter, and GDP in India during the July
-September quarter expanding only 5.3 percent
from the year before. The sharp fall in industrial
activity in the Middle-East and North Africa was
the exception to the rule of improved third
quarter performance — reflecting renewed
political turmoil within the region.

Developing country growth is firm but isbeing dampened by high-income weakness
Box 2 gives an overview of recent developments in thedeveloping regions, while the regional annexes (http://
worldbank.org/globaloutlook) provide additional detail as well as
country-specific forecasts.

For developing countries, the weak external
environment had an obvious moderating
influence on growth in the second quarter of2012. Nevertheless, during the third quarter there
were increasing signs of strengthening domestic
demand in developing countries. In contrast withhigh-income countries, developing-country retailsales grew at a 13.9 annualized pace in Q3, andcapital goods orders picked up. Industrial
production also gained steam.

Data for the fourth quarter remains sparse. The
pace of industrial production growth indeveloping countries has picked up to 8.6
percent during the three months ending
November 2012, with output accelerating in East
Asia & Pacific, Europe and Central Asia, andSouth Asia toward year‘s end. Growth remains
slow and actually weakened in Latin America
and the Caribbean, while Q4 data are notavailable elsewhere. Business sentimentindicators such as purchasing manager indexes(PMIs) are improving, although they remainvery low (figure 12).

After weakening sharply in Q2 and even turning
negative in several regions, economic activity
accelerated in virtually every developing region
in the third quarter of 2012, with industrial
production growing at a 5.3 percent annualizedpace (figure 10). Among those countries forwhich quarterly GDP data are available, output
expanded at a solid 4.2 percent annualized pace.
Industrial production data, which is much more

10

Global Economic Prospects January 2013

Main Text

Box 2. Following a second quarter slowdown, growth has picked up developing countries
Economic activity in the East Asia & Pacific region has rebounded, driven by robust domestic demand in China,
Indonesia, Malaysia, Philippines and Thailand and a surge in exports toward the newly industrialized economies(NIE) of the region. Trade in the region surged toward the end of the year, with Chinese exports rising at a 8.6
percent annualized pace during the three months ending November, and it imports increasing at a 12.5 percent clip.
Reflecting these developments industrial activity in the region East Asia & Pacific has accelerated to an 15.0 percent
annualized pace through November, led by China. Inflationary pressures remain contained and well within thetargeted rates across the region. Asian equities have outperformed the major global and regional stocks markets andhave surged further in December reflecting an improving global and regional economic outlook.
Output in the developing Europe and Central Asia region had also a rebound during the final months of 2012 but theeconomic performance was mixed across countries. While industrial production grew fast in Turkey, Lithuania, andKazakhstan, it contracted sharply in Bulgaria, Ukraine, Latvia, and modestly in Russia, Serbia and Romania during
the three months ending November. And, the summer drought cut into agriculture production in Russia, Romania,
Serbia, and Bosnia and Herzegovina. Despite weak import demand from high-income Europe, regional (especially
Turkey and Russia) trade rebounded toward the end of the year, reflecting low base effects and increased nonEuropean, including South-South sales. Despite slow growth, inflation gained momentum in the second half of 2012reflecting increased food prices, supply constraints and increased taxes and administrative tariffs.
Despite a relatively weak external environment, domestic demand in the Latin American and the Caribbean region
held-up relatively well, recording GDP growth of 1.9 percent in the third quarter, as slightly stronger (albeit stillweak) growth in Brazil compensated for decelerating growth elsewhere, particularly in Argentina and Mexico. The
recovery in industrial production was even more marked, with output expanding at a 3.4 percent annualized paceduring the third quarter, due to a recovery in Brazil and Argentina. However, growth appears to have slowed once
again in Q4. Regional import demand has picked up, rising at a 9.5 percent annualized pace during the 3 months
ending November 2012 — following 5 months of decline. Exports growth remaining relatively weak, withmerchandise export volumes growing at a 3.8 percent annualized pace during the 3 months ending November.
Economic activity in the Middle East & North Africa continues to be buffeted by political turmoil, with aggregate
growth rising and falling as individual countries exit/ enter and re-enter periods of domestic turbulence that can bevery disruptive of short-term activity. Among oil importers in the region, activity declined sharply at an 9.8 percent
annualized pace in the third quarter as political uncertainty in Egypt, Jordan and Morocco weighed on economic
activity. And the combination of domestic disruption and weak Euro Area demand has seen export volumes plummet.
Output among developing oil exporters, has declined in aggregate as production increases in Libya and Iraq wereoffset by declines in Iran following the tightening of international sanctions. Many countries in the region face risingfiscal challenges due to heavy spending in an effort to dampen domestic discontent, with fiscal balances in many oilimporters particularly sensitive to oil (and to a lesser extent food) prices due to subsidization policies.
After a very weak April-June quarter of 2012, economic activity in South Asia appears to have stabilized, withindustrial output growing at a 2.4 percent annualized pace during the three months ending November. While India
dominates the regional trend, industrial output in Pakistan also picked up sharply in the second half of the year. After
declining in line with weak global growth, South Asia‘s export volumes have also picked up in recent months —although the US dollar value of regional exports are still down 2.2 percent in November from a year earlier. Inflationin the region has moderated to an annualized 6.2 percent pace in the three months to November, in part reflecting astabilization and even decline in international commodity prices. Nevertheless, inflation in the region remains high(more than 7.5 percent (y/y) in Bangladesh, and close to 10 percent in India, Nepal, Pakistan, and Sri Lanka),reflecting structural capacity constraints, large fiscal deficits and entrenched inflationary expectations.
Among the 4 economies in Sub-Saharan Africa with available monthly industrial production data are available,
output in the oil exporting economies (Angola, Nigeria and Gabon) slowed in-line with developments elsewhere.
Activity in South Africa was disrupted by labor unrest, with GDP declining in the second quarter and picking up
modestly in the third quarter. Still high commodity prices are stimulating investment activity throughout the region,and contributing to increased productive capacity and exports. Thus, despite the mid-year global economic slump,export volumes were expanding rapidly mid-year year (at a 30 percent annualized pace in the second quarter, versus amore modest 2.2 percent annualized growth rate for imports. Since then the pace of the export expansion has eased to
2.5 percent during the three months ending August. Headline inflation for the region decelerated steadily from a 10.4
percent annualized pace at the end of 2011 to a 6.3 percent pace during the three months ending October 2012.

11

Global Economic Prospects January 2013

Main Text
Figure 12. Business sentiment is improving but remains low

Figure 11. Economic activity picked up in almost every
developing region during Q3

Balance of responses (>50 implies expansion, <50 impies contraction)

60

Quarterly industrial production growth, % saar

20
15

56

10
5

High Income

Developing countries

Non-EUexcl. China

52

0
-5

China

2011 201248-10
Euro area

-15

44

-20
-25
East Asia &Pacific

Europe & Latin America & Middle-East &Central Asia
Caribbean
North Africa

South Asia

40

Sub-SaharanAfricaJan '10

Jul '10Jan '11Jul '11Jan '12Jul '12Source: World Bank, Datastream.

Source: World Bank, Markit, and national sources.

Monetary policy may have exacerbated thecycle in developing countries

The subsequent loosening of policy during thesecond and third quarters of 2012 will similarly
have effect only with a lag. And, while it is
impossible to say with certainty its full effects
have probably not been felt as of yet. As a result,the strengthening of demand in developing
countries can be expected (assuming all else
equal) to continue into 2013 as easier credit
conditions translate into increased consumer andbusiness sector demand.

The stop-go pattern of developing country
growth in the recent past partly reflects thedeterioration in international confidence during
the second quarter of 2012 and the end of year
weakness. However, it also reflects a significant
swing in domestic monetary policies (see earlier
box 1).
In response to rising inflationary pressures andincreasingly binding capacity constraints, many
developing countries appropriately tightened
policy during the second half of 2011 (figure 13).
As a result, real credit growth among several
large middle-income economies operating close
to capacity has decelerated during 2012. In
China, real credit growth dropped to an 11.6
percent annualized rate during the three months
ending in July from a peak of 25.3 percent in
February (figure 14). Similarly, a tightermonetary stance in Brazil and India contributed
to a 5-8 percentage point drop in annualized realcredit growth rates.

Figure 13. Developing-country monetary policy has
shifted from a tightening to a loosening phase25

Number of changes

Increases
Cuts

20

15

10

Although the tightening of domestic policy was
initiated in 2011, it only began to affect activity
in 2012 and it likely exacerbated the dampening
influence of the increase in financial tensions in
May/June of 2012.

5

0
Jan '11

Apr '11Jul '11

Oct '11Jan '12Source: World Bank, Bloomberg.

12

Apr '12Jul '12

Oct '12Global Economic Prospects January 2013

Main Text

Headwinds should diminish,supporting a gradual acceleration of
growthDeveloping country imports have been a
motor for global growth
Global trade has been very weak in 2012, andestimates suggest that developing country
exports of goods and services increased by only
4.2 percent for the year as a whole. Developing
country imports held up better, rising 5.4 percent
reflecting the better economic performance ofdeveloping countries. Overall global trade rose
only an estimated 3.5 percent in 2012 (comparedwith a pre-crisis average of 6.2 percent).

While there have been substantial forces acting
to slow the global economy in 2012, and manyof these are expected to persist through 2013 andinto 2014/15, there are also growing forces ofrecovery that should support prospects going
forward.
In the United States, improving labor market
conditions (since June 789,000 jobs have been
added to the US economy and the unemployment
rate has fallen from 8.2 to 7.8 percent) are
helping to support income and consumer demand
growth. These improvements should, if fiscal
uncertainty is lifted, result in a strengthening ofinvestment growth.

The relatively strong import demand ofdeveloping countries has helped mitigate
recessionary conditions in the Euro Area andother high-income countries (figure 15). Indeed,since 2011 developing countries have been
responsible for 2/3 of the increase in extra-EU
exports of French and German firms.

In addition, the restructuring in the housing
market, which has been a persistent drag on
growth since 2005 (between 2005Q4 and2011Q1 residential investment activity fell by 58
percent), appears to have reached a turning point.
While there are still many problems (including
underwater mortgages and regional oversupply),
the overall market has begun growing, supported
by low mortgage rates. Some observers argue
that the housing sector alone could add as muchas 1.5 percentage points to US growth in 2013
(Slok, 2012). Indeed, increasingly tight housing
market conditions have supported a recovery in

Nevertheless, developing countries are
increasingly less dependent on high-income
countries for their exports. The steady growth ofdeveloping country GDP and increased
interconnections between these economies meansthat since 2010, more than half of developing
country exports go to other developing countries(figure 16).

Figure 14. Real credit growth has slowed in many major developing countries
40

Figure 15. Developing country imports have compensated for weak domestic demand in high-income
countries

Real credit growth, 3m/3m saar

6

TurkeyPortugal

30

Ireland

4

China

Italy

India
2

Japan
Spain

U.S.
Euro Area

Germany

France20

Brazil
0

10
-2

-4

0

Domestic demand-6-10
Jan '10

Jul '10Jan '11Jul '11Jan '12Jul '12-8

Source: World Bank, Eurostat.

Source: World Bank, IMF IFS.

13

Net exports

GDP growthGlobal Economic Prospects January 2013

Main Text

prices and activity.FN7 Residential investment is
up 14 percent from a year ago, sales of singlefamily homes rose 9.1 percent in the first 8
months of the year, and existing home sales
reached a 27-month high in August. New singlefamily homes inventories are at an all-time low
and, although rising somewhat, inventories ofexisting single-family homes remain atdepressed levels.

cliff from significantly disrupting economic
activity in 2013. It assumes that in the new deal,
the total of tax increases and expenditure cuts for2013 will amount to about 1.6 percent of GDP
and that progress is made towards establishing acredible medium-term plan to reduce spending
and increase revenues. Moreover, it assumes thatthe deal includes agreement to provide for a
medium-term path for the debt ceiling that is
consistent with the medium-term plan.

Prospects, will depend importantly on how theremaining fiscal challenges of the United States,
are dealt with. While the January 1, 2013agreement on tax measures resolved most of theimmediate concerns about the fiscal cliff, thelegislation offers only a temporary reprieve(until end of February) before the remaining
mandatory cuts to government spending includedin the fiscal cliff kick in (approximately $110bn
in 2013 or 0.1 percent of GDP).FN8

The fiscal compression of this baseline is about
0.6 percentage points larger than in 2011, which
contributes to a slowing of GDP growth from anestimated 2.2 percent in 2012 to 1.9 percent in2013. In the outer years of the forecast, growth
should pick up to around 3 percent, as thecontractionary effects of continued consolidation
are partially offset by improved confidence thatthe fiscal accounts are returning to a sustainable
path. Should the fiscal impasse remainunresolved, the implications for growth in the
United States and the rest of the world could bemuch more negative (see the more detailed
discussion below).

If no credible medium-term plan for fiscal
consolidation is found by end of February anddebt-ceiling legislation is unchanged or only
short-term extensions provided for, the economy
could be subjected to a series of mini-crises andpolitical wrangling extending over theforeseeable future. This could have potentiallystrong negative consequences for confidence,and even the credit rating of the United States.FN9

In the Euro Area, fiscal consolidation is
expected to continue, but its extent should
diminish, and as a result its negative impact on
GDP and growth should decline — contributing
to a modest firming of growth during the courseof 2013. Overall, the Euro Area‘s fiscal stance is
expected to tighten by about 1 percent of GDP
in 2013, down from a 1.7 percent (of GDP)
tightening in 2012 (see earlier figure 1). As aresult, depending on multipliers the drag on
overall GDP growth from fiscal tightening
should ease by between 0.2 and 0.6 percentage
points.FN10

In the baseline forecast of table 1, a deal is
assumed to be found before March 2013 thatprevents the remaining elements of the fiscal
Figure 16. An increasing share of developing country
exports goes to other developing countries% of developing country exports by destination
100

80

That said, the steep weakening of activity inGermany and France toward the end of 2012serves as a stark reminder of the importance that
confidence will play in the Euro Area recovery.
The more policy markers persist in pursuing thereform agenda of strengthening Euro Area
institutions, improving fiscal balances at thenational level and strengthening structural
policies to raise the growth potential of member
countries, the better the chance that improving
confidence will support the recovery.

60

40

20

0
2001

2002

2003

High income countries

2004

2005

2006

2007

2008

2009

2010

2011

2012

Developing countries

Source: World Bank, IMF Direction of Trade Statistics.

14

Global Economic Prospects January 2013

Main Text

Looking forward, fiscal consolidation, banking
sector consolidation and a lackluster expansion
in the United States will continue to weigh on
European growth — although to a lesser extent
than in 2012. As a result, quarterly GDP growthis expected to turn positive and graduallystrengthen during 2013 (although negative
carryover from falling GDP in 2012 means that
GDP for 2013 is projected to decline
slightly).FN11 Assuming continued progress inaddressing fiscal sustainability issues andreforming institutions, Euro Area growth isprojected to strengthen further, expanding by 0.9
and 1.4 percent in 2014 and 2015 respectively.

capacity and slowly recovering domestic andexternal conditions underpin the projected pickup in growth. The recovery in the developing
Middle-East & North Africa aggregate
principally reflects an assumed gradual decline
in political and military turmoil.
Commodity prices should stabilize or decline
in this moderate growth environment
Although they have been subject to significant
fluctuations during the course of 2012, theaverage of industrial commodity prices in 2012
was broadly stable as compared with 2011. The
barrel price of crude oil was broadly unchanged
in 2012 at $106 versus, $104 in 2011, while
metals and minerals declined 15 percent. On
average, internationally traded food prices wereup only 1 percent in 2012 from 2011, as prices
were roughly equally high in early 2011 and late
2012. As of mid January 2013 internationallytraded USD prices of wheat and maize are 19
and 7 percent higher than in early January 2012,
down 30 percent from their August 2012 highs.

In Japan, the current dispute with China issapping growth, while the country‘s huge fiscal
debt requires attention. Assuming that relations
with China improve during the course of 2013,
output is expected to gradually strengthen but toexpand by only 0.8 percent in 2013 before
strengthening toward 1½ percent by the end of
the forecast period.
Developing country growth should accelerate
slowlyThe surge in maize and wheat prices mid-year
was due to hot and dry conditions in the US thatmainly affected maize, while adverse weather in
Russia and to a lesser extent in Western Europe
cut into wheat production. The spike had lesssevere consequences than the price hike in 200708, mainly because fewer crops were involved
and because the supply shock was not

Regional outlooks, including country-specificforecast, are outlined in more detail in the regional
annexes to this report and are summarized in box 3.

Based on data to date, developing-country GDP
is estimated to have expanded a relatively weak
5.1 percent in 2012, largely on account ofdevelopments during the first half of 2012. The
monetary policy easing undertaken by both highincome and developing countriesFN12 in 2012 is
expected to lift liquidity, consumption andinvestment spending in both high-income anddeveloping countries in the months to come.
This, plus the gradual improvement in demandconditions in high-income countries is projected
to underpin a gradual acceleration of growth indeveloping country growth to 5.5 percent in2013, before firming further to close to 6 percent
in 2014 and 2015.

Figure 17. Growth is expected to be capacity constrained in several regions
12

Annual GDP growth, %
2010

2011

2012

2013

2014

2015

10
8
6
4
2
0

The acceleration, which is underway is expected
to be relatively muted in East Asia & Pacific,
Sub-Saharan Africa, Latin America, and South
Asia because of capacity constraints (figure 17).
In Europe & Central Asia, significant spare-2-4
East Asia &Pacific

Europe & Latin America & Middle-East &Central Asia
Caribbean
North Africa

Source: World Bank.

15

South Asia

Sub-SaharanAfricaGlobal Economic Prospects January 2013

Main Text

Box 3. Regional outlook
GDP growth for East Asia and the Pacific region is projected to slow to 7.5 percent in 2012 – largely on account of
weak external demand and policy actions in China directed towards moderating domestic demand and controllinginflation. Going forward, GDP growth in the region is projected to accelerate to 7.9 percent in 2013 before stabilizing at around 7.5-7.6 percent in 2014-2015 – mirroring a modest acceleration in China in 2013 followed by
growth stabilization through 2015. GDP growth in the remaining countries in the region is forecast to average 5.9
percent over 2013-2015 underpinned by accelerating global trade and a rebalancing of regional demand toward
consumption. Disposable income in the region is forecast to benefit from appreciating (real) exchange rates, rapid
growth in wages in China and ASEAN-4 (Indonesia, Thailand, Malaysia) and an accommodative monetary policy
stance in the context of low inflation across the region. However, the envisaged recovery remains vulnerable to arenewed crisis in the Euro Area, weaker than expected recovery in the US, and the possibility that a decline in Chinese investment is not offset by robust consumption growth.
GDP growth in Europe and Central Asia is estimated to have eased to 3.0 percent in 2012 from 5.5 percent in2011 as the region faced significant headwinds including: weak external demand, deleveraging by European
banks, a poor harvest and inflationary pressures. Growth slowed most in countries with strong economic linkages
to the Euro-area, while it was relatively robust in most resource-rich economies that have benefited from highcommodity prices. GDP growth in the region is projected to rebound to 3.6 percent in 2013 and to 4.3 by 2015,
supported by: improved agricultural performance, reduced deleveraging pressures, and strengthening external demand. Medium-term prospects for the region will critically depend on progress in addressing external (large current account deficits) and domestic (large fiscal deficit, unemployment, and inflation) imbalances; lack of competitiveness; and structural constraints.
Growth in Latin America and the Caribbean decelerated in 2012 to 3 percent, in response to softening domestic
demand in some of the largest economies in the region and a weak external environment. Among the larger economies the growth deceleration was particularly sharp in Brazil (-1.8 percentage points) and Argentina (-6.9 pp.). A
more accommodative policy environment, stronger capital flows (notably FDI) and more robust external demand
are expected to lift regional growth over the 2013-2015 forecasting horizon to an average growth of 3.8 percent.
Labor and tax reforms underway in some of the larger economies, and a drive to boost infrastructure investment
should help address some of the structural issues that have constrained growth in the region. Risks remains tilted
to the downside with the possibility of larger-than-expected fiscal consolidation in high-income countries and ahard landing in East Asia representing central concerns. Striking the right balance between demand stimulus policies and policies that enhance the region‘s supply potential remains a central challenge.
Output in the Middle East and North Africa region has recovered to above 2010 levels, but continuing politicaluncertainty and unrest in several countries are weighing on economic activity. Regional GDP grew by 3.8 percent
in 2012, mostly due to a 4.6 percent rebound among oil exporters as crude oil production in Libya recovered towards 2010 levels and output in Iraq continued to expand. Growth in oil importers in the region was significantly
weaker at 2.5 percent in 2012 due to the adverse impact of Euro Area economic contraction on regional exports
and tourism, and a combination of domestic problems, including a poor harvest in Morocco, fiscal difficulties in
Jordan, and continuing uncertainties in Egypt. Regional GDP growth is projected to slow to a 3.4 percent pace in2013, as growth in oil producers returns to more sustainable rates, and then rise to around 4.3 percent by 2015 —assuming that the negative influence on growth of ongoing uncertainty and domestic unrest eases during the projection period. The war in Syria and the sanction-fueled downturn in Iran are notable sources of instability andweakness in the region.
South Asia's growth weakened to 5.4 percent in 2012, mainly reflecting a sharp slowdown in India. Weak global
demand exacerbated region-specific factors including: subdued investment rates, electricity shortages, policy uncertainties, and weak monsoon rains. Sri Lanka's growth was also dampened by policy efforts to contain overheating and a poor harvest, while growth in Bangladesh slowed in part due to weakening exports. Inflation eased inmost South Asian countries during 2012; however, structural capacity constraints and entrenched inflationary expectations suggest limited scope for policy easing to support growth. South Asia‘s GDP is projected to rise 5.7
percent in 2013 and by 6.4 and 6.7 percent in each of 2014 and 2015, helped by policy reforms in India, stronger(Continued on page 17)16

Global Economic Prospects January 2013

Main Text

investment activity, and a gradual improvement in global demand for South Asia‘s exports. Migrant remittances,in particular from the oil-rich Gulf Cooperation Council (GCC) countries, are projected to remain resilient andsupport domestic demand in Nepal, Bangladesh and Pakistan.
Growth in Sub-Saharan Africa has remained robust at 4.6 percent in 2012 (6.1 percent if South Africa is excluded), supported by resilient domestic demand and still relatively high commodity prices. Strong domestic demand, an accommodative policy environment, increasing foreign direct investment flows, relatively high commodity prices, and increased export volumes in countries with new mineral discoveries (Sierra Leone, Niger and Mozambique) in recent years are expected to underpin a return to the region‘s pre-crisis growth rate of 4.9 percent in2013 and even stronger growth in 2014/15. Nonetheless, risks remain tilted to the downside, as the global economy remains fragile. Weaker growth in China, ongoing fiscal consolidation in the Euro Area and the United States
could potentially derail the region‘s growth prospects.

exacerbated by policy moves that served toreduce international supply further.

However, the greatest policy concern provokedby high food prices is its impact on the health ofthe poor for whom food costs represents 50
percent or more of their income. As such, thesharp increases in food prices that have been
observed at the international level would if
observed in local prices cut sharply into
disposable incomes, reducing funds available for
quality food, schooling and healthcare.
Moreover, even temporary price hikes can havepermanent effects as high food prices increase
the incidence of malnutrition and cognitive
deficiencies (World Bank, 2012b).

Given the modest growth environment expected
over the next few years, industrial commodity
prices are projected to remain broadly stable,
while barring a major supply shock, food prices
are expected to decline about 15 percent between
2012 and 2015 (figure 18). These projections arevery sensitive to supply conditions, especiallyfor maize and wheat, stocks of which are very
low. For oil risks exist to the downside due toimportant supply– and demand-side adjustmentsthat the five fold increase in oil prices since 2000
have unleashed (box 4).

Historically, the extent to which international
prices pass through to local prices has been
limited (see for example World Bank 2011, FAO
2011). However, given the sustained rise ininternational prices since 2006 (the US dollar
price of rice, wheat, and maize prices haveincreased 85, 81, and 142 percent respectively),

Low maize and wheat stocks make thesemarkets particularly susceptible to additional
supply shocks
The stock-to-use ratio for maize currently stands
at 13.4 percent, the lowest level since 1972/73.
The wheat market is better supplied with a stockto-use ratio of 26.2 percent — more than 5
percentage points higher than in 2007/08. In
contrast, rice markets remain well-supplied, withno notable price movements. At these levels,
wheat and maize prices could spike sharply once
again if there are further significant disruptions
to supply.

Figure 18. Barring supply disruptions, commodity
prices are projected to remain stable or ease250

Nominal USD price of internationally traded commodities, index 2005=100

200

Metals & Minerals
150

EnergyHigher food prices can have macroeconomic
implications, including inflationary and balanceof payments pressures, especially for countries(principally small island economies and several
countries in the Middle-East and North Africa
region) that are heavily dependent on imported
food. High prices are also having importantfiscal effects in countries that subsidize basic
food supplies.

Food

100

50

0

2000

2002

2004

Source: World Bank.

17

2006

2008

2010

2012

2014

2016

Global Economic Prospects January 2013

Main Text

Box 4. How is the global energy landscape evolving in response to high oil prices
The landscape of the global energy map is changing rapidly. The International Energy Agency (2012) recently
announced that thanks to increased production of natural gas and shale oil, the United States will become world‘slargest oil producer surpassing Saudi Arabia by the mid-2020s, while North America (Canada, Mexico and the
U.S.A. combined) will become a net oil exporter by 2030.
These developments are to a large extent a natural market reaction to the quadrupling of international oil prices
between 2000-02 and 2010-12, which saw a substantial uptick in global exploration efforts and made profitable
extraction technologies.
High prices have boosted supply and moderated demand
In the United States, new techniques such as horizontal drilling and hydraulic fracturing (―fracking‖), have permitted the wide-spread exploitation of until-now uneconomic shale oil; shale natural gas; and so-called ―tight-oil‖deposits. As a result, U.S. crude oil and natural gas production has increased 30 percent during 2005-2011. Ultimately, these technologies have already added over 1 mb/d to US crude oil output so far, and they are expected to
add much more. Partly as a result of these technologies, global proven reserves have risen by 33 percent since
2000, with 70 percent of the increase coming from increased extraction estimates (reserves growth) as opposed to
new discoveries. New discoveries have also been playing an import role, accounting for about 40 percent of production during the same period (IEA, 2012). Associated investment has contributing importantly to growth in arange of developing countries, including in Sub-Saharan Africa (see Sub-Saharan Africa regional annex).
The demand-side has also reacted, with a rapid increase in the energy efficiency of motor vehicle fleets boththrough the introduction of new more energy efficient technologies such as hybrid cars and reduced demand forenergy inefficient vehicles. Since 2000, the average automobile mileage of new cars sold in the United States has
increased by 18 percent and that of the existing fleet by 7.7 percent. BFN1 Similar trends are observable throughout
the high-income world. As a result, OECD demand for oil has declined a total of 7.6 percent since 2005 (IEA,
2012B). Over the long run the IEA now expects OECD total liquids demand (crude and refined hydrocarbons)demand to fall a further 11 to 21 percent depending on policies.
Demand outside of the OECD (mainly developing countries) has been more robust, with total liquids consumption
rising 3.5 percent annually since 2005, partly reflecting rising vehicle use. More than half of global oil output isconsumed by the transportation industry, which is the fastest growing component of oil demand, especially in
China, India, and the Middle East. These trends are expected to continue although at somewhat slower pace after
2020, with global oil and liquids demand rising by an annual average rate of 0.6 and 0.7 percent between 2011 ad
2035.
Yet, oil prices have remained resilient
Despite the equilibrating trends in supply and demand, world prices remain in excess of $100 per barrel, and are
expected to remain above $100 over the medium-to-long term, mainly because of the elevated extraction cost of
newly discovered and new-technology oil.
Yet, downside and upside risks exist. On the downside, the process of substitution away from oil and toward new
extractive technologies is not yet complete. Currently U.S. natural gas and coal trade at an 80 percent discount tobrent oil — opening up huge arbitrage opportunities, that are likely to exercise increasing downward pressure on
international prices as pipeline reversals and liquefied natural gas exports begin to de-compartmentalize international markets. Over the longer-run, changes in battery technology and/or expanded use of natural gas could significantly erode the engineering advantage of crude oil products (see Commodity Annex), allowing abundant andlow-cost coal to compete indirectly with liquid fuels through electrical vehicles.
A significant upside risk, stems from the environmental costs associated with new extraction techniques. For the
moment, there remains a lively debate concerning the potential for geological damage pollution to aquifers fromthe chemicals and heavy fresh-water use of fracturing techniques.
BFN 1.

Increase in new vehicle passenger car efficiency between 2011 and 2000; Increase in short-wheel base vehicles 2009-2000 Bureau ofTransportation Statistics (2012).

18

Global Economic Prospects January 2013

Main Text

there are increasing indications that local prices
in developing countries are rising as well. In
particular the nominal median price of rice,wheat and maize increased by 18, 6, and 29
percent during 2006-2011 (last year for which
comprehensive data exist).

Developing countries remain vulnerable to a
deterioration of conditions in the Euro Area
As previously discussed, the Euro Area crisis has
already significantly impacted developing
economies, slowing GDP growth and the pace atwhich incomes rise — translating directly intoslower progress in relieving poverty.
Importantly, the range of national and panEuropean measures taken over the past several
years, including by the ECB, has significantly
reduced the risk of an acute crisis.

Policy makers should be preparedfor continued global volatility
While a great deal of progress has been made in
improving fiscal sustainability and crisismanagement institutions in the Euro Area, much
more needs to be done before the risk of further
crises can taken off the table. In the UnitedStates the major fiscal contraction threatened by
the fiscal cliff has passed, but uncertainty
continues to surround the future path of fiscal
policy and the threat of serious economic
disruption posed by the persistent possibility thatthe debt-ceiling will not be raised is also asource of external risk for developing countries.

Nevertheless, a sharp deterioration of conditions
remains a possibility. Table 3 reports the resultsof simulations of a major Euro Area crisis and aprolonged U.S. fiscal policy paralysis scenario.
The Euro Area scenario illustrates the impacts on
global growth of a deterioration of conditions
that causes two Euro Area economies to befrozen out of international capital markets, inturn forcing a sharp decline in government
expenditure and business investment spending(equal to around 9 percent of the GDP of eachcountry).FN13 In the simulation the shock is
assumed to be spread over two years, with 3/4 ofit felt in 2013 and 1/4 in 2014.

Developing countries also face home-grownchallenges, including managing the transition
from today‘s extremely high investment rates in
China to levels more compatible with long-term
growth; evaluating their trend output in the postcrisis world; adjusting fiscal and monetary
policy in accordance with those prospects; andthe still-present possibility of an oil-price spikeor that a further hike in international grain prices.

The impacts for developing countries in this
scenario are much less severe than thosepresented in the June edition of the GEP, bothbecause fewer economies are assumed to be
directly involved and because confidence effects
in the rest of the world are assumed to be lesssevere (partly reflecting the smaller size of theoverall crisis). Nevertheless, growth indeveloping countries is reduced by 1.1
percentage points on average in 2013. As
economies, gradually recover the overall impact
declines — but developing-country GDP would
still be 0.3 percent lower than in the baseline
even two years after the simulated crisis begins.
Important transmission mechanisms and some ofthe vulnerabilities of developing countries in this
scenario include:

Importantly, the balance of risks is more evenly
distributed now and their relative amplitude has
declined as compared with the past several years,
when tail risks were both large and almost
exclusively downside. For the Euro Area thebaseline forecast includes significant pessimism
for growth prospects assuming that the sharp
weakening of activity in core economies persists
for several months despite improving sentiment.
In the United States significant negative
spillover in the first quarter is assumed fromeven a relatively rapid resolution of fiscal
challenges. Should outturns prove stronger ineither of these economies, both global anddeveloping country growth could be morebuoyant. Similarly a resolution to Japan‘s
conflict with China could help spur a stronger
than projected rebound in the world‘s thirdlargest economy.

 Remittances to developing countries could

decline by 1.7 percent or more, representing as
much as 1.4 percent of GDP among countries
heavily dependent on remittances.

 Tourism, especially from high-income Europe,

would be reduced with significant implications

19

Global Economic Prospects January 2013

Main Text

Table 3. U.S. fiscal uncertainty and a deterioration of conditions in the Euro Area would have serious impacts ondeveloping countries
Euro crisis
2013

2014

US fiscal pa ralysis
2013

2015

(% change in le ve l of GDP)

Real GDP(% change inle ve l)Current
accountba lance

Fiscalba lance(change , % of GDP)

U.S.

-1.0

-0.6

-0.2

-2.3

0.6

-0.5

World

-1.3

-0.8

-0.4

-1.4

0.0

-0.5

High-income countries

-1.4

-0.9

-0.4

-1.5

0.1

-0.6

-2.3

-1.4

-0.8

-1.1

0.2

-0.4

-1.1

-0.7

-0.3

-1.0

-0.1

-0.5

Low-income countries

-0.6

-0.4

-0.1

-0.7

0.1

-0.2

Middle-income countries

-1.1

-0.7

-0.3

-1.0

-0.1

-0.5

Developing oil exporters

-1.3

-0.9

-0.4

-1.2

-1.1

-1.0

Developing oil importers

-0.9

-0.6

-0.3

-0.9

0.3

-0.2

East Asia & Pacific

-1.0

-0.7

-0.3

-1.1

0.4

-0.2

Europe & Central Asia

-1.3

-0.9

-0.4

-0.9

-1.0

-0.8

Latin America & Caribbean

-1.2

-0.8

-0.3

-1.2

-0.4

-0.6

Middle East & N. Africa

-1.0

-0.7

-0.3

-0.8

-0.7

-1.4

South Asia

-0.5

-0.3

-0.2

-0.4

0.6

0.0

Sub-Saharan Africa

-1.0

-0.7

-0.3

-0.9

-1.3

-0.8

Euro Area
Developing countries

Source: World Bank.

for countries in North Africa and the
Caribbean.

to reduce the deficit to manageable levels. While
the January 1 2013 legislation resolved somepoints of contention, others have been left
unresolved. A new end-of-February deadline
looms when, unless the authorities intervene
once again, sequestered spending and the debtceiling provisions will kick in.

 Short-term debt: Many developing countries

have reduced short-term debt exposures in part
because of Euro Area deleveraging.
Nevertheless, countries that still have highlevels of debt could be forced to cut into
government and private spending if financial
flows to riskier borrowers become more scarcein such a scenario.

In the baseline scenario significant progress
toward deciding a credible medium-term plan torestore fiscal sustainability and authorize
government borrowing in line with that mediumterm plan is assumed to be arrived at by the endof February 2013 — implying an overall 1.6
percent of GDP fiscal compression in 2013. An
alternative scenario assumes that no mediumterm deal is arrived at, but that a partial deal thatprovides for a $110bn additional fiscal
contraction and only short-term relief from debtceiling legislation is reached. Under such a
scenario, the uncertainty surrounding future tax
and fiscal policy would remain and thelikelihood of another debt-ceiling crisis would behigh.

 Commodity prices: The weakening of global

growth in the Euro Area scenario causes a 7.5
percent decline in oil prices and a 7.4 percent
decline in metal prices. Such declines, arelikely to cut into government revenues andincomes in oil and metal exporters, but helping
to cushion the blow among oil importing
economies.

 Banking-sector deleveraging: A crisis scenario

could accelerate the process of bankdeleveraging in Europe, with economies in
Europe and Central Asia most likely (amongdeveloping countries) to be affected.

The simulation results in table 3 report the
impact on GDP, current-account and fiscal
balances of developing countries in 2013 fromsuch an alternative scenario. It assumes that theuncertainty generated by prolonged negotiations— including surrounding the debt ceiling —continues to weigh on investment and consumer
durable spending in the United States, but also inContinued fiscal policy uncertainty in the
United States could hit developing countries
fairly hard
Following five years of large budget deficits, theUnited States has yet to agree on a set of policies

20

Global Economic Prospects January 2013

Main Text

the rest of the world as concerns about the
implications of a possible U.S. credit rating
downgrade increase. Those worries are assumed
to increase precautionary savings of U.S.
business and consumers by 1 and 2 percentage
points, and those of firms and households inother high-income countries by 0.5 and 1
percentage points, and those of developing
countries by 0.3 and 0.7 percentage points.

Figure 19. Recent upswings in Chinese investment
rate pose serious challenges going forward
50

40

Nominal investment as % of GDP
Bringing investment rate down to pre-boom and crisis levelof 35% implies a 10% of GDP reallocation of demand.

China in 2030 sees 35% investment rate as consistent
with China's long-term production potential.

Post-crisis stimulus

China
2005/08 boom period

30

Developing countries
excl. China

Under these assumptions, growth in the UnitedStates could slow by some 2.3 percentage points.
The Euro Area would be pushed into a deep
recession, potentially increasing the risk of asecond crisis there, and developing country GDP
would decline by 1 percentage point relative tobaseline.

20

High Income Countries
10

0
1960

1970

1980

1990

2000

2010

Source: World Bank.

Lower global growth would cause oil prices todecline, which would hit the current accounts
and tax revenues of oil exporters, but would
benefit importers.

periods of high growth – ever saw investment
rates exceed 40 percent. A level of 35 percent of
GDP is seen to be more sustainable andconsistent with underlying productivity growthand population growth.

An abrupt fall in China’s high investment
rates could slow global growth
China has, on average, recorded close to 10
percent annual growth for more than 30 years
and 10.3 percent growth during the first decadeof this millennium, with growth as high as 14.2
percent in 2007. During most of this high-growth
period, investment (and savings) were at a
relatively high 30-35 percent of Chinese GDP(figure 19). In the 2000s, investment rates
jumped initially to 40 percent of GDP (partly inreaction to the low cost of international capital)
and then again to 45 percent of GDP, because of
China‘s fiscal and monetary stimulus plan
introduced during the global financial crisis. As
a result, the contribution of investment toChinese growth rose from 2.3 percentage points
during the 1980s and 1990s to around 5 percent
in the 2000s. And China‘s capital / output ratio,
which in an economy that is in a steady-state
growth equilibrium will be broadly stable, has
increased since 2000 by 20 percent and is stillrising rapidly.

China's authorities have identified the need for amore balanced pattern of investment, that
implies not just a lower investment rate, but alsoa shift toward investments and expenditures inthe service sector and in intangible assets likehuman capital. This can be achieved, in part, by
reducing implicit subsidies that favor capital
investments over investment in labor (WorldBank & Development Research Center 2012, p.
19). The gradual rebalancing and reduction inphysical capital investment rates, is expected tobe compensated for by more rapid consumption
growth over an extended period of time.

High investment rates are required to sustain thecapital stock in a fast growing economy like
China‘s. Nevertheless, such high investment-toGDP ratios are unprecedented. Neither Japan nor
Korea – two countries that also enjoyed lengthy

While a smooth transition is the most likely
outcome and the one retained in the baseline
scenario, there is a risk that the transition to alower investment rate could happen abruptly,
perhaps provoked by a failure of a significant

China‘s economic history suggests that China,
perhaps more than any other country, has the
instruments to achieve such a transformation.
But the challenge of orchestrating such atransition should not be underestimated. Manyother countries have failed to smoothly adjust
their investment profiles.

21Global Economic Prospects January 2013

Main Text

share of new investments to realize hoped forprofits, resulting in a spike in unpaid loans and a
rapid tightening of credit conditions.FN14 In sucha scenario, investment growth would likely comeunder significant pressure.

Table 4. An abrupt slowing in Chinese investment
would slow global growth significantly

Given China‘s much increased weight in the
global economy and its role as an engine ofglobal growth, a sharp decline in investment
would likely have serious consequences
worldwide. Simulations suggest that a 10
percentage point deceleration in Chinese
investment would cause Chinese GDP growth toslow by about 3 percentage points. The highimport content of investment implies that asignificant share of the slowdown leaks out asreduced imports — reducing the impact on
China but extending it to the rest of the world.

Real GDP

Current account Fiscal balancebalance(%change inlevel)(change,% of GDP)

China

-1.4

1.7

-0.3

East Asia & Pacific

-1.3

1.3

-0.3

East Asia & Pacific (excl China)

-0.6

0.0

0.0

World

-0.5

0.0

-0.2

High-income countries

-0.4

-0.2

-0.2

-0.4

-0.1

-0.1

Developing countries

-0.7

0.4

-0.3

Developing countries (excl China)

-0.3

-0.3

-0.2

Low-income countries

-0.3

-0.2

-0.1

Middle-income countries

-0.7

0.4

-0.3

Developing oil exporters

-0.4

-0.5

-0.3

Developing oil importers

-0.8

0.8

-0.2

Europe & Central Asia

-0.3

-0.5

-0.3

Latin America & Caribbean

-0.3

-0.2

-0.2

Middle East & N. Africa

-0.3

-0.4

-0.5

South Asia

-0.2

0.0

0.0

Sub-Saharan Africa

-0.3

-0.6

-0.3

Euro Area

Source: World Bank.

Such a strong decline in investment rates,
however, is unlikely, in part because of thestrong policy response that such an abrupt
deterioration in the investment climate would
likely elicit. Table 4 presents simulation resultsfrom a smaller 5 percentage point decline in
Chinese investment growth. In this scenario, theslowing in Chinese investment results in a 6.0
percent decline in Chinese imports (relative tobaseline) and a 1.4 percent decline in GDP
relative to baseline. Lower Chinese imports inturn reduce global exports, and world GDP
declines relative to 2013 baseline by 0.5 percent
and 0.3 percent for developing countries outsideof China. Reflecting the composition of Chinese
import demand, high– and middle-income
countries are hit harder than low-income
countries.

projected to decline by 2.8 percent and metal
prices by 4.3 percent relative to baseline.
As a result, in oil exporting countries such as
Nigeria, Oman, and Saudi Arabia the balance of
payments (as percent of GDP) would decline bymore than 0.5 percentage points. In metalexporting countries such as Chile and Peru
current account balances could also weaken
substantially. The simulations suggest thatdeclining incomes due to weaker export prices,
could results in GDP declines ranging from 0.9
percent in Kazakhstan to around 0.5 percentage
points in Mexico and Nigeria.
Fiscal balances would also be affected incommodity exporting countries, adding to thedrag on growth – especially among thosecountries running already large deficits. With somany commodity exporters located in Sub
Saharan Africa, the region would feel the impactof the Chinese slowdown more strongly than its
direct trade linkages might suggest. Simulations
suggest that the region‘s current account andfiscal balances could decline by 0.6 and 0.3
percent of GDP in 2013.

Among the developing countries in the region,
GDP in Vietnam and Thailand, could decline by
0.7 percent (relative to baseline), while inIndonesia the hit would be somewhat smaller at
0.6 percent. Other impacts range between 0.4
percent in Malaysia and 0.2 percent in Lao PDR.
But these regional impacts are not the largest.
China currently consumes 40 percent or more ofmany of the world‘s metals. A sharp decline in
its investment rate would have significant impact
on commodity prices, with large knock on
effects for commodity exporting countries. In theabove mentioned scenario, oil prices are22

Global Economic Prospects January 2013

Main Text

In this potentially volatileenvironment, developing countries
need to rebuild buffers and pursue
cautious macroeconomic policies

policy making more challenging than normal.
But these difficulties are magnified byuncertainty over both the level and rate of
growth of potential output (the level of activity
and pace of growth that an economy canmaintain without generating inflationary or
current account pressures) in developing
countries. To the extent that policy makers overestimate potential and follow a more stimulative
policy than conditions warrant, they could end
up wasting scarce resources by raising future
debt burdens and inflation with little or nobenefit in terms of additional (sustainable) real
GDP growth.

The major challenges facing high-income
countries are predominantly related to fiscal
sustainability and high unemployment, and, for
now, are largely anchored in the short run. Highcyclical unemployment and excess sparecapacity are also problems in several developing
European countries, while high structural
unemployment remains an abiding challenge inmany countries in the Middle-East & North
Africa.

Measuring the level and rate of growth ofpotential output is fraught with uncertainty. Evenin high-income countries, such estimates tend tovary significantly over time (Ehrman and Smets,
2001). For developing countries the issue isparticularly difficult because economic reforms
and rapid development are constantly changing
both the structure of the economy and the pace atwhich productivity grows. Measures of potential
based solely on recent growth trends tend toresult in estimates that are significantly higher
than those based on more theoretically robust
production-function techniques (box 5).

However, the majority of developing countries
are facing a different set of challenges. Unlike
high-income countries, they have by and large
recovered from the 2008/09 crisis. For most ofthese countries, the policy focus needs to shiftback to structural efforts to enhance potential
growth, and away from demand management. At
the same time, they need to continue working
toward reducing both domestic and external
vulnerabilities.
For many developing countries this meansrebuilding the fiscal, monetary and social policy
buffers that were consumed during the 2008/9
crisis, so that if some of the still-present risksfacing the global economy are realized , these
economies would once again be in a position to
respond forcefully.

In particular, an estimate based on pre-crisis
growth performance might indicate that output
was currently some 6 percent below potential indeveloping countries and that growth could besome 1.5 percentage points higher. In contrast,
the production-function based measure ofpotential suggests a situation where long-term
growth potential is much less strong and where
output in more than 60 percent of developing
countries is close to or above potential (figure
20).

Commodity exporting countries may need totake a close look at expenditures and revenues toensure that long-lasting spending commitments
could still be met even if commodity prices andassociated revenues were to decline. While many
developing countries still have ample reserves,
many need to take steps to reduce short-term
debt (external and domestic) and build up
reserves so that their economies would be able towithstand a freezing up of financial markets thatmight accompany a flare up of tensions in highincome countries.

Despite progress in reducing fiscal deficits,
more needs to be done
If developing countries are using recent growth
performance to evaluate the state of the cycle
they could be pursuing a policy that is too
expansionary, accumulating significant debt,
inflation and current account deficits with little
or no pay off in terms of increased real incomesor growth.

Policy in developing countries needs to adapt toan environment where high-income country
growth is expected to remain weak andpotentially volatile. The increased external
volatility alone would make macroeconomic

23

Global Economic Prospects January 2013

Main Text

Figure 20. Output in more than 60 percent of developing countries is close to or above potential

Figure 21. Fiscal deficits in developing countries aremainly structural in nature

Estimated Output gap, percent of potential GDP

8

3

6

2

4

1

2

0

0

-1

-2

-2

-4

-3

-6
-8

-10

Fiscal balances in developing countries (%GDP)-4

Sub-Saharan Africa
Middle-East & N. Africa
Europe & Central Asia

South Asia
Latin America & Caribbean
East-Asia & Pacific

-5

2005
Structural Balance

2006

2007

2008

Cyclical Balance

2009

2010

2011

2012

2013

2014

Total Balance

Source: World Bank.

Source: World Bank.

Fortunately in most developing economies thisdoes not appear to be the case. In aggregate,developing country fiscal balances have
improved markedly from -4.5 percent of GDP in2009 to an estimated -2.9 percent in 2012 (figure21). The improvement reflects both improved
cyclical tax revenues due to the firming businesscycle, and a 1.3 percent of GDP improvement in
the structural (cyclically adjusted) budgetbalance – implying that on average countries aregradually re-establishing buffers (box 6).
Nevertheless, compared with 2007 levels, fiscal
deficits as a percent of GDP have widened inBox 5. Estimating potential output and the cyclical position of developing economies
The boom-bust cycle through which developing (and developed) countries have passed in this millennium complicates the evaluation of both the level and rate of growth of potential output. Based on pre-crisis performance, developing country policy makers could easily conclude that developing-country potential GDP growth is around 7-8
percent per year (average growth for developing countries in the 5 years through 2007 was 7.3 percent.
Naive measures of potential (such as moving averages of aggregate GDP growth or even statistical measures suchas the Hodrik-Prescott or Kalman filters) are prone toerrors (Giorno and others, 1995) – in part because they Box figure 5.1 Using boom period growth as potential
results in a substantial over-estimation of slack
are heavily influenced by the most recent observations.
If a measure is taken towards the end of a boom period
Log of potential GDP
Output gap (%of GDP)
16.8
6
it will tend to over-estimate potential, while if it istaken during a bust phase it will tend to under-estimate
4
16.6(Mise, Kim & Newbold, 2005).
2

The preferred method is to use a production function
method that accounts for changes in labor supply andthe capital stock as well as productivity growth (seefor example OECD (2008), IMF (2005) CBO (2001)).
Measures that rely on a naïve estimate of potential
based pre-crisis performance give an excessively optimistic sense of sustainable growth (7.3 percent), versus 5.9 percent based on underlying productivity, labor
force and capital growth (box figure 5.1). Importantly,
the naïve measure can lead to policy errors, suggestingthat substantially more slack exists in the system thando more sophisticated measures.

16.4

0
16.2

-2

16.0

-4
-6

15.8
-8
Naïve output gapNaïve potential
Actual GDP

15.6

WBG output gap
WBG potential

-10

15.4

-12
1990

1995

Source: World Bank.

24

2000

2005

2010

2015

Global Economic Prospects January 2013

Main Text

Box 6. Output gaps and fiscal space
In the boom years prior to the financial crisis, with GDP growth exceeding potential, large positive output gaps developed, reaching 3.8 percent of GDP by 2008 in developing countries. This strong (cyclical) boost to activity raised tax
revenues (in U.S. dollar terms) in developing countries by nearly 26 percent in 2007 alone.
Fortunately, most developing countries were pursuing a cautious fiscal policy, and used the cyclical tax proceeds to reduce fiscal deficits, which actually turned to surpluses of 0.1 and 0.8 percent of GDP in 2007 and 2008 respectively.
With this conservative, counter cyclical fiscal policy, developing-countries created the fiscal space that in turn allowed
deficits to rise counter-cyclically during the crisis — helping to mitigate the downturn.
The speed with which developing countries recovered from the crisis nicely illustrates the advantages of having ample
buffers. Indeed, looking across regions there is a strong negative correlation between the size of fiscal surplus in 2007
and the size of the GDP hit countries took, with regions that were in surplus having generally experienced a larger fluctuation in their fiscal deterioration and a smaller decline in GDP (relative to potential). The notable exception to thispattern was the Europe and Central Asia region, which unlike other regions had been caught up in the financial excess ofthe boom period and therefore suffered both an external and a domestic shock.
Box table 6.1 Output gaps and fiscal balance responses following the financial crisis

Fiscal Balance in 2007
Change in output gaps (A)Change in fiscal balances (B)Elasticity (B to A)

Developing
countries
0.0
-4.0
-3.8
0.9

EAP

ECA

LAC

MNA

SAS

SST

0.4

3.0

-1.3

-0.1

-4.1

0.4

-1.4
-2.7
1.9

-10.7
-7.2
0.7

-5.4
-3.0
0.5

-0.1
-3.8
29.4

-2.0
-1.6
0.8

-3.1
-6.8
2.2

Source: World Bank.

more than 80 percent of developing countries,
with an average deterioration among thesecountries of 4.0 percent. In 2007, 41 percent ofdeveloping countries had a fiscal surplus, andonly 25 percent of developing countries wereoperating at a fiscal deficit in excess of 3 percent
of GDP. As of 2012, those ratios have reversedwith close to 51 percent of developing countries
running deficits of 3 percent or more and only 12
percent running surpluses (figure 22).

would seem to be in order. For countries where
significant output gaps remain and deficits are
high, policy makers will want to carefully
evaluate the true structural or cyclical nature of
their current fiscal condition and thesustainability of their debt situation before
deciding on allowing deficits to remain at current

Figure 22. Many developing countries need to continue growing fiscal space

Significant additional but gradual progress
reducing deficits will be required if countries areto be in a position to display the same kind ofresiliency that they did in 2007 should external
conditions deteriorate once again (see earlier
risks scenarios).

# Countries
25
2007

2007 : *25% of countries had a deficit in excess of 3% of GDP

2012* 49% were in balance or running a surplus

20

2012: *52% have a deficit in excess of 3% of GDP* 23% are in balance or running a surplus

15

For developing countries operating at close topotential, a strong argument can be made forgradually tightening fiscal policy in an effort toreplenish buffers. World Bank estimates suggestthat some 14 percent of developing countries areoperating at close to potential, but have fiscal
deficits in excess of 3 percent of GDP.
Especially in a global context where the risk of aserious external shock remains elevated, aprudent re-establishment of depleted fiscal space

10

5

Source: World Bank.

25

9

More

Level of balance, % of GDP

10

8

7

6

5

4

3

2

1

0

-1

-2

-3

-4

-5

-6

-7

-8

-9

-10

0

Global Economic Prospects January 2013

Main Text
Figure 24. Inflation is above target in some countries
indicating limited space for policy easing

Figure 23. Inflationary pressures are under control
14

Percent change, 3m/3m saar

9

Percent
Upper Band of Target Range
Lower Band of Target Range
Actual Inflation
Policy interest rate

812Developing Food Inflation

7

10
6

8

5
4

6
3

Developing Headline Inflation

4

2
1

2

High-Income Headline Inflation
00China Thailand

Apr '10

Sep '10

Feb '11Jul '11

Dec '11

May '12

Oct '12

Chile Colombia Mexico Indonesia Brazil

South
AfricaRussiaIndia

TurkeySource: World Bank, national central banks.
Note: the real interest rate is implied by the distance between the triangle and actual inflation.

Source: World Bank, Datastream and International Labor
Organization.

levels or even pursuing a more stimulative
policy.

limiting adequate supply response to growing
demand in light of monetary easing initiated inlate 2011.

The appropriate stance of monetary policy will
also depend on where economies stand in
relation to potential. In the majority ofdeveloping countries inflation is broadly undercontrol.

There is limited scope for easing in several
developing countries in Europe and Central Asiaand in South Asia. In Russia, inflation pressures
have been reoccurring over the past year becauseof supply side bottlenecks, food price hikes andutility and other administered price adjustments,
although inflation has subsided in recent months.
In Turkey, considerable progress has been madein reducing inflation momentum, but headline
inflation remains high and still above the centralbank‘s target range. In India, despite repeatedincrease in policy rates and some easing in
inflation, inflation remains high and real interest
rates close to zero. Despite negative output gaps
in South Africa, prospects for further monetaryeasing appears limited, because of recent wage
hikes in the mining and transport sectors,
exchange rate depreciation, and a deterioratingbalance of payments.

Despite the spike in international maize andwheat prices during the summer of 2012,
inflation remains under 6 percent in almost 80
percent of the developing countries for which theWorld Bank collects data.FN15 Moreover, overall
inflation is moderating rather than accelerating(figure 23). Inflation in most middle-income
countries lies within inflation targeting bands(figure 24) and as a result real policy interest
rates are appropriately low. Large middle
income countries (Brazil, India, Russia, Turkey,
and perhaps South Africa) stand as exceptions.
In these countries inflation remains relatively
high and in some cases real-policy rates are
relatively low, suggesting that there may be
scope for (additional) policy tightening.

The payoff from improved macro buffers
could be large

For some of these economies, high inflation may
reflect lingering capacity constraints despite
slower growth in the recent period. In Brazil, forexample, inflation momentum has recently
accelerated due to capacity constraints
exacerbated by temporary food price pressures

The potential benefits of reestablishing fiscal andmonetary policy space is difficult to assess
unambiguously. However, the resilience with26

Global Economic Prospects January 2013

Main Text

which developing countries exited the recessionof 2008/9 suggests that benefits could be large.
Table 5 reports the results of a set of simulations
designed to illustrate the potential benefits ofcreating additional fiscal space. It shows theimpact on developing country GDP of a uniform
5 percent decline in high-income GDP due to anunspecified shock.

Table 5. GDP impact of an arbitrary high-income country shock (equivalent to 5 percent of GDP) on GDP
Unconstrained
scenario(A)

Binding constraint
scenario(B)

Difference(B-A)

High-income countries-5.2(percentage
points)-5.5-0.3

Developing countries
countries with adequate buffers
countries with inadequate buffers

-3.4
-2.3

-3.8
-3.4

-0.4
-1.1

-3.9
-3.1

-4.3
-3.5

-0.4
-0.4

-2.2
-2.8

-2.4
-4.3

-0.2
-1.5

-2.3
-2.5

-3.0
-4.3

-0.6
-1.9

na
-1.9

na
-2.9

na
-1.0

na
-1.5

na
-1.7

na
-0.2

-1.9
-1.9

-2.1
-2.7

-0.3
-0.8

(% change in GDP)

East Asia and Pacificcountries with adequate buffers
countries with inadequate buffers
Europe and Central Asia
countries with adequate buffers
countries with inadequate buffers
Latin America and Caribbean
countries with adequate buffers
countries with inadequate buffers
Middle East and N. Africa
countries with adequate buffers
countries with inadequate buffers
South Asia
countries with adequate buffers
countries with inadequate buffers
Sub-Saharan Africa
countries with adequate buffers
countries with inadequate buffers

In the first set of results, automatic stabilizers are
assumed to operate in developing countries —
i.e. sufficient funds are assumed to be found on
domestic and foreign capital markets to maintainspending at pre-shock levels despite a 3.5
percent decline in tax revenues.
In the second scenario, the same external shock
is applied but countries are assumed to be unable
to finance more than a 3 percent of GDP deficit.
For countries with a baseline exceeding 3
percent of GDP, it is assumed that no additionalborrowing can be found. For those where theinitial deficit was below 3 percent, but rose to
more than 3 percent in the unconstrained
simulation, it is assumed that only enoughfinancing to cover a 3 percent of GDP deficit isobtained. In both cases, government expenditureis cut by an amount sufficient to maintain preexisting deficits or a deficit of up to 3 percent ofGDP.

Source: World Bank.

Current account and external debt positions
have also deteriorated as compared with 2007
Current account positions of oil-importing
developing countries have deteriorated by 3.2
percentage points since 2007. Nevertheless, on
average their reserve positions are adequate. Oilimporting developing countries excluding China
have an average of 4.5 months of import cover,about the same level observed in 2007 prior tothe crisis, and their reserves represent about 94
percent of their short-term external debt.

Admittedly, the exercise is inherently artificial
and the 3 percent of GDP threshold at whichmarket financing becomes impossible isarbitrary. Nevertheless, it points clearly to thebeneficial effects that having adequate buffers
confers on countries. Specifically, GDP losses
are estimated to be 48 percent larger among
countries with limited fiscal space in the financeconstrained scenario versus the unconstrained
scenario — suggesting that, if these countries
had adequate buffers, their economies would
have suffered much less severely (GDP losses incountries with adequate fiscal space also
deteriorates in the second scenario — but thisreflects the second round effects of the weaker
output in the fiscally constrained economies).

Nevertheless, 20 developing countries have lessthan 3 months of import cover (figure 25).
Moreover, short-term debt represents 40 percent
or more of the foreign currency reserves of some
21 developing countries. For countries withheavy short-term debt exposures or whose
reserves are not adequate to cover imports, asharp decline in export revenues or in theavailability of external financing could force
significant cuts in imports or internal spending –with potentially serious consequences for
growth, and poverty reduction. Vulnerabilities
are even more serious among those 30
developing countries that have both a current
account and government deficit in excess of 4
percent of GDP (figure 26).

27

Global Economic Prospects January 2013

Main Text

Figure 25. Some countries are vulnerable to external financial shocks due to relatively low levels of reserves

Short-term debt as % of international reserves

Months of imports covered by reserves

180

3.5

160

3

140

2.5

120
100

2

80

1.5

60
40

1

20

0.5

0

0

Source: World Bank and Bank for International Settlements.
Note: Reserve numbers as of September 2012 and short-term debt numbers as of June 2012. Offshore centers such as
Panama, Mauritius, Seychelles, Samoa, with large short-term debt levels have been excluded from the first figure.

Several countries have responded to thedeterioration in trade balances by drawing downon their international reserves. For instance inthe eleven months through November 2012, thetrade balance in India, Indonesia and South
Africa deteriorated by 33.1 bn, 26.8 bn and 10.3
bn USD respectively when compared withcalendar 2011. Largely as a result of these
deteriorating trade balances and efforts to limit
exchange rate depreciation, international
reserves declined by 3.0 bn and 1.4 bn USD in
India and Indonesia respectively.

Falling international reserves and high current
account deficits may constrain monetary policy
in some middle-income countries (e.g. South
Africa and India). To the extent that reserves arebeing consumed to meet external financing
requirements and imports, countries may beforced to keep interest rates high in order toattract foreign capital flows (or deter outflows).
Commodity exporters with weak current accountpositions are particularly at risk if commodity
prices ease – either because of better supply
conditions or a slowing in global demand. Wereoil or metal prices to fall by 20 percent, bothforeign currency and government revenues incommodity exporters would be hit hard –potentially forcing them to cut into spending andimports. Simulations show that in such an
instance commodity exporters could be hit by
declines in fiscal balances as high as 2.8 percent
of GDP and a 6.5 percent of GDP declines intheir current account positions. GDP impacts
will depend on the extent to which fiscal space
exists (see earlier discussion), but even in theabsence of constraints impacts could be as large
as 2.8 percent (table 6).

Figure 26. Dual deficits pose challenges in several developing countries
South Africa
Yemen
Kenya
Current account balance
Kyrygz Republic
Syria
Sri Lanka
Fiscal balanceCambodia
Honduras
LebanonMoroccoTunisia
SenegalArmenia
Georgia
Burkina Faso
Mauritius
Ghana
Mozambique
GuyanaMala
JordanSierra Leone
LesothoTanzania
UgandaJamaica
Swaziland
Cape Verde
St. Lucia
Guinea Bissau
St. Vincent & the Grenadines
-30

-25

-20

-15

-10

-5

0

Percent of GDP

Source: World Bank.

28

Global Economic Prospects January 2013

Main Text

Table 6. Country vulnerabilities to changes in commodity prices

Figure 27. Small changes in potential growth rates canhave large long-run effects

20% reduction in specified commodity prices in 2013-2015
Metals &OilFoodminerals

Developing country per capita GDP, relative to 2010 high-income per capita GDP

0.8

Rapid growth (+1.0pp per annum)% change from baseline GDP
KuwaitYemen, Rep.
Nigeria
Kazakhstan
Iran, Islamic Rep.
Venezuela, RB
Colombia
Cote d'Ivoire
LatviaTrinidad and Tobago
Georgia
Belarus
EcuadorRussian Federation
Norway

-2.8
-1.9
-1.6
-1.2
-0.7
-0.7
-0.4
-0.4
-0.3
-0.3
-0.2
-0.2
-0.2
-0.1
-0.1

Paraguay
UruguayArgentina
New Zealand
BelizeUgandaBolivia
BrazilGuyanaMalawi
Chile
Kenya
Mauritius
EcuadorCote d'Ivoire

-2.0
-1.8
-1.2
-0.7
-0.6
-0.6
-0.6
-0.4
-0.3
-0.2
-0.2
-0.2
-0.2
-0.2
-0.2

Mali
Peru
Kyrgyz Republic
Chile
BotswanaSouth Africa
Bolivia
Mozambique
Mauritania
GuyanaGhana
UkraineUgandaAustralia
Namibia

-2.3
-1.6
-1.0
-1.0
-0.6
-0.5
-0.4
-0.4
-0.4
-0.4
-0.3
-0.3
-0.3
-0.3
-0.2

Faster growth (+0.5 pp pa)

0.6

Baseline
Weaker growth (-0.5pp pa)
0.4

0.2
Slow growth (-1.0 pp pa)

0

2000

2010

2020

2030

2040

2050

Source: World Bank.

Source: World Bank.

For the majority of developing
countries, supply-side rather thandemand-management policies are
key to assuring stronger growth

If developing countries are to renew with the fast
growth of the pre-crisis period, they will have tocontinue improving along all of these
dimensions. Failure to do so, is likely to see a
gradual slowing in the pace of productivity
improvement, income growth and poverty
reduction.

While some demand stimulus may be in order for
developing countries that still have large output
gaps and where policy space exists, for the
majority of developing countries promoting
stronger growth will require emphasizing thekinds of deeper long-term structural policies that
underpinned the acceleration of growth that they
have enjoyed over the past 15 years. The bulk ofthat acceleration was due to increased
productivity growth, which in turn derived from
improvements in the overall policy environment,
including: greater macroeconomic stability (bringing
inflation, government deficits and debt undercontrol) an opening up to global trade characterized
by substantial declines in tariffs (and often
initiated unilaterally) a similar opening up to FDI, and thetechnology transfers that accompanied it a strengthening of the rule of law; reductions
in corruption; and declines in regulatory
obstructions to business activity
 substantial investments in human capital(education; health; and gender equality) as
well as investment in infrastructure

The longer-term costs of inaction and benefits
are potentially large. Even small changes in thepotential growth rate of developing countries
will, with time, have significant impacts on the
speed with which developing countries close thegap with incomes in high-income countries.
Indeed, a 1 percentage point increase in the
average growth rate of developing countries
between now and 2050 could see them achieve
75 percent of the 2010 per capita income of highincome countries, versus 53 percent in thebaseline or 36 percent in the case where growthunderperforms by 1 percentage point (figure 27).

Concluding remarks
While there are signs that growth is picking up in
developing countries, the world continues to facea bumpy and uncertain recovery. The pace ofrecovery in high-income countries is likely toremain disappointing. Uncertainty over future
policy, and necessary fiscal and financial
restructuring will continue to drag on growth inmany countries. A clear and credible program for
returning high-income economies to a29

Global Economic Prospects January 2013

Main Text

sustainable fiscal path could unleash a virtuous
circle, of reduced borrowing costs that would
reduce the likelihood of default, and lower
interest rates. This in turn would allowing forfaster growth, which would yield additional
reductions in risk and an improved fiscal
position. However, the significant political,
institutional issues and vulnerabilities thatremain make a slower more stuttering progresssuch as in the baseline the more likely outturn.

that may be contained within the aggregate inother World Bank documents.
2. The average core Tier 1 capital ratio for the
23 biggest European banks by assets stood at
11.4 percent in the third quarter of 2012, up
sharply from the 6.5 percent pre-crisis level.
In the United States, the average tier 1 capita
ratio of the 30 largest banks rose to 11.9
percent at the end of September 2012,
compared with 8.5 percent in the second
quarter of 2008.

Developing countries can grow rapidly in thisenvironment. However, to do so they will needto maintain and reinforce the reform momentum
evident during the 1990s and 2000s, and which
underpinned the acceleration in growthobserved. Given the potential volatility of theexternal environment, this should becomplemented by a gradual program of fiscal
consolidation among developing countries andwhere necessary monetary tightening so thatcountries have the kind of policy space thatwould allow them to respond forcefully in theface of a serious downturn.

3. Spreads on Argentine government debt
surged to 3675 basis points (2408 bps sinceJune), following court rulings that called into
question the nation's 2001 debt restructuring
deal. Later in November however, atemporary injunction eased the country‘sdefault risk and currently spreads are around1600 bps.
4. The decline in yields reflects both a 140 basis
point fall in EMBIG spreads since June, and a
decline in U.S. interest rates in reaction toquantitative easing. Developing country bondspreads are now below their long-term
average levels (of around 310 bps).

A longer-term structural reform agenda should
also include efforts to improve food security,especially in the more vulnerable of developing
economies. This would involve increasing local
productivity, improving local storage andtransportation infrastructure, both to reduce
spoilage and to enable improved access toforeign markets in both good and bad times.

5. Most of the upgrades took place in Latin
America, including Bolivia, Ecuador,
Grenada, Panama, Paraguay, Peru, Suriname,and Uruguay. However Argentina, Belize,
and El Salvador experienced downgrades.
Outside Latin America, Indonesia, Turkey,
and Latvia were upgraded to investment
grade, while notable downgrades occurred for
Belarus, Egypt, Serbia outlook, South Africa,
Tunisia, Ukraine, and Vietnam with mostdowngrades occurring since September. In
contrast, high -income countries‘
creditworthiness continued to deteriorate in2012 amid the lingering European debt crisis,with Greece, Italy, Portugal, and Spainsuffering multiple downgrades. Overall, highincome sovereigns experienced a total of 20
downgrades, with one upgrade for Greece in2012.

Meanwhile developing countries need tocontinue to be active players in the G-20
process, both in order to assist high-income
countries recover from the crisis of 2008/9, butalso to ensure that reform efforts (be they infinancial or real markets) take into fullconsideration potential impacts on developing
countries.

Notes
1. In this publication the aggregate developing
Europe & Central Asia refers to the low– andmiddle-income countries (countries with percapita incomes of less than $12,276 in 2010)of the geographical region. As such, thisclassification excludes from the aggregate
Croatia, Czech Republic, Estonia, Hungary,
Poland, Slovakia, and Slovenia — countries

6. For high-income countries, PMI‘s are lower
than would normally be associated withcurrent levels of economic activity. This
likely reflects the very difficult period that the
global economy has gone through, where30

Global Economic Prospects January 2013

Main Text

successive waves of financial market tensions
have arisen, eased and then arisen once again.
Each of these episodes of heightened tensions
has been associated with a temporary increasein precautionary savings and a period of weakgrowth. This experience may have generated areluctance to commit to new expenditures forfear of a renewed slowing of activity, eventhough financial conditions appear to have
improved much more than during earlier
episodes. Weak confidence and uncertainty
also have roots in the very real challenges
facing high-income countries and concern thatpolitical realities will prevent the kind ofdecisive and medium-term action that might
encourage investors and households to believethat economies are likely to return to astronger and more stable growth track.

for developing regions ranging from 0.5 to
2.6.
11.See box 3 in the June 2012 edition of Global
Economic Prospects (World Bank, 2012) for amore complete discussion of carryover (theinfluence of past year‘s quarterly growth rates
on future year‘s annual growth).
12.Policy rate cuts were complemented byliquidity injections by major economies, forexample the Federal Reserve Bank‘s QE3 andthe ECB‘s commitment to Outright Monetary
Transactions. As a result, by 2012Q3,
monetary positions worldwide had become
very accommodative and policy rates had
declined below their 2009 levels. Key policy
rates settled at 7.25 percent in Brazil, at 6
percent in China, at 5.75 percent in Indonesia,
and Turkey 5.5 and at 5 percent in South
Africa.

7. The Case-Shiller 20-city price index increased
at a 2.6 percent annualized pace in the threemonths ending July and housing starts are up
26 percent during the first eight months of2012 versus the same period in 2011.

13.Differences between this scenario and that
presented in the June 2012 edition of Global
Economic Prospects include the timing andamplitude of the modeled deterioration of
conditions. In the present scenario, thedeterioration is assumed to occur in the firstquarter of 2013.

8. The U.S. Office of Management and Budget(Zeints, 2013) provides an estimate of the
fiscal savings from measures put in place
January 1, 2013 of $617bn over 10 years
against an unchanged policy scenario. This
contrasts with the somewhat misleading CBO
estimate of $3.6tn (CBO, 2013) in additional
deficits, which was based on the
counterfactual of all of the sequesters and tax
increases of the fiscal cliff having been fully
engaged.

14.See also box 4.2 ―How would investment
slowdown in China affect other emerging
market and developing economies?‖ IMF
2012.
15.Quarterly inflation is in double digits in 11 of
the 38 countries where inflation exceeds 6
percent (Belarus, 30 percent; Burundi, 14.3
percent; Eritrea, 13.5 percent; Ethiopia, 26
percent, Malawi, 30 percent, South Sudan, 41
percent, Sudan, 46 percent; Iran, 30 percent,Syria, 40 percent and Venezuela, 18 percent).

9. On August 5 2011, Standard & Poor‘sdowngraded the sovereign debt of the UnitedStates from a AAA to AA+ rating, citing
among other reasons, the failure of theauthorities to address medium-term fiscal
issues — including the debt ceiling (Standard& Poors, 2011).
10.Typically, fiscal multipliers have been
estimated in the range of 0.3 to 1
(Spilimbergo, Symansky, and Schindler,2009). Most recently, the IMF (2012) argued
that in the current recession fiscal multipliersin high-income countries have been higher
perhaps as high as 1.7. Data derived from the2008/9 crisis period suggests point estimates

31

Global Economic Prospects January 2013

Main Text

References______. 2012b. World Energy Outlook 2012.
OECD/IEA, Paris.

Bureau of Transportation Statistics. 2012. Table
4-23: Average Fuel Efficiency of U.S. Light
Duty Vehicles. http://www.bts.gov/
p u b l i c a t i o n s /national_transportation_statistics/html/
table_04_23.html Downloaded November 24,
2012.

IMF (International Monetary Fund). 2005. World
Economic Outlook. Washington, DC: IMF.
______. 2012. World Economic
Washington, DC: IMF.

Outlook.

Mise, Emi, Tae-Hwan Kim, and Paul Newbold.
2005. ―On Suboptimality of the HodrickPrescott Filter at Time-Series Endpoints.‖
Journal of Macroeconomics 27: 53–67.

CBO (Congressional Budget Office). 2001.
―CBO‘s Method for Estimating Potential
Output: An Update.‖ CBO Paper,
Congressional Budget Office, Washington
DC.

OECD. 2008. Economic Outlook. Paris, France.
Sløk, Torsten. 2012. Fiscal Cliff not going toreverse housing recovery. Chartbook,
November, Deutsche Bank. Downloaded
Nov. 25, 2012.

______. 2012. An Update to the Budget andEconomic Outlook: Fiscal Years 2012 to2022. Downloaded Dec. 3, 2012. http://
www.cbo.gov/sites/default/files/cbofiles/
attachments/08 -22-2012Update_to_Outlook.pdf

Standard & Poors. 2011. Global Credit Portal:
Ratings Direct. ―Research Update: UnitedStates of America Long-Term Rating
Lowered to ‗AA+‘ on Political Risks andRising Debt Burden; Outlook Negative.‖
http://www.standardandpoors.com/ratings/usrating-action/en/us/. Downloaded Dec. 11,2012.

______. 2013. H.R. 8, American Taxpayer Relief
Act of 2012. Downloaded Jan. 2, 2013. http://
www.cbo.gov/publication/43829
Ehrman, Michael, and Frank Smets. 2001.
―Uncertain Potential Output: Implications for
Monetary Policy‖. European Central Bank
Working Paper No. 59.

Spilimbergo, Antontio, Steve Symansky, andMartin Schindler. 2009. ―Fiscal Multipliers‖
IMF Staff Note, SPN 09/11. Washington DC.

Food and Agriculture Organization. 2011. The
State of Food Insecurity in the World: How
does international price volatility affectdomestic economies and Food Security? Foodand Agriculture Organization of the United
Nations, Rome.

World Bank. 2011. Global Economic Prospects:
Maintaining Progress amid Turmoil. June
2011. Washington, DC: World Bank.
______. 2012a. Global Economic Prospects:
Managing Growth in a Volatile World. June
2012. Washington, DC: World Bank.

Giorno, Claude, and others. 1995. ―Potential
Output, Output Gaps and Structural Budget
Balances.‖ OECD Economic Studies. No. 24.

______. 2012b. Global Monitoring Report: Food
Prices, Nutrition, and the Millennium
Development Goals. Washington, DC: WorldBank.

Ilzetzki, Ethan, Enrique G. Mendoza, and Carlos
A. Végh. 2011. ―How Big (Small?) Are Fiscal
Multipliers?‖ IMF Working Paper. WP/11/52.
IMF, Washington, DC.

Zeints, Jeffery. 2013. American Taxpayer Relief
Act Reduced Deficits by $737 Billion. Officeof Management and Budget. Washington DC.
Downloaded January 2, 2013 from http://
www.whitehouse.gov/omb/blog

International Energy Agency (IEA). 2012a. Oil
Market Report (13 November 2012). OECD/
IEA, Paris.

32

Global Economic Prospects January2013

Finance Annex

Financial Markets
below their January 2010 levels (prior to theinitial bout of Euro Area tensions) in most highincome countries and those of developing
countries have declined on average 90 bps since
the end of June with largest falls recorded bydeveloping European economies (figure FIN.1).

Recent developments in financial markets
Conditions in global financial markets haveeased significantly since July following thedecisive actions taken by the European Central
Bank, US Federal Reserve and to a lesser degreein Japan.

The reduced likelihood of an acute European
crisis, and increased global liquidity contributed
to a recovery in global equity markets. Afterlosing about 10 percent of their value between
mid-March and mid-May, global stock markets
have recovered with a full year gain of 13.9
percent in developing countries and 12.7 percent
in developed countries (figure FIN.2). Despite
these improvements, investors remain concernedover the US fiscal challenges, global economic
growth and implementation of the Euro area
rescue plan.

The announcement of possible ECB measures todefend the Euro in late July and the actual launchof ECB’s bond-buying program followed by theGerman Constitutional Court favorable ruling on
the European Stability Mechanism in September
have lowered the risk of an acute European crisis(box FIN.1: Recent developments in Euro-zone).
Also in September, the Federal Reserve began its
third round of quantitative easing (QE) with $40
billion asset purchase per month. A few days
later, the Bank of Japan also added ¥10 trillion($129 billion) to its asset purchasing program.

Improved sentiment was accompanied by arecovery in gross capital flows to developing
countries

Since July 2012 yields of high-spread Euro Area
sovereigns have narrowed substantially andfinancial markets’ assessment of risk has
improved considerably. The cost of insuring
against sovereign default on high-spread
European countries has sharply from earlier
highs. Credit Default Swap (CDS) rates are now

Gross capital flows (international bond issuance,cross-border syndicated bank loans and equity
placements) to developing countries havefluctuated widely with investor sentiment overFigure FIN.1 Developing country CDS rates tightened
as risk-aversion eased

Figure FIN.2 Global equity markets had a modest
rebound since June 2012

East Asia&Pacific
Europe&Central Asia
Latin America& Caribbean
Middle East & North Africa

CDS Sovereign rates
basis points
500

MSCI Equity Index
Jan 2011 =100

Developed Markets

110

450

105

400

100

350

95

300

90

250

85

200
150

80

100

75

50

70
Jan-110
Jan-11

Emerging Markets

May-11

Sep-11

Jan-12

May-12

Sep-12

May-11

Sep-11

Jan-13

Source: Datastream and World Bank.

Source: Bloomberg.

33

Jan-12

May-12

Sep-12

Jan-13

Global Economic Prospects January2013

Finance Annex

Box FIN 1. Euro Area developments in the second half of 2012
The Euro Area’s crisis response has progressed significantly during the second half of 2012. In mid-July, markets
concerns rose due to uncertainty surrounding several key events scheduled for the first half of September. Investors worried that thin August markets would provide limited opportunity to hedge against possible downside risks.
Market concerns were significantly eased when ECB President Draghi delivered a forceful speech in London on
July 26th, in which he emphasized that ―the ECB is ready to do whatever it takes to preserve the euro. And believeme, it will be enough.‖ This was followed by a decision at the ECB Council meeting on September 6th to introduce a new facility for Outright Monetary Transactions (OMT). The promise and follow-through actions managed
to calm the markets and led to a significant rebound in key markets. Most significantly, 10-year sovereign yields in
Spain and Italy fell by 148 and 146 basis points since late-July to 5.27 percent and 4.49 percent in December, respectively (box figure FIN 1.1). Equity markets have also responded very positively, with key Spanish and Italian
equity indices up by 23.4 percent and 19.7 percent, respectively since July 27th.
In addition to the ECB’s actions, some other positive developments in September have helped to further improvement in the global financial markets. The German Constitutional Court recognized the legality of the European
Stability Mechanism (ESM), thus paving the way for the ESM to begin operations in October. This was crucial as
the ECB's OMT will operate alongside a precautionary ESM facility. The Dutch election produced a solid vote forcentrist pro-euro parties. Finally, there has been some early movement in a key institutional reform: the European
Commission’s proposal to establish a single bank supervision mechanism for Euro Area banks.
By the end of November, the Troika and the Greek government agreed on a package of measures including a reduction in rates on bailout loans, suspension of interest payments for a decade. In December, the Greek government completed a debt buyback program from its private sector creditors in an effort to cut the country’s public
debt level. The country was also cleared to receive a €34.4 billion loan installment in December 2012.
Considerable uncertainties still remain, however. First, markets have already priced in OMT support, though thespecifics remain to be worked out. Second, the ambitious plans and timetable for the establishment of single banksupervision mechanism have already raised some tensions both within the Euro Area and between EU governments and outside the Euro Area.
Box figure FIN 1.1

Source: Bloomberg.

the past few years (figure FIN.3). After rebounding the easing of flows in August reflecting a normal
during the first quarter, flows fell by about 30 and seasonal lull—as the ECB measures reduced the
40 percent in May-June following the heightened perceived probability of an acute Euro-area crisis
uncertainty related with the Euro-area debt crisis. and monetary-easing by Federal Reserve and Japan
Nevertheless, flows have rebounded since July— Central Bank increased global liquidity. With the34

Global Economic Prospects January2013

Finance Annex

highest monthly flows since 2007 in September
and robust flows since then, gross flows totaled$530 billion, recording a 17 percent increase
compared to 2011.

September. The over-subscribed equity
placement by Russia’s Sberbank for $5.2 billion
in September was followed by few large deals bycompanies from China, Russia and Turkey inNovember and December. As a result, total
equity issuance totaled $103.4 billion in 2012,17 percent higher than 2011.

Bond issuance by developing countries reached ahistoric high in 2012 at $257 billion, almost 50
percent higher than last year’s strong flows.
Issuances in September ($32.2 billion) was thehighest monthly issuances by developing
countries on record followed by around $30
billion issuances both in October and November.
While corporate issuers from Brazil, Russia,
Mexico, and China in financial and oil& gas
sectors continued to dominate the market, there
were also several sovereigns and developing
country corporate borrowers that came to themarket for the first time—attracted by low
borrowing costs due to unprecedented global
liquidity and investors’ intense search for yield.
Bond emissions have also been boosted by the
relative weakness of bank-lending and volatility
in equity markets (box FIN.2: The changing
landscape of international debt markets), both
symptoms of the financial turmoil of the past
few years.

In contrast to bond and equity issuance,
syndicated bank lending to developing countries
remained subdued this year at $169.5 billion
recording a 12.4 percent decline compared to lastyear. While it is difficult to disentangle effects,
deleveraging by high-income country banks andthe low cost of bonds are among the factors
behind these low flows. However, bank-lending
has also shown some tentative signs of recovery
in recent months perhaps reflecting less intenseEuro Area deleveraging. Syndicated banklending to developing countries between
September and December was the higher thanlike periods in 2010 and 2011.
Foreign direct investment inflows to developing
countries fell slightly during the first half of2012 following the heightened uncertainty inearlier months

Equity issuance by developing countries was
also weak in most part of 2012 as companies
stayed away from initial public offerings (IPO)
due to volatility in equity markets. Neverthelessthe issuance has pickedslightly since

Foreign direct investment (FDI) inflows todeveloping countries declined by 5% (year-overyear) during the first half of the year following
the increased uncertainty in the global financial

Figure FIN.3 September marked the highestmonthly flows since 2007

Figure FIN4. FDI inflows to developing countries
slowed down in 2012
$ billion

70

150$ billion

140

Syndicated Bank Lending
Bond Issuance
Equity Issuance

60
50

130
120
110
100

40

90
80

30

70

20

60
2009Q1

10Mar-12

May-12

Jul-12

Sep-12

2010Q3

2011Q2

2012Q1

Note: Countries include Brazil, Bulgaria, Chile, China, India, Indonesia, Kazakhstan, Latvia, Lithuania, Malaysia,
Mexico, Peru, Romania, Russia, Serbia, South Africa, Thailand, Turkey, Ukraine and Venezuela.
Source: World Bank estimates based on data from Central
Banks.

0
Jan-12

2009Q4

Nov-12

Source: Dealogic and World Bank.

35

Global Economic Prospects January2013

Finance Annex

markets due to Euro-zone problems in late 2011
(figure FIN.4). The decline in actual flows wasmuch less acute than the 20 percent suggested byhigh-frequency cross-border mergers andacquisitions and green-field investment data. The
relative resilience of overall FDI, likely reflects
more stable re-invested earnings and intracompany loans.

are expected to fall around 6 percent to $600
billion.

International capital flows in 2012
Net private capital inflows (earlier data referred
to gross flows) to developing countries are
estimated to have declined to $0.99 trillion (4.1
percent of GDP) in 2012 from $1.1 trillion (4.7
percent of GDP) in 2011 (figure FIN.5). Despite
the volatility in market sentiment throughout theyear, significant progress in Euro Area crisis
response followed by monetary easing by thehigh-income economies ceased the downward
trend in capital inflows to developing countries
toward the middle of the year. Nevertheless withexception of net bond and portfolio equity
inflows, all other flows marked a decline. The
largest drop was in net bank lending(disbursement minus repayments). Net banklending with both types of maturities (short- andmedium & long term) declined by 33 percent.
The fall in short-term flows partly reflects
slower trade growth and reduced demand for
trade finance.

FDI performance during the first half of the year
varied across regions. Flows were very weak formost Eastern European countries including
Russia, Latvia, Lithuania, and Serbia as thesecountries continued to be affected by the
economic weakness in high-income Europe.
With the exception of Thailand and Philippines,
FDI inflows to most East Asian economies also
declined. In contrast, FDI inflows increased inalmost all Latin American countries supported
by high commodity prices and increased
investment from the United States, especially toArgentina and Colombia.
Mixed FDI performance is expected to havecontinued in the second half of the year. The
favorable financial conditions since July haveencouraged cross-border acquisitions in somedeveloping countries. Flows to Latin America
are expected to be strong in the second half as
the Belgian beer company AB InBEv’s megabuy-out of Mexico’s Mexican beer maker Grupo
Modelo for $20.1 billion is fully reflected in thedata. At the same time, several countries inemerging Europe including Russia, and Turkey
have announced plans to accelerate privatization
efforts. That said, there have already been few
postponements and less successful sales in
Russia’s banking sector since Russia’s
successful sale of a stake in Sberbank—one ofits largest banks—in September, suggesting thatinvestor appetite might be still limited for theseassets. In addition, inflows to large middle
income countries such as China and India are
expected to decline this year. China is
experiencing structural adjustments in their FDI
flows, including the relocation of labor-intensive
and low-end market-oriented FDI to neighboring
countries. Slow growth and some regulatory
uncertainties held back the investment flows to
India. As result, FDI inflows for the whole year

Deleveraging by international banks cut intoacquisition and trade financeThe 2008/9 financial crisis has put significant
deleveraging pressures on global banking
system. Banks have been forced to cut their loan
Figure FIN.5 Net private capital inflows fell in 2012

$ trillion
1.2
1.0

ST Debt
Bank Lending
Bond Flows
Portfolio Equity
FDI Inflows

0.8
0.6
0.4
0.2

0.0
-0.2

2008

2009

Source: World Bank.

36

2010

2011

2012e

Global Economic Prospects January2013

Finance Annex

portfolios to offset balance sheets losses fromloan and capital losses. The pressures have been
particularly strong among high-income European
banks as faltering growth prospects and debt
problems undermined the value of theirsovereign and other assets. Funding conditions
were exacerbated toward the end of 2011, when
new regulations tightened capital ratio
requirements and increased dollar liquidity
constraints. Deleveraging was achieved througha combination of reduced lending, sales of nonstrategic assets, and exit from riskier businesses
subject to tighter capital buffer requirements.
High-income bank deleveraging and tightened
credit standards cut directly into capital flows todeveloping countries—most notably thosecountries and regions with close ties to European
banks.

fall likely reflects a decline in demand for loans
due to weak economic activity and thecancelation or postponement of expansion plans
given increased economic uncertainty. Suchloans fell most sharply in Europe and Central
Asia (93 percent)—the developing region
hardest hit by the crisis, and Latin America (73percent) a region with close ties to the European
banking system. Loans to South Asia werebroadly stable.
Syndicated lending for trade finance purposes
was also considerably affected with a 35 percent
fall compared to its pre-crisis levels. The decline
mostly reflects retrenchment by the European
banks that played a pivotal role in global tradefinance provision. In addition to their need torebuild their capital stock, dollar funding
challenges of European banks constrained theirability to fund trade activity. Most of the tradetransaction settlements are made in US dollars,and European banks suffered from limited accessto dollar funding during the second half of 2011
after US money market funds withdrew some of
their investment as the European debt crisis.
Trade related funding shortfalls were sharpest
for Sub-Saharan Africa (70 percent) andEuropean countries (50 percent), followed by
Latin America and Middle East and North Africa(25 percent). Anecdotal evidence suggests that
other international lenders (mainly Asianfinancial institutions such as Japanese banks)

Since 2008 spreads on all types of loans widened
sharply from a range of 100 to 150 bps to arange 250 to 350 bps (figure FIN.6). Despite the
sharp increase in spreads, borrowing cost
actually declined because of the sharp
compression in the underlying pricing
benchmark six-month Libor rate (box figure FIN
2.2). Most of the reduction in syndicated banklending to developing countries concerned loans
for acquisitions purposes (figure FIN.7).
Acquisition loans are usually given to acompany to buy specific assets and are typicallyused of short-term tenor. Some of the 70 percent

Figure FIN.7 Funding for acquisitions and tradefinance declined

Figure FIN.6 Spreads on bank-loans widened
sharply
Basis Point

500
400
300

$ billion
Acquisitions
General corporate purposes
Others
Project financeRefinancing
Trade financeWorking Capital

200
180
160
140
120
100
80
60
40
20
0

200
100

2005-20082009-2012

Refinancing

02005 2006 2007 2008 2009 2010 2011 2012

Source: Dealogic and World Bank.

Acquisitions

GeneralCorporate
Purposes

Source: Dealogic and World Bank.

37

Trade
Finance

Project
FinancingGlobal Economic Prospects January2013

Finance Annex

Box FIN 2. The changing landscape of international debt markets: rising bond issuance amid decliningbank-lending
Historically, the majority of developing countries relied more on bank credit rather than bond financing for their external financing needs as cross-border bank lending tended to be cheaper, and developing higher-risk developing countries
had better access to bank lending. Information asymmetry plays an important role in differences between bank andbond financing in terms of access and cost. Banks have closer customer relationships with borrowers than bondholders
and therefore have an advantage in monitoring creditworthiness – which has traditionally resulted in lower costs. Otherwise high risk borrowers might get access to bank lending, if projects were backed by well-defined revenue streams
based on natural resource etc. Another impediment to bond lending were the institutional and legal benchmarks(sovereign credit ratings, etc) required by bond holders. As a result, higher-risk borrowers including some sovereigns,
companies rated sub-investment grade and most low-income countries tended to have access only to bank financing.
Since the 2009 financial crisis, bond financing has played an increasingly important role in international debt flows todeveloping countries. The injection of liquidity into global financial markets, quantitative easing efforts of high-income
central banks, continued improvement in developing-country credit quality (both in absolute and relative terms) havemade the conditions for bond financing more favorable for developing countries. As a result, developing countries haveissued increasing quantities of international bonds. Total bond issuance by developing countries reached $724 billion
during the 2009-2012 period compared with $374 billion during the boom years of 2005-2008 (box figure FIN 2.1).
These improvements as syndicated bank lending to developing countries fell to $632 billion during 2009-2012 compared with $793 billion during 2005-2008. While many factors were at play, deleveraging pressures as well as tighter
regulations contributed to the contraction in international bank-lending. As a result, international bond issuance now
accounts for more than half of the international debt flows to developing countries since 2009, compared to less than
one-third between 2005 and 2008.
Declining cost and improved access have contributed to the increased bond flows in recent years. Cost of borrowing
through international bond issuance has declined considerably over time with the exception of the spike in November
2008 just after the crisis. Average cost of bond financing (proxied by 10-year U.S. Treasury bond yield + EMBIG cash
bond spread) has fallen to a record low level of 460 bps in November 2012 from 680 bps in January 2010. Most of the
reduction in cost was due to the fall in benchmark10-year U.S. Treasury bond yield while the very low policy rates andquantitative easing in high-income countries have kept the price of risk and spreads low for developing countries(Hartelius et al 2008). While cost of bond-financing remains higher than bank-loan, the cost difference between bondand syndicated bank loans (the underlying pricing benchmark, usually the six-month Libor rate + average spread) has
also narrowed (box figure FIN 2.2). With the comparable costs, many large developing country companies relied onbond financing as a substitute for declining bank-lending.
Also, unprecedented investor demand—supported by G3 monetary easing and increased search for yield— has enabled
frontier-market and infrequent issuers to tap the international bond market in recent years, especially during the second
half of 2012. For example, Angola and Zambia for the first time ever and Bolivia in 90 years issued sovereign bonds.
Others governments such as Kenya, Paraguay, Rwanda, Tanzania, and Uganda, as well as numerous companies with
sub-investment grade credit ratings are preparing to issue bonds for the first time in coming months.
Box figure FIN 2.1 Increasing bond flows amid declining bank lending

Box figure FIN 2.2 The difference in cost of bondfinancing and bank-lending narrowed
12

450

Average cost of borrowing, percent

Syndicated Bank Loans$ billion

10

Bond Issuance

400

International Bond Financing
Syndicated Bank Loans

8

350
300

6

250
200

4

150
2

100
50

0
Jan-08

0
2005

2006

2007

2008

2009

2010

2011

2012

Source: Dealogic and World Bank.

Nov-08

Sep-09Jul-10Source: Dealogic and World Bank.

38

May-11Mar-12

Global Economic Prospects January2013

Finance Annex

and domestic banks (mostly in Latin America)
filled the funding gap in their corresponding
regions. The WBG has increased its support totrade finance in low income countries, throughthe IFC’s Global Trade Finance Program, and a
program to support commodity traders from low
income countries.

assessment of the credit quality this year, the risk
profile of developing countries continued to
improve compared with high-income countries
which experienced further deterioration in
2012—suggesting that they will continue toattract a growing share of international capital
flows.FN1 Despite the weak growth environment,
developing countries are expected to growbetween five to six percent in coming years morethan twice as fast as high-income countries.
Flows are also likely to be attracted by thesehigher growth prospects and risk-adjusted
interest rates (despite the recent easing ofmonetary policy in many developing economies,
interest rates in these economies are expected toremain higher than in rich countries).

Despite the decline in total loans, average
maturity for all types of syndicated bank loans
remained at their pre-crisis levels, around five to
six years. Even for project finance which tends
to be funded by longer-term loans—maturities
have remained more or less stable at around 9
years since 2005.
One cautionary factor, however, is the increased
concentration of bank loans since 2009.
Investment grade borrowers accounted for 80
percent of bank loans since 2009, up sharply
from 72 percent during 2005-2008. Increased
bias toward investment grade borrowers might
partly reflect preparation for the upcoming
regulatory changes. For example, some banks
soon will start operating under Basel III with arange of provisions and tightening of conditions(box FIN.3: Deleveraging in banking sector).
These banks may have been adjusting theirbalance sheets in response to the enhanced
recognition of counterparty risk and an increasein risk-weight of certain lines of business. Thereare concerns that some of the provisions under
Basel III may exacerbate further deleveraging
and increase the borrowing costs for tradefinance and project finance.

Under the baseline scenario that there will not be
a major set-back in the resolution of Euro-areacrisis and US fiscal challenges, and that there
will be no major loss of confidence in the global
financial markets, net private capital flows areprojected to increase to $1.12 trillion (4.15
percent of developing-country GDP) in 2013 andgradually reach $1.35 trillion (4.1 percent) by
2015 (figure FIN.8, table FIN.1). Increased
global liquidity and monetary accommodation in
major high-income countries (the US Federal
Reserve indicates its policy rate will remain low
till 2014) are expected to keep high-income
country interest rates low, prompting search foryield and supporting capital flows to developing
Figure FIN.8 Capital flows to developing countries

Even without the burden of additional regulatory
measures, the cost of borrowing for both bondand bank financing will increase in the medium
term when developed countries start monetary
tightening as low benchmark rates have kept thecosts down especially after the crisis.

ST Debt

Bank Lending

Bond Flows

Portfolio Equity

FDI Inflows$ trillion

as a share of GDP (RHS)

9
8
7
6
5
4
3
2
1
0

1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
-0.2

Prospects: Going up but might be a
bumpy ride…
Medium-term prospects for capital flows todeveloping countries are for continued modest
increases (as a share of recipient GDP). With
more upgrades than downgrades market

2004

2006

2008

Source: World Bank.

39

2010

2012e 2014f

Global Economic Prospects January2013

Finance Annex

Box FIN.3 Deleveraging in the banking sector: progress has been made but pressure to do more remains
The more comprehensive yet less-up-to date data on bank-lending (discussion in the text is on only syndicatedbank lending portion) indicate that the pace of deleveraging slowed down earlier this year. Total international
claims—including all cross-border and local claims in foreign currency—by Bank of International Settlements(BIS) reporting banks declined by $616 billion (3.2 percent) in the second quarter of 2012. While the cut reversed
the short-lived rebound of $956 billion (5.2 percent) in the first quarter supported by ECB’s large liquidity provision in December 2011 and February 2012, the reduction was still much lower than $1.3 trillion (7 percent) decline in international claims in the fourth quarter of 2011. In addition, international claims on developing countries
only decreased by $8 billion during the second quarter, with all the decline coming from short-term claims (debtwith an original maturity of one year or less). The fall in short-term debt—most part trade finance in developing
countries—partly reflects the sharp decline in trade activities in the second quarter of the year (see the trade annex)
and partly confirms the tension in trade financing market.
Several factors helped to curb the pace of deleveraging process earlier this year. An important factor is the completion of the process of meeting the capital ratio requirements by European Banking Authority (EBA) by June 2012.
The deleveraging by European banks intensified in October 2011 after EBA introduced 9 percent capital ratio requirement after adjustments for sovereign risk holdings. In fact, most banks announced that they fulfilled the requirement earlier than the deadline. According to EBA’s October review report, more than 75 percent of the banks
reached the required capital ratio by June 2012 mostly through assets disposal and deleveraging. FN2 Second, extraordinary liquidity injection by the ECB LTOR operations in December 2011 and February 2012 eased the funding pressures through boosting confidence in interbank market and helped European banks to reduce their dependence on US money market funds. Several European banks were faced with dollar funding challenges during thesecond half of 2011 after US money market funds withdrew some of their investment as the European debt crisis
escalated.
There are some indications that the slowdown of the deleveraging process has continued also later in the year.
First, syndicated bank-lending to developing countries was 67 percent higher in the second half of 2012 comparedto the first half of 2012. Second, the recent IIF Emerging Market Bank Lending survey indicates sharp improvement in funding conditions for 2012 Q3, for the first time since 2010 especially in Emerging Europe.
Nevertheless, deleveraging pressures on all international banks are expected to continue in medium-term withstrict regulatory changes ahead. Global banks will soon start operating under Basel III with a range of provisions
and tightening of conditions including higher risk-weighted capital requirements and non-risk weighted leverage
ratio. While qualifying capital requirements gradually phase in through 2019, the adjustments to risk-weighted
asset calculations will occur instantaneously. Most banks have been deleveraging to adjust their balance sheets in
response to the enhanced recognition of counterparty risk that will lead an increase in risk-weight of certain line ofbusiness (fixed income trading businesses) and to reach capital ratios faster in response to market and regulatory
pressure. Concerns have been raised about possible unintended consequences of Basel III on developing countries.
According to a recent report prepared for G-20 countries, in addition to higher capital requirements some Basel III
rules related with counter-party credit risk, the measurement of risk between a parent bank and its subsidiary andcapital requirements for certain business activities may exacerbate deleveraging and increase the costs of global
banks operating in developing countries, thereby reducing credit and financial market liquidity. FN3 The report alsosuggests Basel III rules may significantly increase the cost of trade finance and project finance, two forms of credit
that are particularly important in the developing countries. The other highlighted concern is the possible home bias
for banks that operate globally as a result of either the design of the reforms or the way that they are implemented
in other jurisdictions.
Any change in lending strategies of international banks may have an important impact in many developing regions. As of June 2012, international claims by the BIS reporting banks were $2.4 trillion in developing countries.
The importance of these claims is still the highest for the Europe and Central Asia region ($504 billion, 13 percent
of GDP) and the Latin America region ($632 billion, 12 percent) followed by the East Asia and Pacific region($855 billion, 9.5 percent ). The claims in other regions are smaller but still significant with the Sub-Saharan Africa region ($131.9 billion, 5 percent) and Middle East and North Africa ($52 billion, 4.2 percent).

40

Global Economic Prospects January2013

Finance Annex

Table FIN.1 Net capital flows to developing countries ($billions)
Current account balance

2008
412.9

2009
240.5

2010
187.5

2011
152.1

2012e
12.6

2013f
-8.0

2014f
-65.4

2015f
-80.4

Capital inflows

812.6

701.7

1,219.1

1,112.4

1,007.2

1,134.1

1,250.9

1351.5

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

782.2
583.3
636.9
-53.6
198.8
-8.6
223.3
-17.1
1.3
30.4
7.2
10.8
12.4

620.7
542.0
427.9
114.2
78.7
61.0
-11.9
17.8
11.7
81.0
18.3
26.8
35.9

1,145.9
710.8
582.7
128.2
435.1
129.7
37.2
257.6
10.7
73.2
22.4
13.8
36.9

1,082.4
647.8
638.8
8.9
434.6
123.8
108.2
189.3
13.3
30.0
6.6
0.5
22.8

993.1
644.5
600.1
44.4
348.6
143.3
71.5
126.7
7.1
14.1
4.6
-3.9
13.4

1,123.4
761.2
693.2
68.0
362.2
126.1
80.6
146.3
9.2
10.7

1,244.2
856.1
756.5
99.6
388.1
108.4
88.9
180.4
10.4
6.7

1348.4902.9
782.96119.90445.50110.50105.10220.109.80
3.10

Capital outflows-321.4-174.5-310.0-320.0-370.6-373.4-414.3-463.6-211.8
-32.3
-78.3
1.0

-144.3
-75.2
50.7
-5.7

-213.9
-46.5
-57.3
7.7

-213.1
-15.9
-81.0
-10.0

-238.0-17.6-103.0-12.0-275.0
-19.4
-72.0
-7.0

-325.0
-22.3
-61.0
-6.0

-370.0
-28.6
-56.0
-9.0

Net capital flows (inflows + outflows)

491.2

527.2

909.1

792.4

636.6

760.7

836.6

887.9

Net unidentified flows/a-78.3-286.7-721.6-640.3-624.0-768.7-902.0-968.3

FDI outflows
Portfolio equity outflows
Private debt outflows
Other outflows

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

countries in coming years. Bank lending is
expected to rise gradually as intensedeleveraging pressures have now eased.
Nevertheless the growth in private debt flows todeveloping countries in the medium term will behindered by a tightening of regulatory and a
gradual policy tightening after 2014 indeveloped countries.

Russia has committed to reducing restrictions on
foreign investors in number of services
industries. Several countries in Eastern Europe
have been pursuing privatization in their services
sector. Similarly, India might attract influx ofinvestment in coming years as the cap on foreign
ownership in multi-brand retail and aviation
businesses has been raised comes in the
backdrop of a worrisome decline this year.
While China continues to be experiencing rising
wages and productions costs, multinationals areinvesting in China to serve its rising middle
income. FDI inflows to developing countries
will be supported by increasing South-Southflows as the capital outflows increase over theyears.

FDI inflows to developing countries are
expected to increase throughout the forecast
period reaching $783 billion (2.4 percent ofGDP) by 2015. Despite the considerable realside uncertainties in the short-term,
multinationals continue to be attracted todeveloping countries’ medium-term growthprospects, large and growing consumer base,natural resources and still low labor costs. In
addition, many developing countries are bringing
down barriers on foreign investment. For
example, following its recent WTO accession

FDI inflows are expected to increase also in lowincome countries supported by rising SouthSouth FDI and resource-related investments.
This is particularly important as FDI is an

41

Global Economic Prospects January2013

Finance Annex

important source of external financing for these
economies with limited or no access to othertypes of capital flows. In addition, the outlook
for net overseas development assistance (ODA),
which has been a stable source of development
financing for the poor economies, looks gloomy.
As discussed in detail in the finance annex of theJune edition of GEP 2012, many high-income
countries continue to struggle with fiscal
sustainability, and it is unlikely that they will beable to meet their Monterrey targets of providing
0.7 per cent of their national income in ODA—
except in a few instances.

Egypt, Serbia, South Africa, Tunisia,
Ukraine, and Vietnam with mostdowngrades occurring since September. Inc ont r a st , hi gh -i ncome c ount r i es ’creditworthiness continued to deteriorate in2012 amid the lingering European debt
crisis, with Greece, Italy, Portugal, andSpain suffering multiple downgrades.
O ver al l , hi gh -i nco me s o ver ei gn s
experienced a total of 20 downgrades, withno upgrades in 2012.
2. EBA reports states that of 37 banks withinitial shortfall, 24 of them have achieved
the capital requirement and EBA initiatedbackstops only for four banks. They
excluded three banks for further action since
they are already going through deep
structuring. Also six Greek banks are
excluded since their issues are being
addressed by the Greek program.

The outlook for private capital flows is still
subject to serious downside risks. First despite
the recent progress towards a resolution for Euro
-area debt crisis, considerable uncertainties
remain related to the implementation of the
ECB’s announced but not-tested OMT plan; its
ability to resolve the debt issues of high-spread
economies; the speed of economic adjustment inhigh-spread countries; and the establishment of asingle bank supervision mechanism. Any major
set-back could lead to a renewed crisis ofconfidence and potentially a freezing up offinancial markets. A lack of progress in dealing
with the fiscal challenges in the US and Japan
have similar potential to generate confidence
issues. These uncertainties are likely to generate
volatility on the way even if they do not get to alevel to reverse the upward trend in capital
flows.

3. ―Identifying the Effects of Regulatory
Reforms on Emerging Market andDeveloping Economies: A Review ofPotential Unintended Consequences‖
prepared for G20 Finance Ministers andCentral Bank Governors by the Financial
Stability Board in coordination with Staff ofthe International Monetary Fund and theWorld Bank,
19 June 2012. (http://
www.financialstabilityboard.org/
publications/r_120619e.pdf)

Notes:
1. With 26 upgrades and 17 downgrades
market assessments of the credit quality ofdeveloping countries improved in 2012.
Most of the upgrades took place in Latin
America, including Bolivia, Ecuador,
Grenada, Panama, Paraguay, Peru,
Suriname, and Uruguay. However
Argentina, Belize, and El Salvador
experienced downgrades. Outside Latin
America, Indonesia, Turkey, and Latvia
were upgraded to investment grade, while
notable downgrades occurred for Belarus,

42

Global Economic Prospects January 2013

Industrial Production Annex

Industrial Production
high-income countries. The weakening in overall
activity comes despite a strengthening of growthin the developing countries that is equally robustin China and other developing regions.

Recent economic developments
The financial turmoil in high-income Europe in
May and June cut sharply into economic activity
worldwide. Faced with yet another round of
market uncertainty, firms, and households cut
back on investments and big-ticket expenditures– causing global industrial production, which
had been growing at a 5.9 percent annualizedpace in the first quarter of 2012, to remainbroadly flat in the second quarter. Althoughindustrial activity in both developing anddeveloped economies slowed, the deceleration
was more marked in developing countries (from11.1 to 1.5 percent) than in high-income
countries where output contracted at an 1.1
percent annualized rate, following a muted
expansion in the first quarter.

Industrial production in high income countries
fell at a 5.9 percent annualized pace in the threemonths ending in November. A sharp drop in
activity in Japan, by an annualized 18 percent in
the three months ending in November, reflects
an end to post-crisis auto purchase incentives on
the one hand, and a decline in exports to China
due to tensions over the sovereignty of islands inthe region. U.S. weakness appears to reflect the
impact of uncertainty about the future conduct offiscal policy, as it mainly reflects fallinginvestment expenditures, while consumer
demand has remained relatively robust with arebound in the housing market. Euro Area
weakness, which has spread from high-spread
economies to Germany and France likely reflects
weaker external demand for capital goods aswell as a reaction to recent policy changes.
Industrial production in the Euro Area declined
at an 7.1 percent annualized pace during thethree months ending November 2012, with
output in Germany and France falling 9.2
percent and 7.2 percent (3m/3m saar).

The sharp decline of industrial activity indeveloping countries during the second quarterreflected a series of factors, including: a preexisting policy-induced slowdown in several
middle-income countries (Brazil, China, India,
Turkey, among others) that had reached capacity
constraints; a slowing in the East Asia andPacific region from an unsustainable pace, as
activity rebounded following the Tohoku
Tsunami and flooding in Thailand; and perhaps
most importantly an increase in precautionarysavings as the increased turmoil in Europe
sparked concerns about future demand levels andthe possibility of a major crisis (box IP.1).

Table IP.1 Industrial production is recovering in mostdeveloping regions

World
High-income
United States
Japan
Euro Area
Other high-income
Developing
East-Asia & Pacific
Europe & Central Asia
Latin America & Carribbean
Middle-East & North Africa
South Asia
Sub-Saharan Africa

Industrial activity in developing countries isnow strengthening, but industrial activity has
weakened further in high income countries
Since then the pace of activity developing
countries has picked up, but growth in highincome countries appears to be weakening again(table IP.1). Overall, global industrial productionrose at an 0.1 percent annualized pace during thethird quarter of 2012, but data for November
suggest a return to contraction in the fourth
quarter, mainly reflecting declining output in

Source: World Bank.

43

2011Q4 2012Q1 2012Q2 2012Q3 2012Nov
1.3
5.9
-0.1
0.1
-0.4
0.5
2.8
-1.1
-2.7
-5.9
5.1
5.9
2.4
0.3
-1.4
1.7
5.1
-7.7
-15.8
-18.5
-5.6
-2.6
-1.8
0.5
-7.6
1.4
3.7
-0.6
-2.3
-2.9
2.6
11.1
1.5
4.6
8.6
3.7
16.8
3.1
7.3
15.0
5.3
4.6
-3.6
2.0
6.4
-1.0
1.9
-1.1
3.4
0.1
9.6
12.6
13.1
-8.7
..
-0.7
11.2
-7.1
-0.7
2.4
-2.6
-0.6
5.0
5.5
..

Global Economic Prospects January 2013

Industrial Production Annex

Figureindustrial
FigureIP.1
IP.2Developing-country
Growth is picking up
in Asia, output
led bygrowthChina has accelerated since July
Source: Datastream and World Bank.

Figure IP.3
Robustgrowth in theismonthsendingNovember,andMiddle-Eastby 41.2 percent
easing, as activity firms in Sub-Saharan Africa(saar)
through November in the remaining
Source: Datastream and World Bank.
countries in the region (figure IP.2).
Notwithstanding weakening external demand,
Chinese GDP growth picked up after the firstquarter to an 9.1 percent annualized pace in Q3(q/q saar), in part due to robust growth among
services sectors reflecting a gradual reorientationof the economy towards domestic demand. A
sharp acceleration in Indonesia, Malaysia,
Philippines, and Thailand reflects robust
domestic demand supported by accommodative
policies, tight production and trade linkages with
China (Chinese imports rose at an 12.5 percent
annualized pace in the three months ending inNovember), and a surge in exports towards
newly industrialized economies (NIEs) in theregion that experienced a rebound during the lastquarter of 2012.

Industrial production
growth,3m/3m saargrowth, 3m/3m saar
Industrial
production

40

40

30

Lat in A meric a & Caribbean

S outh Asia

E as t A sia & Pacific20

East Asia &Pacific

20

China

10
0

0
E urope & Cent ral Asia

-10

S ub-S aharan Africa

India

-20

Rest of
Middle E as t & N. AfricaSouth Asia

-20
Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep'10 '10 '10 '10 '10 '10 '11 '11 '11 '11 '11 '11 '12 '12 '12 '12 '12-40
Jan '10

Jul '10Jan '11Jul '11Jan '12Jul '12Source: Datastream, World Bank.

Despite the weakness in high income countries,
available data for November suggests thatindustrial activity in the developing countries isstrengthening. Developing countries’ industrial
production grew at an 8.6 percent annualizedpace in the three months ending November.
Industrial production growth improved acrossmost developing regions, with the exceptions of
Latin America and the Caribbean, and the
Middle East and North Africa (figure IP.1). In
East Asia and Pacific, industrial production has
accelerated sharply and is growing at a 11.5
annualized pace in China during the three

South Asia’s industrial production contracted at
an 7.1 percent annualized pace in the second
quarter of 2012, partly due to domestic
difficulties and a decline in export demand. But
industrial output stabilized in the third quarter,and has picked up in Q4—regional industrial
production expanded at a 2.4 percent annualizedpace in the three months ending in November,with industrial output in India growing at a 2.1
percent annualized pace. In Pakistan,notwithstanding domestic security problems andelectricity shortages, industrial output picked up

Figure IP.2 Industrial output is bouncing back in Asia

Figure IP.3 Activity in Europe & Central Asia is mixed

60

Industrial production growth, 3m/3m saar

Industrial production growth, 3m/3m saar

40

Res t of E as t A s ia and Pacific4030

Res t of S outh Asia
I ndia20

Turkey

20

China

0

10

-20

0

RussiaOt her E urope& Cent ral Asia

-40

-10
Jan '10

Jul '10Jan '11Jul '11Jan '12Jul '12Jan '10Source: World Bank, Datastream.

Jul '10Jan '11Jul '11

Source: World Bank, Datastream.

44

Jan '12Jul '12Global Economic Prospects January 2013

Industrial Production Annex

Box IP.1 Normalization in industrial activity with respect to long-term trend levels
Most developing economies have recovered from the global economic crisis, with industrial output levels now inline with long-term trends. At the aggregate level, output was actually about 2 percent above its long-term trend in
February, although high-income countries have yet to regain long-term trend levels.
Despite the severe supply chain shocks that disrupted activity in East Asia and Pacific in 2011 (Japanese earthquake and tsunami, severe and prolonged flooding in Thailand), industrial output there is currently 1.9 percent
above the level consistent with long-term trends (table IP.1). In Latin America and the Caribbean, and South Asia
industrial output levels are 0.3 percent and 2.2 percent above their long-term industrial output trend levels, respectively. Among Latin American countries Colombia, Mexico, Peru have recovered while industrial production in
Argentina, Brazil, and Chile is yet to reach their long-term trend levels. In South Asia only Pakistan is lagging
behind in the recovery and the gap with respect to long(er) term trends remains relatively large. In contrast, many
countries in developing European and Central Asian and the Middle East and North Africa have yet to regain trend
output levels, reflecting the severity of the demand shocks in the former and the ongoing domestic political turmoil
in the latter. Among high-income countries industrial output remains below the long-term trend levels, including
the United States – with the notable exceptions of Korea; Singapore; Taiwan, China; and Germany.

to an 12 percent annualized pace in the threemonths ending in November, mainly due torobust growth of textile exports.

In Latin America, industrial production growthappears to have slowed in the fourth quarter,
decelerating to an 0.1 percent annualized pace inthe three months ending in November from 3.4
percent annualized growth in the third quarter.
After strengthening during Q3, industrial
production growth is weakening again in several
countries. For example, Mexican industrial
production growth held up relatively well during
most of calendar 2012, but fell at a 0.2 percent
annualized pace in the three months to
November — in line with the weakening US
industrial sector (figure IP.4). Brazil’s industrial
production rebounded from a 3.7 annualized
drop in the second quarter to an 3.8 percent
annualized increase in the third quarter

In Europe and Central Asia, industrial
production picked up sharply to a 6.4 percent
annualized pace in the three months ending inNovember 2012 (figure IP.3). The rebound inregional production was mainly due a sharp
upturn in Turkey, where industrial output grewat a 30.5 percent annualized pace in the threemonths ending in November, helped by an
expansion in exports to non-European
economies, and partly due to extra working daysin November from a shift in timing of religious
holidays (Industrial output in November was
11.3 percent higher from a year earlier).
Industrial production also rose in Lithuania at a26.3 percent annualized pace (rebounding from aclosure of the main refinery) and at a 6.9 percent
annualized pace in Kazakhstan in the threemonths ending November. In other countries in
the region, however, industrial output was still
declining through November, reflecting mainly adownturn in the Euro Area, the region’s largest
trade partner. Industrial production contracted
sharply in Bulgaria (by an annualized 13.1%),
Ukraine (8.6% annualized), Latvia (3.7%
annualized), and more modestly in Russia (2%annualized percent) and Serbia (1.2 percent
annualized) in the three months ending inNovember.

Figure IP.4 A rebound in Latin America & the Caribbean
Industrial production growth, 3m/3m saar
20

15

Ot her Lat in A meric a & Caribbean
10

Mexico50-5

B razil-10
Jan '10

Jul '10Jan '11Jul '11

Source: World Bank, Datastream.

45

Jan '12Jul '12Global Economic Prospects January 2013

Industrial Production Annex(notwithstanding weak GDP growth in Q3). But
by November, industrial production growth had
slowed to a 1.2 percent annualized pace. And in
the rest of the region, industrial production was
declining at a 0.6 percent annualized pace in thethree months to November.

annualized pace in Q3—with a larger 9.8 percent
decline among developing oil-importers as thesecountries grapple with ongoing domestic
uncertainty and an adverse external environment.
Egypt recorded an 18 percent annualized decline
in the three month to October, while productionin Jordan and Morocco rose at a modest 3
percent annualized pace in the three months to
September. Industrial output in developing oil
exporters in the Middle East and North Africa
also fell, declining at an 8.2 percent annualizedpace in the third quarter, as strong production
growth in Iraq and Libya was offset by declines
in oil output in Iran (as a result of internationalsanctions) and in Syria (due to civil conflict).

Data for Sub-Saharan Africa and the Middle Eastand North Africa regions has a two month lagwith respect to other regions, with a few
exceptions within the two regions (figure IP.5).
Activity in South Africa, the Sub-Saharan Africa
region’s largest economy, was influenced bylabor unrests, with industrial production growing
at a modest 0.8 percent annualized pace during
the third quarter. But industrial production
growth subsequently picked up to an 3.2 percent
annualized pace in the three months ending inNovember.
In other Sub-Saharan Africancountries where monthly industrial production
data are available, industrial production was
growing at a robust 6.7 percent annualized pacein the third quarter, despite a mid-year slowdown
in several oil exporters (Angola, Nigeria and
Gabon).

Growth is expected to pick up in early 2013
A pick-up in global retail sales recently has
helped inventory adjustments and lays thefoundation for stronger industrial sector
performance in the early months of 2013.
Developing country business sentiment in
manufacturing improved in the fourth quarter,with the official Purchasing Manager Index(PMI) for China reaching 50.6 and the Markit
PMIs outside of China reaching 51.8 inDecember — indicating a majority of developing
country firms see output expanding (figure IP.6).
In the United States, sentiment has held broadly
steady in the positive range, with the Markit
index picking up to a 6-month high in

Data through the third quarter for the MiddleEast and North Africa region suggest that therebound in activity in the first half of 2012
following an easing of political-turmoil may begiving way to additional renewed disruptions,with industrial output declining at an 8.7 percent
Figure IP.5 Data in the Middle-East & North Africa lags

Figure IP.6 Business confidence in developing countries remains robust

Industrial production growth, 3m/3m saar
40

Balance of respondents, >50 implies expansion, <50 implies contraction
60

20

S outh Africa

55

Dev eloping (excl. China)

China
0

50

World

Ot her S ub-S aharan Africa
45-20

E uro A rea

Middle E as t & North Africa

40-40
Jan '10

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

Jul '12Source: World Bank, Datastream.

Jul '10Jan '11Jul '11

Source: World Bank, Datastream.

46

Jan '12Jul '12Global Economic Prospects January 2013

Industrial Production Annex

December. A strengthening US housing market,
robust business sentiment, and a decline inunemployment signal an underlying recovery,
notwithstanding the weak industrial output andrisks related to US fiscal policy. In the EuroArea, business sentiment has become
significantly less negative. However, it remains
extremely low — indeed much lower than actual
industrial production data would seem tosuggest. Elsewhere, business sentiment has risen
in high-income countries outside of the EuroArea, reflecting strengthening external demand.
However, business sentiment in Japan continues
to remain very low, indicating continued
worsening of output and orders, in part reflecting
a sharp decline in orders from China.
Risks and vulnerabilities
For countries tightly linked to the U.S. a main
downside risk is that of a protracted fiscal
impasse related to the US debt limit, as it would
result in a sharp weakening in domestic demandin the U.S. Mexico is particularly vulnerable asclose to 80 percent of its exports are destined for
the U.S.
A sharp deterioration in conditions in Europe,
the U.S. or China would likely produce large
confidence effects for developing countries that
could cause demand for industrial imports, andfor capital goods in particular, to decline. Even amore moderate slowdown in China could havesignificant impacts on the East Asian economies
that are integrated with the Chinese supply
chain.

47

Global Economic Prospects January 2013

Inflation Annex

Inflation
November 2012: Belarus (30%), Burundi(14.3%), Eritrea (13.5%), Ethiopia (26%), Iran(30%), Malawi (30%), South Sudan (41%),
Sudan (46%), Syria (40%), and Venezuela(18%), reflecting disrupted supplies due topolitical turmoil in some countries and large
macroeconomic imbalances in the others.

Global inflation was relatively stable in
2012
Globally, inflation is broadly under control, with
consumer prices rising at a 3.9 percent
annualized rate at the end of 2012. The
experience of countries at different income
levels over the past year has been diverse,
however (figure INF.1). Inflation dropped
dramatically in low-income countries (LICs),
with falling food and fuel-price inflation driving
declines (figure INF. 2). In contrast, inflation
was broadly stable in middle-income countries(MICs) and high-income countries (HICs)
through 2012, though with a mid-year dip in
HICs and an easing in the last quarter of 2012 in
MICs.

Looking ahead, inflation is expected to average
3.5-4 percent in 2013 for the world as a wholeand 6.3 percent in developing countries,
somewhat higher than in 2012, although theoutlook is subject to both upside and downside
risks. A worsening in global growth due to an
intensification of the Euro Area sovereign debt
crisis, an extended fiscal policy impasse in the
United States, or faster-than-expected unwindingof Chinese investment could all translate into aneasing in price pressures. On the upside, supply
shocks in food or fuel markets could intensify
price pressures — especially in low-income
countries, where the weight of thesecommodities in the CPI basket is high.

For developing countries as a whole, inflation
moderated to a 5.1 percent annualized rate in thethree months through December 2012 (saar),from an average 7.2 percent in 2011. By the endof 2012, headline inflation was under 6 percent
in 80 percent of the developing countries forwhich the World Bank collects data. Year-overyear inflation of more than 14 percent wasobserved in only ten developing countries as of

In low-income countries, inflation momentum(the quarterly seasonally adjusted inflation rate
expressed at annual rates) dropped considerably
over the past year, from an average of 14 percent
Figure INF.2 Low-income country inflation eased onmoderating international commodity prices despite
limited pass-through of international food prices tolocal food prices

Figure INF.1 Reflecting weak economic activity, pricepressures remained subdued in 2012 and declined
considerably in low-income countries
Headline inf lation 3m/3m, saar

Price indexes, percentage change, year-on-year

16

50

16

40

14

14
12

12

30

10

10
20

8

8
10

6

6
0

4

4
2
0

2012M01

Global2012M03

2012M05

High Income

2012M07

Low Income

2012M09

-10

2

-20

0

10M07 10M10 11M01 11M04 11M07 11M10 12M01 12M04 12M07 12M10

2012M11

International Energy (LHS)
Developing CPI (RHS)
Developing Local Food CPI (RHS)

Middle Income

Source: World Bank and ILO.

Source: World Bank and Datastream.

49

International Food (LHS)
Low Income CPI (RHS)Global Economic Prospects January 2013

Inflation Annex

Figure INF.3 Flat overall inflation in middle-income countries reflects diverging trends in major economies
Rising inflation

Easing inflation
Headline inf lation, 3m/3m, saar

Headline inf lation, 3m/3m, saar

25

14

12

20
10

15

8

6

10

4

5
2

0
2010M01 2010M05 2010M09 2011M01 2011M05 2011M09 2012M01 2012M05 2012M09

0
2010M01 2010M05 2010M09 2011M01 2011M05 2011M09 2012M01 2012M05 2012M09-2

Turkey

India

China

South Af rica

BrazilRussiaMexicoThailandSource: World Bank and Datastream.

in 2011 to all times low 1.6 percent in the threemonths through September 2012 before starting
an upward trend in the last quarter of 2012. The
steep easing reflected the combined effect of astabilization of local food prices after the 2011
drought-related price hikes, policy tightening,
and the easing of fuel and food supply
disruptions during episodes of political turmoil
in the Middle East and parts of Sub-SaharanAfrica.

easing in the last quarter of 2012, the aggregate
reflects diverging trends in major middle-income
economies (figure INF.3). In China and Turkey,
3m/3m headline inflation eased through much of
2012, while India, experienced a declining
inflation momentum during the second half ofthe year. The easing of inflation observed in2012 in the middle-income countries followed
policy tightening that was undertaken in 2010
and 2011 to address overheating pressures(figure INF. 4). In other major middle-income
countries, on the other hand, such as Brazil andRussia, 3m/3m headline inflation rose duringThough middle-income countries as a group
faced generally stable inflation in 2012, with an

Figure INF.5 Spreads between high-income and middle-income country policy rates, inflation targets and inflation

Figure INF.4 Policy rates were tightened substantiallyover 2010-2011 in some middle-income countries

Percentages

11
9
7
5
3

RussiaIndia

BrazilChina

MexicoS. Africa

2012 annual inflation targets

Short-term policy rates

Philippines

Kazakhstan

Malaysia

Colombia

China

Thailand

VietnamBrazilPeru

Headline inflation

Australia

CanadaEuro Area

UK

U.S

-1

Japan

1

India

Chile

Basis points
500
450
400
350
300
250
200
150
100
50
0

Notes: Upper band where appropriate. Historical (20012011) average wholesale price index inflation is used as aproxy for inflation target in India. Inflation data as of November 2012 unless indicated otherwise. September inflation data for Australia.
Source: World Bank and Central Bank rates.

Source: World Bank and Datastream.

50

Global Economic Prospects January 2013

Inflation Annex

much of 2012, though with an easing in the lastquarter of 2012.

countries, which stabilized the markets, resumed
consumer confidence and helped to revive global
economic activity.

Headline inflation remained high in India andclose to or above the central bank inflation
targets in Brazil, Mexico, Russia, South Africa
and Turkey, despite moderating growth andrelatively high nominal policy rates (figure
INF.5). Inflation in these countries appears tohave been building partly on account of supply
bottlenecks, suggesting that despite slower
growth, these countries may remain supply
constrained such that instead of generating
additional output, demand may contribute tooverheating.

Declining food prices were a major driver ofmoderating inflation in low-income
countries
Local food price inflation trends in developing
regions were mixed during the 2012, with EAP
remaining roughly stable, some regions (LAC
and SSA) showing price moderation, particularly
during the first half of 2012, SAR and MENA
experiencing large declines in food prices in thesecond half of 2012, and food prices acceleratingin ECA in the second half of 2012 (figure
INF.6).

Food price pressures were also a contributing
factor in keeping prices high in 2012 in a
number of the countries shown in figure INF.5,
including Brazil (maize price hike, together witha bounce back in activity following flooding in
the early part of the year), Mexico (maize pricehike), India (poor monsoon) and Russia (poorwheat crop). The last quarter of 2012 brought amoderation in inflation momentum in India,
Mexico, Russia and Turkey, reflecting a decline
in food and fuel prices, tight monetary policies
and currency appreciation.

A mid-year pickup in international grain prices
caused temporary headline inflation spikes in
ECA and LAC (more recent local food price data
are not available but headline inflation in various
regions is discussed in the subsequent regional
sections of this Annex). By October 2012,
headline inflation in the majority of developing
countries, including in ECA and LAC, hadstabilized, with the food price decline
representing a major contributor into thisuniversal price easing trend. For low-income
countries as a group, lower food price inflation
was also a major factor behind the decline inheadline inflation in 2012.

In general, economic growth accelerated orremained robust and inflationary pressures did
not escalate in middle-income countries thatwere able to implement effective countercyclical fiscal and monetary policies and which
continued to effectively move toward more
flexible exchange rate policies and capitalize on
trade openness (including China, Chile,
Colombia, Peru, and the Philippines).

Figure INF.6 Food price inflation eased through June
picking up in Q3 particularly in ECA
Domestic f ood price inf lation, percent change 3m/3m saar
30
25

20

Among high-income countries, the decline ininflation in the first half of 2012 reflected
continued weak economic activity and an
escalation of troubles within the Euro Area, butalso high unemployment and softening
commodity prices. Inflation in high-income
countries bottomed out in three months throughJuly, at 0.15 percent, before rising to 3.1 percent
in the three months through November (versus
an average of 2.9 percent for 2011), following
resolute policy actions undertaken by G3

15
10

5
0
2011M01

2011M04

2011M07

2011M10

2012M01

2012M04

2012M07-5-10East Asia & Pacf ic

Europe & Central Asia

Latin America & Caribbean

Middle east & N. Af rica

South Asia

Sub-Saharan Af rica

Source: World Bank and ILO.

51

Global Economic Prospects January 2013

Inflation Annex

Notwithstanding the slowing of food priceinflation in some developing regions, median
local grain prices are up 24 percent year-on-year
in real terms in developing countries, according
to the United Nations Food and Agriculture
Organization (FAO). The median increase in real
local currency maize price was 35 percent, while
for wheat prices it was 15 percent. Real local
currency grain (maize, rice, and wheat) prices
were up (year-on-year) in 80 percent ofdeveloping countries for which the FAO collects
data, and these higher costs, as discussed in themain text, are creating affordability issues forpoor households in many developing countries.
Developing countries in East and Southern
Africa and Latin America saw some of the
sharpest increases, with some of these countries
heavily dependent on imports. Less than one infive countries reported year-on-year declines infood prices, mostly for rice (figure INF.7).

Moderate inflation in a number of developing
countries provides scope for policy easing tosupport growth if external conditions were to
deteriorate
Moderate inflation rates or rates within thecentral bank targets in China, Indonesia (EastAsia and the Pacific), Chile and Colombia (Latin
America and the Caribbean), Armenia andGeorgia (Europe and Central Asia), Kenya,
Mozambique and Uganda (Africa), and Morocco(Middle East and North Africa) provide somespace for policy easing through policy rate andreserve requirement cuts and liquidity injections
to support growth if external shocks materialize.
In spite of recent downtick in food and fuelprices, inflation remains high in India and closeor above the targeted rates in Brazil, Mexico,
Russia and Turkey (figure INF.8) in the context
of weakening growth. This implies less policy
space to boost domestic demand to support
growth if external conditions were to deteriorate.
Space for countercyclical policies is further
limited by high fiscal deficit in India.

Despite increase in grain prices, high food andfuel prices which prevailed earlier and drove
inflationary pressures in 2011 subsided in 2012.
Declining inflation allowed the policy makers
worldwide but also in the low-income countries
to support growth through monetary easing
throughout 2012, with interest rates droppingfrom 2011 historically high levels to moderate
rates by the end of 2012 (see region and country
specific discussions in the relevant sections of
this Annex).

Regional inflation developments
Weak and uncertain global economic activity,
together with relatively stable commodity prices,
provided the overall context for inflation trends
during 2012. However, heterogeneous country

Figure INF.7 Median developing-country real grain
prices rose 24 percent in 2012

Figure INF.8 Room for policy cutsJapan

Differen ce Between inflation
target an d In flation rate
Sh ort-term In terest rates %U.S.
UKEu ro area

Can adaMexicoS. Africa
Ch in aBrazilIn diaRu ssia

-0.05

-0.03

-0.01

0.01

0.03

0.05

0.07

0.09

Notes: Upper band where appropriate. Historical (20012011) average wholesale price index inflation is used as aproxy for inflation target in India. Inflation as of November
2012 unless indicated otherwise. September inflation data
for Australia.
Source: World Bank and Central Bank rates.

Source: World Bank and FAO.

52

Global Economic Prospects January 2013

Inflation Annex

circumstances shaped particular country andregional inflation outcomes.

in inflation partly related to currency
depreciation but also due to the seasonal factors.

Headline inflation in East Asia and thePacific region declined in 2012

Several other countries in the region have also
experienced a temporary acceleration in inflation
during the course of the year, including thePhilippines in Q3, and Thailand and Vietnam
most recently partly reflecting the rapid growthof domestic demand.

Annualized quarterly inflation in the East Asiaand the Pacific region declined substantiallybetween end-2010 and the second quarter of
2012, from 8 to 2 percent. Most of this decline
was due to a dramatic falloff in inflation in
China (figure INF.9) – reflecting, among otherthings, policy-induced easing in the price ofresidential housing resulting from new
regulations and lending guidelines. Inflation
eased significantly in Vietnam as well. For
China, appreciation of the renminbi vis-à-vis thedollar, which reduced the price of imports for
Chinese firms and consumers while increasing
the price of Chinese exports, also helped tomoderate domestic prices.

On the whole, EAP region saw a decline in theheadline inflation rates in 2012, with the sharpest
declines observed in China, Malaysia andVietnam followed by the Philippines andIndonesia. The headline inflation remained
within the central bank targeted range in China,
Indonesia and Thailand.

Inflation has picked up strongly in Europe
and Central Asia
After a considerable fallback in the first quarterof 2012 (the result of slowing economic
activity), inflation accelerated in developing
Europe and Central Asia region in the second
half of 2012 (figure INF.10). Grain price hikes
due to droughts and poor crop yields in Russia,
Ukraine, and Central Asia were partly to blame,but utility price adjustments in Russia and new
tax policies in Turkey also factored into theregional assessment, as did bumping against
output capacity in several countries.

ASEAN-4 countries (Indonesia, Malaysia,
Philippines, and Thailand) saw their quarterly
inflation ease from a 5 percent annualized paceto 3 percent between end-2010 and the second
quarter of 2012 despite robust domestic demandand policy easing. Currency appreciation among
ASEAN-4 countries, together with broadly
stable food prices in the region, helped tomoderate inflation in all countries, although
Indonesia saw a temporary mid-year acceleration
Figure INF.9 Inflation eased in the EAP in 2012, but
inflation momentum accelerated recently in Thailand
and Vietnam

Figure INF.10 Inflation momentum accelerated in
ECA following poor harvest

CPI, percentage change, 3m/3m saar

16

CPI, percentage change, 3m/3m saar

11

35

9

30

14
12

25

7

10

20

8

15

6

5

3

4

10

1

5

-1
10M01 10M05 10M09 11M01 11M05 11M09 12M01 12M05 12M09

0

2

0
-2
10M07

China
Philippines

Indonesia
Thailand

Malaysia
Vietnam (RHS)

11M01

11M07

ECA excluding Belarus

Source: World Bank and Datastream.

12M01

RussiaSource: World Bank and Datastream.

53

12M07

TurkeyBulgaria

Global Economic Prospects January 2013

Inflation Annex

Inflation in Russia accelerated to 13 percent in
the three months to September 2012 (3m/3msaar), prompting a tightening of policy in
September 2012. The headline inflation in
Russia at 6.4 percent year-over-year in
November remains close to the central banktarget despite growth having slowed
considerably in the third quarter of 2012 andprice pressures easing in the last quarter of 2012.

activity, lower commodity prices, and the lagged
impact of a previously tight monetary policy inthe region. After the monetary policy tightening
cycle that started in mid-2010, most inflationtargeting central banks paused in mid-2011, or
have made very minor adjustments, with the
exception of Brazil, which has lowered policy
rates aggressively (commutative 525 basis pointcut) between September 2011 and December
2012 to support weakening economic activity(figure INF.11).

Inflation pressures have been reoccurring
because of supply side bottlenecks, food pricehikes and utility and other administered priceadjustments as well as the earlier fixed exchange
rate policy in the wake of strong capital inflows
due to rising oil prices. In recent years, Russian
central bank has switched increasingly to
inflation targeting bringing inflation closer to thetargeted rates.
In Turkey, where growth rebounded strongly
after the global recession, to 9.2 percent in 2010
and 8.5 percent in 2011, headline inflation
jumped to 10.5 percent (y/y) in 2011 from 6.4
percent in 2010. Inflation moderated in thesecond half of 2012 in part because of anappreciating Turkish lira and monetary policy
tightening but also due to a good harvest in
2012.FN1 Turkey's central bank cut its benchmark
one-week repurchase rate by 25 basis points to
5.5% on December 18th in the context ofmoderating inflation to support weakening
growth. Inflation rate fell to 6.4% (y/y) in
November, but remains above the central banktargeted 5% inflation rate and is projected toremain above the targeted level due to higher
administered prices.

The summer of 2012 marked a reengagement ofinflationary pressure in several Latin Americancountries, however, following on the modest
revival of global demand due to global policy
easing but also reflecting higher prices ofimported grain from the United States as a resultof a drought in much of the country. Latin
American countries registered some of the
sharpest increases in real domestic maize prices
in the world, which fed through to cause atemporary acceleration of headline inflation in
the third quarter of 2012.
Headline inflation in Uruguay, for instance,
accelerated to 8.6 percent (y/y) in September,well above the central bank’s 4-6 percent
targeted range, prompting the central bank toincrease the policy rate to 9 percent and thegovernment to implement a set of administrativeand fiscal measures to contain the impact of the
Figure INF.11 Inflation momentum accelerated in LAC
as economies reached their potential output levels
CPI, percentage change, 3m/3m saar
98Belarus has seen a major buildup in inflation
momentum over the past year, due, among otherthings, to a relaxation in monetary policy,
exchange rate devaluation, and higher foodprices.

7

6
5
4
3

Inflation in Latin America and the Caribbean
also accelerated in the second half of 20122
1
10M01 10M04 10M07 10M10 11M01 11M04 11M07 11M10 12M01 12M04 12M07 12M10

Inflation in Latin America and the Caribbean
slowed to a 4.5 percent annualized pace in thesecond quarter of 2012 (down from a 7.2 percent
pace in 2011), reflecting the weakening of global

LAC excluding Venesziela

BrazilColombia

MexicoPeru

Source: World Bank and Datastream.

54

Global Economic Prospects January 2013

Inflation Annex

price hike. The government sought an agreementwith supermarkets to reduce the prices of 200
staple items by 10 percent and consideredlowering tariffs and taxes on basic foodstuffs.

the country to escape the conflict is now having
spillover effects across the border in Lebanon,
which is now posting steep increases in rental
housing prices.

Peru managed to achieve strong growth and low
inflation (2.7 percent y/y in November, below
the central bank target of 3 percent). Chile andColombia, as well, have been successful inmaintaining relatively low inflation during therecent volatile economic cycle due to effective
counter-cyclical policies.

Food subsidies and administered prices suppress
price pressures in Algeria and Morocco (figure
INF.12). In Egypt, fuel and food subsidies,
together with weak growth and subdued
domestic demand, led to an easing of inflation
momentum during summer 2012: headline
inflation dropped to 6.2 percent on a year-onyear basis in September, the lowest in more than
two years. Inflation has picked up in more recent
months, however, reflecting reduction in
subsidies and quotas for certain fuels. Tunisia
raised fuel prices in September but prices arestill below cost recovery levels.

Inflation in Venezuela has declined significantly,
from 25 percent at the start of 2011 to 13 percent
as of June 2012 (3m/3m saar), after policy
tightening, although headline inflation remains
high.
In Brazil, the largest economy in LAC, growthslowed markedly in the third quarter of 2012,
despite considerable policy easing implemented
throughout 2012, while inflation accelerated,reflecting a temporary food price hikes due but
also indicating that the economy is operating at
its maximum potential and is facing supply-sidebottlenecks, which are contributing to growing
price bubbles. Headline inflation was 5.8 percent
in December 2012—well above the 4.5 mid-pint
annual inflation target (4.5% +/-2).
Inflation also picked up in Mexico in late 2012,reflecting an increase in food prices. Headline
inflation, however, declined to 3.6 percent yearover-year in December 2012—below thecountry’s quite conservative 4 percent annual
inflation target.
Inflation trends in developing MENA countries
are diverse
Among Middle East and North Africancountries, Iran and Syria continue to experience
double-digit inflation. In both countries, pricepressure are to a large extent due to the impact ofinternational sanctions. US and UK sanctions on
Iran’s financial assets and transactions were on
Iran tightened in 2012. Syrians experienced anacute rise in food prices through the course of2012 (and, in some cases, a shortage of staples
such as bread), while the flood of Syrians fleeing

Further reduction in subsidies and adjustment ofprices to cost recovery levels will raise inflation
temporarily, but their medium-term impact will
be positive through private investment andincreased domestic supplies, which in turnwould result in weakening of price pressures.
In South Asia, supply-side bottlenecks keep
inflation high, despite recent moderation in
inflation momentum
Headline inflation among South Asian countries
remained high in 2012. Price pressures stem
Figure INF.12 Falloff in inflation in MENA excluding
Iran and Syria
Headline inf lation, 3m/3m, saar

20

15

10

5

0
10M01

-5

10M05

10M09

11M01

11M05

MENA excl. Iran and Syria
Egypt
Marocco

11M09

12M01

Algeria
JordanTunisia

Source: World Bank and Datastream.

55

12M05

12M09

Global Economic Prospects January 2013

Inflation Annex
governments’ attempts to rein in fiscal subsidies,
are exacerbating inflationary pressures.

from increasing demand for food (most notably
in India), which in turn reflects rapidly raisinghousehold incomes and tight supplies, and fromsupply bottlenecks for non-food items. In
addition to increasing at a rapid pace, food prices
in South Asian countries are quite volatile, partly
the result of structural constraints in the
production, storage, and distribution of food.

In the third quarter of 2012, weakening ofactivity, the opening up of output gaps, and somedegree of moderation in food inflation caused aslowdown in inflation momentum across SouthAsia, although individual country experiences
have been diverse (figure INF.13). Headline
inflation in the region remains in the 9-10
percent range, and wholesale price inflation in
the range of 7-8 percent.

Headline inflation exceeds 7 percent in Pakistan
and Bangladesh, and remains close to 10 percent
in India, Nepal and Sri Lanka— significantly
higher than the average for developing countries.
In Nepal, the continuing political crisis andinfrastructure constraints mean that domestic
supplies are not keeping pace with robust
demand, resulting in persistent inflationarypressures; the currency peg of the Nepali rupee
to Indian rupee has further boosted inflation
during periods of depreciation of the Indianrupee. In Sri Lanka, a depreciation of thecurrency and agricultural drought caused
inflation to surge to 10 percent in July. Although
inflation has since eased, it remained close to 9
percent in October, prompting the central bankto cut the policy rate in December.

Moderating inflation allowed Pakistan’s central
bank to reduce its key policy rate by acumulative 250 basis points between August andDecember 2012. Persistently high inflation
expectations in India have prevented monetary
policy easing. The country’s benchmark policy
rate was stable at 8 percent for most of 2012, but
the central bank has used other instruments,
including cuts to commercial banks’ reserve
requirements, to improve liquidity and easemonetary conditions. Similarly, despite a sharp
slowdown in growth, Sri Lanka’s central bankkept its benchmark policy rate at 7.75 percent
from the second quarter of 2012 through the endof the year.

In several cases, partial pass through to domestic
retail prices of international crude oil prices,which rose in the latter half of 2012 following adecline earlier in the year, together with several

Sub-Saharan Africa has experienced a steep
decline in inflation
Despite being extremely vulnerable to weather
conditions and related supply disruptions,inflation moderated significantly across much of
Sub-Saharan Africa in 2012.

Figure INF.13 Inflation momentum moderated in SAS
CPI, percentage change, 3m/3m saar
23

In South Africa, the largest economy in theregion, the steady decline in inflation throughmuch of 2012 reflects weak demand and slow
growth, which outweighed the upward
inflationary pressure of wage hikes in the mining
and transport sectors and a weakening rand.
Looking ahead, higher wages and rand weakness
are expected to contribute to a pickup in inflation
during 2013.FN2 The turnaround can already beseen in the data for late 2012.

18

13

8

3

-210M01 10M04 10M07 10M10 12M01 11M04 11M07 11M10 12M01 12M04 12M07 12M10-7SAS

IND3MM

BGD3MM

NPL3MM

PAK3MM

LKA3MM

In East Africa, the high food and fuel prices thatdrove inflationary pressures in 2011 subsided in.

Source: World Bank and Datastream.

56

Global Economic Prospects January 2013

Inflation Annex

2012 (figure INF.14). Declining inflation
allowed policy makers in Kenya and Uganda tosupport growth through monetary easing
throughout 2012, with interest rates droppingfrom 18 percent to 11 percent in Kenya and from23 percent to 12.5 percent in Uganda between
November 2011 and December 2012.FN3Inflation in Kenya, which hit 19.7 percent in2011, was down to 4 percent in October 2012
(food inflation was only 3.4 percent) (figure
INF.15). Similarly, quarterly inflation in
Uganda, which had reached more than 40
percent in late 2011, turned negative in the third
quarter of 2012.

5.8 percent in August; rural inflation, which ismore impacted by food prices, was 14 percent in
September.

In Tanzania, inflation decelerated from the 19.8
percent y/y registered in December 2011 (due tohigh local food prices related to a serious
drought) to 13.5 y/y in September 2012, stillshort of the 10 prevent inflation goal set by thecentral bank said for June 2012 and single digitby the end of the 2012/2013 fiscal year (June2013). The impact on food prices of inconsistent
rainfall in 2012 is main reason that inflation
remains relatively elevated.

The impact of food prices on inflation is also
evident among West African countries. Nigeria,
for example, experienced a temporary price hikein October with inflation rising to 11.7 percent(y/y) reflecting food shortages due to the heavy
floods.

Rwanda continues to buck the regional trend,with inflation rising since June, largely due toincreasing food prices (food costs represent 54
percent of Rwanda’s CPI basket). Urban
inflation in Rwanda, however, dropped slightly
in September, to 5.6 percent y/y, compared to

Global consumer price inflation is projected topick up gradually as confidence and global
demand strengthen. Weak growth will however
keep inflation pressures subdued to around 3-4
percent globally and around 6.3 percent indeveloping countries—above 2012 levels but

Figure INF.14 Moderate inflation in Sub-Saharan Africa

Figure INF.15 Falloff in Kenya’s inflation

CPI, percent change, 3m/3m saar

Percentages

Among West African Economic and Monetary
Union (WAEMU) countries (Benin, Burkina
Faso, Cote d’Ivoire, Guinea Bissau, Mali, Niger,
Senegal, and Togo), inflation pressuresmoderated on improving grain supplies during
the last quarter of 2012 after experiencing a risedue to an increase in prices of fuel and cereals.
The moderating prices allowed the Central Bankof West African States (BCEAO) to keep its
benchmark marginal lending rate at 4 percent.

Global inflation is projected to pick up
somewhat from 2013 through 2015 as growth
firms

48

25

8

43

7

38

20

6

33
28

15

5

23

10

4

18

3

13
8

5

2

3

0

1

-2
10M07 10M10 11M01 11M04 11M07 11M10 12M01 12M04 12M07 12M10

-5

0
2010
Q1

Sub-Saharan Africa excl. South Africa
South Africa
Angola
Ghana

2010
Q2

2010
Q3

2010
Q4

2011
Q1
Growth

2011
Q2

2011
Q3

Inflation

Source: World Bank and Datastream.

Source: World Bank and Datastream.

57

2011
Q4

2012
Q1

2012
Q2

Global Economic Prospects January 2013

Inflation Annex

below inflation observed in 2011. Inflation inhigh income countries is projected to gradually
increase to around 2.5-3 percent by the end of
the first quarter of 2013 and remain around thatlevel throughout 2013. In developing economies,
price pressures are expected to build in somecountries with the rebound in economic activity
and more dynamism in the private sector.

On the downside, slower growth and excess
capacity in some countries will help moderatecore inflation. Stable or declining commodity
prices will reinforce this outcome. Deepening of
economic turmoil in Euro Area and slower US
growth in case the looming ―fiscal cliff‖ ofspending cuts and tax hikes is not addressed andundermines the US and global growth, depressed
economic activity and causes disinflation. Were
external conditions to deteriorate, somedeveloping countries have room to support
growth through policy easing, but others areconstrained.

Overall, consumer prices in these economies areprojected to accelerate to around 6.3 percent in2013 but still below their 2011 level.
The inflation outlook is however quite uncertain
and is subject to both upside and downside
risks—with the considerable consequences for
low income countries, which are sensitive to
price fluctuations due high reliance on primarycommodities, narrow range of policy instruments
and weak fiscal and monetary buffers.

Notes
1. In Turkey, the key policy rate used under the
inflation-targeting framework is the one week
repo auction rate. Turkey also uses an interest
rate corridor and required reserve ratios aspolicy instruments.

On the upside, supply side bottlenecks may pushinflation up as global demand revives. In
addition, inflation may accelerate as theincreased grain prices pass through into local
food prices – especially in the countries with thelarge share of wheat and maize consumption in
their food price basket. Implementation of fiscal
measures, including increase in utility prices andtariffs to cost-recovery levels to reduce quasifiscal deficits, and increase in taxes, which havebeen delayed due to economic uncertainty may
become additional source of inflation. The
upside risks to supply side shocks also include
weather related price hikes to food supplies andrisks to price stability related to supply
disruptions in case of the escalating tensions in
the Middle East.

2. In addition, South Africa plans to introduce arevised CPI basket in January 2013 to reflectchanging household expenditure patterns. The
new basket will assign a higher weight toservices spending vis-à-vis goods.
3. As of July 2011, the Bank of Uganda has useda seven-day interbank interest rate as its main
policy rate, shifting from supporting
aggregate demand via money supply growth
to targeting inflation and reducing bank credit
growth.

The positive effect of continuous policy easing
by the G3 (US, EU, and Japan) as well as major
developing countries and the positive effect of
those policies on inflation expectations may beconsidered as an upside risks to inflation
forecast. However, chances that those policies
would lead to a surge in inflation in the nearterm are low in the present weak growthenvironment and inflation expectations remainanchored around the current target inflation
rates.

58

Global Economic Prospects January 2013

Trade Annex

Global Trade Annex
Indeed, in the three months leading to October,global trade volumes began expanding once
again at an annualized pace of 1.0 percent.
Nonetheless much of the recent expansion in
global trade has been as a result of the cyclical
uptick in developing country import demand, as
high-income country imports was still
contracting in October, albeit marginally.

Recent Developments
Consistent with the weakness in the global
economy, global trade volume growth
decelerated to about 3.8 percent in 2012, downfrom 6.1 percent in 2011 (figure Trade.1). This
represents the weakest annual growth rate inglobal trade volumes since 2009 and falls wellshort of the historical average of 6.8 percent.
Developments in global trade flows were driven
mainly by ongoing weakness in high-income
economies, particularly the European Union (theworld’s largest trading bloc) as well as from aslowdown in some of the larger developing
economies including, China, India and Brazil.

Reflecting subdued growth in the global
economy, trade in industrial goods was
weaker than that of agricultural goods. Latest
available data on commodity composition of
trade suggests that global imports of industrial
inputs such as chemicals, metal and minerals andmachinery were among the hardest hit, falling by
3.4 percent, 4.1 percent and 1.3 percent
respectively in value terms over the first half of2012 compared with the same period in 2011
(figure Trade.2). In part, this reflects weak
durable goods sales, as firms and households
postpone big-ticket purchases during periods of
uncertainty and economic weakness. The income
elasticity of agricultural goods meant thatimports of agricultural goods fared better -rising 1.1 percent (y/y) in value terms in the firsthalf of 2012. Notwithstanding the slowdown in

Global trade trends in 2012 were volatile on
account of economic uncertainty during theyear. After contracting at a seasonally adjusted
annualized pace of 6.2 percent in Q2 2012 –precipitated by the then escalating financial
market tensions related to the Euro Area crisis,
and the resultant increase in precautionarysavings as business and consumer sentiment
weakened - the contraction in global tradevolumes tapered-off somewhat in Q3 2012 andhave shown signs of a pickup in Q4 2012.

Figure Trade.2 H1 2012 growth in imports of selected
products

Figure Trade.1 Global trade growth was subdued in2012(percent growth in values, year-on-year)

volume, % change, 3m/3m

12.0

25

10.0

20

8.0

15

6.0

10

4.0

5

2.0

0

0.0

-5

-2.0

-10
-15

-4.0

GlobalLong-term average
-6.0

-20

Oil

2010M02 2010M06 2010M10 2011M02 2011M06 2011M10 2012M02 2012M06 2012M10

Cars

Source: World Bank.

Source: World Bank.

59

Agriculture Machinery Chemicals Metal ores

Global Economic Prospects January 2013

Trade Annex

the global economy, the trend increase in percapita oil consumption in developing countries
coupled with the shift in Japan’s energy sources
to crude and natural gas after the shut down of
it’s nuclear power plants supported the increasein global imports of oil.

import demand contracted at a 11.2 percent
annualized pace in Q3 2012. Import demand inJapan accelerated in the second quarter
benefitting from government householdincentives program but however weakened in thethird quarter and fourth quarter, after the
expiration of these incentive programs, as well
as from weaker trade with China due to theIsland dispute.

Import demand among high-income countries
have differed, reflecting the relative strengthof their respective domestic economies.
Among high-income countries, import volumes
contracted for six consecutive months throughOctober. With the Euro Area being at the epicenter of the crisis, and with banking sector
deleveraging, fiscal consolidation andunemployment rising, the contraction in importdemand was the most protracted. For each month
between May and September, import demand in
the Euro Area contracted at a double digits
annualized pace (figure Trade.3). However, thesupportive policy interventions by the European
Central Bank which helped to reduce financial
market tensions in the bloc has helped partially
recover some business confidence and support toreal side activity. Indeed, Euro Area importdemand, though still contracting in October (3.5%, 3m/3m saar), had improved from thedepth of contraction in Q3 2012 (-13.5%, 3m/3msaar). In contrast to the Euro Area, and reflecting
output expansion in the US economy (even ifweak), import demand in the United States
expanded through Q2 2012. Nonetheless, its

External demand has helped to mitigate weakdomestic demand in several high-income
countries, particularly in the Eurozone.
Reflecting the ongoing adjustment in the EuroArea (fiscal consolidation, banking sector
deleveraging etc), domestic demand’scontribution to GDP growth has been negative (1.8 percentage points), however, net exports
contribution has been positive (1.6 percentage
points), thereby helping to partially mitigate therecessionary domestic demand conditions in theEuro Area economy (figure Trade.4). In both the
US and Japan, domestic demand was relatively
stronger than in the Euro Area and while net
exports contribution to growth in the US was
neutral, in Japan it was negative due to thesignificant increase in it’s imports of crude oiland liquefied natural gas due to the shut down in
it’s nuclear facilities.
Much of the supportive external demandenvironment to GDP growth in high-income
Figure Trade.4 External demand helped to mitigate therecessionary conditions in several Euro Area economies

Figure Trade.3 Though mostly weak, fortunes among
high-income countries diverged through 2012
volume, % change, 3m/3m saar

40

6.0

30

4.0

20

2.0

10

Ireland
Italy

Spain

Japan
USA

Euro Area

0.0

0FranceGermany-6.0

Domestic demand

Net exports-8.0

GDP growth

-2.0
-10

-4.0

-20
-30

Euro Area

Japan

USA

High-income-40
2010M02 2010M06 2010M10 2011M02 2011M06 2011M10 2012M02 2012M06 2012M10

Source: Eurostat and World Bank.

Source: World Bank.

60

Global Economic Prospects January 2013

Trade Annex

Box Trade.1 The pace of market share gain by developing countries has increased in recent years.
Over the past two decades, the share of developing countries in global trade has doubled from some 15.9 percent
to 31.5 percent, with an average annual increase in market share of some 0.8 percentage points. The great recession has only contributed to accelerating this trend as high-income countries continue to be weighed down by high-debt, fiscal consolidation, elevated unemployment levels and slow growth (even recession in some countries).
With the economies of developing countries remaining fairly resilient since the great recession, this has allowed
them to double their pace of increase in market share since 2008 to an average of 1.5 percentage points per annum– twice the increase in annual market share prior to the great recession.

annualized pace in Q2 after an expansion of 23.8
percent in Q1. Nevertheless, reflecting stronger
domestic demand in developing countries theirimports recovered more quickly and by
November 2012, import demand in developing
countries was expanding at an annualized paceof 16.7 percent.

countries came from developing country
import demand. Even though global trade
growth was weak in 2012, consistent withprevious years, a significant share of the increasein high-income country exports was todeveloping countries. For instance, developing
countries accounted for some 63 percent of theincrease in both France and Germany’s extra-EU
exports and 58 percent of the increase in US’s
exports to the rest of the world.

Not all the mid-year slowdown in developing
countries can be attributed to spillovers from theEurozone. In China, for instance earlier efforts
by monetary authorities to engineer a softlanding (particularly in the property market) was
at play in restraining domestic demand. And in
India stalled reforms, an uncertain economic
environment and a slowdown in foreign direct
investment flows constrained domestic demand.

Developing country trade developments areheavily influenced by cyclical trends in highincome countries. With increased integration
among themselves and also with high-income
countries recent developments in developing
countries confirm the synchronized nature ofbusiness cycles between developed anddeveloping countries (figure Trade.5). The recent
fall and pick-up in import demand among highincome countries was mirrored amongdeveloping countries. Developing country
import demand contracted at a 5.7 percent

Notwithstanding the synchronized nature of high-income and developing country business cycles,
the decoupling of high-income and developingcountry trend growth rates points to an

Figure Trade.5 Cyclical trade trends between highincome and developing countries remain largely
synchronized

Figure Trade.6 The share of developing countries
in global trade is steadily growing in importancevolume, % change, 3m/3m saar

90

(percentage share of imports in global total)
40

80
30

70

20

60
50

10

40
0

-30

High-income

30
20

-10

-20

Developing

High-income

Developing

Developing (ex. China)

Long-term average

1001991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

2010M02 2010M06 2010M10 2011M02 2011M06 2011M10 2012M02 2012M06 2012M10

Source: World Bank.

Source: World Bank.

61

Global Economic Prospects January 2013

Trade Annex
Figure Trade.8 Developing country exports were impacted by both external and ideosyncratic domestic
developments

Figure Trade.7 Export volumes have rebounded inrecent months in some developing regions
volume, % change, 3m/3m saar

40

volume, % change, 3m/3m saar
40

30

30

20

20
10

10

0

0

-10

-10

-20

-20
-30

Europe and Central Asia
2011M03

2011M07

2011M11Sub Saharan Africa
2012M03

2012M07

East Asia-30

South Asia

-40

Latin America and Carribbean-50

2012M11

2011M03

Middle East and North Africa
2011M06

2011M09

2011M12

2012M03

2012M06

2012M09

Source: World Bank.

Source: World Bank.

increasing role for developing countries in global
trade (figure Trade.6 and box Trade.1).

had all begun expanding once again by the third
quarter.

Developing country exports followed a similar
pattern to imports, but with significant
differences across countries and regions(figures Trade.7 and Trade.8). Consistent withthe mid-year slump in global imports,
developing country exports declined for threeconsecutive months through October, however,by November developing country exports had
begun expanding once again. The recent up tickin developing country exports has been mostly
supported by increased South-South trade asimport demand from high-income countries was
still contracting as of October, albeit at a weaker
pace than in the third quarter.

Data for the Middle East and Africa lag behind.
However, latest available data suggest thatdevelopments in the Middle East and North
Africa have been influenced more by politicaldevelopments than the external economic
environment. Indeed, export volumes for the
Middle East and North Africa region has
contracted for twelve consecutive months, withvolumes in the three months leading to August
contracting at a peak 36.4 percent pace. In
contrast, annualized growth rates in Sub SaharanAfrica export volumes were at a double digit
pace in both Q1 2012 (18.3%) and Q2 2012(29.4%). However, in the three months leading
to August, export volumes were expanding at a
subdued pace of 2.5 percent, suggesting that theregions exports were hit by the mid-year
weakness in global demand.

Among developing regions, the worst hit by theQ2 slowdown included: East Asia and Pacific(excluding China) – whose export volumes ofmanufactured goods are particularly sensitive toglobal demand conditions; South Asia andCentral and Eastern Europe both of which havestrong ties to European demand; and Latin
American and the Caribbean, though lessdependent on Euro Area demand are sensitive to
weakening Asian (particularly Chinese demand
for their commodity exports). Notwithstanding
the contraction in exports that each of thesedeveloping regions experienced in Q2 2012, they

Medium term prospects for global trade
Global trade is projected to pick-up over the
medium term but at relatively subdued rates.
As described in the main text, global output isprojected to remain weak but gradually firm
during 2013 and through 2015, with US andEuro Area growth still hampered by fiscal

62

Global Economic Prospects January 2013

Trade Annex

consolidation, banking-sector restructuring andhigh unemployment.

countries are now more important trading
partners than high-income countries. Developing
countries are also increasingly important for high-income countries as well. Since 2000, NorthNorth trade has been expanded on average by
only 7.3 percent over the past decade, whereas
high-income-country exports to developing
economies has increased at an annual averagepace of 11.8 over the past decade (figures
Trade.9 and Trade.10).

Growth in developing countries is also expected
to firm but remain relatively weak. As a result,real trade growth is projected to only gradually
return to pre-crisis growth rates of 5.7 percent in2013, 6.7 percent in 2014, and 7.1 percent in2015.
Developing countries trade shares andcontribution to export and import growth willcontinue expand. Continued productivity
differentials, policy reform and investments inhuman and physical infrastructure are projected
to permit developing countries to continue
growing their share of global trade.
Developing country imports are projected to
expand at an annual average rate of 8.0 percent
between 2013 and 2015, versus a moderate 5.9
percent for high-income countries (driven mainlyby the United States).

The rise in Chinese wages presents anopportunity for other developing countries toenter light manufacturing sector. Not only will
their share of trade increase but also thecomposition of trade among developing
countries. Indeed, with the cost of labor
continuing to rise in China and assuming acontinued appreciation of the renminbi, otherdeveloping countries may be able to enter intosome of the labor-intensive manufacturingsectors that China has dominated in recent
decades (World Bank 2012).

Overall, the share of developing countries in
global trade is projected to reach 35 percent by
2015, with most of the pickup reflecting
increasing South-South trade. As of 2002, SouthSouth trade accounted for only 39.2 percent of
total developing country exports, but by 2010
this share had topped 50 percent – meaning thatfor developing countries, other developing

The quadrupling of Vietnamese exports over the
past decade in part reflects its increasing
competitiveness vis-à-vis China in lightmanufacturing – although to take advantage of
their full potential, countries in Sub-SaharanAfrica will have to address some of the binding
constraints related to infrastructure, access tofinance and human capital.

Figure Trade.9 The dynamic growth of South-South
trade has accounted for the increasing share of developing country exports going to other developing
countries

Figure Trade.10 South-South trade has been the mostdynamic segment of global trade over the past decade(Index of export values, 2001=100)

450( percentage share of developing country exports going to high -income anddeveloping countries )

400

100%

350

90%

80%

300

70%

250

60%

50%

200

40%
30%

150

20%
10%
0%

2002

2003

2004

2005

High-income

2006

2007

2008

2009

2010

100

North-North

North-South

50

South-SouthSouth-North

0

Developing

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: World Bank.

Source: ITC and Comtrade database.

63

Global Economic Prospects January 2013

Trade Annex

Risks

Figure Trade.11 Trade restrictive measures continue torise

Significantly weaker global growth. The
challenges faced by high-income countries
continues to be the main sources of risk for trade
going forward. Euro Area tensions, the fiscal
cliff in the United States and a sharp decline in
Chinese growth are among the risks that could
derail trade in the months and years to come.
Simulations presented in the main text suggestthat a harder landing in China could reduce
global trade growth by 0.63 percentage points
from our baseline forecasts of 5.7 percent in2013.

(Number of new trade restrictive measure by type)
200

Other

160

Export120

Border80
Trade
remedy40

0
mid-October 2010 -April
2011

The current weakness in Japan also represents arisk for trade (Japan is the world’s fourth largest
importer) .

May 2011 to midOctober 2012

mid-October 2011 to
mid-May 2012

Source: World Bank, World Trade Organization.

Should the situation in either Europe or theUnited States degrade sharply, the solvency ofprivate-sector banks could be affected –potentially forcing them to tighten up tradefinance – with serious consequences for trade.
Even in the absence of a global crisis, newregulations introduced under Basle III, due tocome into force in 2016, could significantly raise
the cost of trade finance, potentially increasing
its cost and accessibility to developing-country
firms.

introduced since October 2008 by G-20
countries have been removed, with current
measures estimated to affect some 3 percent of
global trade ($450 billion). Of particular concern
is that, unlike previous restrictive trade measuresthat were seen as combatting the temporary
effects of the global crisis, recent trade measuresare embedded in national industrial plans, hence
appear to be of a longer term nature.

References

A drying up of bank-led trade finance could beparticularly damaging for smaller firms, who
may not have access to alternative financing
methods such as bonds available to larger firms.

World Bank (2012). Light Manufacturing in
Africa.
World Trade Organization (2012). Report to the
TPRB from the Director General on TradeRelated Developments. WT/TPR/OV/W/6.

A rise in protectionism. With unemployment
remaining at elevated levels, weak global
demand and little progress in multilateral tradetalks, the incidence of new restrictive trademeasures has held steady. The World Trade
Organization reports that in the seven months
leading to mid-May 2012, an additional 182 new
trade restricting or potentially distorting
measures were introduced (figure Trade.11).
Compared to the same period a year ago, where
184 new measures were introduced which
affected 0.5 percent of global trade, the recent
measures affects some 0.9 percent of global
trade. Further, only 18 percent of measures

64

Global Economic Prospects January 2013

Exchange Rates Annex

Exchange Rates
decision and timing of Spain’s request for abailout and the economic weakness in the EuroArea temporarily tempered appreciation of theeuro. The euro appreciated strongly again in lateNovember and early December after Greece exit
fears receded following a debt deal in November
to cut the interest rate on official loans to
Greece, extend the maturity of loans from theEuropean Financial Stability Facility (EFSF)
from 15 to 30 years, and grant a 10-year interest
repayment deferral on those loans. Meanwhile,in the United States, a temporary resolution wasreached on the so-called ―fiscal cliff‖ ofautomatic tax increases and spending cuts inearly January. But the protracted fiscal policy
impasse and uncertainty regarding the upcoming
US debt ceiling negotiations have weighed on
US economic activity, and in turn the dollar.
Worsening growth outturns in Japan (partly due
to an island-related dispute with China thatcaused a steep decline in exports) and aggressive
monetary policy easing also contributed to
weakening the yen against both the US dollar (8.5%) and the euro (-13.1%) between September
1 and December 31 2012.

High income exchange rates have beenvolatileHigh income exchange rates, especially crossrates between the US dollar, Euro, and yen, havebeen volatile in recent months, reflecting
alternate bouts of optimism and pessimism
among investors regarding the prospects forresolution of the Euro Area debt crisis, fiscal andmonetary policy actions in Euro Area, UnitedStates and Japan, and uncertainty regarding thepace and sustainability of economic recovery inhigh income countries. Indications by theEuropean Central Bank on July 26 that it would
take action to reduce financial market tensions,and expectations that the ECB’s OutrightMonetary Transactions (OMT) bond purchaseprogram subsequently announced on September
6 would help reduce downside risks to growth,
contributed to the strong 8.6 percent appreciationof the euro against the US dollar between July
26 and December 31 2012 (figure ExR.1). The
third round of US quantitative easing (QE3)
announced on September 11 resulted in an
immediate weakening of the US dollar against
both high income and developing countries’
currencies. Subsequent events relating to the

Movements among high income
currencies have influenced developing
countries’ bilateral exchange rates

Figure ExR.1 High income exchange rates
Index, Jun 2012 = 100, 5-day m.a.

This ebb and flow of the high income exchange
rates has been transmitted to varying extents tobilateral exchange rates of developing countries’
currencies relative to the three majorinternational reserve currencies, the US dollar,
the euro and the yen. In the second half of 2012,
bilateral exchange rates of several large
developing countries experienced appreciationpressures relative to the US dollar, but
depreciated relative to the euro, reflecting in partthe movements in the dollar-euro rate discussed
above (figure ExR.2).

120
115
110
105
100

USD/Euro
Yen/Euro
USD/Yen95
90

Jun-12

Jul-12

Aug-12

Sep-12

Source:World Bank.
Source: World Bank Prospects Group and Datastream

Oct-12

Nov-12

Notwithstanding the fluctuations in bilateralexchange rates of developing countries’
currencies, their trade weighted nominal

Dec-12 Jan-13

Last updated: Jan. 10, 2013

65

Global Economic Prospects January 2013

Exchange Rates Annex

Figure ExR.2 Developing countries’ bilateral exchange rates relative to US dollar and euro
US$/local currency, Index, Jun 1 2012 = 100, 5-day m.a.

Euro/local currency, Index, Jun 1 2012 = 100, 5-day m.a.

112

110.0
107.5

108

105.0
102.5

104

100.0
100

97.5

BrazilIndia
MexicoTurkey
US$/Euro

96

92

Jun-12

Jul-12

Aug-12China
Chile
RussiaSouth Africa
Sep-12Oct-12

BrazilIndia
MexicoTurkeyEuro/US$

95.0
92.5

Nov-1290.0

Dec-12 Jan-13

Jun-12

Jul-12China
Chile
RussiaSouth Africa
Aug-12

Sep-12 Oct-12

Source: IMF International Financial Statistics, JP Morgan, and World Bank.
Source: World Bank Prospects Group and Datastream

Last updated: Jan. 10, 2013

Source: World Bank Prospects Group and Datastream

effective exchange rates (NEERs) have been
considerably less volatile (figure ExR.3). On
average, bilateral exchange rates relative to the
US dollar of the developing countries in figure
ExR.3 were 22 percent more volatile than the
NEERs during the three-year period from
December 2009 to December 2012; and bilateralexchange rates relative to the euro were 36
percent more volatile than NEERs. Exchange
rates that are more closely linked to the US
dollar (e.g., the Chinese renminbi) exhibit
considerable variation relative to the euro; whilecurrencies of countries with tighter trade linkage

Nov-12

Dec-12 Jan-13

Last updated: Jan. 10, 2013

to the Eurozone (e.g., Romanian leu) exhibit
more variation relative to the US dollar. But ingeneral, the diversification of trade destinationsof developing countries implies that bilateral
movements relative to the high income
currencies often offset each other in the tradeweighted basket of currencies relevant fordeveloping countries. This suggests that a focus
on any specific bilateral exchange rate could be
misleading when considering trends in exchange
rates for developing countries, and it may be
more appropriate to consider effective (trade
weighted) nominal or real exchange rates.

Figure ExR.3 Bilateral exchange rates of developing countries tend to be more volatile than trade-weighted nominal effective exchange rates (Average and maximum deviation from trend)
Average percent deviation from HP filtered trend, Dec. 2009-Dec. 2012

Maximum percent deviation from HP filtered trend, Dec. 2009-Dec. 2012

5.0

12.0

4.5

USD/local currency

Euro/local currency

USD/local currency

Euro/local currency

NEER

NEER

10.0

4.0
3.5

8.0

3.0
2.5

6.0

2.0

4.0

1.5
1.0

2.0

0.5
0.0
China Indonesia Malaysia Romania Russia

India

BrazilSouth
Africa0.0

TurkeyChina

Malaysia Russia Romania

India

Indonesia South
AfricaNote: NEER volatility is calculated as the average percent
absolute deviation of monthly REER from a Hodrick-Prescott filtered trend (λ=5000) over 2000-2012.
Source: IMF International Financial Statistics, JP Morgan and World Bank.

66

BrazilTurkeyGlobal Economic Prospects January 2013

Exchange Rates Annex
loss of competitiveness of its manufacturingsector. Peru has also taken some steps, raisingreserve requirements on local and foreign
currency bank deposits and selectively
intervening in currency markets, citing highinternational liquidity and exceptionally low
international interest rates as reasons.FN1 It is
worth noting, however, that capital controls andsustained interventions to prevent currency
appreciation could involve significant risks forthe economy over the medium term (see box
ExR.1 and the Global Economic Prospects June2012 report).

Unconventional monetary policies in highincome countries and gains ininternational commodity prices havecaused concerns of currency appreciationand possible loss of competitiveness
The monetary authorities in the US and EuroArea have committed to an extended period of
unconventional monetary policies, in the context
of the third round of the US Federal Reserve’s
quantitative easing (QE3) program and the
ECB’s OMT bond purchases programs for EuroArea countries that seek financial assistance.
Japan’s central bank has also maintained a
supportive monetary policy stance as growth
faltered. The prospect of an extended period ofaccommodative monetary policies in highincome countries has raised concerns among
policy makers in some developing countries thatit could cause large ―hot money‖ inflows into
government and corporate bonds, and equity
markets, of developing countries (see FinanceAnnex of the Global Economic Prospects
January 2013 report), which in turn, could resultin currency appreciation and loss of export
competitiveness (Frankel 2011, Ostry, Ghosh,and Korinek 2012).

Mexico has also experienced heavy inflows into
government bond markets in parallel with US
monetary easing and relatively strong growth.
However the peso has been allowed to float,
contributing to a 8.4 percent appreciation in realterms since June (figure ExR.4). The South
African rand has been a notable exception to thecommodity- and capital flows-driven rally in
exchange rates, with the trade-weighted realexchange rate declining 2.5 percent between
June and December 2012 as protracted mining
sector tensions, labor unrest, and domestic
economic weakness (compounded by asovereign rating cut by Moody’s in late
September) caused a loss of investors’
confidence.FN2 This has resulted in a strong
historical link to fundamentals, in particular to
the terms of trade (see Exchange Rates Annex of

For commodity exporting countries, it can bedifficult to distinguish between currencypressures related to high commodity prices andrelated foreign direct investment on the one
hand, and more volatile hot money capital flows
on the other. In such countries, high-income
monetary easing-related capital inflows could
plausibly exacerbate commodity price-driven
swings in real effective exchange rates (REERs).
For example, the 28 percent real effective
appreciation of the Brazilian real since January
2009 seems to be principally a reflection of highcommodity prices, strong commodity exports,
and commodity-related foreign direct investment
flows. While hot money flows may contribute toshort-term volatility, the longer-term
appreciation of the real does not seem to reflect
these more volatile forms of capital flows (boxExR.1).

Figure ExR.4 Trade-weighted real exchange rates ofcommodities exporters in 2012
REER appreciation, percent
11
97

Dec11-Dec12
June12-Dec12

5
3
1

-1
-3
-5

Colombia South Africa Indonesia

For some time now, Brazil has actively managed
its bilateral exchange rate in an effort to prevent

Peru

Chile

RussianFederation

BrazilMexicoSources: IMF International Financial Statistics, J. P.
Morgan, and World Bank.

67

Global Economic Prospects January 2013

Exchange Rates Annex

Box ExR.1 The influence of commodity prices and capital markets on developing country exchange rates
The experience during two earlier periods of sustained increase in international commodity prices and private capital
flows is illustrative. Between 2003 and mid-2008 prior to the Lehman crisis, prices of industrial commodities rose
more than 164 percent in real terms and crude oil prices rose 230 percent, implying annual increases of 21 percent and26 percent. A second price rally occurred following the financial crisis with prices recovering close to the pre-crisis
peaks in just over two years, helped by fiscal stimulus measures and sustained monetary easing in high income countries, and a quick rebound in developing countries’ growth compared to a much weaker growth in high income countries. The period of near-zero interest rates and quantitative easing in the US, UK, Japan and other high income countries caused capital flows to developing countries to surge again. The influx of commodity-seeking inflows as well asprivate capital flow (attracted by faster productivity growth), together resulted in a significant appreciation of developing countries’ currencies.
The extent of appreciation of developing countries currencies, however, varied along two dimensions—the importance of primary and industrial commodities in overall imports, and the extent of financial market openness. We
measure the latter as the share of foreign portfolio equity inflows as a share domestic product (GDP), which signals
the extent of integration into global financial markets. As box figure ExR 1.1 shows, developing countries that are in
the top third along both dimensions (e.g., Brazil, South Africa) experienced the steepest appreciation, especially compared to other developing countries that are relatively well-integrated into financial markets but not significant commodity exporters (e.g. India, Turkey, Thailand). By contrast, the real exchange rates of other commodity exportersthat are in the bottom third in terms of our measure of financial market integration (e.g. Gabon, Cameroon, Iran) wereon average flat during the first period and lost value in the second period.
This suggests that commodity prices and capital flows can interact in complex ways to influence currencies of developing countries. A commodity price boom can attract not only foreign direct investment into resource intensive sectors raising overall levels of FDI (box figure ExR 1.2), but in countries with relatively higher levels of financial openness, it can also cause short-term speculative inflows into non-tradable sectors, for example, real estate, that benefit
from the increased demand caused by commodity revenues, in the process further appreciating the currency. Eventually, when international prices retreat or investor risk aversion rises, the process is reversed, as sudden capital outflows depreciate the exchange rate, in the process raising the local currency burden of foreign currency-denominatedliabilities (Ostry et al. 2010). Such a commodity price boom-fueled real exchange rate appreciation, especially incountries with relatively higher levels of financial market integration, can exacerbate risks to firm and sovereign balance sheets (Korinek 2011). Although some financially-integrated commodity exporters have made efforts to mitigate
these risks through controls on cross-border flows, such as Chile’s ―Encaje‖ in the 1990s and Brazil’s more recent
IOF tax on inflows, such controls may come at the cost of reduced allocations of portfolio capital that is often redirected towards countries with more open exchange rate regimes (Forbes et al. 2012), and over time, lower investment
rates, productive capacity and welfare. When there is significant cross-border spillovers of a country’s capital control
policies that can exacerbate existing distortions in others, multilateral coordination of such unilateral policies may bebeneficial (Ostry, Ghosh, and Korinek 2012).
Box figure ExR 1.1 Currencies of commodities exporters that are also financially-integrated experienced the largest gains during periods of commodity
price increases and capital flows

Box figure ExR 1.2 FDI is stronger in commodity exporting countries

Foreign direct investment as share of GDP(Percent)

Average real effective exchange rate appreciation(percent)
30
25

Top third of countries by crude oil and commodities
exports in total exports

10.0

Top third of countries by crude oil and commodities
exports in total exports

9.0

20
15

Bottom third ofcountries bycommodity
exports

8.0

Bottom third of countries bycommodities exports

7.0

10

6.0

5

5.0
4.0

0

3.0
-5
Top 33 percent byBottom 33 percent by
equity market
equity m arket
integration
integration

Jan. 2003-Jan. 2008

2.0

Top 33 percent byBottom 33 percent by
equity market
equity market
integration
integration

1.0
0.0

Jan. 2009-Jan. 20112003-08

Source: IMF International Financial Statistics, JP Morgan
and World Bank.

2009-10Source: IMF International Financial Statistics, JP Morgan,
and World Bank.

68

Global Economic Prospects January 2013

Exchange Rates Annex

the Global Economic Prospects June 2012
report), breaking down in the most recent period.
Indonesia’s real effective exchange rate declined
by 2.6 percent in 2012, but was 19 percent
higher compared to the level in January 2009.

innovative solutions may be needed to manage
the consequences for growth and manufacturing
competitiveness (Frankel 2011, Devarajan andSingh 2012).

Currencies of net crude oil importers
among developing countries remain underpressure

Policymakers in developing countries facedifficult policy choices when faced with asustained surge of inward foreign exchange
flows, whether these are private flows caused bymonetary easing in high income countries,
commodity revenues from persistently highinternational prices, or remittances sent by
migrants living in other countries. Policy
discussion in middle-income resource-richcountries that are relatively well-integrated with
global financial markets such as Brazil, Chile
and Russia have typically focused on concerns
about capital-inflows induced appreciation andpossible loss of manufacturing competitiveness.
However, commodity price-driven currency
appreciation is also an important issue for otherdeveloping countries that are experiencing
natural resource discoveries or increased
exploitation, for example, in CEMAC countries(including Equatorial Guinea, Cameroon, Gabon
and Central African Republic); in Kazakhstan
where managing oil revenues presents
macroeconomic challenges; and in Iraq where oil
production is rising rapidly after politicaltransition.

With a weakening of the global economy andsteep slowdown in exports of developing
countries during the course of 2012 (see Trade
Annex of the Global Economic Prospects
January 2013 report), some developing countries
had to draw down international reserves tosupport their currencies. Currencies of net oil
importers which have faced high international
prices of (and often relatively inelastic domestic
demand for) crude oil imports faced little
appreciation pressure, with their average tradeweighted real exchange rate broadly flat between
January 2011 and December 2012. In contrast,
crude oil exporters and resource rich developing
countries experienced appreciation of 6.9 percent
and 8.6 percent, respectively, during this period(figure ExR.5). While a depreciation of thenominal (and in turn, real) exchange rate canhelp to improve competitiveness and may bedesirable in certain circumstances, a combinationof a flat or declining real exchange rate andfalling reserves suggests that a currency may beunder pressure.

How then should policymakers on commodity
revenue-dependent countries respond to thesesustained inflows? To the extent that these
inflows are used for longer-term productivityenhancing investments, including in humancapital and infrastructure, and used to diversify
the economy towards non-commodity sectors
such as manufacturing and services, there is lessto fear in terms of loss of competitiveness. Somecountries such as Norway and Chile haveeffectively managed commodity revenues andsmoothed consumption and investment throughcycles using ―stabilization funds‖. Other
countries, including African commodity
exporters that are less advanced in managing
their commodity revenues, have experienced
large swings in public spending and higher costs
in non-commodity sectors. In such cases,

Figure ExR.5 Currencies of resource rich and crude
oil exporters have experienced greater appreciationpressures compared to other developing countries
Real effective exchange rate, index Sep 2011=100
110

108

Developing crude oil importers
Developing resource rich

106

Developing crude oil exporters

104
102

100
98
96
Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12

Note: GDP weighted averages of trade weighted realeffective exchange rates of relevant sub-groups.
Sources: IMF International Financial Statistics, JP Morgan
and World Bank.

69

Global Economic Prospects January 2013

Exchange Rates Annex

An indicator of vulnerability of the external
position, and consequently of pressures on theexchange rate, is the ―import cover‖, the numberof months of prospective imports that can befinanced with available international reserves.
The proportion of crude oil and industrial
commodities exporters where international
reserves were less than the critical three monthsof imports rose from 6.3 percent to 9.4 percent
between January 2011 and September 2012 (ormost recent available date); and the share ofcountries with less than five months of importcover rose from 12.5 percent to 25 percent(figure ExR.6). But in the group of non-oil noncommodities dependent countries, the share ofcountries with less than three months of importcover rose from 14 percent to 25 percent in thesame period, and those with less than fivemonths of import cover rose from 44.4 percentof the total to 58.3 percent. In some countries,
the erosion of import cover has been alarming.
For instance, Egypt’s international reserves fell
from the equivalent of over 7 months ofmerchandise imports in January 2011 to about 3
months by November 2012.

accounts (Ghosh, Ostry and Tsangaridis 2012).
The former set of countries may need tomaintain adequate reserves to cover all shortterm liabilities, including the maturing portion oflong term debt, in addition to covering several
months of imports in order to avoid balance of
payments shocks. A large stock of reserves may
also plausibly deter currency manipulators whoseek to profit from greater exchange rate
volatility (Basu 2012).
Despite worsening terms of trade, currencies ofsome net oil importing countries haveappreciated in trade weighted real terms due tocountry specific factors. For example, Turkey’s
real effective exchange rate appreciated in 2012,
initially helped by monetary support for thecurrency to cope with inflation and overheating,and later supported by an improving trade andcurrent account position, as weakening ofexports to Europe was offset by robust gains inexports to the Middle East (figure ExR.7). In
contrast, the real exchange rate of India, anothernet crude oil importer, depreciated by nearly 11
percent between July 2011 and September 2012
on deteriorating external balances andweakening growth outturns. However,significant reform efforts in September led to a
revival of investors’ interest, a surge in portfolio
inflows, and a nominal appreciation of more than
5 percent during that month alone.

Among countries that are relatively better
integrated with global financial markets, reserve
accumulation as an insurance against capital
account shocks may be more important thaninsuring against current account shocks, than for
countries that have relatively closed capital

Figure ExR.6 Import cover declined in middle-income crude oil and commodities exporters, but to a larger extent
in other countries

Middle income crude oil andcommodities exporters

Other middle income developing
countries

Number of middle-income countries with import cover (reserves in monthsof imports) in relevant range

Number of middle-income countries with import cover (reserves in monthsof imports) in relevant range
14

12

10

12

Jan-11
MRV in 2012

Jan-11
MRV in 2012

10

8

8
6

6
4

4

2

2
0

0
Less than 3months

3 - 5 months

5 - 7 months

Less than 3months

7 - 9 months 9 - 11 months 11 months or
more

3 - 5 months

5 - 7 months

7 - 9 months 9 - 11 months 11 months or
more

Note: Import cover is defined as international reserves as a share of the average monthly imports in the last six months.
Sources: IMF International Financial Statistics and World Bank.

70

Global Economic Prospects January 2013

Exchange Rates Annex

Figure ExR.7 Real effective exchange rates of net oil importers India and Turkey followed divergent paths evenwith worsening terms of trade in bothTurkey

India
105

102

85

85

Jan-0998

75

96

Turkey REER

70

94

Turkey terms of trade [Right]

65

92

60

90

Jun-09

Nov-09Apr-10

Sep-10Feb-11

Jul-11

Dec-11 May-12

Oct-12

90

100

80

80

95

104

90

90

100

106

95

95

105

108

100
100

Index, Jan 2009 = 100

Index, Jan 2009 = 100
110

Index, Jan 2009 = 100

Index, Jan 2009 = 100
105

Jan-0985
80

India REER

75

India terms of trade [Right]

Jun-09

Nov-09Apr-10

Sep-10Feb-11

Jul-11

Dec-11 May-12

Oct-1270

Source: IMF International Financial Statistics, JP Morgan and World Bank.

External vulnerabilities vary across developing
regions and among country groups. Net oil
importers across developing regions have facedhigh or widening current account deficits (figure
ExR.8) and depreciation pressures. In contrast,
developing crude oil exporters in the Middle
East, and some East Asian countries such as
China, have current account surpluses (albeit
falling in recent years in the case of China) andlarge reserve buffers to draw on, and are
therefore easily able to manage pressures on
their exchange rates that may result from anadverse external environment.

China’s closely managed bilateral exchange rate
relative to the US dollar appreciated to 6.25
renminbi/US dollar in October 2012, the highest
level in over a decade, from 8.28 renminbi/US$
in January 2005, representing a 32 percent
appreciation with respect to the US dollar and a
35 percent appreciation relative to the euro
(figure ExR.9). The renminbi’s appreciation andfall in China’s current account surplus is one of
the elements of rebalancing the economy
towards domestic demand and further
internationalization of the currency, as evidenced
by progressively larger volumes of trade

Figure ExR.8
ExR.7 Current
Real effective
exchangerates
of netoilin
importers
IndiaExR.9
and Turkey’s
followdivergentpaths
FigureThe Chinese
renminbi
appreciatedrelaaccountsurpluses
have
fallenSource:World
Bank. in several other developing
tive to the US dollar and euro between 2005 and 2012
East
Asia,
but deficits
regions have widened

China's exchange rates

Current account balance as a share of developing countries' GDP, percent

Index, Jan 2005=100

4.5

140

Yuan/US$, inverse scale

5.5

REER index
NEER index

3.5

6Euro/yuan (index)

130

2.5

Yen/yuan (index)

6.5

Yuan/US$ [Right]

1.5

120

7

0.5

7.5

110

-0.5

8
100

-1.5
2005

2006

2007

2008

Sub-Saharan Africa
Middle East & N. Africa (Oil importers)
Latin America & Caribbean
EAP excl. China

2009

2010

2011

8.5

2012e

South Asia
Middle East & N. Africa (Oil exporters)
Europe & Central Asia
China

90
Jan-05Jan-06

Jan-07

Jan-08Jan-09Jan-10Jan-11

Jan-129

Source: IMF International Financial Statistics, JP Morgan
and World Bank.

Source: World Bank.

71

Global Economic Prospects January 2013

Exchange Rates Annex
temporarily find it easier to finance their current
account deficits, implying easing of balance of
payments pressures. But that could also result inheightened balance sheet risks in future, inparticular if the share of short-term debt-creating
portfolio inflows in overall inflows rises.
Currencies of several net oil importing countries
with low or eroded reserve buffers, such as
Egypt, Pakistan, and India, remain vulnerable,
especially when compared to oil exporters andEast Asian countries that have significantly
larger reserve buffers or current accountsurpluses.

transactions denominated in renminbis.
However, the renminbi experienced significant
depreciation relative to the Japanese yen during
the latter part of this period until mid-2011,
implying a 8 percent appreciation over the eight
year period. Partly due to its tightly managed
link to the US dollar, the renminbi experienced
significantly greater volatility with respect to theeuro and yen, broadly reflecting the movements
among high income currencies discussed earlier.
Given China’s status as the world’s largest
exporter of goods, its exchange rate policy has
significant spillover impacts on trade competitor
countries. A recent study finds that exports ofcompetitor countries to third markets tend to riseas the renminbi appreciates, with a 10 percent
appreciation of the renminbi raising a developing
country’s exports at the product-level on average
by about 1.5-2 percent (Mattoo, Mishra, andSubramanian 2012).

Notes
Looking forward
1. Among the less-integrated commodity
exporters, Zambia’s currency benefited fromstrong copper export revenues and investor
interest in its debut $750 billion sovereign
bond in September. The Nigerian naira
benefited from high international oil prices in
2012, and more recently, from Nigeria’s
inclusion in JP Morgan’s Emerging Markets
Bond index (EMBI) in August. However,currency markets in these countries are
relatively thin. In this note, we focus on theinternationally traded currencies of typically
middle income countries.

Developing countries’ bilateral exchange rates
with respect to the international reserve
currencies are likely to continue to be volatile, ashigh income cross-exchange rates (US dollar,
euro, yen) bounce around with the ebb and flowof global financial market conditions and with
policy and real side developments (including thepossibility of a protracted fiscal impasse in the
United States or a resumption of Euro Area debt
turmoil). While there is considerable uncertainty
regarding price forecasts, given prospects that
commodity prices are likely to remain high as
global growth continues to firm, currencies ofcommodities exporters could continue to face
upward pressure – especially those that are alsosignificant recipients of private capital.

2. South Africa’s inclusion in the Citi world
government bond index (WGBI) was
expected to attract substantial inflows, but
coincided with a period of mining tensions.

Finally, the vulnerabilities in some developing
countries, especially net importers of crude oil,are likely to ease as their exports rise with a
gradual strengthening of global trade, but their
weaker international reserve position renders
these currencies especially vulnerable to sudden
withdrawal of private capital flows if investor
sentiment shifts. Net oil importing developing
countries that manage to attract high-income
monetary easing-related capital flows could

References
Basu, K. 2012. “The Art of Currency
Manipulation: How Some Profiteer by
Deliberately Distorting Exchange Rates.”
Manuscript, Ministry of Finance, Govt. ofIndia, and Cornell University.

72

Global Economic Prospects January 2013

Exchange Rates Annex

Cashin, P., L. Cespedes, and R. Sahay. 2004.
"Commodity Currencies and the RealExchange Rate," Journal of Development
Economics, Vol. 75(1), pp. 239-268, October.

Account,‖ IMF Staff Discussion Note 12/10.
September.

Devarajan, S., and Raju Jan Singh. 2012.
―Government Failure and Poverty Reductionin CEMAC‖. Presentation at the World Bank
Forbes, K., M. Fratzscher, T. Kostka, and R.
Straub. 2012. ―Bubble thy neighbor: portfolio
effects and externalities from capital controls.‖
Frankel, J. 2011. ―How Can Commodity
Exporters Make Fiscal and Monetary Policy
Less Procyclical?‖ in Beyond the Curse:
Policies to Harness the Power of Natural
Resources, eds.: R. Arezki, T. Gylfason, and
A. Sy, International Monetary Fund.
Frankel, J. 2012. ―The Natural Resource Curse:
A Survey of Diagnoses and Some
Prescriptions.‖ In Commodity Price Volatility
and Inclusive Growth in Low Income
Countries, eds. R. Arezki, C. Pattillo, M.
Quintyn, and M. Zhu, International Monetary
Fund.
Ghosh, A, J. Ostry, and C. Tsangarides. 2012.
―Shifting Motives: Explaining the Buildup in
Official Reserves in Emerging Markets sincethe 1980s‖ IMF Working Paper 12/34.
January.
Korinek, A. 2011. ―The New Economics ofPrudential Capital Controls.‖ IMF Economic
Review 59 (3), pp. 523-561
Mattoo, A., P. Mishra, and A. Subramanian.
2012. ―Spillover Effects of Exchange Rates: A
Study of the Renminbi.‖ IMF Working Paper
12/88. March.
Ostry, J., A. Ghosh, K. Habermeier, M. Chamon,
M. Qureshi, and D. Reinhardt. 2010. ―Capital
Inflows: The Role of Controls,‖ IMF Staff
Position Note 10/04. February.
Ostry, J., A. Ghosh, and A. Korinek. 2012.
―Multilateral Aspects of Managing the Capital73

Global Economic Prospects January 2013

Commodity Annex

Prospects for commodity markets
in the global environment, oil prices have
responded to geopolitical concerns, includingEU‘s embargo on Iranian oil and on-goingviolence in the Middle East.

Overview
Following sharp declines during 2012Q2,
commodity prices rebounded with most of theindices ending 2012 at levels close to where they
began (figure Comm.1). For the year as a whole,
crude oil prices averaged US$ 105/bbl, just US$
1 above the 2011 level. Food prices increased
marginally as well, though during 2012Q3 grains
reached record highs (figure Comm.2). Metal
prices declined more than 15 percent, ending theyear at levels close to mid-2010 lows. Raw
materials and beverages prices declined sharply
as well—almost 20 percent each. Fertilizer andprecious metal prices changed little.

Under our baseline scenario, which assumes
further easing of financial tensions in Europe,
most prices are expected to decline in 2013. Oilis expected to average 102/bbl in 2013, just 3
percent lower than the 2012 average (table
Comm.1). Agricultural prices are set to decline
more than 3 percent (food, beverages, and raw
materials down by 3.2, 4.7 and 2.2 percent,respectively). Metal prices are expected to gain
marginally but still average 14 percent lower
than 2011. Fertilizer prices are expected to
decline 2.9 percent, while precious metal prices
will increase a little less than 2 percent.

The price declines of most commodities earlier
in the year reflected intensification of theEuropean debt crisis along with slower growthprospects in emerging economies, especiallyChina. In the summer, however, food prices rose
sharply as hot weather and dry conditions in the
US, Eastern Europe, and Central Asia reduced
the maize and wheat outlook. Towards the endof 2012Q3 prices of most industrial commodities
firmed following the ECB bond purchaseprogram and later the announcement of QE3 by
the US Federal Reserve. In addition to weakness

There are a number of risks to this forecast. Onoil, global supply risks remain from the on-going
political unrest in the Middle East. A major
supply cutoff could limit supplies and result in
prices spiking well above US$ 150/bbl. Suchoutcome would depend on numerous factors,
including the severity, duration, policy actions
on emergency reserves, demand curtailment, andOPEC‘s response. Downside price risks, on the

Figure Comm.1 Commodity price indicesFigure Comm.2 Food price indices$US nominal, 2005=100$US nominal, 2005=100

250

300
250

200

200
150

150
100

100
EnergyMetals

Edible oils

Agriculture

Jan-06

Grains5050Jan-07

Jan-08Jan-09Jan-10Jan-11

Jan-12

Jan-13Jan-06

Source: World Bank

Jan-07

Jan-08Source: World Bank.

75

Jan-09Jan-10Jan-11

Jan-12

Jan-13

Global Economic Prospects January 2013

Commodity Annex

Table Comm.1 Nominal price indices—actual and forecasts (2005 = 100)ACTUALFORECASTCHANGE (%)

2008

2009

2010

2011

2012

2013

2014

2011/122012/13

Energy

183

115

145

188

187

183

183

-0.4

-2.6

2013/140.1

Non-Energy
Metals

182
180

142
120

174
180

210
205

190
174

186
176

180
176

-9.5
-15.3

-2.0
1.3

-3.2
-0.1

Agriculture

171

149

170

209

194

188

180

-7.2

-3.2

-4.4

Food

186

156

170

210

212

205

192

0.7

-3.2

-6.4

GrainsFats and oils

223
209

169
165

172
184

239
223

244
230

239
220

225
206

2.4
3.3

-2.1
-4.2

-6.0
-6.5

Other food

124

131

148

168

158

153

143

-5.9

-3.1

-6.6

Beverages

152

157

182

208

166

158

155

-20.2

-4.7

-2.0

Raw Materials
Fertilizers

143
399

129
204

166
187

207
267

165
259

162
245

162
232

-20.0
-2.9

-2.2
-5.6

0.4
-5.3

Precious metals

158

175

272

372

378

378

353

1.7

0.0

-6.7

97
872

62
973

79
1,225

104
1,569

105
1,670

102
1,600

102
1,550

1.0
6.4

-2.9
-4.2

0.2
-3.1

Memorandum items
Crude oil ($/bbl)
Gold ($/toz)

Source: World Bank.

other hand, include weaker oil demand due toslower economic growth, especially by emerging
economies. Nevertheless, the key element for
price stability will be how well OPEC (and more
importantly Saudi Arabia) can address changing
demand conditions. Historically, OPEC has beenable to respond quickly to defend a price floor
by cutting production sharply, but has been
unwilling to respond as quickly to set a priceceiling. On the other hand, there is some roomon spare capacity and stocks. OPEC‘s sparecapacity averaged 3.9 mb/d during 2012Q3, 14
percent higher than 2012Q2 but remarkably
similar to the past decade‘s historical average (ithad reached a low of 2.3 mb/d during the firsthalf of 2008, when oil prices exceeded US$ 140/bbl.) Moreover, OECD oil inventories haverecovered remarkably—up 17 percent from2012Q2 to 2012Q3. On the demand side, while
the oil intensity of GDP in middle income
countries has been rising, it has not reachedlevels that could derail economic growth. Pricerisks on metals depend on the prospects for the
Chinese economy; should it deteriorate, metal
prices could decline substantially as China
accounts for almost half of global metal
consumption.

prices, in view of historically low stock levels.
The wheat market (which currently is bettersupplied than maize) may come under pressure
as well. In contrast, there are limited upside pricerisks for rice and oilseeds since the respective
markets are well-supplied. Trade policy risks
appear to be low as well. Despite the sharp
increases in grain prices during the summer of
2012, countries did not engage in export
restrictions—some press reports to the contrary
turned out to be unsubstantiated. Finally, growthin the production of biofuels has slowed aspolicy makers are increasingly realizing that theenvironmental and energy security benefits from
biofuels are not as large as originally thought.

Crude Oil
Despite large fluctuations, oil prices (WorldBank average) ended the year at US$ 101/bbl,
close to where they began (figure Comm.3). The
decline earlier in 2012 (23 percent down
between March and June 2012), reflected weak
demand due to slower growth outlook andheightened concerns about the European debt
crisis. However, supply concerns, mostly of
geopolitical nature, weighed in later prompting afirming of prices.

On agriculture (and most importantly food), a
key upside risk is weather. Any adverse weather
event is likely to induce sharp increases in maize

Although Brent prices (the international marker)
topped $113/bbl in September, West Texas

76

Global Economic Prospects January 2013

Commodity Annex

Intermediate (the US mid-continent price) has
remained almost $20/bbl below due to the buildup of regional stocks (figure Comm.4). A
decline in the Brent-WTI spread in late 2011/
early 2012, which reflected a euro zone-induced
decline in Brent, turned out to be temporary andby August 2012 the spread exceeded 20 percent
once more.

Figure Comm.3 Oil prices and OECD oil stocks$US per bbl

million bbl
2,800

140

120
2,700
100

80

Crude flows from Canada through the Keystone
pipeline that commenced in 2011, as well as
rapidly rising shale-liquids production in the US,
especially in the states of Texas and North
Dakota, have contributed to the build-up of US
stocks—at a time when U.S. oil consumption is
dropping. Currently, there is limited capacity totransport surplus oil to the U.S. Gulf coast, apartfrom some utilization of rail, truck and barges.
Although the WTI discount is expected to persist
until 2015, when the new pipelines to the U.S.
Gulf are expected to become operational, someeasing may take place earlier depending on the
speed at which the reversal of existing pipelines
will materialize.

2,600OECD oil inventories(right axis)

60

40

2,500

Oil price, World Bank
average (left axis)

20
Jan-06

2,400
May-07

Sep-08Jan-10May-11

Sep-12

Source: IEA, World Bank.
Figure Comm.4 WTI/Brent price differential
30%
25%
20%

15%

World oil demand increased only modestly (lessthan 0.8 percent or 0.67 mb/d) in 2012 (figure
Comm.5). OECD consumption is down almost 5
mb/d, or 10 percent from its 2005 peak. Japan isthe only OECD country that increased crude oil
demand by 1 mb/d. Most of the increase wasdestined for power generation, following theclosing of nuclear capacity after the Tohoku
accident. Non-OECD demand is positive androbust—currently non-OECD countries accountfor almost half of global crude oil consumption
and more than all of the increase in global
demand.

10%
5%
0%

-5%
Jan-10Jul-10Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Source: World Bank.
Figure Comm.5 World oil demand growth4

On the global supply side, the decline in nonOPEC output growth in 2011 appears to havereversed. In 2012, non-OPEC producers added
over 1 mb/d to global supplies, mainly reflecting
earlier large-scale investments. The technology
in the exploitation of the natural gas in the U.S.
—which combines horizontal drilling andhydraulic fracturing—is spilling into thepetroleum industry and is currently applied tothe oil-bearing shale plays of the Bakken
formation in North Dakota and Eagle Fordmb/d

non-OECD

OECD

1Q07

1Q09

2

0

-2

-4
1Q03

1Q05

Source: IEA, World Bank.

77

1Q11

1Q13

Global Economic Prospects January 2013

Commodity Annex

formation in Texas. Oil production from these
two areas has risen very rapidly over the past
few years. For example, Texas and North Dakota
added 1 mb/d of crude oil in just 16 months(from April 2011 to August 2012, figure
Comm.6). Although shale-liquids (also referred
to as tight oil) production has great potential tobe applied elsewhere in the U.S. and worldwide,
there are some public concerns about effects ofthe potential ecological impacts of fracturing andwater use.

Figure Comm.6 US crude oil production
mb/d
5
Other

4
3
2

Texas + N. Dakota

1

Production among OPEC countries has risen 1.8
mb/d since the end of 2010 (prior to disruptionsin Libya) with Saudi Arabia accounting for 1.5
mb/d of the net gain. In the meantime, Libya‘s
oil production has recovered to 1.3 mb/d,
compared with 1.6 mb/d pre-crisis, althoughfurther gains may be difficult due to on-goinginternal disputes. Iraq‘s production reached a pre-war high in March 2012 of 2.84 mb/d, andexports are increasing from a new mooring
system in the Gulf. On the other hand, Iran‘sexports have declined by 0.3 mb/d from presanctions levels, and are set to tumble further
unless alternative buyers (or buying
arrangements) can be found. Iran‘s traditional
crude buyers are struggling to arrange payment
mechanisms, secure ships to lift oil, and toengage insurance companies to underwrite thetrade. Numerous reports indicate that Iran is
circumventing sanctions through bilateral inkind trade arrangements.

0
Jan-00

Jan-02Jan-04Jan-06

Jan-08Jan-10Jan-12

Source: EIA
Figure Comm.7 OPEC spare capacity
mb/d
9

6

3

0
Jan-01

Jan-03Jan-05Jan-07

Jan-09Jan-11

Jan-13

Source: IEA

The net growth in OPEC production has reduced
its spare capacity to 3.5 mb/d (figure Comm.7),
of which nearly two-thirds rests with Saudi
Arabia. The Saudi Oil Minister has promised tokeep the market well supplied, but also deems
that $100/bbl is a fair price.

Figure Comm.8 Crude oil consumption
mb/d
55
50
45

Outlook40

In the near term, oil prices are likely to becapped at around $120/bbl because of priceinduced demand restraint and publicly statedintentions of strategic reserve releases by the
U.S., UK, and France. Upside risks stem fromtechnical and geopolitical problems, particularly

35

OECD

non-OECD

30
25
1Q00

3Q01

Source: IEA.

78

1Q03

3Q04

1Q06

3Q07

1Q09

3Q10

1Q12

Global Economic Prospects January 2013

Commodity Annex

in countries struggling with conflict and security,
including Libya and Iraq.

Caspian, West Africa, and the United States,
likely to offset declines in mature areas such as
the North Sea.

In the medium term, world oil demand is
expected to grow moderately, at 1.5% p.a., withall of the growth coming from non-OECD
countries as it has done in the recent past (figure
Comm.8). OECD oil consumption is expected tocontinue its weakness due to efficiency
improvements in vehicle transport and a gradualswitch to electric and natural gas transport (yetin the absence of innovations, the switch may beslow as discussed in box Comm.1). Moreover,environmental pressures to reduce emissions are
expected dampen oil demand growth worldwide.
Consumption growth in developing countries is
expected to be strong in the near and medium
terms, while it is expected to moderate in thelonger term as their economies mature, subsidies
are phased out, and other fuels penetrate theirfuel mix, notably natural gas.

Nominal oil prices are expected to average $102/
bbl during 2013 and 2014 as supplies
accommodate moderate demand growth. Overthe longer term, oil prices are projected to fall inreal terms, due to growing supply of
conventional and (especially) unconventionaloil, efficiency gains, and a substitution awayfrom oil. The assumptions underpinning theseprojections reflect the upper end cost ofdeveloping additional oil capacity, notably fromoil sands in Canada, currently assessed by theindustry at $80/bbl in constant 2012 dollars. It is
expected that OPEC will continue to limit
production to keep prices relatively high.
However, the organization may be sensitive toletting prices rise too high, for fear of inducing
technological changes that alter the long-term
price of oil.

On the supply side, non-OPEC oil production is
expected to continue its upward climb as highprices have attracted considerable investment
associated with continued advances in upstream
technology (figure Comm.9). High oil prices
have reduced resource constraints, and newfrontiers continue to be exploited, including deep
water offshore and shale liquids discussed
earlier. Production increases are expected from anumber of areas, including Brazil, Canada, theMetalsMost metal prices declined steadily during thefirst three quarters of 2012 (down 15 percent
between February and September) on global
growth concerns, weakening demand by China,
high stocks for most metals, and emerging
supply growth (figure Comm.10). Indeed,
China‘s import demand growth slowed in 2012,

Figure Comm.9 Crude oil production

Figure Comm.10 Metal prices

mb/d

$/ton

55

$/ton

10,00060,000
Copper

50
45

8,000

Non-OPEC

Aluminum
Nickel (right axis)

6,000
40

40,00030,000

4,000

35
30

50,000

2,000

OPEC

25
1Q00 3Q01 1Q03 3Q04 1Q06 3Q07 1Q09 3Q10 1Q120
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12

Source: IEA.

Source: World Bank79

20,00010,000-Global Economic Prospects January 2013

Commodity Annex

Box Comm.1 The “energy revolution”, innovation, and the nature of substitution
Large and sustained price changes alter relative input prices and induce innovation (Hicks 1932). The post-2004
crude oil price increases did just that in both natural gas and oil exploration and extraction through new technologies such as horizontal drilling and hydraulic fracturing. Because of these technologies, the US increased it natural
gas production by almost 30 percent during 2005-12. Similarly, US crude oil production increased by 1.3 mb/dduring the past 4 years. To put this additional oil supply into perspective, consider that global biofuel production interms of crude oil energy equivalent was 1.2 mb/d in 2011.
The sharp increase in natural gas supplies, not only put downward pressure on prices but also induced substitutionof coal by natural gas in various energy intensive industries, notably in electricity generation and petrochemicals.
Natural gas, which traded just 7% below oil in 2000-04 in energy-equivalent terms, averaged 82% lower in 201112 and it has been traded close to parity with coal (figure Box Comm 1.1). On the other hand, growing US oil supplies, coupled with weak demand, caused WTI to be traded at 20% below Brent, the international marker (figure
Box Comm 1.2). The discount is expected to persist until 2015 when new pipelines and reversal of existing pipelines will move oil supplies from the mid-continent US to the US Gulf.
Yet, the shift from crude oil to other types of energy, notably electricity and natural gas, with potential use by thetransportation industry (which globally accounts for more than half of crude oil consumption) has been very slow.
Such slow response reflects the different physical properties these types of energy, namely density (the amount ofenergy stored in a unit of mass) and scalability (how easily the energy conversion process can be scaled up). Theenergy densities of the fuels relevant to the transportation industry are 37 MJ/liter for crude oil, 1 MJ/kg for electicity, and 0.036 MJ/liter for natural gas (in its natural state); Compressed Natural Gas (GNG), used by bus fleetsin large cities, is about 10 MJ/litter, while the density of Liquefied Natural Gas (LNG) is 24 MJ/litter. Energy density is measured in megajoules (MJ) per kilogram or liter. For comparison note that one MJ of energy can light one
100-Watt bulb for about 3 hours.
To gauge the importance of energy density associated with various fuels and technologies consider the following
illustrative example. If a truck with a net weight capacity of 40,000 lbs were to be powered by Lithium-sulphur
batteries (currently used by electric-powered vehicles) for a 500-mile range, the batteries would occupy almost 85
percent of the truck‘s net capacity leaving only 6,000 lbs of commercial space. That is, an energy conversion process that works at a small scale (a passenger car) does not work at larger scales (a truck, an airplane, or an oceanliner). Similarly, to increase the energy density of natural gas, it must be liquefied, which involves cooling it toabout -62 oC at a LNG terminal, transporting it in specially designed ships under near atmospheric pressure but
under cooling, and then off loading at destination, gasified and re-injected into the natural gas pipe network. Thisis a technically demanding process adding considerable costs at delivery. Contrary to natural gas, crude oil products have convenient distribution networks and refueling stations that can be reached by cars virtually everywherein the world. Thus, in order for the transport industry to substitute crude oil by natural gas at a scale large enoughto reduce oil prices, innovations must take place such that the distribution and refueling costs of natural gas become comparable to those of crude oil, which explains why the transport industry is slow to utilize natural gas.
Box figure Comm 1.1 Energy prices

Box figure Comm 1.2 Oil to natural gas price ratio$US /mmbtu

Ratio of oil to US natural gas prices
8.0

25
Crude oil
20

Natural gas (US)

6.0

Coal
15

4.0

10
2.0

5
0

Jan-00

0.0
Jan-02Jan-04

Source: World Bank.

Jan-06

Jan-08Jan-10Jan-12

2000

2002

Source: World Bank.

80

2004

2006

2008

2010

2012

Global Economic Prospects January 2013

Commodity Annex

owing to destocking—China consumes almost
45 percent of world‘s metal‘s output (see figure
Comm.11).

Aluminum prices fell below US$ 2,000 per ton
in the third quarter, near to their pre-2005 levels
due to a persistent global surplus and highstocks. Prices nevertheless are now, at or below
marginal production costs, for many producers
with more limited downside risks—suggestingthat prices are unlikely to fall much further.
Furthermore, a significant amount of inventories
are tied up in warehouse financing deals, andunavailable to the market. Aluminum
consumption continues to benefit fromsubstitution, mainly from away copper in wiringand cable sectors (copper prices are now morethan four times higher than aluminum prices—
they were similar prior to the 2005 boom).
Substitution is expected to continue for as longas the aluminum to copper price ratio is at least
2:1. Global production capacity continues tooutstrip consumption, the bulk of which comesfrom China and to a lesser extent from Middle
East, Europe, and North America. The market
surplus is expected to endure in the near term.
Therefore, prices are likely to respond to higher
production costs, of which energy accounts for
40 percent alone.

The extended period of high prices since mid2000 has generated large investment in new
capacity, and supply is rising more quickly thandemand for some metals, including nickel andcopper. During 2012Q4, however, most metal
prices reversed their downward trend as thepossibility of hard-landing in China became
remote.
An interesting characteristic of the metals (andother industrial commodities) during the recent
boom is that their prices have been highly
volatile, even more volatile than food prices—
historically, the reverse has been the case . In
fact, non-food price volatility during the second
half of the past decade has been the highest since1970, not surprisingly since non-foodcommodities increased the most during therecent boom. However, price volatility for mostcommodities appears to have eased during thepast two years, indicating that the high volatility
during 2008-10 reflected the move from low tohigh prices and the financial crisis of 2008 (seediscussion in box Comm.2).

Copper prices fell sharply in 2012Q2 due toweakening import demand by China. Highcopper prices have led to significant substitutionof copper use and have accelerated recycling
rates of scrap reprocessing. These trends are
expected to continue in the near term. Copper
demand is expected to increase at a modest 2.5
percent per annum over the forecast period, andslow even further over the longer term as copper
intensity in China—which has risen sharply—
plateaus. Copper mine production, which wasflat in 2011, has not kept pace with consumption
due to various of reasons including, technicalproblems, labor disputes, declining grades,delays in start-up projects, and shortages ofskilled labor and inputs. The tightness in copper
production has been pronounced at the world‘s
two largest mines (Escondida in Chile andGrasberg in Indonesia). However, high copper
prices have induced a wave of new mines thatare expected to come on-stream, especially fromsome African countries, Peru, the US, andChina.

Recent developments in metal markets

Figure Comm.11 Consumption of metals'ooo tons
40,000China

30,000OECD

20,000Other
10,000

0
1990

1993

1996

1999

2002

2005

2008

2011

Source: World Bureau of Metal Statistics

81

Global Economic Prospects January 2013

Commodity Annex

Box Comm.2 Commodity price movements: From levels to volatility and comovement
Applying a standard measure of volatility to 45 monthly Box figure Comm 2.1 Commodity price volatility: foodprices during 1970-2012 shows that even though histori- and non-food (5 year averages)
cally non-food prices have been less volatile than food12
prices, during 2005-09 non-food price volatility exceeded
Non-Food (21 commodities)
Food (24 commodities)
that of food prices by a wide margin (9.7 versus 8.0).
9.7
10Furthermore, while non-food price volatility reached re8.8
8.6
8.0
7.8
cord highs during 2005-09, food price volatility did not—
7.5
8
7.0
in other words food price volatility during the recent
6.2
6.0 5.8
5.8
5.8
boom has been high but not unprecedented. This result is
5.7
6
5.4
5.3
5.3
5.2
4.9
remarkably similar to Gilbert and Morgan (2010, p.
3023) who concluded that food price variability during
4
the post-2004 boom has been high but, with the exceptionof rice, not out of line with historical experience. And,2
there is some evidence that volatility has come down tohistorical norms during the past 3 years (figure Box
1970:H1 1970:H2 1980:H1 1980:H2 1990:H1 1990:H2 2000:H1 2000:H2 2010:H1
Comm 2.1). Two factors may account for the high volatility during 2005-09: the move from a lower to higher
Source: World Bank
price equilibrium and the 2008 financial crisis. The latteris supported by the fact that volatility increases sharply
when August 2008 is included in a 2-year moving aver- Box figure Comm 2.2 Commodity price volatility: allcommodities (2-year trailing moving average)
age while a similar decline becomes apparent when Janu12
ary 2011 is included in the average (figure Box Comm
2.2).
10

In addition to increased levels and volatility, commodity
prices have been moving in a more synchronous manner.
In fact, price comovement during the second half of thepast decade has been the highest compared to the 43-year
sample period (figure Box Comm 2.3). Moreover, while
there is some evidence that comovement has moderated
recently, it is still high by historical standards. The increase in comovement implies that common factors havebeen the dominant force behind post-2004 commodity
price movements (box Comm.3 elaborates further on thispoint).

8
6
4
2
0
Jan-72 Jan-76 Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Jan-12

Price volatility is calculated as the median of Source: World Bank
100*STDEV[log p(t)) - log p(t-1)], for 21 non-food and24 food prices, where STDEV denotes standard devia- Box figure Comm 2.3 Commodity price comovementtion, p(t) is the current, and p(t-1) is the lagged price of
0.50
each commodity (their logarithmic difference is the socalled returns). The measure is applied to 5-year periods,
0.40
denoted as H1 and H2 for the first and second part ofeach decade, respectively (2010:H1 includes 36 observa0.30
tions because the sample ends in December 2012). Volatility is also presented as a 2-year trailing moving aver0.20
age. Apart from its simplicity, this measure of volatility isappropriate for non-stationary variables, which is typically the case with commodity prices. Comovement is
0.10
measured as a 2-year trailing moving average of ABS[n(up)-n(down)]/[n(up)+n(down)], where ABS is the absolute value operator and n(up) and n(down) denote theJan-72 Jan-76 Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Jan-12
number of prices that went up and down during themonth. The index can take values between zero (whenhalf of the prices go up and half go down) and unity Source: World Bank

82

Global Economic Prospects January 2013

Commodity Annex(when all prices move in the same direction). While random chance is expected to generate half increases andhalf declines, because of common factors the index is likely to take values well above zero. Indeed during 1970-2012 the index averaged 0.27, implying that of the 44 commodities of the sample, on average, 16 prices wentup (down) and 28 prices went down (up). Two key advantages of the index are that (i) it measures comovement
across a large number of prices (difficult to be measured through parametric models) and (ii) it is not subjected
to degrees of freedom limitations. However, these advantages come at the expense of measuring direction ofchanges only, not magnitude, thus underutilizing the informational content of prices. The index has been usedin the financial literature (see, for example, Morck, Yeung, and Yu (2000) on the measurement of equity price
comovement in emerging economies).

Nickel prices rose modestly in early 2012 butreceded on sluggish market for stainless steel(the end use of more than two-thirds of nickel
production) and rapid restart of nickel pig iron
(NPI) production in China. The country accounts
for 40 percent of global stainless steel
production—up from 4 percent a decade ago.
Stainless steel demand is expected to remainrobust, growing by more than 6 percent
annually, mainly driven by its high grade
consumer applications, initially in high income
countries and increasingly so by emerging
economies. Yet, a wave of new nickel mine
capacity is expected to keep nickel prices close
to marginal production costs. Several new
projects will soon ramp up production, includingin Australia, Brazil, Madagascar, New
Caledonia, and Papua New Guinea. Anothermajor source of nickel supply is NPI in China
which sources low-grade nickel ore fromIndonesia and the Philippines. However,Indonesia has announced that it will develop its
own NPI industry and has introduced export

quotas and may ban nickel ore exports by end2013.

OutlookOverall metal prices are expected to increase
marginally in 2013. Aluminum prices are
expected to increase almost 3 percent in 2013
and remain at that level for the two subsequent
years due to rising power costs, and the fact thatcurrent prices have pushed some producers at or
below production costs.
Nickel prices are expected to increase almost 3
percent in 2013, and following a slightly upward
trend thereafter. Although there are no physicalconstraints in these metal markets, there are anumber of factors that could push prices evenhigher over the forecast period, including
declining ore grades, environmental issues, andrising energy costs.
On the contrary, copper prices are expected to
decline 2 percent in 2013 and as much as 10
percent in 2014, mostly due to substitutionpressures, and slowing demand.

Figure Comm.12 Agriculture price indices2005=100
250

Agriculture
Following a sharp decline from their 2011 peaks,
agricultural prices diverged in the summer of2012. Food prices firmed following a heat wavethat affected the Midwestern US maize
producing states while drought conditions in
Eastern Europe and Central Asia reduced theoutlook for wheat. On the other hand, oilseedand edible oil prices weakened towards the endof the year on better supply prospects fromSouth America (soybeans) and East Asia (palmoil). Beverages and raw material prices
continued their slide as well to end the year

200

150
100

Food

Beverages

50
Jan-06 Mar-07 May-08

Jul-09Raw Materials

Sep-10 Nov-11 Jan-13

Source: World Bank

83

Global Economic Prospects January 2013

Commodity Annex

about 30 percent lower than their 2011 peaks(figure Comm.12). For the year as a whole, theWorld Bank‘s agricultural price index is down
almost 7 percent.

During Aug-Dec 2012, maize and wheat prices
averaged US$ 313 and 353 per ton, associatedwith a 9 percent premium of wheat over maize—
historically the premium has averaged 30%.
Therefore, the summer drought not only reduced
the maize stock-to-use ratio to historical lows,
but brought the wheat-to-maize price premium tohistorical lows as well (figure Comm.14).

Recent developments in global agricultural
markets
Grain prices were remarkably stable between theend 2011 and the summer of 2012, when initialassessments for the 2012/13 season indicated agood crop (figure Comm.13). As a consequence,
prices of key grains fluctuated within a tightband during this period. The outlook changed
dramatically in the summer when the heat wave
in the US and drought conditions in Europe andCentral Asia induced large declines in maize andwheat yields. In its July update, the US
Department of Agriculture (USDA) reduced
sharply the 2012/13 assessment for global maize
production (from 950 to 905 million tons),
causing end-of-season stocks to decline by 14
percent—associated with a stock-to-use ratio ofless than 15 percent, the lowest since 1972/73.
Lesser, but important downward assessment took
place in the wheat market. Prices of both maize
and wheat increased almost 40 percent withinjust a month. Since then, subsequent USDA
assessments have retained the tight outlook forthese two commodities.

Contrary to maize and wheat the rice market iswell-supplied. During the past 3 years rice prices
have averaged $520/ton (they have exceeded$600/ton on only a few occasions). The rice
price variability if the past year reflects, in part,purchases through the Thai Paddy Rice
Program—Thailand is the world‘s largest rice
exporter, accounting for 25-30 percent of global
exports, hence the large influence of its policy
actions on world markets. Reports of somedamage due to floods in Thailand earlier in theyear caused some concern but turned out not tobe important. According to the USDA‘s January
2013 assessment, global rice production is
expected to reach 466 million tons, 1 million ton
above the 2011/12 record. The stock-to-use ratio
is expected to reach 22 percent, marginally lower
than 2011/12 but well within historical norms.
Trade in rice has improved as well reaching a
new record of 39.1 million tons in 2012, aided inpart by a surge in Chinese imports (2.6 million
tons in 2012, up from 0.5 million tons in 2011).

Figure Comm.13 Grain prices

$/mt
500

Figure Comm.14 Wheat/maize price ratio

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

400

60%

$/mt
1,000

50%
40%

800

30%

300
600

20%

200

10%
400

100
0
Jan-06

0%
-10%

200

Jul-07

Jan-09Jul-101960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Jan-12

Source: World Bank

Source: World Bank.

84

Global Economic Prospects January 2013

Commodity Annex

After a 27 percent increase during the first eightmonths of 2012, edible oil prices reversed coursewith the World Bank edible oil price index
dropping almost 12 percent from August to
December. The decline reflects an improved
outlook for the South American crop as well as are-assessment of the US soybean crop whose
yields turned out to be higher than originally
expected. Palm oil supplies from Indonesia andMalaysia are improving as well (figure
Comm.15).

coupled with demand weakening in Europe. Tea
prices edged marginally percent down in 2012.
Prices have surged during the last five years torecord highs partly in response to repeated cycles
of adverse weather conditions in the producing
countries and strong demand by key tea
consumers, including Russia, Pakistan, andvarious Middle East countries as well as
domestic consumption in India.
Last season‘s tight cotton supplies caused prices
to quadruple within less than a year exceeding
US$ 5/kg in March 2011. Yet, prices declined
just as sharply to drop below US$ 2.00/kg in
May 2012. The improved supply outlook for the
2012/13 crop year induced further declines inprices which ended the year 18 percent lower
than January 2012. The cotton market is wellsupplied by historical standards; global
production is expected reach 25.5 million tons
while consumption will not exceed 23.5 million
tons. An estimated two million tons will be
added to stocks, pushing the stock-to-use ratio to
70 percent, the highest since the end of WorldWar II. Approximately 9 million tons of cotton
have gone to the state reserve of China during
the past two seasons, explaining why price did
not collapse (ICAC 2012). Nevertheless, from alonger term perspective, cotton prices increased
the least during the recent commodity boom
when compared to other crops, primarily becauseof the massive supply response by China andIndia caused by the adoption of biotechnology(Baffes 2011).

Following the historic highs earlier in 2011,
beverage prices have been declining
consistently, ending the year 30 percent lower
than their early 2011 highs. The strength inbeverage prices reflected the surge in arabica
prices (which averaged close to $6.00/kg during
2011, the highest nominal level). However, news
that Brazil‘s crop for the current season will bemuch higher than anticipated caused arabica
prices to plummet 36 percent in 2012—Brazil is
the world‘s largest arabica supplier. Robusta
prices have been remarkably stable during thepast year (around US$ 2.30/kg), despite a record
Vietnamese crop—Vietnam is the world‘slargest robusta supplier. Robusta prices did not
decline because coffee roasters included morerobusta in their blends due to high arabica prices.
Cocoa prices, which reached record highs in2011 as well, have weakened considerably inresponse to better crop outlook in Côte d‘Ivoire
Figure Comm.15 Edible oil prices

US$/ton
1,400

US$/tonNatural Rubber prices have been declining
steadily to average the year almost 30 percent
lower than 2011. As was the case with cotton,
natural rubber prices reached record highs in2011 (they exceeded $6.00/kg in February 2011,
more than a 4-fold increase within just 2 years.)
The recent decline reflects better supplies andfears of demand deterioration, especially by
China--most natural rubber goes for tire
production and China has been the fastest
growing market. Crude oil prices play a key role
as well, because synthetic rubber, a close
substitute to natural rubber, is a crude oil byproduct. Expectations for a boom in timber
prices following the Tohoku accident were short

800

1,150
600

900
400

650

Palm oil (left axis)
Soybeans (right axis)

400
Jan-06200

May-07

Sep-08Jan-10May-11

Sep-12

Source: World Bank

85

Global Economic Prospects January 2013

Commodity Annex

lived—it was expected to generate strong
demand for timber products. Malaysian log
prices are down 8 percent in 2012, effectively
reaching pre-Tohoku levels as global demand fortimber products has weakened considerably.

Figure Comm.16 Grain production and stocks

Maize

40%

1,000

900

30%

Global market outlook

800

Agricultural prices are projected to decline 3.2
percent in 2013. Specifically, wheat and maize
prices are expected to average 2.2 and 2.8
percent lower than their 2012 levels. Rice prices
are expected to decline about 4 percent toaverage $540 per ton. Soybean and palm oil
prices are expected to be 3.6 and 2.1 percent
lower, respectively. Among beverage prices
coffee may experience the largest decline (9.6
percent for robusta and 7.6 percent for arabica),
while cocoa and tea will change only marginally.
On raw materials, timber and natural rubber
prices are expected to decline modestly (0.5 and2.3 percent) while cotton prices will drop by 8.5
percent.

20%

A number of assumptions underpin this outlook.
First, it assumes that no adverse weather
condition will affect the Southern Hemisphere‘s
crop while next season‘s outlook will return tonormal trends. In its January 2013 assessment,
USDA estimated this season‘s global grain
supplies (production plus beginning stocks) at
2.47 billion tons, down 2.5 percent from2011/12. If history is any guide, when markets
experience negative supply shocks similar to theone experienced in the summer of 2012,production comes back to pre-crisis levels within
the next season through resource shifting, as was
the case for maize in 2004/05, wheat in 2002/03,
and rice in 2001/02 (figure Comm.16). However,it takes between three seasons before stocks are
fully replenished, in turn keeping prices of therespective commodity under pressure. As
depicted in figure Comm.14, wheat is tradedabout 30 percent above maize in the long term,
indicating that it may take up to 3 years before
maize and wheat prices return to their long term
equilibrium.

20%

700

10%

600

0%

500
2000

2002

2004

2006

2008

2010

2012

Wheat

40%

700

30%
600

500

10%

0%

400
2000

2002

2004

2006

2008

2010

2012

Rice

40%

500

30%

450

20%

400

10%

350

0%

300
2000

2002

2004

2006

2008

2010

2012

Stock-to-use ratio, % (left axis)

Second, it is assumed that in 2013 crude oil
prices will ease marginally while fertilizer prices
will decline by more than 6 percent (bothProduction, million tons (right axis)

Source: US Department of Agriculture (January 2013
update).

86Global Economic Prospects January 2013

Commodity Annex

Box Comm.3 Which drivers matter most in food price movements?
The post-2004 commodity price boom took place in a period when most countries sustained strong economic
growth. Growth in low and middle income countries averaged 6.2% during 2005-12, one of the highest eight-year
averages in recent history. Yet, economic growth was only one among numerous causes of the boom. Fiscal
expansion in many countries along with low interest rates created an environment that favored high commodity
prices. The depreciation of the US dollar strengthened demand from (and limited supply for) non-US$ commodity
consumers (and producers). Other factors include low past investment, especially in extractive commodities (inturn a response to a prolonged period of low prices); investment fund activity by financial institutions that chose toinclude commodities in their portfolios; and geopolitical concerns, especially in energy markets. In the case of
agricultural commodities, prices were affected by higher energy costs, more frequent than usual adverse weather
conditions, and the diversion of some food commodities to the production of biofuels. These conditions led to
global stock-to-use ratios of some agricultural commodities down to levels not seen since the early 1970s. Lastly,
policy responses including export bans and prohibitive taxes to offset the impact of high world prices contributed
to creating the conditions for what has been often called a ‗perfect storm‘ (Box Table Comm 3.1).
Which drivers matters most for food commodities? A reduced-form econometric model applied to five foodcommodities (wheat, maize, rice, soybeans, and palm oil) using 1960-2012 data shows that the most importantvariable is, by far, crude oil which explains almost two thirds of the post-2004 food price increases. The second
important driver is stocks-to-use (S/U) ratio accounting for about 15%, followed by exchange rate, accounting for10%. The remaining 15% reflects, among other drivers, policies. More detailed results can be found in Baffes and
Dennis (2013)—Borensztein and Reinhart (2012) discuss the theoretical underpinnings of the model.
As an example consider wheat. Between 1997-2004 and 2005-12 (roughly considered as pre-and post boom
periods), wheat prices increased by 81%; the S/U ratio declined by 17%, oil prices increased 228%, and the US$
depreciated 12% against a broad index of currencies. The three significantly different from zero estimatedelasticities were: -0.50 (S/U ratio), 0.28 (crude oil), and –0.86 (exchange rate). These elasticity estimates are
consistent with the literature—see, for example, Bobenrieth et al (2012) for the S/U ratio, Gardner (1981) and
Gilbert (1986) for exchange rates, and Baffes (2007) for oil prices. When these elasticities are applied to changesof the respective drivers, they give an 83% increase of the price of wheat during these two periods [-0.50*(-17%) +0.28*228% -0.86*(-11.8%) = 8.7% + 64.3% + 10.2% = 83.2%]. These changes imply an 11% contribution by the
S/U ratio, 77% contribution by oil and 12% by exchange rate movements. Using related methodology, von Witzke
and Noleppa (2011) arrived at a remarkably similar conclusions. World Bank (2012) used similar methodology.
Box table Comm 3.1 Most of the post-2004 ‘perfect storm’ conditions are still in place
Food price index (nominal, 2005 = 100)

1997-2004

2005-12

Change

89

154

73%

4.6
5.4

6.2
7.3

35%
35%

MACROECONOMIC DRIVERS
GDP growth (middle income countries, % p.a.)Industrial production growth (middle income countries, % p.a.)
Crude oil price (nominal, US$/barrel)

25

79

216%

Exchange rate (US$ against a broad index of currencies, 1997 = 100)

118

104

-12%

Interest rate (10-year US Treasury bill, %)Funds invested in commodities (US$ billion)

5.2
57

3.6
230

-31%
304%

SECTORAL DRIVERS
Stocks (total of maize, wheat, and rice, months of consumption)

3.5

2.5

-29%

Biofuel production (tousand b/d of crude oil equivalent)
Fertilizer price index (nominal, 2005 = 100)

231
69

892
207

286%
200%

Growth in yields (average of wheat, maize, and rice, % p.a.)

1.4

0.5

-64%

Yields (average of wheat, maize, and rice, tons/hectare)

3.7

4.0

8%

Natural disasters (droughts, floods, and extreme temperatures)
Policies (Producer NPC for OECD countries, %)

174
1.3

207
1.1

19%
-15%

Source: Barclays Capital, Center for Research for the Epidemiology of Disasters, Federal Reserve Bank of St. Louis,
Organization of Economic Cooperation and Development, US Department of Agriculture, US Treasury, World Bank,and author’s calculations.
Note: 2012 data for some variables are preliminary.

87

Global Economic Prospects January 2013

Commodity Annex

fertilizer and crude oil are key inputs toagriculture). However, because of the energy
intensive nature of agriculture—estimated to be
4 to 5 times more energy intensive thanmanufacturing—an energy price spike is likely
to be followed by food price increases. The pricetransmission elasticity from energy to agriculture
ranges between 0.20 and 0.30 (depending on thecommodity), implying that a 10 percent increasein energy prices will induce a 2-3 percent
increase in food prices (see box Comm.3 forcrude oil‘s contribution to food price changes).

the risk of adequate supplies, which in turndepends on weather.

Third, based on recent experience there are noforeseeable policy responses that would upset
food markets. Such risk however, depends
crucially on the degree to which markets are well
-supplied. If the assumed outlook materializes,
policy actions are unlikely and, if they takeplace, they will be isolated with only limited
impact. For example, when the market
conditions for rice and cotton were tight (in 2008
and 2010, respectively), the export bans had amajor impact on market prices. However, lastyear‘s Thai rice program and the Indian exportban of March 2012 had very limited impact on
prices because these markets were (and still are)well-supplied. News reports earlier in Octoberthat some Central Asia grain producing countries
might introduce export bans did not materialize.
For agricultural commodities, policy responses
is, perhaps, the only risk that it covariant with

Lastly, despite the marginal increase in global
biofuel production during 2011 and 2012, they
will continue to play a key role in food markets.
Currently biofuels account for 1.3/bbl of crude
oil equivalent (figure Comm.17). The 2012 joint
OECD-FAO Agricultural Outlook expects global
biofuel production to expand at an annual rate ofmore than 5 percent through the next decade(from 140 billion liters in 2012 to 222 billion
liters in 2021). Thus, at the beginning of the next
decade between 3 and 4 percent of global area
may be allocated to grains and oilseeds(evaluated at average world yields). However,policy makers are increasingly realizing that theenvironmental and energy security benefits ofsome biofuels may not outweigh their costs (interms of higher food prices). Yet, the likely longterm impact of biofuels on food prices iscomplex as it goes far beyond the land diversion
and policy decisions. It will depend crucially on(i) whether current energy prices make biofuels
profitable and (ii) whether technologicaldevelopments on existing biofuel crops (maize,
edible oils, and sugar cane) or new crops
increase the energy content of these crops, thus
making them more attractive sources of energy.
Thus, high energy prices in combination withtechnological improvements may pose upsiderisks for food prices in the longer term.

Figure Comm.17 Biofuel production

References
Baffes John (2011). ―Cotton Subsidies, the WTO,
and the ‗Cotton Problem‘.‖ The World Economy,
vol. 34, pp. 1534-1556.
Baffes John (2007). ―Oil Spills on otherCommodities.‖ Resources Policy, vol. 32, pp.
126-134.
Baffes, John and Allen Dennis (2013). ―Long
Term Drivers of Food Prices.‖ Mimeo, World
Bank, Washington, DC.
Bobenrieth, Eugenio, Brian Wright, and Zi Zeng
(2012). ―Stocks-to-Use Ratios as Indicator of
Vulnerability to Spikes in Global Cereal
Markets.‖ Paper presented at the FAO, AMIS
meeting, October 2012.
Borensztein, Eduardo and Carmen M. Reinhart

mbd of oil equivalent
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
1990

1993

1996

1999

2002

2005

2008

2011

Source: BP Statistical Review of World Energy and
OECD

88

Global Economic Prospects January 2013

Commodity Annex(1994). ―The Macroeconomic Determinants ofCommodity Prices.‖ IMF Staff Papers, vol. 41,
pp. 236-261.
Gardner, Bruce (1981). ―On the Power ofMacroeconomic Linkages to Explain Events in
U.S. Agriculture.‖ American Journal of
Agricultural Economics, vol. 63, pp. 871-878.
Gilbert, Christopher L. (1989). ―The Impact of
Exchange Rates and Developing Country Debt
on Commodity Prices.‖ Economic Journal,
vol. 99, pp. 773–783.
Gilbert, Christopher L. and C. W. Morgan(2010). ―Food Price Volatility.‖ PhilosophicalTransactions of the Royal Society [Biological
Sciences], vol. 365, pp. 3023-2034.
Hicks, John R. (1932). The Theory of Wages.
Macmillan, London.
ICAC, International Cotton Advisory Committee(2012). Cotton: Review of the Word Situation,
November-December. Washington DC: ICAC.
IEA, International Energy Agency (2012). World
Energy Outlook 2012. OECD/IEA, Paris,
France.
Morck, Randall, Bernard Yeung, and Wayne Yu(2000). ―The Information Content of Stock
Markets: Why Do Emerging Markets Have
Synchronous Stock Price Movements?‖
Journal of Financial Economics, vol. 58, pp.
215-260.
Von Witzke, Harald and Steffen Noleppa (2011).
―Why Speculation is not the Prime Cause ofHigh and Volatile International Agricultural
Commodity Prices: An Economic Analysis of
the 2007-08 Price Spike.‖ HFFA Working Paper.
World Bank (2012). Responding to Higher andmore Volatile Food Prices. Report no. 68420GLB. Washington, DC: World Bank.

89

Global Economic Prospects January 2013

East Asia and the Pacific Annex

East Asia and the Pacific Region
Overview: Growth in the East Asia and Pacificregion declined to 7.5 percent in 2012 from 8.3
percent in 2011, largely on account of weakexternal demand and policy actions in China,
aimed at containing inflationary pressures.
China’s economy slowed to an estimated 7.9
percent in 2012 from 9.3 percent in 2011, its
weakest rate since 1999. Exports from the region
contracted by 8 percent in the three months to
September and caused industrial production
growth to slow to 3-4 percent in Q2. Excluding
China, growth in the region has been resilient to
the global slowdown and accelerated to 5.6
percent 2012, up from 4.5 percent in 2011 thanks
to strong domestic demand, which in major
ASEAN economies (notably Indonesia,
Malaysia and the Philippines) was effectively
supported through countercyclical measures.
This expansion also reflected the fact that theregion grew from a low base, following lastyear’s flooding that cut deeply into Thailand’s
output in particular. Industrial production growth
picked up at 15 percent and export growth
accelerated to 9 percent in the three months to
November heralding economic recovery.
Economic recovery is however fragile, with the
net capital flows to the region, hit by Euro Areatensions at the middle of 2012, expected to pickup only gradually, from $357.4 billion in 2012 toaround $547.8 billion by 2015.

response to stabilization measures, will continue
to benefit from firming up commodity prices,with growth projected to reach 6 percent by
2015. The region will also benefit from apotentially rapid economic transformation in
Myanmar, where growth is projected to surpass
6 percent in 2013 and from the recent accessionof Lao PDR to the WTO which completed thenear-universal international trade integration of
the EAP region.FN1
Risks and vulnerabilities: Openness andintegration make East Asia and Pacific region
vulnerable to sources of global instability. EAP
region could see 1 percent cut in its GDP in 2013
if the risk of the Euro Area crisis unfolds. Failure
to resolve the US debt and fiscal issues would
cut regional GDP by 1.1 percent in 2013. The
regional growth outlook is subject to growth
slowdown in China, stemming from a risk ofunwinding of China’s high investment rates,
particularly if this were to occur in a generally
weak global growth context. A precipitous 5
percentage point decline in investment growth
could see Chinese GDP decline by 1.4 percent
and Chinese imports by 6 percent, shaving off
0.6 percent from the GDP of regional trading
partners. The regional growth outlook isvulnerable to developments related to volatile
capital inflows, related asset price bubbles,
excessive credit growth and risk of sudden
capital outflows. The economies in the region
are also vulnerable to energy price spikes, incase of supply shortages related to a possible
escalation of political tensions in the Middle
East or elsewhere in the world. The EAP region
will benefit from deepening capital markets andimplementing flexible exchange rate policies todevelop effective tools for managing volatile
capital flows and demand. Building buffers todeal with future shocks remains a priority in Lao
PDR, Vietnam and small Pacific islands whererecent progress in global and regional integration
benefitted growth, but also made these
economies more vulnerable to the global andregional business cycles.

Outlook: Continued strong domestic demand,
improved global financial conditions andintensified trade flows will boost the output
response in East Asia and the Pacific. China’s
growth will accelerate to 8.4 percent in 2013
before stabilizing at about 8 percent in 2014 and2015 as economy re-orients toward domestic
demand and services. GDP growth in the region
excluding China is projected to accelerate to 5.8
percent in 2013, and further to 5.9 percent in2014 and 2015 reflecting robust growth inIndonesia (around 6.6 percent), Malaysia(around 5 percent), the Philippines (around 6
percent) and Thailand (around 4.5 percent).
Vietnam, where growth recently slowed in91Global Economic Prospects January 2013

East Asia and the Pacific Annex
ASEAN countries but also because of a reboundof economic activity in Thailand after last year’s
floods cut into regional output in 2011.

Recent developments
GDP growth in the East Asia and Pacific region
weakened in 2012, reaching 7.5 percent, versus
8.3 percent in 2011. The slowdown in 2012
followed an earlier decline in growth from 2010,
and was largely due to conditions in China, theregion’s largest economy. The Chinese economy
grew at an estimated 7.9 percent in 2012, its
weakest annual rate since 1999, reflecting
domestic policy tightening aimed at cooling an
overheated housing sector. The slowdown ingrowth among East Asian and Pacific economies
in 2012 was also related to the weakening of
external demand following the escalation oftensions in the Euro Area during 2012Q2.
Notwithstanding China’s historically low fullyear GDP growth number for 2012 (figure
EAP.1), growth picked up after the first quarterof 2012, expanding at a 9.1 percent annualizedpace in the third quarter. Growth is going tomoderate in the medium term however. The
GDP growth goals for 2014-2-15 have beenrevised downward reflecting the government’s
desire to reorient the economy towards domestic
sources of demand and services.

The slowdown in growth of global trade from 6.2
percent in 2011 to an estimated 3.5 percent in2012 had a considerable effect on tradeintensive East Asia and the Pacific region. Tradeflows slowed over the course of 2012 due toweakening external demand in East Asia’s
largest export markets, the Euro Area and theUnited States. Regional exports, which had been
growing at double-digit rates at the beginning of
the year, slowed markedly and even contracted
during Q3. This weakness, coupled withdomestic policy tightening, caused regional
industrial production to also decline sharply(figure EAP.2). China’s industrial output, which
had been growing at a more than 11 percent
annualized pace at the beginning of the year,
slowed to a 3.5 percent pace in June, withindustrial activity in the other developing
countries in the region, notably Malaysia,
Philippines and Thailand, experiencing a shortperiod of a mid-year contraction.
More recently, there are signs of recovery, withboth third quarter industrial production andexport data strengthening. Economic revival in
the region has been driven by robust domestic
demand in China, Indonesia, Malaysia,
Philippines and Thailand and a surge in exports

Excluding the impact of China, GDP growth in
the East Asia and the Pacific region was resilientin 2012, with annual growth accelerating to 5.6
percent (up from 4.5 percent in 2011), partly
because of stimulus measures implemented in

Figure EAP.2 Plunge of industrial output growth in
EAP in Q2 followed by recovery in Q3

Figure EAP.1 China's annual GDP growth slows but
quarter/quarter growth accelerates

2.5

GDP q/q50

9.5

GDP y/yPercentage change, 3m/3m saar

Percentage change, 3m/3m saar

Percent y/y, saar

Percent q/q, saar

14

40

2.3

9.0

12

30
10

20

2.1

8.5

1.9

8.0

10

8

0

6

-10

1.7

7.5

1.5

7.0

4

-20
2

-30
-40

0
2012M5 2012M6 2012M7 2012M8 2012M9 2012M10 2012M11

1.3

6.5
11Q3

11Q4

12Q1

12Q2

China (RHS)
Thailand2012Q3

Source: World Bank.

Source: World Bank.

92

Philippines
Malaysia

Indonesia
VietnamGlobal Economic Prospects January 2013

East Asia and the Pacific Annex

toward the newly industrialized economies(NIE) of the region whose exports to the rest of
the world have also experienced a rebound in thelast quarter of 2012. Japan’s continued robust
demand for imports, stemming fromreconstruction efforts following the devastating
earthquake in March 2011, also provided
additional boost for exports among othercountries in East Asia Pacific, particularly thePhilippines. Chinese exports increased at a 8.6
percent annualized pace during the three months
ending November, and its imports grew at a 12.5
percent clip (figure EAP.3).

Production and exports in Thailand grew very
rapidly at the beginning of 2012 from a flood
affected low base with a pace of growth slowing
down later in the year as production has
recovered to the levels observed before flood
related devastation. Indicators of consumer andbusiness sentiment across the region, such aspurchasing manager indexes (PMIs), are low but
improving.
In Lao PDR, investments in mining andhydropower projects supported GDP growth of
more than 8 percent in 2012. Growth in othertransition economies of the region, including
Cambodia and Vietnam slowed somewhat on
weak external demand and in the case ofVietnam reflecting earlier policy tightening
measures. Weaker growth in China
disproportionally affected Mongolia through asteep decline in demand for the country’s
mineral resources. As a result growth slowedfrom 17.5 percent in 2011 to a still very robust
11.8 percent in 2012 and there was a significant
deterioration in the current account. Growth
outcomes in the Pacific sub-region were mixed,with individual countries’ dependency on
different external sources of growth(commodities (petroleum, gold and copper),tourism and remittances) explaining much of thevariation in outturns. High commodity prices
and investments into mining and infrastructure
helped to sustain growth in PNG and TimorLeste. Growth continues to be weak in Fiji anddeclined in crisis hit Solomon Islands
particularly vulnerable to external shocks due tofrequent natural disasters.

Reflecting these developments industrial activity
in the region has accelerated to 15 percent
annualized pace through November, led by
China and reflected among ASEAN economies,
whose production is tightly linked to activity in
China and the NIEs through multi-country
production networks across the region. The
revival of exports and industrial activity among
the developing EAP economies took longer toengage than China and NIEs, in part because
demand for key ASEAN-produced manufactured
export products, including traditional electronics,
lagged behind the revival of global demand formobile devices produced in China and NIEs.
Nevertheless, industrial activity in thesecountries expanded at a firm pace in the third
quarter, growing at a 5 percent or higher pace inIndonesia, Malaysia, Philippines and Vietnam.
Figure EAP.3 Export rebound in EAP in Q4
Export volumes, percent change, 3m/3m saar

50
40

Weak global demand, rebalancing in China andincreased domestic demand in Indonesia
contributed to further reduction of regional
current account surpluses in 2012. Reserve
positions, however, remain strong across theregion, serving as the buffers against the heavy
external headwinds. The aggregate current
account surplus of East Asian and Pacificcountries declined by an estimated $267 billion
between 2008 and 2012. Almost all of thedecline reflects a $220 billion decline in China,
where the current account fell from $420 billion(9.3 percent GDP) in 2008 to below $200 billion

30
20
10
0
-10
-20
-30
-40
2012M05 2012M06 2012M07 2012M08 2012M09 2012M10 2012M11
China
South Korea
Hong Kong, SAR, China
Indonesia

Malaysia
Taiwan, China
Singapore
ThailandSource: World Bank.

93

Global Economic Prospects January 2013

East Asia and the Pacific Annex(2.3 percent of GDP) in 2012 (figure EAP.4).
Net exports from China have declined because ofa weak external demand, but also reorientationof growth toward import-intensive investments
and the gradual appreciation of the renminbi. In
Indonesia, the current account deteriorated partly
because of robust growth in domestic demand
and related strong import growth financed by
FDI and other private inflows. Indonesia posted
a record trade deficit of $1.54 billion in Octoberon weak external demand for the country’s
commodity exports (coal, tin and palm oil) andstrong growth of fuel imports supported by pricesubsidies. Declining mineral exports to China
saw Mongolia’s current account deficit widening
to over 18 percent of GDP in 2012, with thedeficit being financed by strong FDI inflows andforeign credit attracted by the country’s richmining sector.

Asian Pacific: 7.8 percent in North-East Asia,
8.6 percent South-East Asia, and 5.4 percent in
Oceania. China, Philippines and Vietnam
continued to be among top ten recipients ofremittances globally in 2012, receiving $66
billion, $24 billion, and $9 billion, respectively,
but among East Asia and the Pacific countries,
remittances as a share of GDP is highest in
Samoa and Tonga (20 percent), Philippines (10percent), Vietnam (7 percent) and Fiji (6percent). Remittances to East Asia and thePacific increased an estimated 6.9 percent in
2012, reaching $114 billion—well off the 12.3
percent increase recorded in 2011.FN2 The growthof remittances has been mixed across East Asiaand the Pacific countries and depends to a large
degree on the economic performance of the main
remitter countries. Remittances to Samoa, forexample, which receives inflows predominantly
from New Zealand and Australia, registereddouble digit growth in 2012, while those to
Tonga, which receives about half of its
remittances from the United States, declined bymore than 20 percent. Remittances to Philippines
were much less volatile, growing at 5 percent in
2012, reflecting the diversified base of theremittances (see Remittances brief for moredetailed discussion).

Trade in services, including revenue fromtourism and remittances, remains an importantsource of foreign exchange for small economies
in the region. East Asia is a major global tourist
destination among developing countries, having
welcomed about 204 million visitors in calendar
year 2011 (about one fifth of all international
tourists), according to the United Nations World
Tourism Organization (UNWTO). Tourist
arrivals expanded quickly during the first ninemonths of 2012 in all three sub-regions of East

Economic policies. The majority of East Asian
economies tightened their monetary policy in theearly part of 2011 to slow down credit expansion
and contain price pressures steaming from theoverheating generated by the earlier easing
cycle. Those measures had effect with a lag. In
China, for example, where policy makers
implemented the policy tightening to stem
overheating in the housing market, tightening
contributed to a sharp deceleration in real credit
growth to an 11.6 percent annualized rate during
the three months ending July from a peak of 25.3
percent in February. Weakening of global
demand in mid 2012 exacerbated the easing ofgrowth among East Asia and the Pacificeconomies for the year as a whole. Specifically,
the decline in global trade volumes from 6.2
percent growth in 2011 to an estimated 3.5
percent in 2012 had considerable impact on tradeintensive East Asia and the Pacific region. On
the balance, economic growth slowed across the

Figure EAP.4 Compression of current accounts as
economies rebalance
USD billions

USD billions

50

500

40

400

30
300

20

10

200

0

100

-10
0

-20
-30

-100
2007

2008

2009

2010

China (RHS)

Malaysia

Indonesia

Philippines

2011

2012
ThailandSource: World Bank.

94

Global Economic Prospects January 2013

East Asia and the Pacific Annex

region in the last quarter of 2012 and prompted
the governments to react by stimulating demandthrough a combination of fiscal and monetarymeasures in the second half of 2012.

monetary policies effective in generating a
supply response to monetary easing.
Monetary policy easing across the region also
helped in providing temporary liquidity support
to the private sector as international banking
flows declined in early 2012 further due to reemergence of the Euro Area crisis, deleveraging
among troubled European banks andinternational portfolio flight toward safe havens
from EMs. However, growth and price volatility
and uncertainty had a negative impact on
investment decisions exacerbating uncertainties
related to the global economic slowdown andreflected in the performance of asset prices (seemore detailed discussion below).

The majority of the countries engaged in
expansionary fiscal policies, with fiscal deficits
widening across the region (figure EAP.5).
Monetary policy has been eased, with themultiple rounds of interest rate cuts in Indonesia,
Thailand and Philippines. China returned to amonetary easing and stimulus mode in thesecond quarter of 2012, implementing theinterest rates cuts, lowering reserve requirement
ratios, and implementing a series of open market
operations to inject liquidity and thus stimulatedomestic credit (figure EAP.6).
Fiscal policy was also relaxed in China in 2012
but much less so than during the previous roundof stimulus measures. Implementing demand
stimulating policy measures in China, Indonesia,
Philippines and Thailand was possible due to
comfortable fiscal positions, solid levels of
foreign reserves, sustainable debt levels andstable prices across the region, allowing
monetary policy easing without undermining
price stability objectives. In addition, theeconomic structure of East Asia and the Pacificeconomies, with a dynamic private sector andefficient and deep financial intermediation, madeInflation. Generally, East Asia and the Pacifichas experienced a sharp fall in inflation rates due
to slower demand, declining commodity prices
and administrative measures to cool housing
prices in China. Quarterly inflation in the region
declined from a 6.0 percent annualized pace inthe second quarter of 2011 to 2.4 percent during
the three months ending October 2012 (saar).
The pace of decline in inflation was fastest in
China and Vietnam, but inflation in the othercountries in the region has eased as well,allowing policy rate cuts across the region
including most recent policy easing in Thailand
and Philippines. Several ASEAN countries have

Figure EAP.5 Fiscal policies were relaxed across theregion to support domestic demand

Figure EAP.6 EAP Monetary policies have been accommodative across the region
Key policy rates, percent

Fiscal balance, percent of

0.0

11

-1.0

9
7

-2.0

5

-3.0

3

-4.0

2011

2012

1

-5.0
-1
2006

-6.0
Malaysia

Thailand

Vietnam Philippines Indonesia

China

Source: World Bank.

2007

2008

2009

China

Indonesia

Philippines

Thailand2010

Source: World Bank and Central Bank rates.

95

2011

2012

Malaysia

Global Economic Prospects January 2013

East Asia and the Pacific Annex

Figure EAP.7 Inflation moderated in EAP region led
by China, but inflation momentum accelerated in Thailand and Vietnam
Headline inflation, 3m/3m, saar
11

Financial markets and capital flows
Capital flows toward the developing world(including East Asia and the Pacific (table
EAP.1) declined sharply in the second quarter of2012 as tensions over European debt
sustainability escalated, but these tensions eased
and flows regained strength in the third quarter,
following action taken by the European Central
Bank and the U.S. Federal Reserve (see main
text and detailed discussion in Finance Annex).
Despite the recovery in capital inflows to East
Asia and the Pacific countries during the third
quarter of 2012, overall net capital flows to theregion for 2012 as a whole are estimated to havefallen by $93 billion, mainly due to reduced
short-term debt inflows reflecting the slow-downin trade (a large share of short-term debt flows
are trade-finance related). Equity inflows, which
represent about 70 percent of total net capital
inflows to the region, are also estimated to havedeclined — mainly on account of China, where
they are estimated to have fallen by about $30
billion in 2012.

Headline inflation, 3m/3m, saar
35
30

9

25

7

20
5

15
3

10

1

5

-1
10M01 10M05 10M09 11M01 11M05 11M09 12M01 12M05 12M09
China
Philippines

Indonesia
Thailand0

Malaysia
Vietnam (RHS)

Source: World Bank.

experienced a temporary acceleration in inflation
during the course of the year, mainly due toseasonal factors, including Indonesia in Q2, thePhilippines in Q3, and Thailand and Vietnam
most recently partly reflecting the rapid growthof domestic demand (figure EAP.7 and Inflation
Annex). On the whole, EAP region saw a decline
in the headline inflation rates in 2012, with the
sharpest declines observed in China, Malaysia
and Vietnam followed by the Philippines andIndonesia.

Despite the decline, China continues to attract
substantial equity inflows, although the structureof these inflows is changing. Rising wages andproduction costs are reducing investment into
primary manufacturing, while investment in the

Table EAP.1 Net capital flows to East Asia and the Pacific

2008

2009

2010

2011

2012e

2013f

2014f

2015f

Capital inflows

206.8

255.9

516.9

450.2

357.4

421.8

493.1

547.8

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

207.2
203.6
211.2
-7.6
3.6
1.2
17.9
-13.3
-2.3
-0.4
1.2
-0.05
-1.5

252.0
184.7
154.5
30.2
67.3
8.4
-6.1
65.0
0.03
3.9
2.2
0.1
1.6

513.9
329.8
290.0
39.8
184.0
20.8
13.2
148.9
1.1
3.0
2.7
-0.02
0.3

448.7
283.3
274.9
8.4
165.4
18.9
1.8
144.9
-0.2
1.4
0.9
-0.03
0.6

357.2
260.2
251.7
8.5
97.0
19.6
-4.3
85.1
-3.4
0.2
0.3
-0.2
0.1

421.9
302.8
284.8
18.0
119.1
21.4
6.7
90.7
0.3
-0.1

494.4
361.5
332.0
29.5
132.9
22.3
8.3
102.1
0.2
-1.3

549.7
375.4
339.2
36.2
174.3
19.3
11.3
143.2
0.5
-1.9

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

96Global Economic Prospects January 2013

East Asia and the Pacific Annex
only just surpassing the previous post-crisis peakof $517 billion in 2010. The recovery of external
flows should also be reflected in a gradualincrease in asset prices throughout the region.

services sector is gradually rising. Capital
inflows are also experiencing a geographicalshift, as global South-South flows are rising,with China playing a key role in outward FDIfrom the developing world as firms relocate
labor-intensive and low-end production toneighboring countries. Indonesia, Philippines
and Vietnam saw an increase in net equity
inflows in 2012, including through equity
investment from China. Bond issuance in theregion, stepped up insignificantly to an estimated$19.6 billion in 2012, up 3.7 percent from what
was a robust pace of issuance ($18.9 billion) in
2011. Net official inflows approached nil asrepayments almost equaled new borrowing.

Medium-term outlook
Improved global financial conditions, a gradual
pickup of growth in high-income countries and a
return to more normal global trade growth are
expected to support a gradual strengthening of
output in East Asia and the Pacific between 2013
and 2015. Accommodative monetary policy andlow inflation in ASEAN-4 (Indonesia, Malaysia,
Thailand, Philippines) are also expected tocontribute, while ample fiscal space in mostcountries in the region means that they will nothave to contend with fiscal consolidationpressures. However, some fiscal tightening isenvisaged in Malaysia as well as Indonesia,
where plans to reduce fuel subsidies were
delayed in 2012. In Cambodia and Vietnam,
efforts to reduce high level of debt among stateowned enterprises may serve as a drag on
growth. The East Asia and the Pacific region,
especially China and ASEAN economies, enter2013 with a strong carryover of growth from2012, in contrast to the situation in high-income
countries and many developing economies.

Asian equities have outperformed the major
global and regional stocks markets and have
surged further in December reflecting an
improving global and regional economic
outlook. The MSCI index of Asia-Pacific shares
excluding Japan delivered double-digit returns
expanding by almost 20 percent in 2012,reflecting investors’ confidence in Asian
economies despite the present global turbulenceand experiencing a mid-year dip. Equity market
performance at the country level showed
considerable divergence, however, with
Southeast Asian equities (those in Indonesia,
Malaysia, Thailand and Philippines)
outperforming North Asian equities – namely,
those of China. The Shanghai Composite Index
gained about 4 percent in 2012 reflecting the end-of-year recovery in December after falling
below a symbolic 2,000 benchmark level on
November 27. Relatively poor performance ofNorth Asian equities in 2012 reflected concerns
about China’s medium-term growth outlook
related to mid-year slowdown, uncertainty on
corporate profitability, as well as economic
reform directions related to the once-per-decade
government transition that China completed in
November 2012. In contrast, equity markets in
Thailand and the Philippines delivered over 30
percent gains in 2012 on resilient domesticdemand-driven growth. Net capital flows to East
Asia and the Pacific are expected to recover only
gradually, growing from $357.4 billion in 2012(3.5 percent of regional GDP) to around $547.8
billion (4.2 percent of regional GDP) by 2015—

Overall, growth in developing East Asia and thePacific is projected to accelerate to 7.9 percent in2013. The figure reflects a firming of growth inChina, to 8.4 percent. In the years thereafter,
China’s growth is expected to gradually ease, to
8 and 7.9 percent in 2014 and 2015, respectively,reflecting the ongoing re-orientation of output
toward domestic demand and services. Growth
will continue to rely heavily on consumer
spending by the growing incomes and growing
credit of the expanding middle-class. In thebaseline of the January 2013 Global Economic
Prospects (see the main text), the share ofinvestment in China’s overall GDP is projected
to continue on a path of slow decline —implying significantly weaker investment growth
and a gradual easing in potential output growth
as the pace of capital accumulation and labor
force growth slow.

97

Global Economic Prospects January 2013

East Asia and the Pacific Annex

The slower growth projected for China and therebalancing of demand toward consumption andservices will have important implications forother countries in the region. Countries whose
economies that are heavily integrated with
China’s global production chains may need tosimilarly reorient their economies toward
domestic demand, but also redirect their export
sectors toward accommodating Chinese
domestic demand. Despite the changing external
environment, growth in other major East Asiaand the Pacific economies is projected to pick up
modestly in the coming years. Reflecting the
expected recovery in the global trade flows,demand for the exports of East Asia and Pacificwill strengthen, and with it the pace of industrial
and export activity — although growth rates are
expected to remain below the extraordinarily
high rates of the recent past.

in Malaysia (around 5 percent), Thailand (4.5
percent) and the Philippines as well (around 6
percent). Vietnam, as an oil exporter, continues
to benefit from high oil prices. Among lowincome countries in East Asia and the Pacific,
Lao PDR is projected to sustain 7.5 percent
growth, bolstered by continued strong
investment in hydropower and mining. The
country’s recent WTO accession should provide
additional boost to the economy as it expands its
market share in global markets. Growthprospects in Cambodia (around 7 percent) arebased on achieving the dividends from focus on
higher rice production, inflows of FDI into thegrowing garment industry and a growing tourism
industry. Mongolia and Myanmar also have thepotential to deliver strong growth over the
projection period due to rapid politicaltransformation—but this potential may not berealized if the pace of reform weakens (table
EAP.3).

For the major ASEAN countries, growth isprojected to increase to 5.8 percent in 2013 asthese countries benefit from the revival of world
trade (table EAP.2). Growth in this countrygroup is expected to increase to 5.9 percent in2015, as Indonesia continues to grow rapidly (ataround 6.6 percent) and growth remains robust

Papua New Guinea, Fiji and the small pacificislands are also expected to benefit from therevival in global trade and tourism, which is
projected to increase by about 6 percent per year
(globally) over the projection period. Moreover,Table EAP.2 East Asia and Pacific forecast summary(annual percent change unless indicated otherwise)00-09aGDP at market prices

b

8.1

2010

2011

9.7

8.3

Est. Forecast
2012
2013
2014
7.5

7.9

7.6

2015
7.5

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

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

8.1
7.3
8.0
6.0
7.6
10.6
10.3
9.6
0.8
4.7
5.3
-1.8

9.7
8.9
9.7
7.2
7.9
13.8
23.0
19.5
2.5
3.7
6.8
-2.5

8.3
7.6
8.3
8.2
9.5
9.5
8.2
6.2
1.3
2.6
5.6
-1.7

7.5
6.8
7.5
8.1
8.5
9.0
4.3
5.9
-0.2
1.9
6.5
-2.1

7.9
7.2
7.8
8.0
8.5
6.5
10.4
10.3
0.8
1.9
4.6
-1.7

7.6
7.0
7.6
7.9
8.7
6.8
9.9
10.8
0.4
1.5
4.2
-1.5

7.5
6.9
7.5
7.6
7.7
5.7
9.9
9.3
1.0
1.5
3.9
-1.3

Memo items: GDP
East Asia excluding China
4.3
6.9
4.5
5.6
5.8
5.9
5.9
China
9.4
10.4
9.3
7.9
8.4
8.0
7.9
Indonesia
4.6
6.2
6.5
6.1
6.3
6.6
6.6
Thailand
3.5
7.8
0.1
4.7
5.0
4.5
4.5
a. Growth rates over intervals are compound weighted averages; average growth contributions, ratiosand deflators are calculated as simple averages of the annual weighted averages for the region.
b. GDP at market prices and expenditure components are measured in constant 2005 U.S. dollars.
c. Sub-region aggregate excludes Fiji, Myanmar and Timor-Leste, for which data limitations prevent theforecasting of GDP components or Balance of Payments details.
d. Exports and imports of goods and non-factor services (GNFS).

Source: World Bank.

98

Global Economic Prospects January 2013

East Asia and the Pacific Annex

Table EAP.3 East Asia & the Pacific country forecasts
00-09a2010

2011

Est. Forecast
2012
2013
2014

2015

Cambodia
GDP at market prices (% annual growth) b
7.4
6.0
7.1
6.6
6.7
7.0
7.0
Current account bal/GDP (%)
-5.3
-10.4
-8.7
-10.0
-8.7
-7.0
-6.7
China
GDP at market prices (% annual growth) b
9.4
10.4
9.3
7.9
8.4
8.0
7.9
Current account bal/GDP (%)
5.0
4.0
2.8
2.3
2.3
2.0
2.0
Fiji
GDP at market prices (% annual growth) b
1.3
0.1
1.9
2.1
2.2
2.3
2.3
Current account bal/GDP (%)
-7.7
-7.7
-9.9
-9.8
-10.0
-10.0
-9.0
Indonesia
GDP at market prices (% annual growth) b
4.6
6.2
6.5
6.1
6.3
6.6
6.6
Current account bal/GDP (%)
2.5
0.7
0.2
-2.3
-1.6
-1.7
-1.7
Lao PDR
GDP at market prices (% annual growth) b
6.2
8.5
8.0
8.2
7.5
7.5
7.5
Current account bal/GDP (%)
-2.4
-6.2
-11.4
-16.3
-18.1
-19.0
-18.0
Malaysia
GDP at market prices (% annual growth) b
3.9
7.2
5.1
5.1
5.0
5.1
5.3
Current account bal/GDP (%)
12.9
11.1
11.0
7.7
5.8
3.7
2.9
Mongoliab
GDP at market prices (% annual growth)
5.8
6.4
17.5
11.8
16.2
12.2
8.0
Current account bal/GDP (%)
-6.8
-14.3
-15.1
-18.0
-1.5
3.0
4.3
Myanmarb
GDP at market prices (% annual growth)
9.7
5.3
5.5
6.3
6.5
6.6
6.7
Current account bal/GDP (%)
-0.7
-1.3
-2.6
-4.1
-4.2
-4.8
-5.1
c
Papua New Guinea
GDP at market prices (% annual growth) b
3.0
7.6
9.0
8.0
4.0
7.5
4.6
Current account bal/GDP (%)
2.3
-25.6
-35.0
-30.0
-20.0
-13.0
-8.4
Philippines
GDP at market prices (% annual growth) b
4.0
7.6
3.9
6.0
6.2
6.4
6.3
Current account bal/GDP (%)
1.5
4.5
3.1
3.2
2.9
2.7
2.5
Solomon Islands
GDP at market prices (% annual growth) b
2.4
7.8
10.5
5.3
4.0
3.3
3.3
Current account bal/GDP (%)
-20.7
-30.8
-6.0
-5.8
-10.9
-9.0
-8.7
Thailand
GDP at market prices (% annual growth) b
3.5
7.8
0.1
4.7
5.0
4.5
4.5
Current account bal/GDP (%)
3.3
4.1
1.5
0.2
-0.3
-0.4
-0.7
Timor-Leste
GDP at market prices (% annual growth) b
3.3
9.5
10.6
10.0
10.0
10.0
9.0
Current account bal/GDP (%)
18.4
48.1
55.0
43.5
36.2
25.0
24.0
Vietnam
GDP at market prices (% annual growth) b
6.6
6.8
5.9
5.2
5.5
5.7
6.0
Current account bal/GDP (%)
-7.4
-4.1
0.2
2.7
1.3
0.9
0.7
World Bank forecasts are frequently updated based on new information and changing (global)
circumstances. Consequently, projections presented here may differ from those contained in other
Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any
given moment in time.
Samoa; Tuvalu; Kiribati; Democratic People's Republic of Korea; Marshall Islands; Micronesia,
Federated States; N. Mariana Islands; Palau; and Tonga are not forecast owing to data limitations.
a. GDP growth rates over intervals are compound average; current account balance shares are simple
averages over the period.
b. GDP measured in constant 2005 U.S. dollars.
c. The start of production at Papua-New-Guinea-Liquefied Natural Gas (PNG-LNG) is expected toboost PNG's GDP growth to 20 percent and shift the current account to a 9 percent surplus in 2015.

Source: World Bank.

in line with projected improvements to economic
conditions in migrant receiving countries,
remittances to the region are projected toincrease by 8.3 and 9.9 percent in 2013 and2014, respectively, with particular benefit toVietnam and Philippines, as well as a number ofPacific islands, including Samoa and Tonga.

the high-income countries due to several factors,
in particular a continuation (or deepening) of thecrisis in the Euro Area and the fiscal impasse in
the United States. In addition, while theimmediate concerns of a hard landing in China
have passed, the regional growth outlook is
subject to a growth slowdown in China
stemming from a risk of unwinding of China’s
high investment rates—particularly if this is tooccur in a disorderly fashion in a generally weak
global growth context. Although global financial
conditions have improved significantly since
July 2012, the economic outlook of the Euro

Risks and vulnerabilities
Prospects for East Asia and the Pacific region,
like those in the rest of the world, remains
vulnerable to volatility that could emerge from99

Global Economic Prospects January 2013

East Asia and the Pacific Annex

Box EAP.1 Investment and growth in China
China’s growth model of the past 30 years has been very successful. Relying on a combination of high investment
rates, rapid capital stock accumulation, and strong productivity growth (due in part to the movement of the rural
population to higher productivity manufacturing jobs), China has recorded an average of 10 percent annual growthsince the initiation of structural reforms in 1978. During most of this high-growth period, investment (and savings)
were at a relatively high 30-35 percent of GDP. In the 2000s, investment rates jumped to 40 percent of GDP(partly in reaction to the low cost of international capital at the time), and then to 45 percent of GDP as part ofChina’s fiscal and monetary stimulus plan introduced in response to the global financial crisis in 2008. Such highinvestment to GDP ratios are unprecedented. Neither Japan nor Korea – two countries that have also enjoyedlengthy periods of rapid growth – ever saw investment rates exceed 40 percent. As China’s investment rate increased, the contribution of investment to growth rose to about 50 percent of 10 percent annual growth in the
2000s. China’s capital/output ratio, which in an economy on a stable growth path will be broadly stable, increasedby almost 25 percent over the past 15 years and is still rising rapidly.
China's authorities have identified the need for a more balanced pattern of investment, that implies not just a lower
investment rate, but also a shift toward investments and expenditures in the service sector and in intangible assets
like human capital, as a major medium-term challenge for the country, including in the recently released China
2030 study (World Bank, 2012). Doing so will be challenging, as investment will have to grow slower than GDP
for a sustained period of time. Slower investment growth will imply a gradual slowing of Chinese potential output
growth, but only gradually as it will be affected by the level of the investment rate and not the rate of growth ofinvestment. As a result, if China is to avoid opening up a large output gap, either investment rates will have to decline slowly (thus allowing demand growth to keep pace with potential) or consumption growth will have to expand very rapidly. Both processes will be challenging, even in an economy like China’s where the state plays astrong and effective role in shaping the trajectory of growth.
Box figure EAP 1.1 China growth slowdown is likely
to result in a recessionary gap...
Percent y/y

Percent of potential GDP
3

Box figure EAP 1.2 China capital output ratio continues to increase despite declining share of investment in the output...

12

Percent

2.80

45

2
10
2

2.75

44

1

2.70

8

43

2.65

1
6

42

2.60

4

41

2.55

2

40

0
-1
-1

2.50
2.45

-2
-2

39

0

2010

2011

2012

2013

2014

2015

2.40
2.35

38
2011

Output gap (LHS)

Potential (RHS)

Actual (RHS)

Source: World Bank.

2012

2013

Investment/GDP (LHS)

2014

2015

Capital/output (RHS)

Source: World Bank.

address fiscal problems in the US would result
into a sharp 2.3 percentage point cut in the US
growth in 2013 relative to the baseline. Given
the importance of the US economy globally, thiswould also trigger a weaker global confidence.
Should this risk materialize, EAP region will see
a 1.1 percent cut in its GDP in 2013 relative tobaseline—slightly higher than the impact
associated with the Euro Zone related crisis.
Among the EAP developing economies China,
Thailand and Indonesia are projected to be mostaffected by a growth slowdown in high income

Area remains uncertain and continued
improvement is contingent on continued
progress implementing the structural and fiscal
reform agendas that have so-far just begun.
Failure to pursue these reforms or a significant
growth disappointment could prompt markets tolose confidence once again, potentially pushing
the currency area into a serious crisis. Unfolding
this risk could cut EAP regional GDP by 1
percent in 2013 (see discussion in main text).
The US fiscal paralysis also pose a major risk to
the EAP regional growth outlook. Failure to100

Global Economic Prospects January 2013

East Asia and the Pacific Annex

countries (about 1-1.2 percent cut in GDP inboth 2013 and 2014 relative to the baseline)
followed by Vietnam and Malaysia (about 0.80.7 percent cut in the GDP relative to thebaseline) due to reduced import demand in highincome countries, much tighter international
capital conditions and increased pre-cautionarysavings within the region.

deepening capital markets and implementing
flexible exchange rate policies to develop
effective tools for managing volatile capital
flows and demand.
East Asia and the Pacific countries are also
vulnerable to commodity price increases,
perhaps due to supply shortages following an
escalation of geo-political situation in the Middle
East. Should oil prices rise by $50 dollars per
barrel for a sustained period, growth among oil
importers could decline by 1.7 percentage points,
inflationary pressures would rise and regional
trade balances would significantly deteriorate(see Main text). Building buffers to deal with
future shocks remains a priority in Lao PDR,
Vietnam and small Pacific islands where recent
progress in global and regional integration
benefitted growth, but also made these
economies more vulnerable to the global andregional business cycles.

The process of bringing China’s high investment
rate down to more sustainable levels, while
likely to proceed smoothly, does carry with it therisk of a more abrupt contraction, particularly if
this were to occur in a generally weak global
growth context. Such an outcome could arise if
consumer demand does not offset slower
investment growth, or profits from past
investment are not forthcoming, resulting in a
spike in unpaid loans and a rapid tightening ofcredit conditions. Such developments could inturn put pressure on loan repayments, newinvestment, employment and incomes (see box
and discussion in main text). A precipitous 5
percentage point decline in investment growth
could see Chinese GDP decline by 1.4 percent,and Chinese imports by 6 percent. Impacts onregional trading partners would see their GDP
decline by around 0.6 percent. Simulations
suggest Vietnam’s export volumes and GDP
could decline by 2.2 percent and 0.7 percent
respectively, in Thailand export volumes and
GDP may fall relative to baseline by 1.7 percent
and 0.7 percent respectively and Malaysia’s
exports will contract by 1.8 percent, although theimpact on GDP is projected to be smaller than inother countries of the region at estimated 0.4
percent of GDP. Commodity exporting countries
would be hardest hit due to the additional burden
implied by lower commodity prices, with metal
prices projected to fall by 4.3 percent in 2013
and by another 3 percent in 2014.

Notes:The regional growth outlook is vulnerable todevelopments related to volatile capital inflows
and related asset price bubbles, excessive credit
growth and risk of future sudden capitaloutflows. EAP region will benefit from acontinued effort to deepen structural reforms tokeep its global competitive edge in the MediumTerm perspective. This would also include

101

1With Laos joining the WTO, all East Asiaand the Pacific countries with the exceptionof North Korea will be members of theinstitution.

2

Remittances are measured as a sum of threecomponents in the IMF’s BOP Statistics:
compensation of employees, workers’
remittances and migrants’ transfers. The
compensation of employees refers to ―theincome of border, seasonal, and other shortterm workers who are employed in an
economy where they are not residents and ofresidents employed by nonresident entities‖.
The workers’ remittances are current
transfers by migrants ‖. Migrant transfers are―net worth of migrants’ assets that aretransferred from one country to another at
the time of their migration‖. For thePhilippines, the estimate differs from US$
21 billion projected based on the Central
Bank’s definition of remittances. Share of
remittances in GDP is based on the last threeyear average reported in the World
Development Indicators database (WDI).

Global Economic Prospects January 2013

Europe and Central Asia Annex

Europe and Central Asia Region
Overview: Growth in developing Europe andCentral Asia region (box ECA.1) decelerated
considerably in 2012 after a relatively strong
2011. All economies in the region had to deal
with challenging external conditions, including
the Euro Area recession and debt problems,
volatile global financial markets and a slowing
global economy. The Western Balkan countries,
with their strong economic and banking linkages
with high-income Europe, suffered the most fromdeclining export demand, reduced capital andremittance flows, and banking-sector
deleveraging. Banking systems in several
countries are under considerable pressure due toa sharp slowdown in economic activity, weakcredit demand, and tight foreign funding
conditions. Non-performing loans (NPLs) rose
especially in Bosnia and Herzegovina (12.7
percent), Moldova (15.3 percent) and Romania(17.3 percent). NPL rates are likely to haveclimbed in Ukraine, while remaining a high levelof 37 percent in Kazakhstan.

an estimated 3.5 percent in 2012 (4.3 percent in2011), due to drought, rising inflation and weak
global sentiment. Several countries in the region(Albania, Bulgaria, Macedonia and Romania)
grew by less than one percent in 2012, while
Turkey had a soft landing, after two years of
unsustainably high growth, at 2.9 percent in 2012(8.6 percent in 2011).
Outlook: GDP growth in the region is projected
to rebound only slightly to 3.6 percent in 2013,
under the baseline assumptions that there will be
no major loss of confidence in the global
financial markets; and that there will not be amajor setback in the resolution of Euro Area
crisis and US fiscal problems. The rebound in2013 is projected to be limited as most of thefactors that constrained the growth in 2012 arelikely to remain present albeit less forcefully.
Prospects for the region critically depend on
tackling large current account and fiscal deficits,high unemployment and inflation, lack ofcompetitiveness and other structural constraints
to the economies. Regional GDP is projected tofirm to 4.0 percent in 2014 and 4.3 percent in2015.

External factors have improved since September.
Export values grew by a 21 percent annualizedpace in the three months ending in November
supported by the robust import demand from non-European markets. Improved financial
conditions have helped the region’s access tointernational bond markets with increased
number of issuances by Russia and Turkey aswell as less frequent issuers such as Bulgaria,
Romania, Lithuania, Serbia and Ukraine. The
region’s industrial production growth has also
picked up since November.
GDP growth in the region is estimated to havefallen to 3.0 percent in 2012, from 5.5 percent in2011. And, despite high oil prices, growth inRussia, the region’s largest economy, declined to
Box ECA. 1 Country coverage
For the purpose of this note, the Europe and Central Asia
region includes 21 low– and middle-income countries withincome of less than $12,276 GNI per capita in 2010. These
countries are listed in the table ECA.3 at the end of this note.
This classification excludes Croatia, the Czech Republic,
Estonia, Hungary, Poland, Slovakia, and Slovenia. The list of
countries for the region may differ from those contained inother World Bank documents.

103

Risks and vulnerabilities: The region’s
economic outlook remains subject to serious
global and regional risks.
Euro Area Crisis. Given Europe and Central
Asia region’s close financial and trade ties withhigh-income Europe, it would be directly
impacted by both a major deterioration of thedebt crisis or slow-growth/stagnation in the Euro
Area.
China. An abrupt unwinding of China’s highinvestment rates, particularly if this were to occur
in a generally weak global growth context, will
have significant global consequences, especiallyfor commodity exporters.
Banking Sector. The high levels of NPLs in theregion’s banking system may further constrain
the already slowing credit growth. Nevertheless,there is some level of resilience in most banks in
the region with their capital adequacy ratios inexcess of 10 percent by the end of 2011.

Global Economic Prospects January 2013

Europe and Central Asia Annex
The overall impact of these developments was tocause growth to slow down during the first halfof 2012 in almost all economies in the region(figure ECA.1). The contraction was particularly
sharp in Serbia and Macedonia FYR withnegative growth rates during the first half of theyear. Growth also eased markedly in Lithuania,
Turkey and Ukraine. Although third quarter
GDP data is available for only a few countries,
where it exists it suggests that that growth
remained weak in the third quarter. Real GDP
contracted in Ukraine (-1.3 percent saar year
over year) and Romania (-0.5 percent) andgrowth weakened in Russia (2.9 percent) andTurkey (1.6 percent), while there was a slight
improvement in Latvia (5.2 percent) and
Lithuania (4.4 percent).

Recent developments
Growth slowed down during the first half of2012 as the region faced several headwinds…
Economic growth decelerated considerably inEurope and Central Asia during the first half of2012 as various factors hindered economic
activity in the region (box ECA.1). All
economies had to deal with challenging external
conditions, including the recession and debt
problems in Euro-zone, volatile global financial
markets and slowing global economy. Western
Balkan countries that have strong economic andbanking linkages with high-income Europe
suffered most from: declining export demand,
reduced capital and remittances flows (includingFDI); and banking-sector deleveraging (which
together with domestic policy tightening in somecases contributed to a sharp decline in regional
credit growth).

High frequency data indicate that economic
performance was mixed across countries during
the later months of the year
Industrial production in the Europe and Central
Asia region rebounded sharply growing at a 6.4
percent annualized rate (3m/3m saar) in the three-months ending in November (figure ECA.2).
The rebound was mainly supported by the strong
performance in few economies: Turkey (30.5
percent due to strong exports and extra working
days in November), Lithuania (26.3 percent as it
is still rebounding from prolonged closure of themain oil refinery), and Kazakhstan (mainly due

The global economic slowdown reduced export
demand for commodities such as steel, which
affected Ukraine’s economy adversely. And
despite a 4.6 percent increase in gold prices thisyear, a geological shift at the country's main goldmine, and to a lesser extent strikes, led to a sharp
contraction in production growth in Kyrgyz
Republic.
Domestic consumption, which has been the main
driver of growth in the region during thefinancial crisis was increasingly held back bytighter credit conditions, fiscal tightening, andhigh unemployment. A particularly sharp
adjustment in domestic demand in Turkey was
mainly the result of monetary tightening from
October 2011 through July 2012 that led to a
sharp contraction in bank lending.

Figure ECA.1 Growth has been slowing down…
GDP growthy-o-y (%) saar
8

2011Q4

2012Q1

2012Q2

2012Q37
6
5
4In addition, unusually bad weather cut into
agricultural activity, after a relatively strong
2011 in countries such as Romania and Serbia.
Also, political uncertainty ahead of elections in
Russia, Serbia and Ukraine, and escalated
political problems in Romania also impeded
growth by slowing progress in necessaryreforms, prompting capital outflows, andlimiting external capital inflows.

3
2
1
0

-1
-2
Lithuania

Lativia

Source: World Bank.

104

RussianFederation

TurkeyUkraineGlobal Economic Prospects January 2013

Europe and Central Asia Annex

to base effects). Industrial production growth
remained weak for the rest of the region
contracting sharply in Bulgaria (13.1 percent),
Ukraine (by 8.6 percent), Latvia (3.7 percent),
and more modestly in Russia (2 percent), Serbia(1.2 percent) and Romania (1 percent) in thethree-months ending in November. In addition toindustrial production, the impact of the summer
drought is expected to have cut into GDP growthin the third quarter in affected countries,
including Russia, Romania, Serbia, and Bosnia
and Herzegovina.

for developing countries in general. There has
been only a modest pickup in global trade in Q3
2012, with developing country imports volumes
expanding once again, although for high-income
country imports were still contracting.

Business surveys for December suggest thatfavorable operating conditions of the Turkish
manufacturing sector will continue as its PMI
index remained above the benchmark 50 for
December. While seasonally adjusted PMI index
for Russia’s services sector also remained above
the benchmark in December, its PMI for the
manufacturing sector went back to 50 indicating
a possible slow-down in the sector in early 2013.
External factors have improved since September
with global trade picking up….
As discussed in detail in the main text and thefinance annex, global financial market tensions
eased in late July, as confidence was slowly
restored in the Euro Area. The real side impactof the improvements in financial conditions andcapital flows was modest in high-income
countries – although it is more visible in the data
Figure ECA.2 Mixed IP performance in the second of
2012

30

IP Volume Growth
3m/3m saar
Europe Central Asia25

ECA Oil Exporters

20

Export demand in the region is likely to remain
firm in coming months driven by non-European
markets especially from other developing
countries. Also, import demand from European
markets has been strengthening in recent
months. Prospects for Turkey’s export growth
remain uncertain, however.FN1 While it will
benefit from the pick-up in global trade, theprospects for its gold exports remain uncertain in
coming months.

ECA Oil importers

15
10
5
0
-5
-10
2010M01

For the region, the improvement in trade is moremarked. Regional merchandise export value
rebounded growing at a 21 percent annualizedpace during the three months ending inNovember 2012 (figure ECA.3). The reboundcame despite the recession and weak importdemand in high-income Europe—the region’s
main export destination (high-income European
import value growth was negative through thethird quarter and only grew at a 1.7 percent
annualized pace in November). The exports were
driven by the strong performance of large middle
income countries such as Russia (24.1 percent
saar during the three months through November2012) and Turkey (15.5 percent). The robust
export performance of the region partly reflects
base effects and partly the increasing importanceof non-European economies including otherdeveloping countries as destinations supported
by Russia’s accession to the WTO. Turkey's
remarkable export performance during most of
this year for example was supported by its
successful market diversification strategies,
depreciation in real effective exchange rate andstrong gold exports to Middle Eastern economies
including Iran and the United Arab Emirates.
Similarly, Latvia has been able to offset the
weak state of demand in high-income Europe byincreasing exports to Russia and other CIS
economies. Turkey continues to be a major
destination for exports from the South Caucus
region as is China for countries in Central Asia.

2010M09

2011M05

2012M01

2012M09

Source: World Bank.

105

Global Economic Prospects January 2013

Europe and Central Asia Annex..but the improved financial market conditions
has only helped the region’s access to bondmarkets while other capital flows remained weaksince mid-2011 due to deleveraging by EuroArea banks. Most of the decline in 2012
involved refinancing and general corporate
purposes loans. After the intense period during
the second half of 2011, the pace of deleveraging
in high-income Europe appears to have eased in2012 (see Main text and the Finance annex).
Nevertheless, bank-lending has declined
substantially. According to Bank of International
Settlement data, European banks’ foreign
claims—including all the cross-border and local
lending by subsidiaries—fell by $51 billion
between June 2011 and June 2012. Countries
subject to the largest reductions included
Romania ($18 billion, 9 percent of GDP), Serbia($5.4 billion, 12.8 percent of GDP) and Bulgaria(4.6 billion, 8.8 percent of GDP). The impact ofdeleveraging by the European banks wascompensated for fully in Russia, Uzbekistan, andpartially in Turkey by non-European banks. The
decline in cross-border bank loans is likely toimpact activity most in those countries that have
limited access to alternative financing sources
like bond-financing. Intense deleveraging has
already coincided with negative domestic growth
in many countries in the region (see thediscussion later).

Following the decisive actions taken by theEuropean Central Bank, and liquidity injections
by G3 countries, the cost of insuring against asovereign default of European and Central Asian
countries has narrowed by between 100 bps and250 bps since June. Bond yields also declined bysimilar amounts. Taking advantage of lower
borrowing costs, firms in Russia issued
international bonds totaling $39.3 billion, while
Turkey issued $19.3 billion. Infrequent
sovereign issuers also took advantage, with
Bulgaria issuing $1.2 billion in bonds since July.
Other issuers included: Ukraine ($5.4 billion),
Romania ($5.2 billion), Lithuania ($2.2 billion)
and Serbia ($1.8 billion) (figure ECA.4).
Overall, despite the mid-year weakness,international bond issuance by firms andsovereigns in Europe and Central Asia surged in2012 at $85 billion, its highest value in three
years. With the large equity issuances by two
Russian companies and a Turkish bank since
September, equity flows in the region increasedby 12 percent reaching 13.6 billion in 2012. In
contrast, bank lending to the region fell by 8
percent in 2012. Excluding Russia, the fall waseven larger at 14 percent.

FDI inflows to Europe and Central Asia havedeclined sharply…

Syndicated bank lending has been under pressure

Foreign direct investment (FDI) inflows accountFigure ECA.3 Export value growth has rebounded
mostly driven by developing country demand

Figure ECA.4 Gross capital flows have rebounded

Import and Export Value
3m/3m saar

30

80

40

Bank-lending
Bond

25

Europe Central Asia Exports
Developing Country Imports
High-income Country Imports
EU High Income Imports

60$ billion

Equity

20
15

20

10

0

5

-20
-40
2011M01

2011M06

2011M11

2012M040
Jan-11

2012M09

Source: World Bank.

Jul-11

Source: World Bank.

106

Jan-12

Jul-12

Global Economic Prospects January 2013

Europe and Central Asia Annex

for more than 20 percent of gross fixed
investment during 2009 and 2011 in Georgia(36.8 percent), Kazakhstan (32.6 percent) andAlbania (31.8 percent). For the region as awhole, FDI fell by 25 percent (year-over-year)
during the first half of 2012. While FDI declined
in other regions too, the decline in Europe &Central Asia was much sharper–due to a severe
contraction in investment outflows from highincome European economies. In addition, unlike
most other developing regions, reinvested
earnings were limited due to weak profitability
and intercompany loans slowed down sharply.
The largest decline was in Serbia (80 percent)followed by countries such as Georgia, Latvia
and Lithuania with declines around 20 percent.
With the exception of Russia, the flows
increased only slightly in the second half in mostcountries. While improved financial conditions
since July encouraged several countries toaccelerate privatization efforts, some
postponements and less successful sales of
stakes in state owned assets suggest thatinvestors still have limited appetite for theseassets.

percent) in 2011 (table ECA.1). While theselevels are well off the unsustainably high 14
percent of GDP levels observed in the boom
years, they are nevertheless on par with otherdeveloping regions where private capital flows
account for 4 to 6 percent of their GDP. Goingforward, assuming there is no major set-back in
the resolution of Euro-area crisis or in financial
markets confidence, net private capital inflows to
the region are expected to start rising in 2013and gradually strengthen along with global
growth to reach $226 billion in 2015—around
4.8 percent of the region’s GDP. By 2015, allflows are expected to increase, with bondissuance expected to level off slightly as banklending picks up the pace, with the latter
supported by increased South-South flows.
Developing Europe has suffered from a sharp
decline in remittances, while Central Asian
economies benefited from the increased flows
from Russia…
Remittances are an important source of bothforeign currency and domestic incomes forseveral countries in the developing Europe andCentral Asia region. They represent more than
20 percent of GDP in Kyrgyz Republic andMoldova and about 45 percent in Tajikistan.
Remittance flows to the region are projected to

Net private capital inflows to the Europe andCentral Asia region are estimated to havedeclined to $175.9 billion (4.4 percent of theregion’s GDP) in 2012 from $194.6 billion (5.7

Table ECA.1 Net capital and workers’ remittances flows to Europe and Central Asia ($ billions)

Capital Inflows (official+private)

2010

2011

2012e

2013f

2014f

2015f

180.9

200.1

174.2

209.7

224.2

224.9

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

157.3
87.2
88.0
-0.8
70.1
21.3
-5.8
45.9
8.8
23.5
3.5
9.4
10.7

194.6
108.6
118.7
-10.1
86.0
13.6
33.2
24.5
14.7
5.5
2.4
-1.0
4.1

175.9
103.1
99.5
3.6
72.8
22.5
23.4
16.5
10.4
-1.7
-0.1
-5.0
3.4

211.0
137.4
131.2
6.2
73.6
27.3
15.4
23.5
7.4
-1.3

226.4
149.8
138.7
11.1
76.6
21.4
16.3
29.7
9.2
-2.2

226.1
142.6
129.1
13.5
83.5
19.3
18.5
40.0
5.7
-1.2

Memo item:
Workers' remittances

37

41

41

45

51

58

18
19

18
23

Central and Eastern Europe & Turkey
Commonwealth of Independent States

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

107

Global Economic Prospects January 2013

Europe and Central Asia Annex

remain at their 2011 level of $41 billion but withmajor differences across countries (table
ECA.1). On-going economic problems in highincome European countries have led to a jump in
unemployment rates skewed against migrant
workers, with migrant unemployment rising
faster than native-born unemployment in France,
Greece, Italy and Spain causing some migrants
from European Union with free mobility such as
Romania return home. Overall, remittanceinflows have declined significantly in Serbia,
Albania, and Romania. In contrast, remittancesflows from Russia, which account for 30 percentof the inflows to the region, benefited from highoil prices. As a result, total inflows to Armenia,
Georgia, Kyrgyz Republic, Moldova andTajikistan are estimated to have grown in 2012.
Flows are expected to reach $58 billion by 2015(see Migration and Development Brief 19).

important role in supporting the robust credit
growth before the crisis. Several countries in theregion had loan-to-deposit ratios exceeding 100
percent by large margins. Reflecting the intensedeleveraging by the parent banks in recent years,
however foreign funding has become limited andcostly. In an effort to reduce to the dependence
on cross-border lending, domestic banks hiked
deposit rates in order to attract more domestic
savings. The process has helped to reduce thedependence on foreign funding in countries suchas Bulgaria and Romania where loan to deposits
ratios declined. While this will be beneficial in
the long-term and reduce external vulnerabilities
in the region over the longer run, over the shortrun it has also increased lending costs—
contributing to tighter credit conditions.
Even if the acute intense phase of deleveraging
has passed now, tight supply conditions are
expected to remain in the medium-term withstrict regulatory changes ahead for the global
banking system (see Finance Annex box FIN.2).
When the demand for credit pick up in tandemwith the economic activity, this might create
bottlenecks for countries with little room toimprove their local funding sources.

Domestic demand growth has remained underpressure with tighter credit conditions, rising
inflation, fiscal adjustments, and highunemployment which are likely to linger throughnext year…
Credit growth in the region has declined sharply
over the last year especially in countries withstrong European bank presence. Real domestic
credit growth has been negative for Latvia and
Lithuania since early 2009—not shown in the
figure, and has also sharply declined in countries
such as Albania, Bulgaria, Macedonia FYR,
Romania and Turkey in recent months (figure
ECA.5). With the exception of Turkey where theslowdown in credit growth was mainly due todomestic monetary policy tightening, thedeclining credit growth reflects partly supplyside constraints related with foreign funding.
While the demand for credit also fell as the
economic activity in the region slowed down
during the same time, the recent CESEE
Deleveraging Monitor by the Vienna Initiative
assesses that the tightening of supply conditions
have contributed decelerating credit extension in
the region.FN2

After easing slightly in the first half of the year,
inflation in the region has gained momentum inrecent months (figure ECA.6), reflecting
increased food prices following weak crops in
Figure ECA.5
growthSharp fall in real domestic credit

Real credit growth (year over year)

25
20

Albania
Bulgaria
Macedona
Romania
Turkey

15
10
5
0
-5

Foreign funding—particularly cross-border
lending from the parent banks to theirsubsidiaries operating in the region—played an-102010M01 2010M07 2011M01 2011M07 2012M01 2012M07

Source: IMF and World Bank

108

Global Economic Prospects January 2013

Europe and Central Asia Annex

Russia, Ukraine and Kazakhstan, as well as
supply constraints and increased taxes andadministrative tariffs (Russia and Turkey). The
uptick in inflation will likely weigh on
consumption, particularly if food prices continue
to rise, and will leave less room for monetary
policy to support the growth if conditions
deteriorate. Indeed, the central bank of Russia
raised interest rates by 25bps in September on
the expectation that inflation pressures willcontinue.

Turkey’s credit rating to investment grade.
On-going fiscal adjustment by most of thecountries in the region has also been hampering
the domestic demand growth. Developing
countries that are part of the European Union(EU) have been lowering structural fiscal deficits
to meet the 3 percent target required by the EU.
The further adjustments are likely to occur in
Ukraine and Romania, where government
spending increased in the run up to elections.
Russia too may adopt a tighter stance, as its
surplus has been depleted following pre-election
spending.

While the inflation in Turkey did not accelerate
in the second half of the year, it remained higharound 9 percent (year over year) up until
September. Nevertheless, the central bank ofTurkey responded to weak growth mid-year byincreasing liquidity supply to banks in July, andcut its overnight lending rate for the first time inseven months in September. The bank cut its
overnight lending rate which serves as the upperbound of its interest rate corridor by 150 basis
points to 10 percent and took steps to keep loan
growth in check to avoid overheating. Further
easing came in October as the inflation has
started to fall significantly. Turkey’s inflation
reached 6.4 percent (year over year) by
November with the help of the fall in foodprices. The move also seeks to reduce
appreciation pressures as capital flows
strengthened following quantitative easing steps
in high-income countries and the upgrade ofHigh rates of unemployment in the region are
another factor weighing on domestic demand.
While unemployment conditions in Turkey,
Latvia, Lithuania and Russia have improved
along with output, labor market conditions
remain very weak elsewhere, including in
Albania and Bulgaria and Serbia. Currently,
unemployment is well over 20 percent of thelabor force in Serbia, Kosovo, and Macedonia
FYR.

Outlook
Growth in the region is expected to decline
sharply to an estimated 3.0 percent in 2012 from
5.5 percent in 2011 (table ECA.2). Hit hard by
the weakness in high-income Europe, the Central
and Eastern Europe is projected to have slowed
down markedly, whereas the adjustment for CIS
countries is expected to have been less severe.
Several countries (Albania, Bulgaria, Macedonia
FYR and Romania) are forecasted to growth lessthan one percent, while Serbia entered to arecession in 2012 (table ECA.3).

Figure ECA.6 Inflation has gained momentum
Rate of Inflation
1210
8

GDP growth in the region is projected torebound only slightly to 3.6 percent in 2013,
under the baseline assumptions that there will be
no major loss of confidence in the global
financial markets; and that there will not be amajor set-back in the resolution of Euro-areacrisis and US fiscal challenges. The rebound in2013 is projected to be limited as most of thefactors that constrained the growth in 2012 arelikely to remain present (albeit somewhat less

6
4
CPI (3m/3m saar)
2
CPI (y-o-y)0
2009M01

2009M10

2010M07

2011M04

2012M01

2012M10Source: World Bank

109

Global Economic Prospects January 2013

Europe and Central Asia Annex

forcefully). Economic growth in high-income
Europe is forecasted to rebound but still remain
weak in 2013. Fiscal adjustments by regions’economies will continue and domestic credit
growth will continue to be constrained on the
supply-side. Region’s growth is expected togradually rise to 4.3 percent by 2015.

institutions has been crucial for many countries
in the region to create financial buffers and to bea catalyst in addressing their macroeconomic
imbalances. Some countries including Bosnia
and Herzegovina, Georgia and Romania (withprecautionary IMF supported program andlending from the World Bank) have benefited
from the financial support from the IMF andother IFIs to cope with the deterioration of
external conditions. On the other hand, the IMF
supported programs were put on-hold during pre-election period in Serbia and Ukraine but
discussions are expected to resume in coming
months. Both of these economies have large
external financing needs (current account andexternal debt amortization) and reducing
borrowing costs is crucial going forward.
Already in recession, Serbian economy also
suffers from a large fiscal deficit, very highunemployment rate (more than 20 percent) andrising inflation.

Prospects for the region critically depend on the
progress in addressing external (large current
account deficits) and domestic (large fiscal
deficit, unemployment, and inflation)
imbalances; lack of competitiveness; andstructural constraints in their economies. Key
structural factors include strengthening policy
reform effort to reduce public debt, advancing
structural fiscal reforms, improving labor market
flexibility, improving business environment andfinancial market efficiency. Some of thecountries have already progressed considerably
in reducing their fiscal deficit such as Romania
and Latvia where it is projected to fall below 3
percent required by EU.

After two years of unsustainably strong growth,Turkey has had a soft-lending with growthslowing to a projected 2.9 percent in 2012 from

External support from international financial
Table ECA.2 Europe and Central Asia forecast summary(annual percent change unless indicated otherwise)00-09a

2010

2011

2012

2013

2014

2015

GDP at market prices b

5.3

5.5

3.0

3.6

4.0

4.3

4.2

Est.

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

GDP at market prices c
GDP per capita (units in US$)

4.2
4.0

5.4
4.9

5.6
5.1

3.0
2.6

3.6
3.2

4.0
3.6

4.2
3.9

PPP GDPPrivate consumption
Public consumption
Fixed investment

4.3
5.9
2.5
6.6

5.1
5.1
-0.2
11.7

5.3
6.6
2.2
7.2

3.0
3.4
2.9
0.0

3.6
4.2
2.7
4.5

4.0
4.5
3.2
5.0

4.2
4.8
3.0
5.6

Exports, GNFS d

5.2

7.5

6.4

5.3

4.2

5.4

6.0

7.1
-0.3
2.3
9.3
-0.6

17.3
-2.7
0.7
9.2
-3.5

11.4
-1.6
0.8
8.6
0.3

3.4
0.6
0.6
2.2
-0.2

5.2
-0.4
0.0
6.0
-1.0

6.0
-0.3
-0.4
5.6
-1.1

6.7
-0.3
-0.7
5.4
-1.2

4.7

3.9

4.4

3.1

3.5

3.8

3.9

4.1

-0.4

3.1

1.4

1.8

2.5

3.3

4.8
4.4
3.0
4.2

4.7
4.3
9.2
-1.6

4.6
4.3
8.5
2.5

3.4
3.5
2.9
0.6

3.7
3.6
4.0
1.6

4.1
3.9
4.5
2.2

4.0
3.8
5.0
3.0

Imports, GNFS d
Net exports, contribution to growth
Current account bal/GDP (%)
GDP deflator (median, LCU)
Fiscal balance/GDP (%)
Memo items: GDP
Transition countries eCentral and Eastern Europe f
Commonwealth of Independent States g
RussiaTurkeyRomaniaa. Growth rates over intervals are compound weighted averages; average growth contributions, ratios and deflators arecalculated as simple averages of the annual weighted averages for the region.
b. GDP at market prices and expenditure components are measured in constant 2005 U.S. dollars.
c. Sub-region aggregate excludes Bosnia and Herzegovina, Kosovo, Montenegro, Serbia, Tajikistan and Turkmenistan.
Data limitations prevent the forecasting of GDP components or Balance of Payments details for these countries.
d. Exports and imports of goods and non-factor services (GNFS).
e. Transition countries: CEE and CIS (f + g below).
f. Central and Eastern Europe: Albania, Bosnia and Herzegovina, Bulgaria, Georgia, Kosovo, Lithuania, Macedonia, FYR,
Montenegro, Romania, Serbia.
g. Commonwealth of Independent States: Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyz Republic, Moldova, RussianFederation, Tajikistan, Turkmenistan, Ukraine, Uzbekistan.

Source: World Bank.

110

Global Economic Prospects January 2013

Europe and Central Asia Annex

8.6 percent in 2011 (table ECA.3). Most of thedeceleration came from easing domestic demandand investment following monetary policy
tightening that led to sharp adjustment in credit
growth. The sharp adjustment has not generated
any major disturbance in the economy as thecountry continues to benefit from its ongoing
access to international capital markets (bondflows in particular). Economic rebalancing has
started already with easing current accountdeficit from 10 percent in 2011 to a projected 6.8
percent in 2012. While capital flows to Turkey
are expected to be robust next year, current
account deficit remains high and makes thecountry vulnerable to sudden changes in investor
sentiment. In addition, while the adjustment has
also come through declining imports, theresilience of its exports has been mainly due toits unprecedented exports of gold to Iran(directly or via the United Arab Emirates) inreturn for its energy imports. The impact of gold
exports on the current account is unsustainable
however since the draw down on Turkish gold
stocks (Turkey is not an important producer ofgold) will likely require an increase in imports
going forward to bring stocks back up to normal
level.

exploration and investments should result inincreased production over the forecast period,
both the pace of income (commodity prices areprojected to decline in real terms) and output
growth is likely to be significantly slower than in
the recent past. While the extractive sectors willremain important sources of income, policy must
focus on establishing the conditions under which
other sectors of the economy can prosper andexpand. Here there are no easy answers, but
improving the predictability and enforcement oflaws, reducing administrative burdens andhurdles and investing in both infrastructure andhuman capital are important components of any
lasting effort to diversify and reducing
dependence on commodity-related earnings.

Risks and vulnerabilities
The region’s economic outlook is still subject toserious downside global and regional risks. On
the external front: Given the region’s close financial and tradeties with high-income Europe, it would bedirectly impacted by a major deterioration of
the Euro-area debt crisis (by as much as 1.3
percent of regional GDP, see discussion in
main text), but even a slow-growth or
stagnation scenario would impinge on therecovery in Europe and Central Asia.

Economic growth in Russia—the largest
economy in the region—is expected to decline to
3.5 percent in 2012 from 4.3 percent in 2011 due
to unfavorable base effects, a drought inagriculture, rising inflation, and weak global
sentiment. Despite the projected high oil price,
growth is expected to pick up only modestly to
3.8 percent by 2015 reflecting monetary
tightening, a tight labor market, and capacity
constraints. The government will find it difficult
to step up public investment in view of the large
non-oil budget deficit. Similarly, economic
growth in Kazakhstan is projected to slowdown
in 2012 due to capacity constraints and thedrought affecting the wheat production and
expected to pick up only by 2014 after a new
oilfield becomes operational.

 The US fiscal policy paralysis is anotherimminent risk. Here the direct linkages areless strong (an estimated 0.9 percent of GDP),
with regional oil and metal exporters hit harder
due to weaker commodity prices. However,should the situation there go very wrong knockon effects in the Euro Area (and developing
Europe) could be serious.
 Finally,

while a progressive decline inChina’s unusually high investment rate is
expected over the medium– to long-term,
there would be significant domestic andglobal consequences if this position were to
unwind abruptly. Impacts for developing
commodity exporters would be especiallyharsh if commodity prices fall sharply.

For the commodity exporters, the key challenge
continues to be high dependence on extractive
industries. Most of them are bumping against
capacity constraints, and while current

A sharp drop in confidence can lead to a sudden

111

Global Economic Prospects January 2013

Europe and Central Asia Annex
Figure ECA.7 The share of nonperforming loans in
total loans rose markedly

reversal of global financial conditions and affectsignificantly the countries with high externalfinancing needs (current account deficits andamortization of external debt) in 2012. Even if
the risks related with then Euro-area and US cliff
are not fully actualized, these countries are stillin a vulnerable position as these uncertainties arelikely to generate volatility in the financial
markets on the way. Some of the vulnerabilities
have decreased. According to the recent data by
Bank of International Settlements, all countries
in the region—with the exception of Bulgaria
and Ukraine—have reduced short-term debt
since 2011 lowering their external financing
needs for 2013.

20

Nonperformaning Loanspercent of total loans (%)
Bosnia and Herzegovina
Moldova
Romania
ECA (median)

18
16
14

12
10
8
6
4
2010 2010 2010 2010 2011 2011 2011 2011 2012 2012 2012
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3

The internationally-traded food prices surged in
the summer of 2012 as a result of adverse
weather shocks. So far, the current food priceshock is less severe than in 2007-08, mainly
because fewer crops have been involved.
Moreover, this time around it has not been
aggravated by a significant and simultaneously
higher oil price. The pass-through from world to
local prices during the most recent period
continued to be low. A spike in local food prices
will affect poor population with a higher share offood in household budgets. Nevertheless thehigher volatility of commodity prices will
require a concerted policy response that should
combine continued strengthening of the capacityof social safety nets to respond to crises, andagricultural programs aimed at enabling the
supply response.

Note: Methodology may vary by country.
Source: IMF Financial Soundness Indicators and WorldBank.

credit growth going forward, which has alreadyslowed down considerably. Nevertheless, there
is some level of resilience in most banks in theregion with their capital adequacy ratios inexcess of 10 percent by the end of 2011.

Notes:
1. Turkish gold exports totaled $14.3 billion by

October from $2.7 billion during January to
October in 2011. The Turkish government
stated on November 23rd that Iran was using
the earnings from energy sales to Turkey,
which are deposited in Turkish banks, to buy
gold. The gold is subsequently transferred toIran. Iran provides 18 percent of Turkey's
natural gas and 51 percent of its oil.

Aside from these global risks for the region’s
economy, banking systems in several countries
are under considerable pressure (figure ECA.7).
The sharp slowdown in economic activity, weakcredit demand and tight foreign funding
conditions have increased pressures on profits.
Non-performing loans (NPL) in some countries
rose especially in Bulgaria (17 percent), Bosnia
and Herzegovina (12.7 percent), Moldova (15.3
percent) and Romania (17.3 percent). After sharp
economic slowdown, the NPL rates are likely tohave climbed in countries such as Ukraine, whileremaining at already very high level at 37
percent in Kazakhstan. The high levels of NPL
in region’s banking system may further constrain

2. http://ec.europa.eu/economy_finance/articles/
governance/pdf/2012-11-12-deleveragingmonitor_en.pdf

112

Global Economic Prospects January 2013

Europe and Central Asia Annex

Table ECA.3
ECA.3 Europe
Europe andand Central
Central Asia
Asia country
country forecasts
forecasts
Table
Est.

Forecast

00-09a

2010

2011

2012

2013

2014

2015

GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Armenia

4.9
-8.6

3.5
-11.4

3.0
-12.6

0.8
-11.8

1.6
-9.7

2.0
-7.9

3.0
-6.0

GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Azerbaijan

7.7
-7.4

2.2
-14.6

4.7
-10.8

6.8
-10.6

4.3
-9.3

4.4
-9.1

4.4
-9.1

GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Belarus

14.4
2.9

5.1
28.2

0.1
26.6

2.0
15.5

4.2
12.4

3.7
11.4

3.6
9.9

GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Bulgaria

6.6
-4.6

7.7
-15.0

5.3
-10.5

2.8
-1.5

4.0
-3.0

4.0
-3.5

4.5
-4.4

GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Georgia

4.0
-11.3

0.4
-1.5

1.7
0.3

0.8
-1.5

1.8
-2.9

2.4
-3.2

3.0
-3.4

GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Kazakhstan
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Kosovo
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Kyrgyz Republic
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
LatviaGDP at market prices (% annual growth) b
Current account bal/GDP (%)
Lithuania
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Moldova

5.6
-12.6

6.3
-11.4

7.1
-12.5

4.9
-10.8

5.1
-11.9

5.4
-11.3

5.6
-10.3

7.5
-2.0

7.3
1.6

7.5
7.6

5.0
4.3

5.5
3.9

5.7
3.3

6.0
3.0

5.8
-18.2

3.9
-25.9

5.0
-26.2

3.6
-23.6

3.3
-21.6

4.0
-18.0

4.0
-16.0

4.1
-6.0

-0.5
-6.4

5.7
-6.3

1.0
-9.1

8.5
-6.4

7.5
-4.6

3.5
-3.3

3.7
-10.2

-0.3
3.0

5.5
-1.2

5.3
-2.1

3.0
-2.9

3.4
-3.6

3.6
-3.7

4.2
-7.1

1.3
1.5

5.9
-1.7

3.3
-3.0

2.5
-3.4

3.5
-3.3

4.3
-3.1

GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Macedonia, FYR

4.4
-8.4

7.1
-9.8

6.4
-12.6

0.0
-10.8

3.1
-8.9

4.0
-8.8

5.0
-8.4

GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Montenegro

2.3
-6.1

2.9
-2.8

2.8
-2.6

0.0
-3.5

1.0
-4.3

2.5
-4.5

3.5
-5.2

-11.4

2.5
-22.9

3.2
-17.7

0.2
-17.8

0.8
-18.5

1.5
-17.8

2.0
-17.0

GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Russian Federation

4.2
-7.5

-1.6
-4.4

2.5
-4.9

0.6
-3.6

1.6
-4.3

2.2
-3.9

3.0
-3.7

GDP at market prices (% annual growth) b
Current account bal/GDP (%)

4.4
9.3

4.3
4.8

4.3
5.5

3.5
4.2

3.6
3.3

3.9
2.6

3.8
1.8

Albania

GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Romania

SerbiaGDP at market prices (% annual growth) b
3.6
1.0
1.6
-2.0
2.0
3.1
3.6
Current account bal/GDP (%)
-9.5
-6.8
-8.9
-11.3
-9.9
-9.2
-8.8
Tajikistan
GDP at market prices (% annual growth) b
7.7
6.5
7.4
7.5
7.0
6.0
6.0
Current account bal/GDP (%)
-4.8
-0.2
0.6
-0.4
-2.5
-1.4
-1.5
TurkeyGDP at market prices (% annual growth) b
3.0
9.2
8.5
2.9
4.0
4.5
5.0
Current account bal/GDP (%)
-3.3
-6.4
-10.0
-6.8
-7.0
-6.8
-6.5
UkraineGDP at market prices (% annual growth) b
3.9
4.1
5.2
0.5
2.2
3.2
3.5
Current account bal/GDP (%)
2.2
-2.5
-6.2
-7.8
-6.6
-5.6
-4.7
Uzbekistan
GDP at market prices (% annual growth) b
6.1
8.5
8.3
8.2
7.5
7.0
6.8
Current account bal/GDP (%)
5.2
4.9
4.8
4.5
4.5
4.0
3.8
Source : World Bank.
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently,
projections presented here may differ from those contained in other Bank documents, even if basic assessments ofcountries’ prospects do not significantly differ at any given moment in time.
Bosnia and Herzegovina, Turkmenistan are not forecast owing to data limitations.
a. GDP growth rates over intervals are compound average; current account balance shares are simple averages over the period.
b. GDP measured in constant 2005 U.S. dollars.

113

Global Economic Prospects January 2013

Latin America and the Caribbean Annex

Latin America & the Caribbean Region
demand and robust domestic demand. Growth inBrazil is forecast to accelerate to 3.4 percent in2013, boosted by accommodative monetary andfiscal policies whose full effects are yet to befelt. Growth in Mexico is forecast to slow to 3.3
percent in 2013, in part, due to slower US
growth. Energy exporters Bolivia, Venezuela
and Ecuador will see growth slow, as will
Central America. The Caribbean will strengthenslightly mostly on account of the Dominican
Republic.

Overview: Economic growth in Latin America
and the Caribbean region slowed sharply in
2012, making the region the second slowest
performer, after developing Europe and Central
Asia, amongst all developing regions of theworld. A weak external environment and acontraction in domestic demand were largely
responsible for a tepid regional GDP growthestimated at 3 percent in 2012 (4.3 percent in2011). Growth in Brazil, the region’s largest
economy, decelerated markedly to an estimated
0.9 percent in 2012, from an already-modest 2.7
percent in 2011, while Argentina’s economic
growth contracted to 2 percent, from 8.9 percent
the previous year. The slowdown was modest inCentral America and the Caribbean, while
growth in Mexico, the region’s second largest
economy, remained robust expanding by an
estimated 4 percent in 2012 despite its strong
links to the fledgling US economy. Elsewhere in
the region, growth was relatively buoyant, albeit
weaker than 2011. Chile posted a brisk
performance with growth estimated at 5.8
percent in 2012, as did Panama (10 percent), andPeru (6.3 percent).

Risks and vulnerabilities: The region remains
vulnerable to an uncertain external environment,
an increased exposure to East Asia, and tocountry-specific factors.
Euro Area and the US fiscal paralysis. Should
either of these scenarios materialize, the ensuing
weak global demand and demand forcommodities would negatively impact
commodity prices, incomes, fiscal balances and
GDP growth in the region, in particular forcommodity exporting countries. Countries withfewer macroeconomic buffers could beparticularly vulnerable in case of a significant
weakening in global demand.
Looking East. As the region, notably SouthAmerica, is becoming increasingly reliant onexports to East Asia, particularly China, the riskof a stronger-than-expected deceleration in
China is a downside risk for commodity
exporting countries in particular.
Policy Errors. Domestic imbalances and/or
policy errors could also be detrimental to growthin selected economies in the region. In the
Caribbean countries, with weak financial
systems, a sharp slowdown in growth would
result in a marked deterioration in credit qualitythat could further impair growth.
Hot Money. In the short-run, a possible return of
hot money may complicate policy-making in
financially integrated economies in the region,
resulting in currency appreciations. Over the
medium term, however, expectations of costlier
capital could limit investment and growth.

Economic activity in the region provided amixed picture in 2012. Industrial production
slowed, though not uniformly, in the first half ofthe year but rebounded in 3Q 2012 with signs of
weakness reappearing in 4Q again. Growth ofremittances decelerated due to weak labormarket conditions in the main migrantdestinations of the US and Europe, while theregion received the largest share of gross capital
flows (international bond issuance, cross-border
syndicated bank loans, and equity placements) todeveloping countries, accounting for 33 percentof the $412 billion global gross capital flows in
the first 10 months of 2012.
Outlook: Regional growth is expected toaccelerate to 3.5 percent in 2013 and average
about 3.9 percent over the 2014-2015 period,
mainly due to a more accommodative policy
environment in some of the larger economies in
the region, supported by stronger external

115

Global Economic Prospects January 2013

Latin America and the Caribbean Annex
year. The slowdown was much more moderate
in the Central American sub-region, where
growth expanded by 0.1 percent in 2012, and in
the Caribbean economies, where growth
decelerated by 1.4 percentage points. On theother hand, despite its strong links to therelatively weak US economy, growth in Mexico(the second-largest economy in LAC), held up
well, expanding by an estimated 4 percent in2012.

Recent economic developments
Economic growth decelerated in Latin America
and the Caribbean during 2012, although
performance was mixed across economies in theregionGrowth in Latin America and the Caribbean(LAC) slowed from 4.3 percent in 2011 to an
estimated 3 percent in 2012, largely due to a
weaker global environment, but also to a marked
slowdown in domestic demand in some of thelarger economies in the region (e.g. Brazil) andcountry-specific factors (e.g. Argentina) (table
LAC.1). Growth decelerated to a 1.9 percent
seasonally adjusted annualized rate (saar) in thethird quarter of 2012, from close to 3.2 percent
in the first quarter of the year and around 4
percent in the first half of 2011. Apart from
Europe and Central Asia, where growth slowedby 2.6 percentage points in 2012 versus 2011,
Latin America and the Caribbean experienced
the sharpest growth deceleration (1.3 percentage
points) among developing regions in 2012.

Elsewhere in the region, growth remained
relatively buoyant, with the economies ofColombia, Chile, Panama, and Peru continuing
to expand briskly, albeit at a slightly lower rate
than in 2011. Paraguay stood out as a poor
performer in 2012, contracting by an estimated 1
percent (following 4 percent growth in 2011) on
account of a severe drought as well as weaker
growth in major trading partners such as
Argentina and Brazil. In Colombia, tourist
arrivals performed well despite subdued global
growth in the first half of 2012; tourist arrivals in
the Caribbean and Central America were up in2012 as well, by 5.2 and 6.8 percent,respectively.

Slowdown during the latter half of 2012 wasparticularly sharp in Brazil, where annual GDP
growth is estimated to have fallen to 0.9 percent,compared to the 2.9 percent expected as of mid-Industrial production exhibited similar patterns
as regional GDP growth in the first and second

Table LAC.1 Latin America and the Caribbean summary forecast(annual percent change unless indicated otherwise)
GDP at market prices b

00-09a

2010

2011

2.6

6.0

4.3

Est. Forecast
2012
2013
2014
3.0

3.5

3.9

2015
3.9

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

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

2.6
1.4
2.7
2.9
2.6
3.6
2.8
3.7
-0.2
-0.3
6.3
-2.4

6.1
4.9
6.1
6.0
4.1
10.9
11.6
22.4
-2.7
-1.2
5.1
-3.0

4.4
3.2
4.5
5.2
2.7
7.8
5.9
9.8
-1.3
-1.3
7.0
-2.2

3.0
1.8
2.9
3.0
2.5
4.2
3.8
4.7
-0.4
-1.7
5.5
-2.8

3.6
2.4
3.6
3.5
2.5
5.3
5.4
5.6
-0.3
-1.5
5.8
-2.6

3.9
2.8
4.0
3.8
2.5
6.0
6.3
6.2
-0.3
-1.6
5.4
-2.4

3.9
2.8
3.9
3.9
2.5
6.1
6.7
7.0
-0.4
-1.6
5.8
-2.4

Memo items: GDP
LAC excluding Argentina
Central America e
Caribbean fBrazilMexico

2.5
1.5
3.4
2.9
1.2

5.8
5.4
4.7
7.5
5.6

4.0
4.0
3.8
2.7
3.9

3.1
4.1
2.4
0.9
4.0

3.6
3.4
3.8
3.4
3.3

3.9
3.7
3.9
4.1
3.6

3.9
3.7
4.2
4.0
3.6

Argentina
3.4
9.2
8.9
2.0
3.4
4.1
4.0
a. Growth rates over intervals are compound weighted averages; average growth contributions, ratios and deflators arecalculated as simple averages of the annual weighted averages for the region.
b. GDP at market prices and expenditure components are measured in constant 2005 U.S. dollars.
c. Sub-region aggregate excludes Cuba and Grenada, for which data limitations prevent the forecasting of GDP
components or Balance of Payments details.
d. Exports and imports of goods and non-factor services (GNFS).
e. Central America: Costa Rica, Guatemala, Honduras, Mexico, Nicaragua, Panama, El Salvador.
f. Caribbean: Antigua and Barbuda, Belize, Dominica, Dominican Republic, Haiti, Jamaica, St. Lucia, St. Vincent and
the Grenadines, and Suriname.

Source: World Bank.

116

Global Economic Prospects January 2013

Latin America and the Caribbean Annex

quarters of 2012, slowing to 1.9 and -1.1 percent(saar), respectively. In contrast to regional GDP
growth, which was weak in the third quarter,
industrial production in LAC economies
rebounded, reaching 3.4 percent in the third
quarter. However, this rebound in industrial
production has not been uniform across theregion and the signs of a new slowdown towards
the end of 2012 are evident. For example,
Mexican industrial production growth held up
well during most of 2012 and has only started toslow recently. Argentina and Brazil, on the other
hand, experienced strong industrial production
growth in the third quarter, after registering
weak performance in the first half of the year,
but have started slowing down again in the
fourth quarter (figure LAC.1). In Central
American countries, industrial production trends
have been similar to those observed in Argentina
and Brazil – i.e., it troughed at around -1.5
percent in May, and have accelerated to around
4.9 percent by September and have slowed down
recently to 3.4 percent in November.

pressure since peaking at 23.7 percent in
February and have declined at a 13.2 percent
annualized pace in November. Overall, regional
import growth (+9.5 percent annualized in
November) has recovered from five months ofdecline – supportive of a modest improvement indomestic demand. But exports remains weak,with export volumes growing at only 3.8 percent
annualized pace in November, largely on
account of weak import demand from the US
and the Euro Area.
The pace of growth of remittance flows in
nominal US dollar terms to the Latin America
and the Caribbean region decelerated toestimated 2.9 percent in 2012 from 7.3 percent in2011, as weak labor markets and subdued
income growth in the main migrant destinationsin North America and Europe affected the abilityof migrants to send money home.
Notwithstanding a gradual recovery in the US
labor market and an upturn in the housing sector
in the second half of the year, flows to thelargest regional remittance recipient Mexico
remained broadly stable, declining by estimated
0.3 percent to $23.5 billion in 2012, comparedwith a 6.8 percent increase the previous year.
Several remittance-dependent economies, and inparticular in countries with large migrant
population to the U.S. such as Honduras andJamaica (where these flows are 16.7 percent and14.1 percent of GDP, respectively), have seen asteep deceleration in estimated growth of
nominal remittance inflows to 1.7 and 2.3
percent, respectively in 2012. The sharp
economic downturn and high unemployment in
Spain and other European remittance sources has
weighted negatively on the overall remittancevolumes in Latin America as well.

The industrial production growth patterns arealso reflected in export volumes with
Argentinean and Brazilian exports volumes on
the rise in recent months after bottoming out in
June, whereas Mexican export volumes appears
to have peaked in July and has been declining inrecent months. In Central American countries
export volumes have been under significant
Figure LAC.1 Industrial production
percent, 3m/3m saar
20

15

Argentina
Brazil10

MexicoInflation in the Latin America and the Caribbean
region dropped to 4.8 percent annualized pace inthe second quarter of 2012 (down from a 7.1
percent pace in 2011) reflecting the weakeningof global activity and the lagged impact ofrelatively tight monetary policy stance (earlieron) in the region. After the monetary policy
tightening cycle that started in mid-2010 mostinflation-targeting central banks paused in mid2011, or have made very minor adjustments,

5

0

-5

-10

-15
2010M01

2010M07

2011M01

2011M07

2012M01

2012M07

Source: World Bank.

117

Global Economic Prospects January 2013

Latin America and the Caribbean Annex

except of Brazil which has lowered policy rates
aggressively (commutative 525 basis point cut)to support the weakening economic activity(figure LAC.2).

counter-cyclical policies. Moderate pricepressures allowed Columbia to cut the policy
rates in November and late December to provide
additional stimulus to the economy. Inflation
remains high in Venezuela and Argentinareflecting expansionary policies.

Inflation started picking up again during thethird quarter in reaction to the considerable
global policy easing, while higher food and oil
prices also contributed to price pressures during
a temporary US drought related grain priceuptick. Latin America registered some of the
sharpest increases in real domestic maize prices
affecting food price inflation and contributing toa temporary acceleration of the headline inflationin the third quarter of 2012 to 7 percent. The
headline inflation in Uruguay accelerated to 7.5
percent (y/y) in December well above the central
bank's 4-6 percent targeted range prompting thecentral bank to increase the policy rates to 9.25
percent and the government to implement a setof administrative and fiscal measures (e.g. seek
an agreement with the country’s supermarkets to
reduce the price of 200 basic staples by 10
percent and to consider lowering tariffs and taxes
on basic foodstuff) to contain the price hike.

Capital flows return were buoyant in the second
half of 2012
Overall capital flows to the region haveremained strong helped by intensifying searchfor higher yields, renewed prospects ofappreciation of select local currencies, and still
favorable commodity prices. Net private capital
inflows rose slightly to an estimated $321 billion
in 2012 (or 6.1 percent of GDP), up 7.2 percent
from 2011, with net bond financing climbing
11.7 percent to $95 billion (or 1.8 percent ofGDP) (table LAC.2). There was a slight increasein FDI inflows as they reached about $167
billion, 5.7 percent above the $158 billion
registered in 2011. FDI continues to be the mostsignificant source of financing for the current
account in many countries, with Brazil
remaining the favored destination of FDI
investors in the region—and is the second only
to China among developing countries. Shortterm debt flows showed some signs of rebound,
posting positive net flows of $4.3 billion, butthey remain well below a peak of $43.8 billion in2010. Net portfolio equity inflows rose to $12.2
billion in 2012, after dropping sharply to $7.4
billion in 2011, while net bank lending declining
slightly to $41 billion.

Peru managed to achieve strong growth and low
inflation (2.7 percent y/y in December - within
the Central Bank’s target band of 1-3 percent).
Chile and Columbia have been successful inmaintaining relatively low inflation during therecent volatile economic cycle due to effective
Figure LAC.2 Monetary policy has been on hold inseveral countries
Short-term Interest Rates

Latin America received the largest share of grosscapital flows (international bond issuance, crossborder syndicated bank loans, and equity
placements) to developing countries this year,
accounting for 33 percent of the $412 billion
registered in the first ten months of 2012. The
robust flows underlined a record pace of bondissuance by region’s borrowers, which rose to$91 billion, up about 22 percent year-on-yearbasis. In fact, Latin American borrowers havedominated the developing-country corporatebond market, constituting nearly half of the total
market volume ($158 billion), as they have taken
full advantage of the low funding costs andPercent
14

12

Brazil1086Colombia

Chile
Mexico

4
2

Peru

0
Dec-09Apr-10Aug-10Dec-10

Apr-11

Aug-11

Dec-11

Apr-12

Aug-12

Dec-12

Sources: World Bank, Bloomberg, and Datastream.

118

Global Economic Prospects January 2013

Latin America and the Caribbean Annex

Table LAC.2 Net capital flows to Latin America and the Caribbean region ($ billions)
2008

2009

2010

2011

2012e

2013f

2014f

2015f

Capital Inflows

186.0

179.6

328.5

303.9

322.4

326.2

327.1

342.3

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

179.3
127.5
137.2
-9.7
51.8
8.9
40.8
2.6
-0.5
6.7
2.4
0.0
4.3

161.6
126.5
84.9
41.6
35.1
45.9
-1.7
-8.6
-0.5
18.0
6.6
0.4
11.0

306.1
166.6
125.3
41.3
139.5
72.9
21.7
43.8
1.1
22.5
8.3
1.3
12.9

299.1
165.6
158.3
7.4
133.4
85.2
51.7
-3.0
-0.4
4.8
-2.9
0.2
7.5

320.5
179.5
167.3
12.2
141.0
95.1
41.4
4.3
0.2
1.9
0.4
0.1
1.4

327.1
198.0
182.4
15.6
129.1
72.2
42.7
12.7
1.5
-0.9

327.8
200.8
176.3
24.5
127.0
57.7
45.2
23.4
0.7
-0.7

344.7
214.5
184.2
30.3
130.2
60.2
51.4
16.5
2.1
-2.4

Note: e = estimate, f = forecast/a Combination of errors and omissions, unidentifed capital inflows to and outflows from developing countries.

Source: World Bank.

unprecedented investor demand. In terms ofsectoral distribution, banks and oil & gas areespecially over-represented with a combined
share of about 60 percent. For example,
Brazilian oil company Petrobras has raised morethan $10 billion through two bond offerings in
February and September. In contrast, banklending and equity issuance fell sharply this year
as companies continued to move away from thehigher borrowing costs in the bank markets (andturned to the bond market instead), and region’s
stocks markets remained fragile following global
equity-market sell-offs in 2011.

production growth rate in 6 quarters – a (modest)
rebound in GDP growth is expected.
Furthermore, a more accommodativeenvironment in some of the larger economies in
the region in conjunction with stronger external
demand should lift growth in 2013, while soundmacroeconomic policies, robust domestic
demand and stronger external demand should
support growth over the medium term.
Particularly in Brazil, the benefits of lower
interest rates are expected to start kicking-in
during the course of the year, which should
underpin stronger domestic demand growth.

Economic outlook

However, this will to some extend be counteredby the reshaping of demand in China away frominvestments and exports towards domestic
consumption and manufacturing, and will affectcommodity exporters in the region that rely on
Chinese demand as the main growth engine.
Most commodity prices are expected to decline
marginally in 2013, due to weaker demand, andin some cases improved efficiency, lower
intensity of use and substitution. On an annual
basis, oil prices are an exception, as it isexpected to remain relatively stable at highlevels. Non-oil commodity prices are forecast to
decline, while manufacturing prices are expected
to recover somewhat after declining in 2012.
This means that, on one hand, the terms of trade

Growth is accelerating starting with the final
quarter of 2012
Overall growth in the region is expected toaccelerate to 3.5 percent in 2013 and average
about 3.9 percent over the 2014-15 period.
Already there are indications that growth hasbottomed-out in the second/third quarter of theyear. Historically there has been a strong
correlation between industrial production and
GDP growth rates (figure LAC.3). With
industrial production growth increasing from 1.3 percent in the second quarter to 3.4 percent
in the third quarter – the highest industrial

119

Global Economic Prospects January 2013

Latin America and the Caribbean Annex

Figure LAC.3 GDP growth to follow revival in industrial production
percent, 3m/3m (saar)
10.0

pressure on core inflation in 2013 in Brazil. But
this should be countered by cuts in electricity
tariffs (while also helping support to the
manufacturing sector as tariffs will be cut 28
percent for industrial users). Also, the somewhat
below potential growth will also help curtailinflationary pressures.

7.0

8.0

Industrial Production (lhs)6.0

GDP (rhs)
6.0

5.0

4.0

4.0

2.0

3.0

0.0

2.0

-2.0

1.0

Growth in Mexico is also forecast to slow tofrom an estimated 4 percent in 2012 to 3.3
percent in 2013, primarily due to negative 2012base effects (i.e., exceptionally strong growth in
the first part of 2012), but also as the economy isimpacted by still sluggish US growth. On theother hand, the approval of labor reforms is
expected to support growth by lowering the costof hiring and firing, encouraging job creation
including temporary and part-time jobs that
could lead to an increase in participation rate.
The ministry of Labor estimates 400,000 jobs
would be created yearly as a result of labormarket reform. Growth in other countries withstrong macroeconomic frameworks andcompetitive economies is expected to exceed theregional average, with Colombia and Chile
growing in around 4 percent or more, withdomestic demand showing strong dynamism, inparticular private investment.

0.0

-4.0

2010Q1

2010Q3

2011Q1

2011Q3

2012Q1

2012Q3

Source: World Bank.

for non-oil commodity exporters will deteriorate
while, on other hand, the terms of trade will
improve for their non-commodity sectors as theircurrencies depreciate. Marginal improvements interms of trade for oil exporters andmanufacturing exporters could be expected aswell (see Commodity Annex).
Growth in Brazil is forecast to accelerate to 3.4
percent in 2013, boosted by stimulative
monetary and fiscal policies whose full effects
have not yet been felt (table LAC.3). Growth
will also benefit from 2012-second halfcarryover effects. The slowdown of credit
growth is expected to subtract from growth
however, as will a slightly less favorable termsof trade.

Growth performance among other commodity
exporters will be mixed. In Argentina
expectations of a record harvest next season andhigh international prices for its soft commodities
exports, along with a recovery in Brazil’s
domestic demand are expected to support growthof 3.4 percent in 2013, while continued
weakness in consumer and business sentimentand policy uncertainties will constrain growth.
Over the medium term Argentina’s economic
performance is likely to be affected byinterventionist policies, weaker businessenvironment and consumer sentiment, as well as
growing imbalances. Changes to the Central
Bank Charter in March 2012 increased the limit
on Central Bank credits to fiscal authorities, in
effect increasing the ability of the Central Bank
to monetize government’s deficits. The
deterioration in fiscal balances and external
accounts is limiting Argentina’s ability (policyroom) to respond to global or domestic shocks in

Lower interest rates should reduce interest
payments releasing resources for countercyclicalmeasures over the medium term. Efforts by thegovernment to improve the efficiency of theeconomy by reducing Custo Brazil (high input
costs and tax burden, heavy bureaucracy andinadequate infrastructure) should support
potential GDP over the medium term
notwithstanding a deceleration in labor force
growth.
The end of tax exemptions and the lagged passthrough of past depreciations will put upward120

Global Economic Prospects January 2013

Latin America and the Caribbean Annex

a countercyclical manner. Difficulties infinancing government deficits at both federal andstate level are expected to lead to a tightening offiscal spending in coming years, especially if
prices of soft commodities decline. Paraguay’s
economy is expected to recover from the 2012
recession, as agricultural output improves
sharply and as Brazilian demand recovers. GDP
is expected to continue to slow in energy
exporters such as Bolivia, Venezuela, andEcuador as government spending growth eases.
In Peru, growth will remain relatively steady ataround 6 percent over the forecast period.

Risks and vulnerabilities
The region remains vulnerable to an uncertain
external environment, an increased exposure to
East Asia, and to country-specific factors.
A main risk to the global economy is still posedby the possibility of a marked deterioration in
conditions in Euro area, although this scenario isless likely than only a few months ago. In such a
scenario, global demand and demand forcommodities would be significantly weaker thanin the baseline, negatively affecting commodity
prices, incomes, fiscal balances and GDP in
particular in commodity exporting countries. If it
unfolds this risk could cut Latin America and the
Caribbean regional growth by 1.2 percent in2013 and 0.8 percent in 2014 (see discussion in
main text).

The expansion in Central America is expected toslow somewhat due to relatively weak
performance in the U.S., notwithstanding a more
expansionary fiscal stance in some of theeconomies. An incipient modest recovery in the
U.S. housing sector will provide some support toremittances although sluggish improvement inlabor markets and lower net migration to the
U.S. will keep remittances growth subdued.
Private consumption will also be affected byhigher food and energy prices. Panama is
forecast to remain the fastest growing economy
in Latin America, expanding 7.5 percent in 2013,
with growth driven by the expansion of the
Panama Canal and several other large investment
projects, including the Panama City project.

The US fiscal policy paralysis is anotherimminent risk for countries in this region.
Failure to address fiscal problems in the US
would result into a sharp 1.8 cut in the US
growth in 2013 relative to the baseline through aconsiderable fiscal drag on the US economy.
Direct impact of such scenario is as strong (anestimated reduction of 1.2 percent of GDP in2013 and 0.4 percent in 2013), with regional oil
and metal exporters hit harder due to weaker
commodity prices as well as economies
dependent remittances from the US.

Growth in the Caribbean is expected tostrengthen slightly to 3.8 percent in 2013, mostly
on account of improving performance in the
Dominican Republic. Growth in other countries
in the sub-region will continue to be constrainedby high debt levels, and relatively weak
remittances and tourism revenues, despite a pickup in tourist arrivals. Large debt and current
account deficits will continue to constrain
growth in the sub-region.

Figure LAC.4 Region’s trade exposure to the US andChina (average 2009-2011)
90%
80%

MexicoShare of exports going to US

70%

Current account balances are expected todeteriorate in the region overall as terms of trade
deteriorate for some of the larger economies in
the region, while stronger domestic demand anda loss of competitiveness fuel imports.

Dominican
Republic
Jamaica

60%
50%

El Salvador
Latin America
GuatemalaColombia
and theEcuador
Caribbean
Costa Rica
Panama40%
30%

Nicaragua
20%
10%GuyanaBolivia0%Paraguay
0%

5%

Peru
BrazilChile

Argentina
10%

15%

20%

Share of exports going to China

Source: UN Comtrade and World Bank.

121

25%

Global Economic Prospects January 2013

Latin America and the Caribbean Annex

As the region, particularly South America, has
become increasingly reliant on exports to East
Asia, prospects in that region and China inparticular are increasingly important (figure
LAC.4). The risk of a stronger-than-expected
deceleration in China is another downside risk
for commodity exporting countries in particular.

deterioration in credit quality that could further
impair growth.
A possible return of hot money to the region
may complicate the fine-tuning of policy infinancially integrated economies in the region,
resulting in currency appreciation. Over the
medium term expectations of costlier capital
could limit investment and growth (Global
Economic Prospects 2010).

Domestic imbalances and/or policy errors could
also be detrimental to growth in selectedeconomies in the region. In the Caribbean
countries with weak financial systems a sharp
slowdown in growth would result in a marked

Table LAC.3 Latin America and the Caribbean country forecasts

Argentina
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Antigua and Barbuda
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
BelizeGDP at market prices (% annual growth) b
Current account bal/GDP (%)
Bolivia
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Brazil
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Chile
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Colombia
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Costa Rica
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Dominica
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Dominican Republic
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
EcuadorGDP at market prices (% annual growth) b
Current account bal/GDP (%)
El Salvador
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
GuatemalaGDP at market prices (% annual growth) b
Current account bal/GDP (%)
GuyanaGDP at market prices (% annual growth) b
Current account bal/GDP (%)
Honduras
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Haiti
GDP at market prices (% annual growth) b
Current account bal/GDP (%)

122

Est. Forecast
2012
2013
2014

00-09a

2010

2011

3.4
2.7

9.2
0.8

8.9
0.0

2.0
1.1

3.4
0.3

4.1
-0.1

4.0
-0.5

3.4
-15.4

-8.9
-12.8

-5.5
-10.7

1.0
-11.4

1.5
-12.2

3.2
-14.6

3.4
-16.2

3.6
-12.9

2.9
-2.9

2.0
-2.5

4.0
-2.3

2.8
-2.4

2.6
-2.6

2.9
-2.8

3.4
3.7

4.1
4.9

5.2
2.7

4.7
4.3

4.4
3.7

4.1
3.2

3.9
2.4

2.9
-0.7

7.5
-2.2

2.7
-2.1

0.9
-2.5

3.4
-2.6

4.1
-2.8

4.0
-3.1

3.3
0.7

6.1
1.5

6.0
-1.3

5.8
-2.9

5.1
-2.8

4.5
-2.8

4.7
-2.7

3.7
-1.4

4.0
-3.1

5.9
-2.9

3.5
-4.2

3.8
-4.4

4.1
-4.1

4.2
-3.0

3.8
-5.0

4.7
-3.5

4.2
-5.3

4.6
-5.5

4.0
-5.3

4.3
-5.2

4.4
-5.4

2.4
-18.2

0.1
-20.8

0.9
-16.0

0.4
-13.3

1.2
-13.7

1.5
-13.8

1.7
-14.1

4.5
-2.6

7.8
-8.6

4.5
-8.1

3.0
-7.2

4.3
-6.5

4.5
-5.9

4.8
-5.9

4.2
1.0

3.3
-2.4

8.0
-0.3

4.5
-0.4

3.9
2.6

3.3
-0.6

3.3
-2.9

1.7
-3.8

1.4
-3.1

1.5
-5.4

1.8
-5.0

2.3
-4.4

2.9
-3.7

2.8
-3.4

3.0
-4.8

2.8
-1.5

3.9
-3.2

3.3
-3.5

3.5
-3.6

3.4
-3.8

3.6
-3.8

2.1
-9.0

3.6
-7.2

5.2
-8.6

4.2
-14.0

4.8
-15.8

4.6
-17.1

4.5
-18.2

3.8
-6.4

2.8
-6.2

3.4
-8.7

3.3
-9.4

3.7
-9.3

3.9
-8.9

3.7
-8.5

0.6
-20.7

-5.4
-2.5

5.6
-4.6

2.2
-4.2

6.0
-5.2

4.2
-5.0

4.2
-4.7

2015

Global Economic Prospects January 2013

Latin America and the Caribbean Annex
00-09a2010

2011

Est. Forecast
2012 2013 2014

2015

Jamaica
GDP at market prices (% annual growth) b
1.0
-1.5
1.3
-0.3
1.0
1.6
1.6
Current account bal/GDP (%)-10.3-6.9 -14.1 -12.0 -11.6 -12.1 -10.2
Mexico
GDP at market prices (% annual growth) b
1.2
5.6
3.9
4.0
3.3
3.6
3.6
Current account bal/GDP (%)
-1.5
-0.4
-1.0
-1.3
-1.0
-0.6
-0.6
Nicaragua
GDP at market prices (% annual growth) b
2.8
3.1
5.1
4.0
4.2
4.4
4.6
Current account bal/GDP (%)-17.5 -10.5 -14.2 -17.6 -15.7 -13.7 -11.8
PanamaGDP at market prices (% annual growth) b
5.6
7.5
10.6
10.0
7.5
7.0
6.5
Current account bal/GDP (%)-4.8 -10.8 -11.3-9.8 -10.6 -10.7 -10.5
Peru
GDP at market prices (% annual growth) b
4.8
8.8
6.9
6.3
5.8
6.0
6.0
Current account bal/GDP (%)
-0.7
-2.5
-1.9
-3.9
-4.1
-3.8
-4.0
Paraguay
GDP at market prices (% annual growth) b
2.5
15.0
4.0
-1.0
8.5
4.6
4.7
Current account bal/GDP (%)
0.2
-3.6
-1.2
-2.5
-1.3
-1.6
-1.4
St. Lucia
GDP at market prices (% annual growth) b
2.1
3.4
1.2
0.7
1.2
1.7
2.0
Current account bal/GDP (%)-19.6 -13.7 -23.2 -24.1 -20.8 -19.2 -18.7
St. Vincent and the Grenadines
GDP at market prices (% annual growth) b
2.8
-1.8
0.0
1.2
1.5
2.5
3.0
Current account bal/GDP (%)-18.9 -31.6 -30.1 -27.2 -25.9 -23.8 -20.5
Suriname
GDP at market prices (% annual growth) b
4.2
4.1
4.7
4.0
4.5
4.5
5.0
Current account bal/GDP (%)
9.9
6.4
5.5
-0.1
-2.1
-4.1
-1.3
Uruguay
GDP at market prices (% annual growth) b
2.1
8.9
5.7
4.0
4.0
4.0
4.0
Current account bal/GDP (%)
-1.3
-1.9
-2.8
-4.5
-4.7
-2.7
-2.6
Venezuela, RB
GDP at market prices (% annual growth) b
3.3
-1.5
4.2
5.2
1.8
2.0
2.0
Current account bal/GDP (%)
10.0
3.1
8.7
5.3
6.4
6.1
6.0
World Bank forecasts are frequently updated based on new information and changing (global) circumstances.
Consequently, projections presented here may differ from those contained in other Bank documents, even if basic
assessments of countries’ prospects do not significantly differ at any given moment in time.
Cuba, Grenada, St. Kitts and Nevis, are not forecast owing to data limitations.
a. GDP growth rates over intervals are compound average; current account balance shares are simple averages overthe period.
b. GDP measured in constant 2005 U.S. dollars.

Source: World Bank.

123

Global Economic Prospects January 2013

Middle East and North Africa Annex

Middle East and North Africa Region1
Overview: Political uncertainty continued toweigh on economic activity in many countries in
the Middle East and North Africa region
during 2012. Nonetheless, growth in 2012
recovered to above 2010 levels, with aggregate
GDP estimated to have grown by 3.8 percent in
2012, compared with a 2.4 percent contraction in
2011. The rebound was largely driven by arecovery in oil exporter Libya, where GDP grewan estimated 108 percent, and continued robust
expansion in Iraq (11 percent growth). However,
GDP in Syria, in the throes of internal conflict, isestimated to have contracted by a fifth, but there
is significant uncertainty about these estimates.
Algeria’s economy grew an estimated 3 percent,while Iran experienced a modest recession.
Growth among oil importers remained sluggish
at an estimated 2.5 percent in 2012 due to theimpact of the Euro Area debt crisis on regional
exports, together with domestic problems,
including a poor harvest in Morocco (3.0 percent
growth in 2012), fiscal difficulties in Jordan (3.0
percent growth in 2012), and continuing
uncertainty and weak reserves position in Egypt(2.6 percent growth projected for the 2012-13
fiscal year). Tunisia’s GDP rose an estimated 2.4
percent in 2012, but in Lebanon, spillover effects
from the conflict in Syria caused growth todecelerate to an estimated 1.7 percent in 2012.

Outlook: Regional GDP growth is projected toslow to 3.4 percent in 2013 as growth in Libya
returns to a more sustainable pace; and then torise to 3.9 percent in 2014 and 4.3 percent in2015. In Egypt, GDP growth is projected to rise
to 3.8 percent in the 2013-14 fiscal year and to
4.7 percent in 2014-15. GDP in Jordan and
Morocco is projected to expand 3.3 and 4.4
percent in 2013, firming to 4.5 and 5.1 percent
by 2015. Iraq’s economy will remain buoyant
with growth projected at 13.5 percent in 2013
before moderating to 8.5 percent in 2015;
Libya’s growth is forecast to moderate to 7.6
percent in 2013, easing to 5.1 percent in 2015;
while Algeria’s growth is projected to firm to 4.3
percent by 2015. Iran’s growth is forecast at 0.6
percent in 2013, rising to a modest 2.8 percent in2015, while growth in Lebanon is forecast at 2.8
percent in 2013, firming to 4.0 percent in 2015.
Risks and vulnerabilities:
Political uncertainty. Protracted politicaluncertainties and domestic unrest pose a key risk
to the region’s growth outlook. The ongoing
conflict in Syria is a notable source of instability
in the region: economic spillovers from Syria to
Lebanon, Jordan, and other countries may
intensify if the political crisis in Syria worsens.
Euro Area or US debt turmoil. A resumptionof Euro Area tensions would particularly affectthe region’s oil importers, due to Europe’s
importance as a trade partner and source ofinvestment, tourism, and remittances. A flare up
of debt tensions in the United States would also
harm this region through trade ties and fromnegative effects on global economic growth.
Fiscal challenges. Despite recent efforts andplans in several countries to improve fiscal
sustainability by undertaking significant subsidy
reforms, further reforms could prove challenging
in the face of popular resistance.

Production in crude oil exporters continued to
expand in 2012. But among oil importers,industrial production and manufactured exports
remained weak amid domestic tensions and theEuro Area debt crisis. Inflation rose sharply in
Iran and Syria. In other countries, despite
international food price increases during 2012,
inflation rates remained subdued, in part owing
to subsidy regimes. Private capital flows to theregion continued to decline in 2012, falling by
an estimated 16 percent, to $12.5 billion. FDI
flows to the region also fell, by a more modest 7
percent. Good news came in the form of tourist
arrivals, with Egypt, Jordan and Tunisia postingstronger gains in attracting tourists, but tourism
to the region was still below 2010 levels.

1 Due to data limitations, Djibouti and West Bankand Gaza which are part of the MENA region are
not included in these regional forecasts. The
MENA region classification excludes the six countries of the Gulf Cooperation Council.

125

Global Economic Prospects January 2013

Middle East and North Africa Annexdeveloping MENA oil exporters’ GDP growing
by an estimated 4.6 percent in 2012 (figure
MNA.1, left panel and table MNA.2). However,
because of the contraction in 2011, GDP for oil
exporters is still about 1 percent lower than its
2010 level. Libya’s output contraction in 2011
was especially deep, with crude oil production
dropping precipitously from 1.7 million barrels
per day (mb/d) in early 2011 to less than 10,000
b/d in August 2011; but by November 2012,crude oil production had risen to 1.5 mb/d,
according to data compiled by the Organizationof Petroleum Exporting Countries (OPEC).
Iraq’s GDP expanded an estimated 11 percent in
2012, similar to the pace in 2011, led by rapidly
rising crude oil production and investment incapacity expansion. Algeria’s GDP growth
accelerated modestly to an estimated 3 percent in
2012, from 2.5 percent in 2011, with demand
supported in part by oil revenues andgovernment expenditure, although crude oil
production remained broadly stable during theyear.

Recent economic developments
Gross domestic product (GDP) in the developing
Middle East and North Africa (MENA) region
contracted in 2011 due to disruptions toeconomic activity following the “Arab Spring”
popular movements in early 2011.FN1 But in
2012, regional GDP recovered to about 1 percent
higher than its level in 2010, as an estimated 3.8
percent growth in 2012 reversed the 2.4 percent
decline recorded in 2011. The regional upturn in2012 was mainly due to a partial recovery of
Libya’s GDP following a steep contraction theprevious year. But in many countries across theregion, continuing domestic tensions andpolitical uncertainty held back investment andweighed on economic activity during 2012.
External headwinds from a slowing global
economy and economic contraction in the EuroArea, the developing MENA region’s largest
trade partner, also contributed to weak non-oil
exports. Within the overall context of relatively
sluggish growth across the region in 2012(barring a few notable exceptions), economic
performance across developing crude oil
exporters and oil importers exhibited substantial
variation.

In several other developing oil exporters,
however, GDP declined or remained flat during
2012. The escalation of internal conflict in Syria
resulted in GDP falling by about a fifth,
according to preliminary estimates, but lack ofreliable aggregate or sector-level data implies
that GDP estimates for Syria are subject tosignificant uncertainty. Iran’s GDP contracted

Output in developing MENA oil exporters
recovered close to the level of 2010
A sharp recovery of Libya’s output resulted in

Figure MNA.1 Among MENA developing oil exporters, a sharp recovery of Libya’s GDP in 2012 offset weakeroutturns in Syria and Iran, while oil importers experienced a modest growth pick-up in 2012
Percent contribution to developing MENA oil exporters' GDP growth

Percent contribution to developing MENA oil importers' GDP growth

6.0

5.0

4.0

4.0

2.0

3.0

0.0

2.0
Yemen

-2.0

Syria

1.0

Libya
Iraq

-4.0

0.0

Iran

Algeria

-6.0

-1.0

MENA oil exporters

-8.0
2010

2011

2012e

2009

Source: World Bank.
Note: 2012 GDP data are estimates.

126

MoroccoLebanonJordan

Egypt

-2.0
2009

Tunisia

MENA oil importers

2010

2011

2012e

Global Economic Prospects January 2013

Middle East and North Africa Annex

modestly by an estimated 1 percent in 2012 astightening of international sanctions—including
a ban by the EU on oil purchases in mid-2012
and the freezing of Iran’s financial assets andtransactions by the US and UK earlier—cut into
crude oil production, exacerbating existing
macroeconomic imbalances including alreadyhigh inflation.FN2 By November, Iran’s crude oil
production had fallen to 2.7 mb/d, one quarter
less than the 3.6 mb/d average in 2011,
according to OPEC data. Yemen’s GDP
remained flat in 2012, as production continued tobe disrupted by domestic tensions.

Oil importers’ economic performance remainedsluggish in 2012 mainly due to domestic
uncertainty
GDP growth in developing MENA oil importers
remained sluggish in 2012, broadly unchanged at
an estimated 2.5 percent in 2012 compared with
2.4 percent in 2011 (figure MNA.1, right panel,and table MNA.2), as these countries continued
to grapple with domestic tensions amid anadverse external environment. While domestic
difficulties played a more significant role in therelatively weak economic performance of oil
importers, external headwinds from the debt
crisis in the Euro Area (the region’s largest trade
partner) contributed to subdued exports andinvestment inflows.

Growth of crude oil production in developing
MENA oil exporters slowed in the third quarterof 2012 (figure MNA.2, first panel). In line withweaker production growth, developing MENA
oil producers also recorded weaker export
volume growth in the third quarter, as
strengthening exports in Libya and Iraq wereoffset by a decline in Iran, and, to a smaller
extent, in Algeria (figure MNA.2, second panel).
While the drop in Iran’s exports can be attributed
to tighter sanctions, a smaller annualized decline
in Algeria’s export growth appears to be partly
related to rising domestic demand for gasoline,
caused by a rise in vehicle ownership. In Yemen,a fragile security situation and attacks on oil andgas pipelines during 2012 caused considerable
volatility in exports.

In Egypt, which has the largest economy among
oil importers, GDP growth picked up modestly
to 2.2 percent in the fiscal year ending in June2012 from 1.8 percent in the previous fiscal year.
But continuing domestic uncertainty and unrest
into the final months of 2012 resulted in a weak
calendar year performance. Tunisia returned to
growth in 2012 after experiencing an output
contraction in 2011. But Morocco’s growthmoderated to an estimated 3 percent in 2012,
from 5 percent the previous year, partly becauseof a weaker than expected agricultural harvest.
Despite problems with a gas pipeline that also
contributed to fiscal difficulties in 2012, GDP

Figure MNA.2 Crude oil production and export volume growth in developing MENA oil exporters weakened during the third quarter of 2012
Crude oil production, 3m/3m seasonally adjusted
annualized rate (Percent)Export volumes, 3m/3m seasonally adjusted
annualized rate (Percent)Crude oil production index(January 2011=100)

80

100

120

80

80

60

40

40

0

20

-40

0

-80

Export volume index(January 2011=100)
160

60
40
20
0

120

80

-20
-40
-60

40

-80
-100
Jan-11

May-11

Sep-11

Algeria
Iraq
Developing MENA oil exporters

Jan-12

May-120
Jan-11

Sep-12Iran
Syria
Libya [Right]

May-11

Sep-11

Jan-12

May-12

Sep-12

Algeria

Iran

Iraq

Developing MENA Oil exporters

Libya [Right]

Source: US Energy Information Administration for monthly crude oil production data (accessed via Thomson Reuters),
Haver Analytics and World Bank

127

Global Economic Prospects January 2013

Middle East and North Africa Annex
The extended downturn in Europe adversely
affected the export performance of thedeveloping MENA region, but exports appear tobe picking up in some countries (figure MNA.3,
second panel). Merchandise export volumes ofoil importing MENA countries fell at a 14
percent annualized pace in the three months toJuly 2012 during resurgence of Euro Area debt
tensions, but rose 9.9 percent in the third quarter.
Egypt experienced an export volume decline of
10 percent (annualized) in the three months toJuly; but in Jordan, Morocco, and Tunisia,
export volume growth picked up strongly
between September and November.

growth in Jordan accelerated modestly to an
estimated 3 percent in 2012, up from 2.6 percent
in 2011. Lebanese GDP growth weakened to an
estimated 1.7 percent in 2012, as economic
spillovers from Syria’s conflict intensified
during the course of the year.
Reflecting country-specific drags on growth inoil importers, and to an extent, the impact of theEuropean debt crisis on demand for the region’sexports, industrial production for the group of oil
importers declined at a 9.8 percent annualizedpace in the three months to September 2012
(figure MNA.3, first panel). Despite thesequential decline in production, oil importers’
industrial output was 4.5 percent higher in thefirst three quarters of 2012 compared with thesame period of 2011, and close to the level in thelike period of 2010. Industrial output in Egypt
continued to decline in the second half of 2012
on an annualized basis, by 17.9 percent in thethree months to October compared to theprevious quarter. But industrial production in
Jordan and Morocco started to pick up in thethird quarter, by an annualized 3 percent in bothcountries. In Tunisia, with a reduction ofdomestic tensions, industrial output growth
accelerated to an annualized 14.1 percent pace inthe third quarter compared with the second
quarter, but industrial output was only 1.6
percent higher in the first three quarters of 2012
than the same period in 2011.
Figure MNA.3
picking up

Inflation experiences in the developing MENA
countries are diverse
Inflation experiences in developing MENA
countries have been relatively diverse, reflecting
several factors: supply disruptions from ongoingdomestic unrest or conflict, a relatively highdependence on imports of food (and among oil
importers, of crude oil), subsidy regimes for fueland food, and weak purchasing power due toerosion of incomes in countries experiencing
economic instability.
Iran and Syria experienced steep increases inannual inflation though the course of 2012
(figure MNA.4, first panel). In Iran, officiallyreported inflation rose to 37 percent in December

In developing MENA oil importers, industrial production has remained sluggish, but exports are

Industrial production, 3m/3m seasonally adjusted annualized rate (Percent)Export volumes, 3m/3m seasonally adjusted annualized rate (Percent)

100

90

80
60

60
40

30

20
0

0

-20
-40

-30

-60
-60

-80
Jan-11

May-11

Sep-11

Jan-12

Egypt

JordanMoroccoTunisiaMay-12

Jan-11

Sep-12

Apr-11

Jul-11

Oct-11

Jan-12

Egypt
MoroccoDeveloping MENA oil importers

Developing MENA oil importers

Source: World Bank.

128

Apr-12JordanTunisia

Jul-12Oct-12

Global Economic Prospects January 2013

Middle East and North Africa Annex

2012 (27.4 percent for the 12-month period), asinternational sanctions exacerbated the effect ofearlier subsidy reforms on domestic prices.
Sanctions also caused the black market value ofthe Iranian rial to decline precipitously, from12,500 per U.S. dollar at the beginning of 2012
to around 35,000 in October. Inflation rose
sharply in conflict-affected Syria, from 15.4
percent in January to nearly 50 percent bySeptember 2012. Syria’s conflict had spillover
effects on inflation in Lebanon, in part from aincrease in rental prices for residential properties
from Syrians fleeing the conflict.

food subsidies, together with weak growth andsubdued domestic demand, caused inflation tofall to 4.3 percent in November, but inflationrose again to 5.6 percent in December (figure
MNA.4, second panel). In Morocco, a poor
agricultural harvest and a rise in food grain
imports have added mostly to the subsidy
burden, rather than being manifested in higher
inflation, with annual inflation at only 1.6
percent in November. Similarly, a disruption to
Jordan’s natural gas supplies from Egypt and asubstitution to costlier imported fuels caused
Jordan’s subsidy burden, rather than domestic
prices, to rise—although inflation increased to
6.7 percent in November from under 5 percent inprevious months, in part due to a rise in fuelprice undertaken as part of fiscal reforms.

Notwithstanding an increase in international
food prices during the summer of 2012 (causedby drought in the US and heat wave in Russia),
and the MENA region’s relatively higher
dependence on food imports (figure MNA.5),
year-on-year inflation rates in other developing
MENA countries did not rise in a significant
manner, in part owing to subsidy regimes andadministered prices. A forthcoming World Bank
study estimates that even with the high importdependence in the developing MENA region, thepass through of international prices to domestic
prices in MENA countries is, on average, similar
to that in other regions. Inflation momentum andannual inflation have been relatively subdued in
Iraq. In Algeria, inflation rose in the months to
October mainly because of food price increases,
but moderated in November. In Egypt, fuel andGovernments in developing MENA countries areattempting to rein in fuel subsidies to improvefiscal sustainability
The high burden of fuel subsidies in thedeveloping MENA countries (figure MNA.6)
and their adverse implications for publicfinances have resulted in several governments in
the region, particularly among crude oil
importers, undertaking significant subsidy
reforms to improve fiscal sustainability. Jordan
and Tunisia raised fuel prices in the second halfof 2012 in an effort to bring down their fuelsubsidy burden and reduce fiscal deficits. Such

Figure MNA.4 Annual inflation has spiked in a few developing MENA countries
Inflation, year-on-year (Percent)Inflation, year-on-year (Percent)50

20
Algeria

Egypt

JordanLebanonMorocco

Iran

40

15

Iraq
Syria

Tunisia

Yemen

30

10

20

5

10

0

0
Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12-5Oct-12

Jan-11

Source: World Bank.

129

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12Oct-12

Global Economic Prospects January 2013

Middle East and North Africa Annex

reforms may cause a one-time increase in prices
and possibly temporarily raise inflation, but theirpositive impact on fiscal positions would result
in reduced crowding out of private investment,
which in turn would ease supply constraints andweaken price pressures over time. Given theimportance of fuel subsidies in the overallsubsidy burden in developing MENA countries,
reducing fiscal deficits will require a forcefulattack on fuel subsidies and greater transparency
in pricing. However, reducing fiscal pressures
without causing social turmoil could provechallenging, and will require efforts tocommunicate the longer term benefits of subsidy
reforms and better targeting of subsidies to reachthe most vulnerable.

reserves represented only three months ofimports (figure MNA.7). Financial assistancefrom Gulf Cooperation Council (GCC) countries
and other donors have allowed reserve levels torise in more recent months, but reserves fell by
about half a billion dollars in November.
Moreover, the final approval of a $4.8 billion
IMF program has been delayed until January
2013 or later. If approved, IMF assistance would
unlock substantial additional aid flows fromother multilateral and bilateral donors andimprove Egypt’s reserve position significantly in
2013, while reforms undertaken as part of the
program would contribute towards enhancing
fiscal and external sustainability. However,domestic tensions could pose implementationdifficulties, deter private investment, anddampen growth in the near term. In Jordan,
Morocco, and Tunisia, current account deficits
have widened, mostly as a result of weak export
performance together with a high burden of
crude oil imports. In contrast, Libya’s current
account position has improved, buoyed byrecovery in crude oil production and continued
elevated international prices, but current accountpositions have deteriorated in Syria and Iran.

External balances in some developing MENA oil
importers have deteriorated
Several oil importing developing MENA
countries experienced deteriorating current
account positions due to elevated international
prices of crude oil and food imports, together
with weakening European demand for theirexports. As a result of balance of paymentspressures, Egypt drew down its international
reserves substantially during the course of 2011
and 2012, such that by November of 2012,
Figure MNA.5 Dependence on food imports is higher
in MENA than in other developing regions
Foodgrain imports as share of domestic foodgrain consumption,(average of 2009/10, 2010/11 and 2011/12 crop years, Percent)Gross imports

50

Migrant remittances grew and tourism rosemodestly in 2012
Figure MNA.6 Fuel subsidies comprise a large shareof GDP in several MENA countries
Subsidies as percent of GDP
14
12

Net imports

40

Food subsidies

1030

Fuel subsidies

20

8

10
0

6

-10
4

-20
-30

2

-40
Middle East
& N. Africa

Latin
Sub-Saharan East Asia &FormerSouth Asia
America &AfricaPacific
Soviet Union
Caribbean(12)

Source: World Bank based on US Department of Agriculture (accessed October 2012).
Note: US Department of Agriculture (USDA) sub-regions
are aggregated into broader geographical categories but
may not fully correspond with the World Bank’s regionalclassification. See www.usda.gov for details.

0
LebanonTunisia

JordanMorocco

Egypt

Iraq

Yemen

Source: “Inclusion, Dignity, and Resilience: The Way Forward for Social Safety Net Reform in the Middle East andNorth Africa Region", J. Silva, V. Levin, and M. Morgandi,
World Bank June 2012.
Note: Data are for different years: Lebanon (2008), Tunisia(2011), Jordan (2011), Morocco (2008/9), Egypt (2009),
Iraq (2009), Yemen (2008).

130Global Economic Prospects January 2013

Middle East and North Africa Annex

Figure MNA.7 Egypt’s international reserves havestabilized at a low level
Import cover(International reserves in months of imports)

Financial flows to the developing MENA region
slowed in 2012 and remain weak compared with2010 levels

International reserves(US $ billions)

9

40

8

35

7

Private capital flows to developing MENA
countries halved in 2011 due to domestic turmoil
in several countries, with private debt and equity
flows experiencing steep falls as portfolio
investors retreated from the region. The decline
continued into 2012, when private capital
inflows are estimated to have fallen a further 16
percent, to $12.5 billion, mainly due tocontinuing domestic uncertainties in several
countries (table MNA.1). FDI flows to theregion, however, fell a smaller 7 percent in 2012,as a decline in flows to Iran offset rising foreign
investment in crude oil exploration andextraction in other oil exporters. In oil importing
countries, in particular in Egypt and Lebanon,
foreign investment inflows remained subdued.
Some projects in the non-oil sector (for instance,
the reopening of an Isuzu auto plant in Tunisia in2012) suggest that foreign firms are anticipating
expanded market opportunities, but many moreinvestment projects remain on hold due tocontinuing political uncertainty and domestic
unrest.

30

6

25

5

20
4

15

3

10

2

egyImport_cover1

egyIntl_reserves0
Nov-10May-11

50
Nov-11

May-12

Nov-12

Source: World Bank

Migrant remittances to the region rose as
migrants sent money to help their families andfriends in need during this period of domestic
turbulence. Remittance flows to the developing
MENA region rose 8.4 percent in 2012,
accelerating from a 6.3 percent increase in 2011,
according to World Bank estimates. This rise
was led by strong increase in flows to Egypt,where inflows rose 26 percent in 2012, to $18
billion. The experience for other countries was
uneven, however. Remittance inflows to Jordan,for example, rose by 2.2 percent, while inflows
to Tunisia rose 9.8 percent, and those to
Morocco fell 3.3 percent.

OutlookGDP growth in the developing MENA
region is forecast to slow from 3.8 percent in2012 to 3.4 percent in 2013 (see table
MNA.2 for regional forecasts and table
MNA.3 for country-specific forecasts).
Growth in oil producers is projected toreturn to a more sustainable pace in 2013
after a sharp recovery in 2012, in line withfurther increases in crude oil production in
Iraq and in Libya, and to a smaller extent in
Algeria, while output in Iran and Syria
remains subdued. In oil importers, GDP
growth is forecast to pick up modestly in
2013, as continuing domestic uncertainty inseveral countries, together with a projected
near-stagnant output in the Euro Area in2013 and weak demand for the MENA
region’s exports, hold back a more robust

The year 2012 also saw a return of tourists to the
MENA region, although tourism has yet torecover to 2010’s level. According World
Tourism Organization statistics, tourism arrivals
in the Middle East and North Africa region fell
7.5 percent in 2011. But arrivals in 2012 rose 3.5
percent in the first half of the year compared to
the like period in the previous year.FN3 Tourist
arrivals in the Middle East rose by less than 1
percent in the first half of 2012, as several
countries continue to face domestic tensions. In
North Africa, however, tourist arrivals
rebounded at a faster 10.5 percent pace in thefirst half of 2012, led by strong gains in arrivals
in Egypt, Tunisia and Jordan.

131

Global Economic Prospects January 2013

Middle East and North Africa Annex

Table MNA.1 Net capital flows to Middle East and North Africa ($ billions)
2008

2009

2010

2011

2012e

2013f

2014f

2015f

Capital inflows

23.7

30.9

31.4

15.8

13.1

19.0

24.4

32.4

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

25.4
30.0
29.6
0.4
-4.6
-0.8
-0.6
-1.9
-1.3
-1.7
-0.3
-0.1
-1.3

28.4
27.5
26.3
1.2
0.9
0.1
-1.3
3.0
-1.0
2.4
0.9
-0.1
1.6

30.2
24.2
22.3
2.0
5.9
3.2
-0.9
4.5
-0.8
1.3
0.8
0.0
0.4

14.8
15.2
15.4
-0.2
-0.4
-0.6
-0.02
0.9
-0.6
0.9
0.9
-0.1
0.1

12.5
13.3
14.3
-1.0
-0.8
-1.1
-2.0
2.3
0.0
0.6
-0.2
0.1
0.7

17.3
16.0
15.5
0.5
1.3
-0.7
-0.8
2.8
0.0
1.7

22.0
19.2
17.9
1.3
2.8
0.5
0.8
1.5
0.0
2.4

29.5
24.9
23.0
1.9
4.6
1.8
1.4
0.9
0.5
2.9

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

GDP growth for the group of developing oil
importers is forecast to pick up modestly to
3.5 percent in 2013. Economic conditions inthis group are expected to improvemarginally in 2013. But continuing
uncertainty will hold back private
investment and growth, while weak
conditions in high-income Europe in 2013
imply subdued demand for the region’sexports. In Egypt, GDP growth is projected
to rise to a modest 2.6 percent pace in the
2012-13 fiscal year ending in June 2013, as
policy uncertainties, a deteriorating reserve
position, and domestic unrest negatively
impact economic activity.

rebound in economic activity.
Regional GDP growth is forecast to rise
gradually to about 4.3 percent by 2015 —assuming that the negative influences on
growth of domestic uncertainty and unrest
fade during the forecast period, and ongoing
political transitions lead to more accountable
and transparent institutions over time. As
regional uncertainty ebbs and global growth
accelerates in 2014 and 2015, rebuilding of
infrastructure, private investment, industrial
activity, and economic diversification can be
expected to support growth in bothdeveloping oil exporters and oil importers in
the MENA region. Forecasts for all MENA
countries are subject to the baseline
assumptions that the adverse effects of theEuro Area debt crisis on the MENA region’s
trade and investment flows start to wane
over time, and that domestic tensions within
the region do not flare up in a significant
manner.

Jordan’s GDP growth is forecast to risemodestly to 3.3 percent in 2013, as weakdomestic and external demand acts as a dragon growth. Growth in Morocco is forecast to
bounce back to 4.4 percent in 2013, buoyedby an expected return to normal agricultural
harvests and strengthening domestic
demand. Lebanon’s GDP growth forecast for
2013, at 2.8 percent, is weaker than that of
all other developing MENA oil importing
countries, partly due to the negative

The outlook for developing oil importers is
clouded by domestic uncertainty andweakness in Europe

132Global Economic Prospects January 2013

Middle East and North Africa Annex

release of other multilateral and bilateralassistance contingent on the IMF program,
would arrest the deterioration in externalbalances, while significant cuts to fuelsubsidies and tax reforms, if implemented asplanned, will bring the fiscal position to asounder footing and free up resources for theprivate sector. Egypt’s growth is expected tofirm to 3.8 percent in the 2013-14 fiscal
year, and rise to 4.7 percent by 2014-15.
Steps towards sound macroeconomic
policies in oil importers are also likely toresult in a decline in investors’ risk aversion
and result in higher private investment
inflows over the medium term (see below).

spillovers from unrest in neighboring Syria
on tourism and other services exports.
Nevertheless, Lebanon’s growth is forecast
to rise gradually over time, to around 4
percent by 2015. Even after a return to
growth in 2012, Tunisia continues to facedomestic tensions and structural challenges
to generating sustained and inclusive growthover the medium term. Tunisia’s GDP
growth is forecast to rise modestly to 3.2
percent in 2013.
As domestic tensions are resolved over time,
GDP growth among oil importers is forecast
to rise to about 4.7 percent by 2015. In
Egypt, the expected approval of a substantial
IMF program in 2013, together with the

GDP in developing oil exporters is projected

Table MNA.2 Middle East and North Africa regional forecast summary(annual percent change unless indicated otherwise)00-09aGDP at market prices b

3.9

2010

2011

2.8

-2.4

Est. Forecast
2012
2013
2014
3.8

3.4

3.9

2015
4.3

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

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

4.3
2.8
4.3
4.3
3.6
6.4
4.2
7.2
-0.6
5.3
5.9
-1.0

2.8
1.2
2.6
1.4
3.9
0.6
2.2
1.0
0.4
1.3
8.4
-3.0

1.5
0.0
1.4
2.4
5.5
3.4
0.0
1.7
-0.6
3.7
10.5
-0.8

0.2
-1.3
0.0
1.3
3.8
1.1
-4.6
4.1
-3.0
1.0
7.5
-7.0

2.4
0.9
2.2
3.0
4.3
3.8
4.6
4.7
-0.1
0.6
6.2
-4.9

3.3
1.8
3.1
3.5
4.1
4.8
5.6
6.2
-0.3
0.4
5.4
-2.6

4.0
2.5
3.8
3.8
3.9
5.6
6.9
7.0
-0.2
0.3
5.1
-1.7

Memo items: GDP
MENA Geographic Region f
3.8
3.1
1.8
4.4
3.6
3.9
4.1
Selected GCC Countries g
3.6
3.5
6.3
5.1
3.8
3.9
3.8
Developing Oil Exporters
3.6
2.2
-5.2
4.6
3.3
3.7
4.1
Developing Oil Importers
4.5
3.7
2.4
2.5
3.5
4.4
4.7
Egypt
4.4
3.5
2.0
2.4
3.2
4.3
4.7
Fiscal Year Basis
4.3
5.1
1.8
2.2
2.6
3.8
4.7
Iran
4.6
1.0
1.7
-1.0
0.6
1.6
2.8
Algeria
3.4
3.3
2.5
3.0
3.4
3.8
4.3
a. Growth rates over intervals are compound weighted averages; average growth contributions, ratiosand deflators are calculated as simple averages of the annual weighted averages for the region.
b. GDP at market prices and expenditure components are measured in constant 2005 U.S. dollars.
c. Sub-region aggregate excludes Iraq and Libya, for which data limitations prevent the forecasting of
GDP components or Balance of Payments details.
d. GDP measured at PPP exchange rates.
e. Exports and imports of goods and non-factor services (GNFS).
f. Geographic region includes high-income countries: Bahrain, Kuwait, Oman, United Arab Emirates
and Saudi Arabia.
g. Selected GCC Countries: Bahrain, Kuwait, United Arab Emirates, Oman and Saudi Arabia.

Source: World Bank

133

Global Economic Prospects January 2013

Middle East and North Africa Annex

to rise at a slower but more sustainable pacein 2013-15

economic performance wane over time.
After GDP declined in 2012, growth in Syria
is also expected to remain subdued, as thecivil conflict continues into 2013. In Yemen,
crude oil and gas production has been
constrained by an uncertain domestic
security situation. Following a large GDP
decline in 2011 and flat growth in 2012,
Yemen’s economy is projected to grow by
about 4.0 percent in 2013—but GDP in 2013
would still be below its 2010 level. GDP
growth in Algeria is projected to rise to 3.4
percent in 2013, and further strengthen toaround 4.3 percent by 2015, as government
plans to promote oil and gas extraction andnon-oil economic activities bear fruit. As aresult of the above country-specific factors,
GDP growth among MENA oil producers is
expected to rise gradually over the forecasthorizon, reaching about 4.1 percent by 2015.

For the group of regional oil exporters, GDP
growth is projected to slow to 3.3 percent in2013, as the pace of increase in crude oil
production in Libya slows and production in
Iran and Syria remains subdued. After adramatic expansion of Libya’s GDP in 2012,
supported by a recovery of crude oil
production to close to the level of early
2011, economic output is expected to growat a slower but still robust 7.6 percent pacein 2013. Continuing security uncertainties,
however, pose risks to Libya’s growth
outlook. GDP growth in Iraq is forecast toaccelerate to 13.5 percent in 2013, as further
investments in developing additional
capacity are made and crude oil production
continues to rise. But infrastructure
bottlenecks, disputes over revenue sharing
arrangements with the Kurdish province andsecurity concerns may post obstacles tobringing new production capacity on stream.
Over the medium term, Iraq’s crude oil
production is expected rise from over 3 mb/din late 2012 to more than 4 mb/d by 2015,
and further to 6 mb/d by 2020, according toInternational Energy Agency (IEA)
forecasts. Revenues are also likely toincrease as oil prices are expected tocontinue to remain buoyant in US dollar
terms over the forecast horizon in step with a
gradual acceleration of global demand.

Private capital flows are expected to remain
subdued in the near term as continuing
uncertainty discourages foreign investors,
but flows are projected to rise over time
Private capital flows to developing countries
in the MENA region are projected toincrease to about $17 billion in 2013, fromthe low base of 2012 (table MNA.1). But
flows would be significantly smaller thanthat received in 2009 and 2010, as
continuing uncertainty and domestic
tensions in several large oil importers and insome developing oil exporters discourages
foreign investors. Over the medium term,
private capital flows are forecast to rise to$30 billion by 2015, close to their 2010
level, as international investors are attracted
by opportunities in non-oil activities,
especially in tourism and manufacturing, as
well by continuing expansion of the oil andgas sectors. Private capital flows to Egypt
are likely to remain weak in the near term
given unresolved domestic tensions,although in the later years of the forecast

GDP in Iran, however, is projected to remainbroadly flat in 2013, rising a modest 0.6
percent, as international sanctions dampen
crude oil production and economic activity.
Despite a slow pace of growth, space forpolicy stimulus is limited following a large
currency depreciation in 2012 and highinflation. Iran’s GDP growth is forecast to
pick up to a modest 3 percent pace by 2015
as the impact of domestic and external
factors that are acting as a drag on current

134

Global Economic Prospects January 2013

Middle East and North Africa Annex

Foreign investment in developing MENA oil
exporters is expected to rise over the forecasthorizon, as producers continue to expand
capacity, while foreign investment inflows
into non-oil sectors of these countries will
increase as they attempt to reduce
dependence on oil revenues and diversify
their industrial base. Iraq is expected toallow significant foreign investments to meet
its ambitious crude oil production targets.
Algeria, faced with a rising domestic

horizon, flows into non-oil economic
activities should rebound as these tensions
are gradually resolved. In other oil
importers, including Jordan, Morocco andTunisia, further improvement in themacroeconomic and policy environment
over time will attract foreign investment.
Spillovers effects from civil conflict in Syria
could, however, result in temporarily weaker
foreign investment inflows to Lebanon.

Table MNA.3 Middle East and North Africa country forecasts
00-09a135

2011

Est. Forecast
2012
2013
2014

2015
Algeria
GDP at market prices (% annual growth) b
3.4
3.3
2.5
3.0
3.4
3.8
4.3
Current account bal/GDP (%)
22.3
7.3
10.3
7.0
4.7
4.1
3.8
Egypt, Arab Rep.
GDP at market prices (% annual growth) b
4.4
3.5
2.0
2.4
3.2
4.3
4.7
Fiscal Year Basis
4.3
5.1
1.8
2.2
2.6
3.8
4.7
Current account bal/GDP (%)
1.1
-2.0
-2.3
-3.1
-3.6
-3.5
-3.2
Iran, Islamic Rep.
GDP at market prices (% annual growth) b
4.6
1.0
1.7
-1.0
0.6
1.6
2.8
Current account bal/GDP (%)
6.6
6.7
12.0
8.3
7.6
6.3
5.4
Iraq
GDP at market prices (% annual growth) b
-1.0
0.8
9.9
11.1
13.5
11.0
8.5
Current account bal/GDP (%)
-1.8
7.9
0.1
5.8
6.8
8.2
JordanGDP at market prices (% annual growth) b
6.1
2.3
2.6
3.0
3.3
4.0
4.5
Current account bal/GDP (%)
-4.4
-7.1
-12.0
-14.7
-13.3
-12.7 -12.1
LebanonGDP at market prices (% annual growth) b
4.4
7.0
3.0
1.7
2.8
3.8
4.0
Current account bal/GDP (%)
-16.8
-20.4
-21.4
-20.1
-19.4
-18.5 -17.9
Libya
GDP at market prices (% annual growth) b
3.8
3.5
-61.1
108.0
7.6
5.8
5.1
Current account bal/GDP (%)
22.6
-11.8
16.9
8.5
7.8
7.3
Morocco
GDP at market prices (% annual growth) b
4.6
3.7
5.0
3.0
4.4
4.8
5.1
Current account bal/GDP (%)
0.2
-4.6
-8.3
-9.0
-8.1
-7.4
-6.7
Syrian Arab Republic
GDP at market prices (% annual growth) b,c
4.6
3.2
-3.0
-20.0
1.0
2.3
2.8
Current account bal/GDP (%)
2.7
-0.6
1.5
-7.1
-6.3
-5.4
-4.8
Tunisia
GDP at market prices (% annual growth) b
4.1
3.0
-1.8
2.4
3.2
4.5
4.8
Current account bal/GDP (%)
-2.7
-4.8
-7.4
-9.0
-8.4
-8.1
-8.0
Yemen, Rep.
GDP at market prices (% annual growth) b
3.5
7.7
-10.5
0.1
4.0
4.1
4.3
Current account bal/GDP (%)
1.2
-5.6
-5.0
-5.0
-6.3
-6.1
-5.6
World Bank forecasts are frequently updated based on new information and changing (global)
circumstances. Consequently, projections presented here may differ from those contained in other
Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any
given moment in time.
Djibouti, West Bank and Gaza are not forecast owing to data limitations.
a. GDP growth rates over intervals are compound average; current account balance shares are simple
averages over the period.
b. GDP measured in constant 2005 U.S. dollars.
c. The estimate for GDP decline in Syria in 2012 is subject to significant uncertainty.

Source: World Bank.

2010

Global Economic Prospects January 2013

Middle East and North Africa Annex

relative to the baseline, and reduce global
growth by 1.4 percent. The developing
MENA region’s growth would be 0.8
percent lower in 2013 compared with thebaseline. A resumption of Euro Area debt
tensions during the forecast horizon would
also adversely affect MENA oil importers,
since Europe is the largest trade partner andthe most important source of investment andremittances for the developing MENA
region.

demand for energy, is expected to encourage
greater foreign investment in exploration andrefining in the oil and gas sectors, as well as
continue efforts to attract investment in nonoil sectors as it attempts to further diversify
its economy.
Risks and vulnerabilities
The growth outlook for the MENA region isvulnerable to a combination of domestic andglobal risks. A key domestic risk to theoutlook is that of protracted politicaluncertainty and continuation of domestic
tensions, which could have negative effects
on economic performance. Other risks
include the possibility of reforms aimed at
improving fiscal sustainability, in particular
those involving reduction of subsidies andfuel price increases, going off track or being
reversed. In Egypt, a delay or halt in future
aid disbursements could spiral into serious
balance of payments difficulties given its
already low level of reserves. In Iraq, a stilluncertain security situation poses downside
risks. The ongoing conflict in Syria and thesanction-fueled downturn in Iran are notablesources of instability and weakness in theregion.

Another external risk stems from thepossibility of a sharp fall (or spike) in crude
oil prices compared with that projected in
the baseline. A sharp fall in international
crude oil prices resulting from weaker thanprojected global economic growth, a
protracted fiscal impasse in the US, or other
unforeseen events, would benefit the fiscal
and current account positions of oil
importers, while hurting oil exporters, inparticular those with relatively weak fiscal
and reserve buffers. Conversely, a rise in
crude oil prices, for instance resulting from
intensification of geopolitical tensions along
the Strait of Hormuz, would put pressure on
the fiscal and external balances of MENA oil
importers.
The risk of a further spike in international
food prices in 2013, following sharp
increases in 2012, also presents a significant
source of external risk for this net foodimporting region (see figure MNA.5). The
global stock-to-consumption ratio for maize,
and to a lesser extent for wheat, are expected
to remain very low for the 2012-13 crop
year, according to the US Department ofAgriculture forecasts. Such tight supplies
suggest that international prices could rise
sharply even in the event of a relatively
small supply shock. The high importdependence of MENA countries and stillhigh subsidies—despite expectations thatthese will be gradually reduced as part ofAs for external risks, a protracted fiscal
impasse in the United States represents animmediate threat to global growth, and in
turn, for the economic performance ofdeveloping MENA countries. The baseline
assumes that a credible medium-term plan torestore fiscal sustainability in the US andauthorize government borrowing is agreed toby the end of February 2013 (see the main
text of the Global Economic Prospects
January 2013 report). An alternative
scenario where only a short-term relief fromthe debt ceiling legislation is agreed uponand considerable uncertainty remains
regarding future tax and fiscal policy, could
shave off 2.3 percent from US GDP growth136Global Economic Prospects January 2013

Middle East and North Africa Annex

ongoing economic reforms—imply that
fiscal positions could deteriorate, anddomestic prices surge (to the extent thatthese are market determined) in response to
an upward shock to international food prices.
Increasing domestic food supplies in theregion and reducing dependence on imported
food remains key to reducing the region’svulnerability over the longer term. In the
short term, however, the fiscal impacts andthe adverse implications for the poorest andmost vulnerable could be mitigated throughbetter targeting of subsidies.
Notes:
1

Crude oil exporting countries in thedeveloping Middle East and North Africa(MENA) region for which GDP estimatesand forecasts are available include Algeria,
Iran, Iraq, Libya, Syria, and Yemen.
Developing MENA oil importers include
Egypt, Jordan, Lebanon, Morocco andTunisia. The addition of Libya and Iraq to
the MENA regional aggregate in this report
has resulted in a significant adjustment inregion’s growth performance in recent,current and future years vis-à-vis theestimates published in the June 2012 Global
Economic Prospects report.

2

As a result of falling Iranian oil production
and rising Iraqi output, Iraq has become thesecond largest producer (behind Saudi
Arabia) in the group of Organization ofPetroleum Exporting Countries (OPEC).

3

The UN World Tourism Organization’s
country classification for the Middle Eastand North Africa sub-regions (seewww.unwto.org) does not correspond with
the World Bank’s regional classification fordeveloping
countries(http://
data.worldbank.org/about/country classifications/country-and-lending-groups).

137

Global Economic Prospects January 2013

South Asia Annex

South Asia Region
Overview: Economic growth in South Asia
weakened considerably in 2012 to an estimated
5.4 percent, from 7.4 percent the previous year.
Delayed monsoon rains, electricity shortages,
macroeconomic imbalances including large
fiscal deficits and high inflation, and policy andsecurity uncertainties contributed to subdued
economic activity in the region, which also faced
negative impacts from the Euro Area debt crisis
and a weak global economy. In India, theregion’s largest economy, growth measured infactor cost terms is projected to decelerate to 5.4
percent in the 2012 fiscal year (ending in March2013) from 6.5 percent in the 2011 fiscal year.
Growth in Pakistan, the second largest economy
in the region, remained broadly stable at a
projected 3.8 percent in the 2012-13 fiscal year
compared with 3.7 percent in 2011-12.
Bangladesh’s growth is projected to slow to 5.8
percent in 2012-13 (6.3 percent in 2011-12); andNepal’s growth to 3.8 percent in 2012-13 (4.6
percent in 2011-12). Sri Lanka’s GDP growthslowed to an estimated 6.1 percent in 2012 (8.3
percent in 2011). In contrast, Afghanistan’s
economy grew robustly by about 11 percent
mostly due to a good harvest.

announced in September-October 2012.
Outlook: Regional GDP growth is projected torise to 5.7 percent in 2013, firming to 6.7 percent
in 2015, supported by a gradual improvement inglobal demand for South Asia’s exports, policy
reforms in India, stronger investment activity,
and a return to normal agricultural production.
India’s GDP growth is forecast to strengthen
modestly to 6.4 percent in the 2013 fiscal year,
rising to 7.3 percent in 2015. Pakistan’s GDP
growth is projected to strengthen to 4.0 and 4.2
percent in 2013-14 and 2014-15, respectively.
Bangladesh’s GDP growth is projected to pickup to 6.2 and 6.5 percent in 2013-14 and 201415, while Sri Lanka’s growth is forecast to risein 2013 to 6.8 percent, strengthening to 7.2
percent in 2015. Net private capital flows to theregion are expected to rise by 20 percent to $87
billion in 2013 and to $117 billion by 2015.
Risks and vulnerabilities: Growth in the region
remains vulnerable to an uncertain external
environment and country-specific factors.
Euro Area or US debt turmoil. A resumptionof financial market tensions in the Euro Area or
protracted debt uncertainty in the United States
would affect the South Asia region through bothtrade and financial channels. Moreover, greater
volatility in international financial markets could
make it difficult for India to finance its widening
current account deficit.
Fiscal challenges. Although governments acrossthe region have committed to tackling their large
subsidy burdens and fiscal deficits, such efforts
could get side-tracked by spending pressures,
especially with elections scheduled in several
countries in the next two years. In particular, if
coupled with weak growth, continuing highbudget deficits may have potentially adverse
implications for sovereign creditworthiness.
Agriculture. Another poor harvest could haveadverse implications for rural incomes andemployment, food prices, inflation, the fiscal
burden of subsidies, and overall growth.

Industrial production in South Asia was sluggish
until the third quarter of 2012, due to domestic
difficulties as well as weak external demand, butpicked up in the fourth quarter. The debt crisis in
the Euro Area, South Asia’s largest export
market, had severe knock on effects on theexport performance of South Asian countries,
but exports in some countries appear to beturning a corner. Agriculture, which accounts forhalf of South Asia’s employment and just undera fifth of its GDP, was hit by weak monsoon
rains. Remittances rose 12.5 percent to $109
billion, buoyed by flows from Arabian Gulf
countries that benefited from elevated oil prices.
Net private capital flows to the region remained
stable at $72.6 billion in 2012 ($72.5 billion in2011), as an increase in portfolio equity inflows
offset declines in bank lending and foreign direct
investment (FDI). Portfolio equity inflows to
India surged after a number of reforms were139

Global Economic Prospects January 2013

South Asia Annex

Recent economic developments

environment for the private sector.

South Asia’s economic performance weakened
in 2012 in the face of external and domestic
headwinds. Regional gross domestic product(GDP) growth slowed to an estimated 5.4
percent in 2012 from 7.4 percent in 2011, as
headwinds from the Euro Area debt crisis andweakening global growth exacerbated the impactof adverse domestic factors in South Asia.FN1
Delayed monsoon rains resulted in a subpar
agricultural outcome, while electricity shortages,
macroeconomic imbalances including large
fiscal deficits and high inflation, and policy andsecurity uncertainties contributed to weaker
investment and subdued economic activity. A
decline in regional export revenues during thesecond and third quarters of 2012 and elevatedinternational prices of crude oil imports
maintained pressures on current accountpositions of South Asian countries, partiallyalleviated by a steady increase in migrant
remittances. And although inflation momentum
eased across South Asia in the second half of2012, headline annual inflation remains
significantly higher than the average for otherdeveloping regions, reflecting structural capacity
constraints and, to some extent, expansionary
fiscal policies in recent years.

Industrial production and exports havestabilized and are turning a corner towards
growthAfter a strong decline during the second quarterof 2012, industrial production in South Asia has
stabilized and is picking up, with output rising at
a 2.4 percent annualized pace in the three months
to October. In India, industrial production surged
8.3 percent in October 2012 from a year earlier
and then fell 0.1 percent in November, partly due
to a difference in timing of the Diwali festival
across the years. On a seasonally adjusted
annualized basis, India’s industrial output grew
2.1 percent in the three months to November
compared with the previous quarter (figure
SAR.1). Industrial activity has picked moredecidedly in Pakistan, rising at a 12 percent
annualized pace in the three months to
November from the previous quarter, and was
6.5 percent higher in November than a year
earlier. However, inadequate supply ofelectricity, and of gas for firms with captive
power plants, continues to hobble Pakistan’s
industrial sector. In Sri Lanka, weak external
demand and slowing economic growth weighed
negatively on industrial production. But the paceof deterioration eased slightly in October, withproduction volume 7.1 percent lower than a year
earlier compared with -8.0 percent in September.

The already large fiscal deficits and persistently
high inflation in South Asian countries have
limited the scope for policy easing or demand
stimulus measures to support growth. Given a
projected weak global economy in 2013 anddownside risks to the outlook, including thepossibility of a protracted fiscal impasse in the
United States or a resumption of Euro Area debt
turmoil (see the main text of the Global
Economic Prospects January 2013 report), South
Asian countries urgently need to strengthen theirmacroeconomic fundamentals and rebuild theirpolicy buffers to withstand external shocks, aswell as enhance their longer-term domestic
growth drivers. These can be achieved, inparticular, through sustained efforts at fiscal
consolidation over the medium term,
maintaining prudent macroeconomic policies,
deepening structural reforms to ease capacity
constraints, and improving the business

Figure SAR.1 Industrial production is picking up inSouth Asia
Industrial production, 3m/3m seasonally-adjusted annualized rate (Percent)

40
India
30

Pakistan
Developing excl. South Asia

20
10
0
-10
-20

-30
Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Sources: Haver Analytics and World Bank.

140

Jul-12Oct-12

Global Economic Prospects January 2013

South Asia Annex

The debt crisis in the Euro Area, South Asia’s
largest export market, had significant knock on
effects on the export performance of South Asian
countries. The slowing of South Asia’s exports
during the summer of 2012 was particularly
severe in US dollar terms, especially whencontrasted with the double-digit rates of
expansion in 2010 and in the first half of 2011
(figure SAR.2 first panel). But with an
improvement in the pace of demand growth in
the United States and China in the third quarterof 2012, and a slowing pace of deterioration inEuro Area output, South Asia’s export volumes
appear to have turned a corner towards growth in
the final months of 2012 (figure SAR.2 second
panel). In India, the pace of decline in monthly
export revenues slowed in October andNovember compared with the steep year-on-year
declines experienced during the second and third
quarters of 2012 after the Euro Area debt turmoil
intensified in early May, and export volume
growth has stabilized. Pakistan’s export growth
picked up in the months leading to November,mostly reflecting an increase in exports ofgarments and processed cotton products.
However, electricity shortages during the second
half of December adversely affected textile
production and may dampen export growth insubsequent months. After experiencing declines
during the June-September period, Bangladesh’s
export volume growth was flat in the threemonths to October compared with the previous

quarter, as a pick-up in US garment demand(fueled in part by an acceleration of US
economic growth in the third quarter of 2012)
offset to some extent weak European demand.
Similarly in Sri Lanka, with a pick up in garment
exports, the pace of year-on-year declines inoverall exports slowed in recent months, but
export revenues in US dollar terms were still 6.6
percent lower in November than a year earlier.
Inflation momentum has slowed across theregion, but headline inflation remains
persistently highReflecting the weakening of activity since thesecond quarter of 2012 and the opening up of
output gaps, and a moderation in food inflation,
inflation momentum slowed sharply in the South
Asia countries in the second half of 2012.
Regional inflation moderated to a 6.2 percent
annualized pace in the three months to October(3m/3m saar), from 8.4 percent in August (figure
SAR.3 first panel). An easing of food inflation as
agricultural harvests came to the market helped
to moderate overall consumer price inflation
across the region, except in the case of India
where food inflation remained sticky at a highlevel (figure SAR.4). However, annual (year-onyear) inflation picked up again in December inPakistan, caused partly by an acceleration in thepace of food price increases. Inflation also
picked in Bangladesh, but to a smaller extent,

Figure SAR.2 South Asia’s export revenue and volume growth slowed sharply in 2012, but are turning a corner
Export volumes, 3m/3m seasonally-adjusted annualized rate (Percent)

US$ exports, year-on-year growth (Percent)
100

160

India

India

Pakistan

80

Pakistan

Bangladesh

Bangladesh

100

Sri Lanka

60

Developing excl. South Asia

Developing excl. South Asia
40
40

20
0

-20

-20
-80

-40
Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

Jan-11

Oct-12

Sources: Haver Analytics and World Bank.

141

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12Oct-12

Global Economic Prospects January 2013

South Asia Annex

Figure SAR.3 Inflation momentum fell sharply but annual inflation remains high compared with the average fordeveloping countries
Inflation, year-on-year (Percent)Inflation, 3m/3m seasonally adjusted annualized rate (Percent)

14

20

12
15

10

10

8
6

5

4
0

2

-5
Jan-11 Apr-11

Jul-11

India
Bangladesh
Sri Lanka

Oct-11 Jan-12 Apr-12

Jul-120
Jan-11 Apr-11

Oct-12

Jul-11

Oct-11 Jan-12 Apr-12

India
Bangladesh
Sri Lanka

Pakistan
Nepal
Developing Countries

Jul-12Oct-12

Pakistan
Nepal
Developing Countries

Source: Haver Analytics and World Bank.
Note: Inflation for India based on the consumer price index for industrial workers (CPI-IW). For annual inflation in the second chart, the new All-India CPI inflation series is used from December 2011 onwards.

reflecting recent fuel price increases as well as
higher food price inflation. Despite themoderation in regional inflation since the second
quarter of 2012, annual consumer price inflation
exceeds 7.5 percent in Pakistan and Bangladesh,and remains at around 9-10 percent in India,
Nepal, and Sri Lanka—significantly higher than
the average for developing countries (figure
SAR.3 second panel).

domestic supplies not keeping pace with robust
demand that is partly fueled by remittances,resulting in persistent inflationary pressures; thecurrency peg of the Nepali rupee to the Indianrupee has further raised inflationary pressuresduring periods of depreciation of the Indianrupee. In Sri Lanka, a depreciation of thecurrency, drought, and earlier increases inadministered fuel prices caused inflation to surge
to 10 percent by July; inflation remained close tothat level moderating slightly to 9.1 percent in
December.

The persistence of inflation in South Asia
reflects structural capacity constraints in
production (partly the result of a weak businessenvironment – see Box 1), as well as entrenchedinflationary expectations. Despite a decelerationin headline inflation in Pakistan since May, core
inflation (i.e. excluding food and energy items)
has continued to remain close to 10 percent. One-year ahead inflation expectations in India rosefrom 5.6 percent in the third quarter of 2006 to
9.2 percent in the last quarter of 2009, andreached 12.7 percent by the third quarter of 2012
(figure SAR.5). Moreover, food inflation inIndia has remained high on a year-on-year basis,
as rising urban and rural incomes in recent years
have resulted in increased demand for proteins,
fruits and vegetables, while supply has not kept
pace, in part due to structural bottlenecks in foodproduction, storage, and logistics (figure
SAR.4). In Nepal, the continuing political crisis
and infrastructure constraints have resulted in

Figure SAR.4 Food inflation moderated in countries
other than India, but has started to pick up in Bangladesh and Pakistan
Food inflation, year-on-year (Percent)
20

15
10
5
0
-5
Jan-11

Apr-11

Jul-11

India
Bangladesh
Sri Lanka

Oct-11

Jan-12

Apr-12

Source: Haver Analytics and World Bank

142

Jul-12Oct-12

Pakistan
Nepal
Developing Countries

Global Economic Prospects January 2013

South Asia Annex

Box SAR.1 Doing Business in South Asia
South Asian countries score relatively low in terms of
their position in the World Bank’s Doing Business index
with an average rank of 111 among 185 countries in thelatest round, which suggests that firms in the region facea difficult business environment. The sub-indices suggestthat South Asian firms encounter serious obstacles ingetting reliable access to electricity, in paying taxes, andin enforcing contracts. The finding on difficult access toelectricity is consistent with the shortages and demandsupply gaps that have characterized this sector. The obstacles in paying taxes are also reflected in the relatively
narrower tax bases and lower tax revenue-to-GDP ratios
in South Asian countries compared with the average forother developing countries (see South Asia Annex of the
Global Economic Prospects June 2012 report). South
Asian countries, however, score better in terms of accessto credit and protecting investors than their overall ranksuggests, reflecting strength of domestic financial markets.

Box figure SAR.1 South Asia is a difficult place fordoing business"East of doing business" rank among 185 countries(Lower values indicate better rank)
120

100

80

2012

2011

60

40

20

0
South Asia
average*South Af rica

Chile

Thailand

United States

Source: Doing Business 2013 report, World Bank
Note: South Asia average includes Bangladesh, India,
Nepal, Pakistan and Sri Lanka. See
www.doingbusiness.org for more details.

In terms of changes in ranks between the 2011 and 2012
rounds, Nepal, Pakistan, and Bangladesh fell by one,
three and five notches, respectively, while India’s rank held steady. Sri Lanka’s rank improved from 96 to 81—
making it one of the top ten countries in the world that have improved the most, in part due to improvements in theprocess of starting a business and getting access to credit.

Persistent inflation and large fiscal deficits inSouth Asia (see below) have, in general, limited
available space for monetary easing to support
growth or to respond to external and domestic
shocks. In India despite a deceleration in GDP
growth to 5.3 percent in the third calendar
quarter of 2012 from more than 8 percent in the2009 and 2010 fiscal years, persistently highinflation has limited the scope for interest ratecuts, with the benchmark policy rate kept stable
at 8 percent for most of 2012. India’s central
bank, however, has used other instruments,
including cuts to commercial banks’ cash reserve
requirements to inject liquidity into the system.
Similarly, despite a sharp slowdown in GDP
growth in the second quarter of 2012, Sri
Lanka’s central bank kept its benchmark policy
rate at 7.75 percent for most of the year. But thebank cut its policy rate by 25 basis points in midDecember after growth slowed even further inthe third quarter of 2012, expecting inflation tomoderate in the first half of 2013 as a result ofpreviously introduced policies to curb domestic
demand. In contrast, a moderation in inflation
allowed Pakistan’s central bank to reduce its key
policy rate by a cumulative 250 basis points
between August and December of 2012.

Figure SAR.5 Inflationary expectations in India haverisen since 2006
Mean inflation rates for given survey quarter
16
14
12
10
8
6

Current perceived
1-year Ahead
ActualLinear (Current perceived)
Linear (1-year Ahead)
Linear (Actual)420Q32006

Q22007

Q12008Q42008Q32009Q22010Q12011

Q42011

Fiscal deficits remain high indicating need forcontinued efforts at consolidation

Q32012

Source: Reserve Bank of India and World Bank
Note: Consumer price index inflation for industrial workers(CPI-IW)

Large fiscal deficits in South Asia compared143

Global Economic Prospects January 2013

South Asia Annex

with other developing regions remain a source ofconcern, as government borrowing requirements
may be crowding out private investment, whileassociated spending may be contributing to
inflationary pressures. India’s general
government deficit is estimated at over 9 percent
of GDP, significantly higher than the 1.7 percent
average deficit for the emerging market
economies belonging to the Group of 20,
according to the IMF’s Fiscal Monitor (figure
SAR.6).FN2 A target of 5.3 percent of GDP has
been set for the central government budget
deficit for the 2012 fiscal year ending in March
2013, with plans to gradually reduce the deficit
to 3 percent by the 2016 fiscal year. But the
deficit could overshoot the target if growth
remains weak, tax and non-tax revenues do notmaterialize to the extent expected, or if spending
pressures remain strong. Despite efforts at
consolidation, fiscal deficits are 6 percent or
higher in Pakistan and Sri Lanka, and above 4
percent in Bangladesh. Subsidies, mainly for fueland to a lesser extent for food, contribute to theoverall deficits—subsidies account for over 2
percent of GDP in India and Pakistan, and over
3.5 percent of GDP in Bangladesh, according torecent World Bank and IMF estimates.
Moreover, losses of public sector firms in the
petroleum and electricity sectors have been
substantial in South Asian countries, implying a―quasi-fiscal‖ burden for governments.
Governments across South Asia have taken steps
to redress these subsidies, in particular by raisingadministered prices for fuel, and in some cases,of electricity. For instance, Sri Lanka raised
administered fuel prices in early 2012 as a partof fiscal reforms, and again later in the year.
Bangladesh has recently raised fuel prices toreduce the burden of subsidies. The Indian
government raised regulated diesel prices by 14
percent in September 2012, but local prices arestill well below international prices. Plans inIndia to move towards direct cash transfers in2013 (based on the ―Aadhar‖ national identitycard) would eventually replace existing fuelsubsidies and welfare payments, and is expected
to result in lower leakages and improved
targeting to the neediest. Reducing deficits inSouth Asian countries will require a moreforceful attack on fuel subsidies, which evenafter successive measures to bring them undercontrol still account for the bulk of the overallsubsidy burden. Moving towards pricing
mechanisms that better reflect the level andvariability of input costs will help to improve thefinancial sustainability of public and private
firms in this sector. Efforts to bring deficits
under control will also need to involve efforts tobroaden the tax base, which is extremely narrowin some countries, and to improve compliance—in particular, in Pakistan where a very small
percentage of citizens pay income tax—as wellas to simplify the tax code (see also South Asia
Annex of the Global Economic Prospects June2012 report). Bangladesh has undertaken
significant tax policy and public financial
management reforms in 2012 towards similar
objectives.

Figure SAR.6 Fiscal deficits are significantly higher
in several South Asian country compared with theaverage for the G-20 emerging market countries
General government deficit as percent of GDP
10

8

6

Agriculture in South Asian countries wasaffected to varying extents by delayed monsoon
rains

4

2

Agriculture, which accounts for half of South
Asia’s employment and just under a fifth of its
GDP, was affected to varying extents by adelayed monsoon season (late arrival and latedeparture) in 2012, following good harvests inprevious years. Although the share of agriculture

0
India

Sri Lanka

Pakistan

Bangladesh Low income
countries

G-20
emerging
markets

Source: IMF Fiscal Monitor October 2012, IMF Article IVconsultations; and World Bank

144

Global Economic Prospects January 2013

South Asia Annex

in South Asia’s GDP has been declining steadily
in recent decades, the weak monsoon rains in2012 slowed regional agricultural activity andexacerbated the economic downturn. As a result,food grain production for the region is expected
to decline modestly by about 1 percent in the
2012/13 crop year after two consecutive years ofmore than 5 percent increases, according to US
Department of Agriculture (USDA) estimates(table SAR.1).FN3 In India, the delayed monsoon
season resulted in ―below normal‖ rather than―deficient‖ rains, according to India’s
Meteorological Department, thereby avoiding aserious adverse impact on food grain production.
Accumulated food grain stocks from good
harvests in previous years have helped to avert athreat to food security in India and enabled it tocontinue to export rice. In Pakistan, the latemonsoon arrival during the secondary Kharif
crop only marginally affected rice and cotton
production. Despite limited water availability
earlier in the year and floods later, rice output is
expected to rise modestly, according to UN Foodand Agriculture Organization (FAO) estimates.

harvest the previous crop year.
Stabilization of international crude oil prices in2012 resulted in easing of terms of trade shocks
Rapid increases in international crude oil prices
in 2010 and 2011 had contributed todeteriorating terms of trade for South Asian
countries. Brent crude oil prices rose 29 percent
in 2010, and by 39 percent in 2011, but prices
stabilized in 2012 (figure SAR.7), resulting in aneasing of the earlier terms of trade shocks.
Current account positions in South Asia,
however, continued to deteriorate as export
revenue growth slowed rapidly, or evendeclined, due to the Euro Area debt crisis and aslowing global economy, but import growthslowed to a smaller extent. India’s current
account deficit rose sharply to 5.4 percent of
GDP in the third calendar quarter of 2012 from
3.9 percent in the second quarter, as export
earnings continued their decline while importcosts remained relatively strong, in partreflecting robust domestic demand for gold andstill elevated crude oil prices. Partly as a result of
earlier crude oil price increases, Pakistan’scurrent account deficit had widened to 2 percent
of GDP in the 2011-12 fiscal year, but therelease of coalition support funds and continued
robust pace of increase in migrant remittances
helped to reduce Pakistan’s current accountdeficit to 0.4 percent of GDP in the first fivemonths of the 2012-13 fiscal year (JulyNovember period).

In Bangladesh, the delayed monsoon rains
affected the Aman rice crop in a few areas (theAman crop accounts for more than a third of thecountry’s rice production), but it does not appear
to have had a major effect on the aggregate
Aman harvest. Sri Lanka, however, experienced
a drought in 2012 due to the delayed monsoons,
which is estimated to have resulted in a morethan 30 percent decline in the secondary Yalarice harvest in 2012 (following a good main
Maha rice harvest earlier in the year) according
to the FAO. In Nepal, the delayed monsoon rains
and fertilizer shortages reduced rice production
in parts of the country in 2012, following a good

Migrant remittances have remained a stable
resource flow for the South Asia region, but
tourism to Sri Lanka slowed

Table SAR.1 South Asia’s food grain balances (millions metric tons)
2008/20092009/20102010/20112011/20122012/2013 (f)Production

292.1

284.2

298.8

315.8

313.7

% change

1.2

-2.7

5.1

5.7

-0.7

Consumption

279.4

278.4

292.9

296.2

303.1

% change

-0.8

-0.3

5.2

1.1

2.3

Net exports

-2.1

1.0

2.3

13.7

13.7

Ending stock

41.0

45.8

49.4

55.2

52.1

Source: US Department of Agriculture (USDA) and World Bank.
Note: Crop marketing years vary across countries.

145

Global Economic Prospects January 2013

South Asia Annex
given the Nepali rupee’s peg to the Indian rupee.
The more-or-less steady increase in remittances
to South Asian countries has supported current
account positions, particularly when demand forexports weakened. And, migrant remittances
represent an important source of incomes anddomestic demand in Nepal (22% of GDP),
Bangladesh (11%), Sri Lanka (7.9%), andPakistan (5.7%).

Figure SAR.7 Deterioration in South Asia’s terms oftrade eased in 2012 with stabilization of crude oil
pricesTerms of trade change (Percent)

Brent crude oil price per barrel(annual average, US$)

15

120
110

10

100
5
90
0
80
-5

70

-10

Tourism, a significant source of revenue for Sri
Lanka, boomed in the aftermath of the civil
conflict, with tourist arrivals growing by 46
percent in 2010 and 31 percent in 2011.
However, the pace of increase in tourism arrivals
slowed to 11 percent by September 2012 (figure
SAR.8), as arrivals from Western Europe (37percent of the total) slowed and tourism fromother South Asian countries (26 percent of thetotal) virtually stalled, mainly due to slowing
economic growth in India. However, tourist
arrivals from the United States and East Asian
countries have picked up strongly in recent
months, reflecting rising disposable incomes in
the countries of origin. As a result, the year-onyear growth of tourist arrivals to Sri Lanka
picked up again to 18 percent in November.

60
2009

2010

Bangladesh
Pakistan
Brent crude price [Right]

2011

2012
India
Sri Lanka

Source: World Bank
Notes: Terms of trade based on changes in countryspecific commodity-weighted export and import price indices.

Migrant remittance inflows to South Asia were
buoyed by flows from the oil-rich Gulf
Cooperation Council (GCC) countries that
benefited from elevated crude oil prices in 2011
and 2012, compared with the levels in previous
years. Remittances to South Asia are estimatedto have totaled $109 billion in 2012, an increaseof 12.5 percent over 2011—the largest
percentage increase among all developing
regions (table SAR.2). South Asia’s share in
overall remittances received by developing
countries rose from 17 percent in 2005 to 27
percent in 2012. In addition to the continued
demand for migrant labor from the GCC
countries, the increase in remittances to India
was also partly a result of incentives created by
the more than 12 percent depreciation of the
Indian rupee against the US dollar in 2012,
compared with the average rupee-dollar rate in2011. Nepal likely experienced a similar effectCapital flows to South Asia remained stable in2012, due to strong equity flows to India
Private capital flows play a critical role forstability of the region’s balance of payments
position given the size of South Asia’s (inparticular India’s) current account deficit. Net
private capital flows to the region remained
stable at $72.6 billion in 2012 ($72.5 billion in2011), as an increase in portfolio equity inflows
offset declines in bank lending and foreign direct

Table SAR.2 Migrant remittances inflows to South Asia grew robustly in 2012 (US$ billions)
2005

2006

2007

2008

2009

2010

2011

2012e

Bangladesh
India
Nepal
Pakistan
Sri Lanka

4.3
22.1
1.2
4.3
2.0

5.4
28.3
1.5
5.1
2.2

6.6
37.2
1.7
6.0
2.5

8.9
50.0
2.7
7.0
2.9

10.5
49.5
3.0
8.7
3.4

10.9
54.0
3.5
9.7
4.2

12.1
63.0
4.2
12.3
5.2

13.7
69.8
5.1
13.9
6.3

South Asia

34

43

54

72

75

82

97

109

17.1

18.3

18.9

21.6

23.8

24.1

25.4

26.8

Share of South Asia indeveloping countries (%)

Source: Migration and Development Brief 19, World Bank

146

Global Economic Prospects January 2013

South Asia Annex

Figure SAR.8 Tourism arrivals to Sri Lanka(especially from India) slowed in 2012

third quarter, according to Reserve Bank of India
data. FDI to Pakistan, however, has continued to
decline over a longer period (since 2008)reflecting the uncertain security situation, weakgrowth prospects, and widespread electricity
shortages, while portfolio equity flows remain
subdued (figure SAR.10).

Tourism arrivals, year-on-year change (Percent)
100
80
60
40

Outlook

20

South Asia’s growth is projected to strengthen
over the forecast horizon

0-20
Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12

All countries
North America
South Asia

South Asia’s GDP growth is projected to rise to
5.7 percent in the 2013 calendar year from 5.4
percent in 2012 (tables SAR.4 and SAR.5). The
modest recovery in growth is in line withprojections of a weak global economy and nearstagnant output in the Euro Area, South Asia’s
largest trade partner. Regional growth will be
constrained by an uncertain external
environment, amid risks of a protracted fiscal
impasse in the United States and possible
resurgence of Euro Area turmoil. Electricity
shortages are expected to ease gradually overtime as South Asian countries continue structuralreforms to expand capacity and improvefinancial sustainability of this sector, but thisconstraint is likely to remain binding in the nearterm. Together with a gradual pick up in the
global economy, South Asia’s regional GDP
growth is projected to accelerate to 6.4 percent

Western Europe
East Asia

Sources: Haver Analytics and World Bank

investment (table SAR.3). FDI inflows to South
Asia fell 17 percent in 2012, while internationalbank lending slumped a larger 34 percent amid
European banking sector deleveraging. In
contrast, net equity flows to South Asia rose toan estimated $11.5 billion in 2012, reversing a
net $4.8 billion outflow in 2011. Despite
weakening growth and a deteriorating current
account position, equity inflows to India surged
and the domestic equity market rebounded after
a number of reforms were announced in
September-October 2012 (figure SAR.9). FDI
inflows to India also picked up strongly in the
Table SAR.3 Net capital flows to South Asia ($ billions)
2008

2009

2010

2011

2012e

2013f

2014f

2015f

Capital inflows

64.7

89.8

100.4

78.3

75.2

89.1

105.9

117.9

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

55.9
35.0
50.8
-15.8
20.8
1.7
11.2
8.0
-0.05
8.8
1.4
3.2
4.2

78.9
63.4
39.3
24.1
15.5
1.9
10.9
2.7
-0.1
11.0
2.4
3.6
4.9

90.7
60.3
30.4
29.9
30.4
10.1
8.6
11.8
-0.05
9.6
3.3
2.0
4.4

72.5
30.9
35.7
-4.8
41.6
0.7
18.4
22.5
-0.03
5.8
2.0
0.0
3.7

72.6
41.1
29.7
11.5
31.5
0.2
12.1
19.4
-0.2
2.6
0.9
-0.2
1.9

87.3
53.3
36.9
16.4
34.0
0.9
15.4
17.8
-0.1
1.8

104.7
63.5
42.9
20.6
41.2
1.5
16.5
23.1
0.1
1.2

117.3
76.4
51.8
24.6
40.9
2.9
19.6
18.3
0.1
0.6

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

147

Global Economic Prospects January 2013

South Asia Annex

Figure SAR.9 Gross capital flows to South Asia

Figure SAR.10 Foreign investment in Pakistan

Gross capital inflows (US$ billions)

Private investment inflows, 3 month moving average (US$ millions)

14

500

12

400

FDI inflows
10

Equity Issuance
Bond issuanceBank Lending
Total flows

8

300
200

6

100

4

0

2

-100

0
Jan-09Jul-09Jan-10Jul-10Jan-11

Jul-11

Jan-12

Portfolio investment inflows-200
Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12

Jul-12

Source: Dealogic and World Bank

Source: Haver Analytics and World Bankand 6.7 percent in 2014 and 2015, respectively,
supported by a gradual improvement in global
demand for South Asia’s exports, continued
policy reforms, stronger investment activity, anda return to normal agricultural production.

investor confidence and led to an increase inequity inflows. Several reforms still remain
pending, however, including (among others) onland acquisition, insurance, pensions, mining,and direct taxes, that require parliamentary
approval. Moreover, investment growth has been
relatively weak in recent quarters (figure SAR.11
first panel), the fuel subsidy burden and fiscal
deficit remain high, and the country needs toattract substantial foreign investment inflows tofinance a larger current account deficit. Given a
projected weak, albeit gradually strengthening,
global economy and a potentially volatile
external environment, it will be essential tomaintain sound macroeconomic policies, sustain
efforts at fiscal consolidation over the medium
term, deepen structural reforms, and improve theinvestment climate for the private sector.
Reflecting a projected gradual improvement inglobal demand and expectations of continued
policy reforms, India’s GDP growth in factor
cost terms is forecast to rise to 7.1 percent in the2014 fiscal year and to 7.3 percent by 2015. A
return to normal agricultural production during
2013-15 and an expected revival of mining
activity as hold-ups to production in key natural
resource-rich states are gradually resolved
should boost output in these sectors, providing a
tailwind to growth over the forecast horizon.

India’s GDP growth measured in factor costterms slipped to 5.3 percent in the third quarterof 2012, as a subpar agricultural outcome
exacerbated relatively weak performance inmanufacturing, mining and services. Growth in
the 2012 fiscal year ending in March 2013 isforecast at 5.4 percent, the weakest in nearly adecade.FN4 India’s GDP growth is projected tostrengthen to 6.4 percent in the 2013 fiscal year,with a stronger rebound held back in part bydifficult global economic conditions. A range ofpolicy reforms were initiated in the second halfof 2012, including liberalization of regulations
for foreign direct investment in the retail,aviation and broadcasting sectors; an increase inadministered diesel prices and rationing ofsubsidized liquefied petroleum gas (LPG)
cylinders in an effort to curb fuel subsidies;passage of banking sector reforms in Parliament;
the creation of a high-level cabinet committee tofast-track clearances for infrastructure projects;
and a move towards direct cash transfers to
reduce leakages and improve targeting ofsubsidies and welfare payments. As discussed,
the spurt of reforms temporarily restored

Pakistan’s GDP growth is projected to remain

148

Global Economic Prospects January 2013

South Asia Annex

Figure SAR.11 Weaker investment growth in India and Pakistan
India

Pakistan
Investment as share of GDP(Percent)

Investment, year-on-year change(Percent)
25

Investment, year-on-year change(Percent)

38

20

37

15

36

10

35

5

34

0

33

-5

32

-10
-15
Q3-2006

25

25

20

20

15

15

10

10

5

5

0

0

-5

-5

-10

Investment growth

-10

-15

Investment/GDP ratio [Right]-15

31
Investment growth
Q3-2007

Q3-2008

Investment/GDP ratio [Right]

Q3-2009

Q3-2010

Q3-201130
Q3-2012Investment as share of GDP(Percent)-20-20
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Sources: Haver Analytics and World Bank.

broadly stable at 3.8 percent in the 2012-13
fiscal year compared with 3.7 percent growthrecorded in 2011-12. Growth is projected toremain close to 4 percent during 2014 and 2015,a relatively sluggish pace compared to regional
peers. A weak investment climate, infrastructure
gaps, sovereign creditworthiness concerns, andlarge fiscal deficits continue to pose obstacles toa sustained improvement in investment activity
and economic performance. Electricity and gas
shortages for the industrial and agricultural
sectors, macroeconomic challenges including
fiscal deficits and high inflation, and security
uncertainties, have hampered productive
business activities. Mainly as a result of adverse
domestic factors, investment as a share of GDP
fell by nearly a third between the 2007-08 and2011-12 fiscal years (figure SAR.11 second
panel), contributing to Pakistan’s current
lackluster growth potential, especially comparedwith the more than 6 percent average annual
GDP growth recorded between 2003 and 2007.
This secular decline in investment, unlessreversed through sustained improvements inmacroeconomic performance and policy
credibility as well as addressing infrastructure
gaps, has negative implications for productive
capacity and potential output growth during theforecast horizon. Concerted efforts to addresselectricity shortages, a major constraint togrowth, would also help to raise the sustainable
pace of growth.

Bangladesh’s GDP growth is projected to
decline to 5.8 percent in the 2012-13 fiscal year
from 6.3 percent in 2011-12, in part due to amoderation in exports resulting from an adverse
global environment. Although Bangladesh’s
export performance weakened in 2012, domestic
demand was supported by steady inflows of
migrant remittances and a relatively stable
agricultural performance. External constraints
have been exacerbated by supply sidebottlenecks including inadequate infrastructure,and by political uncertainty. A further
diversification of export markets and gains inmarket share will benefit Bangladesh, as growthis expected to pick up faster in North Americaand Asia compared with near-stagnant growth
projected for the Euro Area in 2013.
Infrastructure and energy constraints could,
however, slow further gains in competitiveness.
Bangladesh’s GDP growth is forecast to rise to
6.2 percent in the 2013-14 fiscal year, as theglobal economy continues its slow path to arecovery, and pick up to 6.5 percent in 2014-15.
GDP growth in Sri Lanka slowed to an estimated
6.1 percent in 2012, in part from policy efforts
designed to limit excessive credit growth andcontain overheating, exacerbated by weakening
demand for exports and a drought. Sri Lanka’s
imports also slowed due to weaker domestic
demand, policy measures to curb imports, andcurrency depreciation. Electricity cuts resulting

149

Global Economic Prospects January 2013

South Asia Annex

from the effect of drought on hydropower
generation capacity also adversely affectedeconomic activity. Although policy reforms in
Sri Lanka acted as a drag on growth in 2012,
they are also likely to boost growth outturns
during the forecast horizon. A pick up of tourism
during the forecast horizon will also contributeto economic activity in the island. Sri Lanka’s
growth is forecast to rise to 6.8 percent in 2013
as external demand continues to improve
gradually and agricultural production growth
returns to normal rates. Growth is expected toincrease further to 7.2 percent by 2015 (a weaker
pace compared with the more than 8 percent
growth in 2010 and 2011), as the earlier boom ininvestment and reconstruction following
stabilization after political conflict tapers off,
implying a more sustainable pace of growth inline with underlying macroeconomic
fundamentals.

Nepal’s economic performance has remained
relatively sluggish, as the ongoing constitutional
crisis, a weak investment climate, andinfrastructure bottlenecks have eroded business
confidence and adversely affected investment
and industrial activity. Following a surge in
growth to 4.6 percent in the 2011-12 fiscal year
mainly from a robust agricultural harvest andservices growth (in part supported by migrant
remittances), GDP growth is projected to
weaken to around 3.8 percent in the 2012-13
fiscal year, as agricultural output growth returns
to its longer-term trend, while industrial
performance continues to remain weak. GDP
growth is then forecast rise to about 4.3 percent
by the 2014-15 fiscal year as the political andeconomic situation start to normalize. Migrant
remittances are expected to remain a relatively
stable and significant source of financing and,
together with tourism revenues, support
consumption demand during this period of

Table SAR.4 South Asia regional forecasts(annual percent change unless indicated otherwise)00-09a2010

2011

Est. Forecast
2012
2013
2014

2015

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

9.3
7.8
9.4
6.6
11.1
12.3
16.9
14.8
-0.6
-2.7
9.3
-8.7

7.4
5.9
7.4
5.9
6.3
5.8
16.5
21.1
-2.5
-3.2
8.3
-7.6

5.4
4.0
5.4
5.8
5.8
5.2
4.4
7.7
-1.5
-3.8
8.9
-9.0

6.7
5.3
6.7
6.8
5.9
7.5
8.9
8.6
-0.8
-2.0
8.4
-7.0

5.9
4.4
5.9
5.4
5.8
8.8
11.3
9.6
-0.3
-0.6
6.5
-7.1

5.7
4.3
5.7
6.0
5.7
6.2
6.1
6.6
-0.8
-3.2
9.3
-8.3

6.4
5.0
6.4
6.5
5.8
7.2
8.3
8.0
-0.7
-2.6
8.6
-7.7

Memo items: GDP at market prices fSouth Asia excluding India
4.6
5.1
5.1
4.8
4.9
5.3
5.5
India
6.6
9.6
6.9
5.1
6.1
6.8
7.0
at factor cost
8.4
6.5
5.4
6.4
7.1
7.3
Pakistan
4.2
3.1
3.0
3.7
3.8
4.0
4.2
Bangladesh
5.2
6.1
6.7
6.3
5.8
6.2
6.5
a. Growth rates over intervals are compound weighted averages; average growth contributions, ratiosand deflators are calculated as simple averages of the annual weighted averages for the region.
b. GDP at market prices and expenditure components are measured in constant 2005 U.S. dollars.
c. GDP figures are presented in calendar years (CY) based on quarterly history for India. For
Bangladesh, Nepal and Pakistan, CY data is calculated taking the average growth over the two fiscal
year periods to provide an approximation of CY activity.
d. GDP measured at PPP exchange rates.
e. Exports and imports of goods and non-factor services (GNFS).
f. National income and product account data refer to fiscal years (FY) for the South Asian countries,
while aggregates are presented in calendar year (CY) terms. The fiscal year runs from July 1 throughJune 30 in Bangladesh and Pakistan, from July 16 through July 15 in Nepal, and April 1 throughMarch 31 in India. Due to reporting practices, Bangladesh, Nepal, and Pakistan report FY2009/10
data in CY2010, while India reports FY2009/10 in CY2009.

Source: World Bank.

150

Global Economic Prospects January 2013

South Asia Annex

uncertainty; as well as finance imports ofpetroleum products and cover the trade deficit
with India. However, after a surge in remittanceinflows during 2011-12, helped partly by the
incentives created by a depreciation of the
Nepali rupee in line with its peg to the Indianrupee, remittances are likely to grow at a moresustainable rate over the forecast period.

considerable political and security uncertainty.
However, in 2012, Afghanistan’s economy grewstrongly as a result of an exceptionally good
harvest. Real GDP growth is estimated at around
11 percent, a significant increase from 7.3
percent in 2011. The good harvest has alsobrought Afghanistan to near food selfsufficiency and slowed inflation to 4.6 percent inJuly 2012 on a year-on-year basis, although
inflation edged up to 5.4 percent in September.
The medium-term outlook for Afghanistan
remains cautiously optimistic. At the Tokyo
conference in July 2012, donors pledgedAfghanistan is in a state of transition which
involves the handover of security responsibilities
from international forces to the Afghan
government. This process is characterized by
Table SAR.5 South Asia country forecasts

Calendar year basis b
Bangladesh
GDP at market prices (% annual growth) c
Current account bal/GDP (%)
India
GDP at market prices (% annual growth) c
Current account bal/GDP (%)
Nepal
GDP at market prices (% annual growth) c
Current account bal/GDP (%)
Pakistan
GDP at market prices (% annual growth) c
Current account bal/GDP (%)
Sri Lanka
GDP at market prices (% annual growth) c
Current account bal/GDP (%)

Est. Forecast
2012
2013
2014

00-09a

2010

2011

5.2
0.6

6.4
1.8

6.5
0.2

6.1
0.8

6.0
0.8

6.3
1.0

6.5
0.9

6.2
-0.5

10.4
-3.2

7.9
-3.6

5.5
-4.5

5.8
-3.8

6.6
-3.0

6.9
-2.4

3.4
-0.9

4.4
-2.6

4.2
0.2

4.2
0.7

4.0
0.7

4.2
0.8

4.3
1.0

4.2
-1.4

3.0
-0.7

3.4
-1.0

3.8
-1.0

3.9
-0.8

4.1
-0.7

4.2
-0.5

4.4
-3.7

8.0
-2.3

8.3
-7.9

6.1
-7.1

6.8
-5.8

7.1
-5.0

7.2
-4.3

2015

Fiscal year basis b
Bangladesh
GDP at market prices (% annual growth) c
5.2
6.1
6.7
6.3
5.8
6.2
6.5
India
GDP at market prices (% annual growth) c
6.6
9.6
6.9
5.1
6.1
6.8
7.0
Memo: Real GDP at factor cost
8.4
6.5
5.4
6.4
7.1
7.3
Nepal
GDP at market prices (% annual growth) c
3.4
4.8
3.9
4.6
3.8
4.1
4.3
Pakistan
GDP at market prices (% annual growth) c
4.2
3.1
3.0
3.7
3.8
4.0
4.2
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.
Afghanistan, Bhutan, Maldives 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. National income and product account data refer to fiscal years (FY) for the South Asian countries
with the exception of Sri Lanka, which reports in calendar year (CY). The fiscal year runs from July 1
through June 30 in Bangladesh and Pakistan, from July 16 through July 15 in Nepal, and April 1
through March 31 in India. Due to reporting practices, Bangladesh, Nepal, and Pakistan report
FY2009/10 data in CY2010, while India reports FY2009/10 in CY2009. GDP figures are presented incalendar years (CY) based on quarterly history for India. For Bangladesh, Nepal and Pakistan, CY
data is calculated taking the average growth over the two fiscal year periods to provide anapproximation of CY activity.
c. GDP measured in constant 2005 U.S. dollars.

Source: World Bank.

151

Global Economic Prospects January 2013

South Asia Annex

sufficient funds to fill Afghanistan’s (civilian)financing gap (estimated at $4 billion per year on
average over the next years), and this should
allow the government to sustain service delivery
and development gains. Nevertheless, thetransition process, which is associated with adecline in military and civilian aid, and theupcoming presidential elections could further
increase uncertainty in the medium term and takea toll on investor confidence. Projections suggestthat even with favorable assumptions, real GDP
growth may fall from the average of 10 percent
per year experienced over the past decade to 4-6
percent for 2013-2015.

Bangladesh, and to provide a relatively stablesource of hard currency earning for South Asian
countries, particularly for Pakistan where FDI
flows have dried up in recent years.

Risks and vulnerabilities
The economic outlook for the South Asia regionis subject to several risks. A key domestic risk isthat of fiscal consolidation not proceeding asplanned. Although governments across theregion have committed to fiscal consolidation
measures, with elections coming up in several
South Asian countries within the next two years,
the pressures for populist spending measures
could increase and cutting subsides may provedifficult. If in addition, growth outturns turn out
weaker than anticipated or planned revenueraising measures (e.g., disinvestment plans for
public enterprises) do not materialize, it could
lead to higher than planned budget deficits andrising government debt, with potentially adverse
consequences for sovereign creditworthiness.
Another domestic risk is that agricultural
outturns are weaker than expected due to rainfall
shortages or drought during the forecast horizon,
which would have adverse implications for rural
incomes and employment, food prices, inflation,
the fiscal burden of subsidies, and overall
growth.

Private capital flows are projected to risereflecting a favorable medium-term growth
outlook
Private capital flows to South Asia are expected
to rise by 20 percent to $87 billion in 2013, andto increase further to $117 billion by 2015, as
regional growth picks up over the course of 2013-15 (table SAR.3). Improved growth outturns,
together with an extended period of low-interest
rates in high income countries and abundantliquidity in global financial markets will buoy
capital flows to South Asia during the forecasthorizon. Foreign direct investment is expected toincrease in 2013 to $37 billion, while net
portfolio equity flows are forecast to rise further
to around $16 billion. As issues relating to holdups in mining activity in India are resolved,
investment flows are expected to recover in this
sector as well. Even with a modest pick-up of
growth in 2013, India’s growth will remain
relatively high by global standards, and thus thecountry is likely to remain an attractive
destination for international investors looking tolonger term returns.

In terms of external risks, a protracted fiscal
impasse in the United States is an immediaterisk to the global economy, and in turn for South
Asia’s economic outlook. The baseline assumes
that a credible medium-term plan to restore fiscal
sustainability in the US and authorize
government borrowing is agreed to by the end of
February 2013 (see the main text of the Global
Economic Prospects January 2013 report). An
alternative scenario where only a short-term
relief from the debt ceiling legislation is agreed
upon and considerable uncertainty remains
regarding future tax and fiscal policy could
shave off 2.3 percent from US GDP growth
relative to the baseline, and reduce global growthby 1.4 percent in 2013. Such a scenario would
reduce demand for South Asia’s exports and cut
into financial flows to the region. Overall, South
Asia’s growth would be 0.4 percent lower than

Migrant remittances to South Asia are expected
to increase by around 9-11 percent annually over
2013-15 to reach $144 billion in 2015, according
to forecasts by the World Bank’s Migration andDevelopment Brief 19. These resilient resource
flows, notably from the oil-rich Gulf
Cooperation Council (GCC) countries, areexpected to continue to support domestic
demand in the region, especially in Nepal and152

Global Economic Prospects January 2013

South Asia Annex
Figure SAR.12 South Asia is relatively less dependent on food grain imports than other regions

under the baseline. Another source of externalrisk for South Asia is the possibility ofresurgence of Euro Area tensions during theforecast horizon. The Euro Area accounts for thelargest share of South Asia’s exports and a
resumption of financial market tensions in theEuro Area would affect South Asia through tradeand financial channels.

Foodgrain imports as share of domestic foodgrain consumption(average of 2009/10, 2010/11 and 2011/12 crop years, Percent)
50
40
30

Net
Gross
imports imports

20
10
0

A fall in crude oil prices due to weaker thanprojected global growth—caused by either of theabove two scenarios or other unforeseen
events—would benefit current account positionsof South Asian countries and reduce the fiscal
burden of fuel subsidies. But lower crude oil
prices would also cut into migrant remittances if
economic activity in the migrant-destinations in
the oil-exporting Arabian Gulf region were toslow and demand for migrant labor were to
decline. Conversely, a spike in crude oil prices
due to geopolitical tensions would worsen
current account and fiscal positions in this net oil
importing region.

-10
-20
-30
-40
Middle East
& N. Africa

Latin
Sub-Saharan East Asia &FormerSouth Asia
America &AfricaPacific
Soviet Union
Caribbean(12)

Source: US Department of Agriculture and World Bank
Note: US Department of Agriculture (USDA) sub-regions
differ from the World Bank’s regional classification. See
www.usda.gov for details.

both domestic and foreign investors, resulting in
weakening investment growth in recent years.
Moreover, South Asia’s high fiscal deficits haveadverse economic consequences in terms ofcontributing to persistence of inflation andcrowding out of productive business investment.
Sustained efforts at fiscal consolidation are
therefore necessary to free up resources for theprivate sector, reduce inflation, and generate
policy space to respond to external and domestic
shocks.

A further increase in international food prices
represents yet another source of external risk forSouth Asia. Drought in the US and heatconditions in Eastern Europe and Central Asian
grain exporters cut into international grain
supplies and caused international food prices torise during the course of 2012, althoughinternational food prices moderated somewhat
towards the end of the year. The overall
dependence of the South Asia region on
imported food grains is small compared withother regions (figure SAR.12). However,structural capacity constraints in foodproduction, especially as consumption ofproteins and edible oils continues to increase
with rising incomes, are likely to imply tightdomestic supplies (relative to demand) going
forward, which can increase the vulnerability of
the region to shocks to international food prices.

Policies also needed to address structural
challenges to growth, including, among others,
in electricity generation and agricultural
production. Firms and consumers in South Asian
countries have been faced with widespread
power outages, as rising demand has outstripped
capacity. Both electricity generation companies
and firms with captive power plants facerationed supply of inputs, which have adversely
affected industrial activity. Expanding capacityand ensuring financial sustainability of bothpublic and private enterprises in the energy
sector are critical for future growth outcomes.
Similarly, agricultural supply has fallen short ofdemand as incomes have risen and foodpreferences have shifted, contributing topersistence of food inflation, and in turn overall
inflation. Raising agricultural productivity and

Policy reforms need to address fiscal andstructural constraints
Domestic uncertainties, an adverse external
environment, and a relatively poor businessclimate in the South Asia region have deterred

153

Global Economic Prospects January 2013

South Asia Annex

output, as well as improving storage andtransport infrastructure both to reduce spoilage
and to enable improved access to foreign
markets, are necessary steps towards easing
shortages, improving food security, and reducing
inflationary pressures.

half a percentage point from India’s GDP
growth in the 2012 fiscal year comparedwith a normal agricultural season.

Notes:
1

The South Asian countries included in theregional estimates and forecasts include
Bangladesh, India, Nepal, Pakistan, and Sri
Lanka. The text also discuses recent
developments and economic prospects for
Afghanistan. However, Afghanistan, Bhutan
and Maldives were not included in the South
Asia regional aggregates due to insufficientreliable historical data on national income
accounts and balance of paymentscomponents.

2

The World Bank follows the IMF’s
methodology for the estimates of the general
government deficit for India. IMF and Indian
presentations differ, particularly regarding
divestment and license auction proceeds, net
versus gross recording of revenues in certain
minor categories, and some public sector
lending (IMF Fiscal Monitor October 2012).

3

USDA crop marketing years vary acrosscountries in South Asia (and across rice andwheat harvests in India): the 2012/13 cropmarketing year corresponds to April 2012March 2013 for wheat and October 2012September 2013 for rice in India; May 2012April 2013 in Pakistan; July 2012-June 2013
in Bangladesh and Nepal; and October 2012September 2013 for Sri Lanka. Therefore,changes in weather patterns during thecourse of 2012 influence harvests to asignificantly greater extent in the current(2012-13) crop year than output in theprevious (2011-12) crop year.

4

Preliminary estimates suggest that weak
agricultural performance due to delayedmonsoon rains may have subtracted almost

154

Global Economic Prospects January 2013

Sub-Saharan Africa Annex

Sub-Saharan Africa Region
Overview: GDP growth in Sub-SaharanAfrican remained robust at 4.6% in 2012,
notwithstanding the slowdown in the global
economy. Indeed, excluding the region’s largest
and most globally integrated economy, South
Africa, GDP growth in the region was at strong
5.8% in 2012, with a third of countries in theregion growing by at least 6%. Robust domestic
demand, steady remittance flows, still highcommodity prices, and increased export volumes(thanks to increased investment flows to thenatural resource sector in recent years) were
supportive of the region’s growth in 2012.
Nonetheless, besides the drag from a weakerglobal economy, domestic factors, including
earlier monetary policy tightening (Kenya andUganda), protracted labor disputes (South
Africa), and political unrests (Mali and Guinea
Bissau) weakened growth in a number ofcountries in the region.

from 15.9 percent of GDP to over 22 percent of
GDP in 2012. This is expected to continue,
particularly so as an increasing number of theregion’s economies are able to tap into
international capital markets to help addressbinding infrastructural constraints (in 2012
Zambia issued its debut international bond, a$750 million Euro bond, which wasoversubscribed by 15 times). Further, theongoing increase in export volumes from several
countries that have discovered mineral deposits
in recent years (Ghana, Kenya, Mozambique,
Niger, Sierra Leone, Tanzania, and Uganda)
should boost growth prospects. Overall, theregion is projected to grow at its pre-crisis
average rate of 5 percent over the 2013-15
period (4.9 percent in 2013, graduallystrengthening to 5.2 percent in 2015). Excluding,South Africa, the region’s growth will average
6% over the 2013-15 period.

Economic activity was similarly diverse in theregion. Reflecting still high commodity prices
and relatively robust growth prospects in theregion, net private capital flows to the region
increased by 3.3 percent to a record high $54.5
billion in 2012. Much of the increase in net
capital flows came in the form of increased
foreign direct investment flows to the region,
which increased to $37.7 billion in 2012 from$35.7 billion in 2011, notwithstanding the 6.6
percent decline in foreign direct investment
flows to developing countries in 2012. Exports
grew strongly in the first half of the year;
however, a sharp deceleration of industrial
commodities and oil exports occurred in thethird quarter. Tourism, an important driver ofgrowth in the region, remained robust, withstrong tourist arrivals in many of the popular
destinations, including South Africa, Mauritius,
Sierra Leone, Madagascar and Cape Verde.

Risks and vulnerabilities: Risks to the outlook
remain tilted to the downside, as weaker growthin China, ongoing fiscal consolidation in theEuro Area and the United States could
potentially derail the region’s growth prospects.
Further, a number of domestic concerns could bea drag on growth in the region.
Euro Area debt crisis. Although the worst
appears to be over, should a credit crunch hitsome of the larger troubled Euro Area
economies, GDP growth in the region could
decline by one percentage point.
Weak US economy. Fiscal policy paralysis in
the US could curtail growth in the region by atleast 0.9 percentage points in the 2013.
China investment. With Chinese demandaccounting for some 50 percent of manyindustrial metals exported from Africa, adisorderly unwinding of China’s high investment
rate could lead to deteriorating current accountand fiscal balances, and cut into the region’s
growth prospects.
Domestic
factors.
Political
instability,
protracted industrial disputes and adverse
weather conditions could also undermine growth
in a few countries in the region.

Outlook: Medium-term growth prospects
remain strong and should be supported by a pick-up in the global economy, still high commodity
prices, and increased investment. Since 2000,
investment in the region has increased steadily

155

Global Economic Prospects January 2013

Sub-Saharan Africa Annex
region’s growth prospects. Besides externalrisks, domestic concerns such as politicalinstability, protracted industrial disputes andadverse weather conditions could undermine
growth in a few countries in the region.

Introduction
Despite the global economic slowdown in 2012,
growth in Sub-Saharan Africa has remainedrobust, supported by resilient domestic demandand still relatively high commodity prices. In
2012 the region’s growth is estimated at 4.6
percent (figure SSA.1). About a third ofcountries in the region grew by at least 6%(figure SSA.2). Excluding South Africa, theregion’s largest economy, the remaining
economies grew at a robust 5.8 percent – higher
than the developing country average of 5.1
percent. Medium-term growth prospects remainstrong and should be supported by a pick-up in
the global economy, still high commodity prices,
and investment in the productive capacity of theregion’s economies. The ongoing increase inexport volumes from several countries in theregion (Mozambique, Niger, Sierra Leone, etc.)that have discovered mineral deposits in recent
years should boost growth prospects.

Recent developments
Capital flows to Sub Saharan Africa held up in
2012, despite slowdown in global economy.
Uncertainty in financial markets, banking sector
deleveraging in the Euro Area and a subdued
global economy weakened capital flows todeveloping countries by an estimated 8.6 percent
in 2012. Reflecting still high commodity prices
and relatively robust growth prospects in theregion, net private capital flows to the region
increased by 3.3 percent to a record high $54.5
billion in 2012 (table SSA.1). Much of theincrease in net capital flows came in the form of
increased foreign direct investment, however, thede-escalation of market tensions following
policy interventions by European authorities andultra-loose monetary policy in other high-income
countries also supported an increase in bondflows to the region with the bulk of the increase
coming from two new international sovereign
bond issuers – Angola and Zambia.

Overall, the region is projected to grow at it’s
pre-crisis average rate of 5.0 percent over the
2013-15 period: 4.9 percent in 2013, andgradually strengthening to 5.2 percent by 2015.
Risks to the outlook remain tilted to thedownside, as the global economy remains
fragile, and weaker growth in China, ongoingfiscal consolidation in the Euro Area and theUnited States could potentially derail the

Aggregate foreign direct investment inflows
increased by 5.5 percent in 2012, although fordeveloping countries as an aggregate it fell by

Figure SSA.1 Sub-Saharan Africa continues robust
growthFigure SSA.2 Fastest growing Sub-Saharan Africa
economies in 2012

(real GDP growth, % ch)

5.0

3.0

1.0

-1.0

-3.0

25%

Sierra Leone
Niger
Cote d'Ivoire
AngolaChina
Ethiopia
RwandaGhana
MozambiqueEritrea
ZambiaIndia
Brazil7.0

Developing (ex. China)
Sub Saharan Africa
Sub Saharan Africa (ex. South Africa)-1.0

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

Source: World Bank

1.0

3.0

Source: World Bank

156

5.0

7.0

9.0 11.0 13.0 15.0

Global Economic Prospects January 2013

Sub-Saharan Africa Annex

6.6 percent. Foreign direct investment flows to
the region increased to $37.7 billion in 2012
from $35.7 billion in 2011 (figure SSA.3). The
resilience of foreign direct investment flows in
the region in 2012 reflects, inter alia, the longer
time horizon of investment decisions in theextractive industries sector (which in value terms
accounts for the bulk of investment to theregion), and is therefore less sensitive to shortterm shifts in market sentiment. Investment
incentives remain elevated due to still high levelof commodity prices in 2012 (even if lower than2011), the wealth of natural resources across theregion, and the relatively high rates of returns on
investment in sub Saharan Africa.FN1 In 2012,
several mines were expanded or new ones built
across countries in the region, prospecting
yielded major gas discoveries along the east
coast of Africa, new commercially viable oilwells were drilled in West Africa and East
Africa and a number of countries across West,
Central and Southern Africa found new mineraldeposits.FN2

sector, notably among infrastructure related
projects in construction, transportation,
electricity, telecommunication and water.FN3This should help alleviate some of the binding
constraints to growth that many countries in theregion face. In addition, some of the larger
economies with a growing middle-class such as
Nigeria, South Africa, Angola, Kenya, andGhana, are increasingly attracting investment
flows to their rapidly expanding consumer sector(e.g. retail, consumer banking etc).
Consumer spending most likely held up in 2012.
Consumer spending accounting for over 60
percent of GDP in the region and is, therefore, an
important determinant of overall growth.
Consumer demand has grown relatively rapidly
in recent years, supported by solid real incomesgrowth. Indeed, over the past decade real per
capita incomes rose by an average of 2.3 percent
annually. As a result, as of 2012 some 21 Sub
Saharan African countries (almost half) areclassified as middle-income economies
compared to only nine a decade ago.

While the extractive industry sector dominates interms of the value of overall foreign direct
investment flows, the relative importance of the
primary sector in greenfield investments is
declining (although project numbers are stable),reflecting increasing investments in the services

Unfortunately comprehensive data on retailspending, consumer demand and sentiment isunavailable in most countries in the region.
Where data do exist, they suggest that consumer
demand was robust in 2012. In South Africa,

Table SSA.1 Net capital flows to Sub-Saharan Africa ($ billions)
2008

2009

2010

2011

2012e

2013f

2014f

2015f

Capital Inflows

43.4

47.0

61.1

64.2

65.0

68.3

76.2

86.1

Private inflows, net

38.4

37.1

47.8

52.7

54.5

58.8

68.9

81.0

Equity Inflows, net

33.4

43.2

42.7

44.1

47.4

53.7

61.3

69.0

Net FDI inflows

39.1

32.5

26.7

35.7

37.7

42.4

48.7

55.6

Net portfolio equity inflows

-5.7

10.7

16.0

8.4

9.7

11.3

12.6

13.4

Private creditors. Net

5.0

-6.2

5.1

8.6

7.1

5.1

7.6

12.0

Bonds

-1.6

2.0

1.4

6.0

7.0

5.0

5.0

7.0

Banks

2.3

0.5

0.5

3.1

0.9

1.2

1.8

2.9

Short-term debt flows

4.4

-9.5

2.8

-0.5

-0.9

-1.2

0.6

1.2

Other private

-0.1

0.8

0.5

-0.05

0.1

0.1

0.2

0.9

Official inflows, net

5.0

9.9

13.3

11.4

10.5

9.5

7.3

5.1

World Bank

1.9

3.1

4.0

3.2

3.3

IMF

0.7

2.2

1.2

1.4

1.3

Other official

2.4

4.6

8.2

6.8

5.9

Note : e = estimate, f = forecast
e = estimate, f = forecast/a Combination of errors and omissions, unidentifed capital inflows to and outflows from developing countries.

Source: World Bank

157

Global Economic Prospects January 2013

Sub-Saharan Africa Annex

record low interest rates and solid wage hikes
contributed to a 4.9 percent (y/y) increase inretail sales volumes during the first eight monthsof 2012. Similarly, in the region’s second largest
economy, Nigeria, wholesale and retail sales
volume were up 8.5 percent for the first half of2012.

contributed to the decline in passenger car
imports there.
Overall, although data are sparse available
indicators suggest that consumer strength held
up in most countries, except where monetarystance was tight, political instability disrupted
economic activity and adverse weather cut into
agricultural sector incomes.

For countries where high-frequency retail sales
data does not exist, data on specific products canbe used to gauge the strength of consumer
spending. In Kenya, a 14 percent decline inmotor vehicle registration in the first eightmonths of 2012 suggests that consumer spendingon durables was weak. However, passenger car
imports for the broader region suggest somestrength, with car imports up 6.1 percent (y/y,values) for H1 2012 compared with a 1.2 percent
rise globally (figure SSA.4).
Stronger consumer spending was supported by
improved access to credit (e.g. South Africa,
Angola, Ghana, Mozambique, and Zambia),
declining inflation rates and lower interest rates,
a rebound in agricultural sector incomes thanks
to more favorable weather conditions (Niger,
Guinea and Mauritania all experienced better
rains compared with the 2010/2011 crop year),and the steadiness of remittance flows (estimatedat $31bn in 2012 and 2011). In contrast, higher
interest rates earlier in the year for Uganda and
Kenya and political unrest in Guinea Bissau

With a few notable exceptions, central banks in
the region reacted to weakening inflationpressures and slower growth by easing monetary
policy. Inflation rates declined in the region,
from a GDP-weighted average of 9.5 percent inJanuary to 7.7 percent in September. This inaddition to the weak global environment sparked
many central banks in the region to cut policy
rates, supporting credit flow to the real economy(particularly business spending as firms accountfor a higher share of private credit demand in
most Sub Saharan African countries). Interest
rate cuts outnumbered hikes by 3:1 in in 2012
(figure SSA.5). Kenya and Uganda were among
the most aggressive to cut policy rates. However
credit growth in these two economies remained
constrained for the greater part of 2012 – partly
because of lags in the transmission of monetary
policy and because interest rates thoughdeclining remained high (between 11-23
percentage points). Interest rates were however
hiked in economies where inflation was creeping

Figure SSA.3 Foreign direct investment flows to Sub
Saharan Africa held-up in 2012, despite weaker global
economic environment

Figure SSA.4 Growth in passenger car imports inselected Sub-Saharan Africa economies (1st half
2012)

(Net inflows, $billions)

Kenya

Ethiopia45

Zimbabwe

40

Mauritania
World

35

Uganda30

Côte d'Ivoire
Mauritius

25

SSA

20

Mali

15

Cape Verde
South Af rica

10

Liberia

5

Angola

-20

0
2008

2009

2010

2011

-10

0

10

20

(values, percent year-on-year)

2012e

Sources: UNITC , Comtrade and World Bank.

Source: World Bank.

158

30

40

Global Economic Prospects January 2013

Sub-Saharan Africa Annex

up (Ghana) and or faced some current accountchallenges (Cape-Verde).

government revenues in many Sub-SaharanAfrican countries, spending needs to be
sufficiently flexible as to be able to absorb what
could be a significant revenue loss if commodity
prices were to fall. World Bank simulations
suggest a 20 percent fall in industrial commodity
prices would lead to a further 1.6 percentage
point decline in government balances over athree year period.

Fiscal balances deteriorated in 2012. Althoughvery difficult to evaluate with precision, WorldBank estimates of the level of potential output in
Sub-Saharan economies suggests that demandlevels in more than half were close to or above
potential in 2012 – despite the slowing of growth(figure SSA.6). In other countries, estimatedoutput gaps (the difference between demandlevels and actual output) are relatively small –exceeding 2 percent in only 9 countries in theregion (figure).

That said, markets appear to be confident in theability of countries and of firms operating in theregion to repay loans. Increasingly, countries in
the region are issuing longer-term bonds (bothdomestic and foreign) and attracting financing
from larger developing countries, notably China.
And this borrowing is helping to bridge what theWorld Bank estimates to be a $31 billion annual
infrastructure financing deficit. For the morefragile economies in the region, public capital
investments rely heavily on official development
assistance (ODA)

Overall real government spending is projected to
grow about 0.6 percentage points higher than
GDP in 2012 and the region’s general
government balance is projected to deteriorate in2012. Debt-to-GDP ratios in the region are
relatively low in historical comparisons or ascompared with high-income countries,
nonetheless they have increased from 28.9
percent in 2008 to 33.1 percent in 2012.

While only a few countries are active ininternational bond markets, more are gaining

While government spending has been
appropriately prioritizing infrastructure projects
that are likely to contribute to the countries
future growth potential, care must be exercised
to ensure the long-term sustainability ofspending programs. In particular, in so far as
high commodity prices have boosted

Figure SSA.6 Estimated output GAP for 2012
Zimbabwe
Gabon
Eritrea
ZambiaRwandaCentral Af rican Republic
Sudan
Ghana
Nigeria
Togo
Burkina Faso
Ethiopia
LesothoBotswana
Gambia, The
Malawi
Cote d'Ivoire
Comoros
Niger
Kenya
Sierra Leone
Tanzania, United Rep.
Madagascar
Mauritania
Namibia
Mozambique
Benin
Mauritius
Cameroon
South Af rica
Congo, Dem. Rep.
Swaziland
UgandaCape Verde
Senegal
Seychelles
BurundiAngolaCongo, Rep.
GuineaGuinea-Bissau
Mali

Figure SSA.5 Year-to-date changes to policy rates in
Sub-Saharan Africa countries
Malawi
Ghana
Cape Verde
RwandaZambiaSierra Leone
Nigeria
Botswana
West African States
AngolaSouth Africa
Namibia
Mauritius
GambiaCongo Dem. Rep
Mozambique
Kenya
Uganda-1,200

-800

-400

0

400

800

-10.0

(%)

Source: World Bank.

Source: World Bank and Central Bank news info

159

-5.0

0.0

5.0

Global Economic Prospects January 2013

Sub-Saharan Africa Annex

access. For example Zambia issued a maiden 10year $750 million Euro bond at a 5,625 percent
yield - - lower than yields in some high-spread
Euro Area economies at the time - that wasoversubscribed. As such it joined Ghana,
Senegal, Nigeria, Namibia -- all of whichaccessed global bond markets for the first time inrecent years. Further, the inclusion of South
Africa to the Citi World Government Bond
Index (WGBI) and Nigeria to the JP Morgan
Emerging Market Global Bond Index is
supporting an increase in foreign investor
participation in their domestic bond markets.

volumes decline at a 2.1 percent pace in July
(42.1 and 5.9 percent for oil exporters).
Reflecting the preponderance of commodities intheir export baskets and the decline incommodity prices, the deceleration in exports
values was even steeper. Indeed, excludingSouth Africa export values contracted at a -30.5
percent pace (3m/3m) in July; with sharpest
declines occurring among oil (-39.4 percent) andindustrial raw material exporters (-10.3 percent)reflecting the greater sensitivity of their export
prices to global demand changes compared toagricultural commodities.

Export growth in Sub Saharan Africa wasrelatively robust in 2012. Export volumes in theregion increased by 4.5 percent between Januaryand July 2012, versus a global average of 3.6
percent during that period. Excluding South
Africa, the region’s largest economy, exports
from the rest of the region were up 6.0 percent(figure SSA.7). The good performance was
supported by earlier investments in the export
sector, and a diversification of trading partners(particularly to Asia). The region’s oil exporters
increased their exports by some 5 percent(mostly due to increased output from Angola, as
output in Nigeria declined slightly). Metal andother industrial raw material producers(excluding South Africa), several of whom havebenefited from the coming onstream of newmineral exports (Sierra Leone, Mozambique,
Niger etc.) increased their export volumes by
13.9 percent (y/y) during the first seven monthsof 2012. Export volume growth was strongest forthe predominantly agricultural exporters (17.1
percent, y/y), in part due to weaker base effects
but also due to the lower cyclical sensitivity ofagricultural commodities.

While the global cycle was an important factor
here, local disruptions to production from labor
unrest (South Africa) and military confrontations(Guinea Bissau) were also at play.
Trends in services trade, particularly tourism, areincreasingly becoming an important driver ofgrowth in several Sub Saharan African countries(including traditional destinations such as CapeVerde, Kenya, Mauritius, Seychelles and newer
destinations such as Rwanda. Data from the UN
World Tourism Organization shows that thegrowth in tourist arrivals to the region picked up
by some 5.7 percent in the first half of 2012,
compared with a global average of 4.9 percent
during the same period (figure SSA.8). Sub
Saharan African countries that recorded strong
Figure SSA.7 Growth in Sub-Saharan Africa exports
were impacted by developments in the global economy(volumes, %ch 3m/3m saar)
60
50
40

Overall, however, regional exports weresensitive to the slowdown of the global economy
in the second quarter of 2012. As with otherdeveloping economies, following a strong
rebound in the first half of the year, exports
slowed in the third quarter. The sharpest
deceleration occurred among the industrial
commodity exporters, whose exports had been
growing at a 52.1 percent annualized pace in thethree months ending in June, but who saw export

30
20
10
0
-10
-20
-30

-40

Sub Saharan Africa (SSA)

SSA (ex. South Africa)

2010M01 2010M07 2011M01 2011M07 2012M01 2012M07

Source: World Bank and Datastream.

160

Global Economic Prospects January 2013

Sub-Saharan Africa Annex
robust performance in recent years expected tobe sustained over the projection horizon (table
SSA.2). On aggregate the region’s GDP growthis expected to average 5 percent over 2013-2015(4.9, 5.1, and 5.2 percent for 2013, 2014 and2015 respectively). Excluding, the region’slargest economy, South Africa, GDP growth forthe rest of the region is expected to pick-up to
about 6.1 percent in 2013 and maintain thatgrowth through 2015 (6.0 percent and 6.1
percent in 2014 and 2015 respectively).

growth in tourist arrivals included South Africa(11 percent), Sierra Leone (17 percent),
Madagascar (13 percent) and Cape Verde where
tourist arrivals jumped 15 percent, supported inpart by a diversion of tourists from troubled
North African countries.
The growth of tourist arrivals to destinations in
the region notwithstanding the economic
weakness in Europe is encouraging and reflects adiversification of source countries. For instance,
in Mauritius, arrivals from Europe (largest
source market) fell by 7.7 percent for the January– September period, but arrivals from China rose
38.3 percent, and those from Russia by 91.2
percent. Further arrivals were up from elsewherein Africa (13.2 percent), Australia (13.5 percent),
Canada (18 percent) and South America (55.3
percent). Other countries have fared much lesswell, for instance the cancellation of major
charter flights to Mombasa following terrorism
and piracy concerns there contributed to the 2
percent (y/y) fall in tourist arrivals to Kenya
between January and August 2012. Similarly the
conflict in Mali led to a sharp decline in tourist
arrivals there.

Increased investment will be a major driving
force of growth over the medium term. Increased
investment is to be a main driving force in theregion. Since 2000, investment in Sub-SaharanAfrica has steadily increased from 15.9 percent
of GDP to over 22 percent of GDP in 2012. In
addition to growing foreign sources ofinvestment finance, domestic investment is also
expected to benefit from the ongoing financial
sector deepening in the region, albeit from a very
weak base. Over the past decade, bank deposits
as a share of GDP have increased by some eightpercentage points, supporting a ten percentage
point increase in the private sector credit to GDP
ratio during this period (figure SSA.9). With thelag in monetary policy transmission, thewidespread cuts in policy rates in 2012, isexpected to provide some stimulus to economic
activity through 2014.

Medium-term outlook
Medium term GDP growth prospects for Sub
Saharan Africa remain strong with the same
driving forces that have underpinned the region’s

Foreign direct investment to the region is
expected to remain strong over the medium term.
The World Bank projects FDI to the region toincrease to new record levels each year reaching$55.6 billion in 2015. FDI inflows to theextractive industries sector and to the agriculture
sector (to a lesser extent) should be supported bypersistently high (if somewhat softening)commodity prices over the next 2-3 years (seecommodity annex). Strong exploration efforts inEast Africa during recent years have led to thestriking of several oil and gas wells and further
exploration and discoveries are expected overthe forecast horizon. In Southern Africa,
Mozambique expects to attract some $50bn inforeign investment over the next decade thanks
to its huge coal deposits and offshore gas
discoveries. Similar investments in the minerals

Figure SSA.8 Growth in tourist arrivals in SubSaharan Africa has been above average in recent
years, albeit from a low base
Percent
12.0
10.0
8.0
6.0
4.0
2.0
0.0
-2.0

World

High-income

Developing

Sub Saharan Africa

-4.0
-6.0
2009

2010

2011

2012

Sources: UN World Tourism Organization

161

Global Economic Prospects January 2013

Sub-Saharan Africa Annex

sector in West Africa (Ghana, Liberia, Sierra
Leone, Guinea, Niger etc.) are also expected.

government revenues decline. If appears likely,
official development assistance continues tocome under budgetary pressure in high-income
countries, poor and more fragile economies that
depend on aid for infrastructure spending may
find themselves falling behind. Other countries

Sixty percent of firms not currently present in
the region, indicated in a recent survey theirintention to expand into the region over the next
3-5 years (EIU, 2012). For instance, the Carlyle
group and two other partners recently announcedplans to invest some $210 million in a Tanzanianagribusiness entity (the private-equity group’s
first foray into Sub-Saharan Africa).

Figure SSA.9 Financial deepening across SubSaharan Africa, 2001-2011(Bank deposit to GDP
34

Continued investment in infrastructure will be
critical to maintaining and strengthening growthover the medium term– potentially boosting
growth rates in the region by 2 percentage
points. Indeed, infrastructural shortcomings may
be depressing firm-level productivity by as muchas 40 percent in some countries in the region(Escribano, Guasch, and Pena, 2008).

32

30
28
26
24
22

As discussed above, countries will need tocontinue giving priority to such investments,
while at the same time taking care to safeguard
fiscal flexibility should commodity prices and

2001

2003

2005

2007

2009

2011

Source: World Bank, Datastream.

Table SSA.2 Sub-Saharan Africa forecast summary(annual percent change unless indicated otherwise)
GDP at market pricesb00-09a

2010

2011

4.3

5.0

4.5

Est. Forecast
2012
2013
2014
4.6

4.9

5.1

2015
5.2

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

GDP at market prices c
GDP per capita (units in US$)PPP GDP c
Private consumption
Public consumption
Fixed investment
Exports, GNFS d
Imports, GNFS d
Net exports, contribution to growth
Current account bal/GDP (%)
GDP deflator (median, LCU)
Fiscal balance/GDP (%)
Memo items: GDP
SSA excluding South Africa
Oil exporters e
CFA countries fSouth Africa
Nigeria
Angola

c

4.3
2.0
4.5
4.7
5.6
8.9
4.5
5.3
-0.3
0.1
6.7
-0.4

4.9
2.4
5.2
5.6
13.6
-0.1
6.4
2.5
1.3
-1.2
6.1
-3.9

4.5
2.0
4.7
5.5
3.3
14.7
2.9
11.2
-2.9
-1.2
8.0
-1.0

4.6
2.1
4.6
5.2
5.3
3.2
4.5
6.6
-0.9
-2.9
4.1
-2.8

4.9
2.4
5.4
4.8
4.9
8.6
6.4
6.9
-0.4
-3.1
6.7
-2.4

5.1
2.5
5.4
4.4
4.1
6.4
8.1
7.3
0.0
-3.3
5.9
-2.1

5.2
2.7
5.5
4.4
2.8
6.3
9.0
7.1
0.4
-3.0
6.0
-1.7

4.9
5.5
3.8
3.2
5.6

6.2
6.1
4.5
2.9
7.8

5.3
4.9
2.7
3.1
6.7

5.8
6.0
5.2
2.4
6.5

6.1
6.2
5.2
2.7
6.6

6.0
6.0
4.7
3.2
6.4

6.1
6.2
4.3
3.3
6.3

10.7

3.4

3.4

8.1

7.2

7.5

7.8

a. Growth rates over intervals are compound weighted averages; average growth contributions, ratios and deflators
are calculated as simple averages of the annual weighted averages for the region.
b. GDP at market prices and expenditure components are measured in constant 2005 U.S. dollars.
c. Sub-region aggregate excludes Liberia, Chad, Somalia and São Tomé and Principe. Data limitations prevent theforecasting of GDP components or Balance of Payments details for these countries.
d. Exports and imports of goods and non-factor services (GNFS).
e. Oil Exporters: Angola, Cote d Ivoire, Cameroon, Congo, Rep., Gabon, Nigeria, Sudan, Chad, Congo, Dem. Rep.
f. CFA Countries: Benin, Burkina Faso, Central African Republic, Cote d Ivoire, Cameroon, Congo, Rep., Gabon,
Equatorial Guinea, Mali, Niger, Senegal, Chad, Togo.

Source: World Bank.

162

Global Economic Prospects January 2013

Sub-Saharan Africa Annex

in the region are likely to tap into international
capital markets to support their infrastructural
programs, including perhaps first-time entries bycountries like Rwanda, Uganda, Kenya, andMozambique. Bilateral funding sources,
particularly from other developing countries will
also be critical for some countries. Indeed, theForum on China-Africa Cooperation (FOCAC)
recently announced that China will provide$20bn of credit lines to African countries toassist in developing infrastructure, agriculture,
manufacturing and small and medium-sizedenterprises (figure SSA.10).

infrastructure and other investment needs,
growing demand for oil among oil importers,
and rising per capita incomes, should boost
demand for consumer durables and otherimports. As a result, the regional current accountdeficit is projected to about 2.8 percent ofregional GDP in 2014 from 2.4 percent in 2012
before improving to 2.5 percent in 2015, and net
exports are expected to be a modest drag (figure
SSA.11). However, for some of the lessdiversified oil exporters (Angola, Congo), net
exports will be positive.
These expected medium term positive
developments will however not be universal
across the region. Indeed, labor market
challenges (South Africa) and politicalinstability (Mali) is expected to cut into
economic activity in some countries in theregion over the forecast horizon.

The modest pick-up in the global economy
projected in 2013 and beyond should provide
some support to Sub-Saharan African export
growth. Sub-Saharan Africa exports areprojected to continue increasing rapidly over theforecast horizon, partly due to an expected
strengthening of global demand, but mainlyreflecting further increases in the region’s shareof global markets – itself partly a reflection of
productivity growth, but also the coming on
stream of new mineral exports in several
countries (e.g. Burkina Faso, Mozambique,
Niger, Cameroon, Gabon, Sierra Leone etc.). A
stronger global economy should also see afurther strengthening of the region’s tourism
sector.

Risks
Notwithstanding the robust growth expected forthe region over the forecast horizon, the risks
remain tilted on the downside.

The increased demand for capital goods to meet

Fragile global recovery. While the tepid
recovery of global economic activity is ourbaseline scenario, the many tension points in the
global economy could result in a much weakerglobal outcome. Financial markets tensions inFigure SSA.10 Net official flows to Sub-SaharanAfricaFigure SSA.11 Domestic demand remains a robust
pillar of growth in Sub-Saharan Africa$ billion
16(percentage contribution)

14
12
10

Other official (incl. China thru 2008)
Offical excluding China
China
IMF
World Bank

12
10
8
6

8
6

4

4

2

2

0

0

-2

-2

-4

-4

2006

2007

2008

2009

2010

2011

-6

-6

Net exports

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: World Bank.

Source: World Bank.

163

Domestic demand

Real GDP growth

2012

Global Economic Prospects January 2013

Sub-Saharan Africa Annex

the Euro Area have eased since 2012Q2 and thelikelihood of a serious deterioration in conditions
decreased, nonetheless conditions still remainfragile and sentiment is vulnerable to bad news.
Should they deteriorate markedly, with a credit
freeze to some of the larger high-spread troubled
Euro Area economies, global economy activity
could return to recession-like conditions and
GDP in Sub-Saharan Africa could fall by up to
1.0 percentage points relative to the baseline
forecasts, although results will differ by country(figure SSA.12).

and a deeper fiscal contraction to take place, thiswould serve as a larger drag to US growth. In an
alternate scenario we assume no such agreement
is arrived at and that authorities agree on apartial deal that provides for $110bn additional
fiscal contraction but only short-term relief fromdebt ceiling legislation, creating further
uncertainty on future tax and fiscal policy.
Should that arise, the trade channel alone could
cause Sub Saharan African GDP to decline by
0.9 percentage points relative to baseline.
Further, current account and fiscal balances
could deteriorate by 1.3 and 0.8 percentage
points from their baseline projections. However,given the importance of the US economy inglobal markets, the indirect impacts throughweaker confidence and the potential rattling of
global financial and commodity markets would
likely have a stronger impact on the region.

The fiscal consolidation in the United States isalready sapping growth there. In our baseline, acredible medium-term plan to restore fiscal
sustainability is assumed to be arrived at by
February 2013—implying a 1.6 percent of fiscal
compression. However, were this not to occur
Figure SSA.12 Potential GDP impacts on selected
Sub Saharan African economies from an escalation inEuro Area Crisis

A third tension point surrounds the possibility ofa disorderly unwinding of China’s unusuallyhigh investment rate. With Chinese demandaccounting for some 50 percent of manyindustrial metals exported from Africa, a sharper
than envisaged down turn there could lead to aslump in commodity prices which would impact
the non-diversified metal and mineral exporters
in the region (e.g. Zambia, Botswana, Namibia,
Democratic Republic of Congo) as well as oil
exporters in the region that trade predominantlywith China (e.g. Angola, Sudan etc.). Indeed, anabrupt slowing in Chinese investment would
slow the regions GDP by 0.3 percent, withcurrent account and fiscal balances deteriorating
by 0.6 and 0.3 percentage points of GDP
respectively.

(Percentage deviation from baseline GDP growth projections)
Cote d'Ivoire
Mali
Nigeria
SenegalMozambique
Botswana
Sub Saharan Africa
GhanaSouth Africa
Central African Republic
Sierra Leone
Togo
Cape-Verde
Mauritania
Kenya
Mauritius
Benin
Namibia
Malawi
Ethiopia
UgandaRwandaIndeed, the above discussed tension points in the
global economy are not necessarily mutually
exclusive as one event could trigger anotherevent. Hence in this environment of increased
fragility in the global economy, developing
countries, including in Sub Saharan Africancountries will benefit from building the relevant
short-term policy buffers and undertaking
policies that will support the competitiveness of
their economies in the long-run (including
physical and human capital development, accessto finance, and removing cumbersome regulatory-1.8 -1.6 -1.4 -1.2 -1.0 -0.8 -0.6 -0.4 -0.2 0.0
Source: World Bank.

164

Global Economic Prospects January 2013

Sub-Saharan Africa Annex
and with much of activity in the sector being of a
subsistence nature and dependent on good rain
fall patterns, adverse weather conditions remain
an important risk factor. Rain patterns in thelatter half of 2012 in the Sahel region of West
Africa and in East Africa suggest normal first
harvests for 2013, however the situation
thereafter remains unknown.

requirements that impede investment activity).
However, compared to the pre-crisis period
policy buffers for most economies in the region
remain weaker. For instance, while in 2007
fiscal balances were in a surplus of some 0.4
percent of GDP, in 2012 fiscal balances havedeteriorated to above 2 percent of GDP for theregion. And though in 2012, headline inflation
has come down for the region, it still remains
high in a number of countries, hence limiting
options for monetary policy stimulus in these
economies. Hence, were there to be anothersignificant down turn in the global economy,
unlike the recent episode where the fiscal policy
space existed to embark on countercyclicalpolicy, the capacity to do so now remains more
limited, unless buffers are quickly rebuilt. The
importance of having adequate buffers isobserved in a simulation carried out of anarbitrary high-income country shock - equivalent
to a 5% decline in GDP. The results of thesimulation show that while GDP growth for Sub
Saharan African countries with adequate policy
buffers suffer a 0.3 percentage point decline inGDP, their counterparts without the policy
buffers, and thus unable to engage incountercyclical fiscal policies, suffer a moremarked decline of 0.8 percentage point reductionin their GDP growth relative to the baseline.

Notes:
1. The United Nations World Investment
Report, 2012 reports that data on the
profitability of United States FDI (FDI
income as a share of FDI stock) show a 20
per cent return in Africa in 2010, comparedwith 14 per cent in Latin America and the
Caribbean and 15 per cent in Asia
(UNCTAD, 2012).
2. Until these recent findings East Africa wasconsidered to be less endowed compared to
the rest of the region
3. World Investment Report, 2012.

References:
Economist Intelligence Unit, 2012. Africa cities
rising. EIU, London.

Domestic risks. Besides these external risks,
downturns from domestic challenges are equallyimportant. Disruptions to productive activity
from unrest (political, civil and labor) are
important potential downside risks, as
investment, trade and tourism activity, allimportant growth drivers, are likely to suffer.
Indeed, in 2012, labor unrest in South Africa,
terrorists activity in parts of Nigeria, coup d’etats
in both Mali and Guinea Bissau, and politicalstalemate in Guinea and Madagascar curtailed
economic activity to varying degrees in these
economies. Though most economies in theregion remain stable, simmering concerns,
particularly in the fragile economies continue topose an important downside risk to economic
activity there over the medium term.

Escribano, Alvaro, J.Luis Guasch, Jorge Pena(2008). Impact of Infrastructure Constraints
on Firm Productivity in Africa. Working
Paper 9, Africa Infrastructure Sector
Diagnostic, World Bank, Washington, DC.

With the agricultural sector being the largest
employer for almost all economies in the region,

165

Global Economic Prospects January 2013

Sub-Saharan Africa Annex

Table SSA.3 Sub-Saharan Africa country forecasts

00-09aAngolaGDP at market prices (% annual growth) b
Current account bal/GDP (%)
Benin
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Botswana
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Burkina Faso
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
BurundiGDP at market prices (% annual growth) b
Current account bal/GDP (%)
Cape Verde
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Cameroon
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Central African Republic
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Comoros
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Congo, Dem. Rep.
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Congo, Rep.
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Cote d Ivoire
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Equatorial Guinea
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Eritrea
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Ethiopia
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Gabon
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Gambia, The
GDP at market prices (% annual growth) b
Current account bal/GDP (%)

166

2010 2011

Est. Forecast
2012 2013
2014

2015

10.7
4.9

3.4
9.1

3.4
13.0

8.1
8.5

7.2
5.9

7.5
4.7

7.8
4.8

3.7
-8.4

3.0
-9.4

3.1
-9.8

3.5
-9.8

3.8
-9.0

4.5
-7.6

5.0
-6.4

3.4
8.3

7.0
0.5

8.1
8.7

5.8
8.9

5.1
8.7

4.9
8.9

4.8
8.6

5.2
-13.1

7.9
-7.0

4.2
-0.7

6.4
-8.9

6.7
-8.3

7.0
-7.7

6.3
-7.1

2.9
-17.8

3.8
4.2
-15.9 -16.0

4.1
-18.2

4.3
-17.4

4.6
4.9
-16.6 -15.8

5.5
-11.3

5.2
5.0
-12.8 -11.1

4.8
-9.9

4.9
-8.3

5.0
-6.4

5.1
-6.4

3.0
-2.4

3.2
-3.8

3.8
-6.6

4.6
-5.8

4.8
-4.3

5.0
-4.1

5.1
-3.7

0.6
-8.5

3.3
-12.6

3.1
-7.2

3.8
-6.1

4.0
-5.4

4.1
-5.1

4.2
-4.9

1.8
-12.2

2.1
-28.2

2.2
-9.6

2.5
-7.0

3.5
-6.1

4.0
-6.9

4.0
-7.6

4.2
0.6

7.2
6.9
-16.6 -11.5

6.6
-12.7

8.2
-14.6

6.4
7.5
-15.1 -12.2

3.8
-2.0

8.8
-21.4

3.4
5.4

4.7
0.5

5.6
2.6

5.4
1.4

4.7
0.5

0.8
1.9

2.4
2.0

-4.7
0.3

8.2
-3.7

7.0
-3.9

6.0
-4.5

5.5
-4.7

17.0
15.4

-0.8
-32.3

7.8
-7.9

5.7
-14.1

6.1
-10.0

1.4
-1.3
-11.8 -12.3

1.8
-21.5

2.2
-5.6

8.7
-0.9

7.5
-0.8

6.0
1.3

3.5
2.7

3.0
4.1

7.4
-5.7

9.9
-1.4

7.3
-2.5

7.8
-6.3

7.5
-6.3

7.2
-6.7

7.5
-6.7

1.6
14.9

6.6
7.2

5.7
23.8

4.7
22.0

3.5
16.5

3.3
12.2

3.5
7.3

3.8
-3.5

6.1 -4.3
2.0 -16.8

3.9
-17.9

10.7
-17.1

5.5
5.8
-15.0 -13.2

Global Economic Prospects January 2013

Sub-Saharan Africa Annex

Ghana
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
GuineaGDP at market prices (% annual growth) b
Current account bal/GDP (%)
Guinea-Bissau
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Kenya
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Lesotho
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Madagascar
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
MalawiGDP at market prices (% annual growth) b
Current account bal/GDP (%)
Mali
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Mauritania
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Mauritius
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Mozambique
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Namibia
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Niger
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Nigeria
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
RwandaGDP at market prices (% annual growth) b
Current account bal/GDP (%)
SenegalGDP at market prices (% annual growth) b
Current account bal/GDP (%)

167

00-09a2010 2011

Est. Forecast
2012 2013 2014 2015

5.0
-6.5

8.0 14.4-7.5 -9.9

7.5
-11.8

7.8
-9.7

7.4
-9.7

2.6
-7.1

1.9 3.9-7.0 -23.8

4.8
-39.6

5.0
-46.7

6.0
6.5
-52.5 -53.9

0.9
-14.9

3.5
-23.8

5.3
-7.2

-2.8
-6.5

3.0
-6.5

4.6
-6.7

5.1
-6.6

3.6
-2.4

5.6
-7.4

4.5
-9.3

4.3
-8.9

4.9
-8.7

5.1
-8.2

4.8
-7.7

3.2
2.9

5.6 5.8-20.2 -21.4

4.3
-23.6

5.2
-13.4

5.3
-9.2

5.0
-6.9

2.5
-12.3

1.6
-15.0

1.0
-7.6

2.2
-8.1

4.5
-7.9

4.8
-8.2

5.4
-7.6

4.0
-10.9

6.5 4.3-17.9 -12.2

4.1
-12.7

5.4
-12.9

5.6
6.0
-12.6 -12.0

5.1
-8.1

5.8
-12.6

2.7
-4.9

-1.5
-5.1

3.5
-4.8

5.9
-7.6

4.5
-11.2

5.2
-2.9

3.9
2.9

4.8
-18.4

5.2
-15.4

4.9
4.9
-15.3 -13.2

3.4
-2.7

4.1 3.8-10.4 -12.6

3.3
-10.8

3.6
-9.7

4.0
-8.8

7.1
-14.0

6.8 7.3-18.1 -25.7

7.5
-27.7

8.0
-27.0

8.2
8.0
-41.7 -41.6

4.0
3.5

6.6
-2.1

3.8
-0.9

4.2
-0.3

4.3
-0.9

4.4
-1.3

3.7
-9.7

8.0 2.3-32.5 -21.6

12.0
-22.6

6.8
-18.9

6.1
5.0
-18.6 -19.1

7.5
-8.1

6.0
-7.2

4.4
-7.8

5.0
-1.7

5.6
14.4

7.8
6.8

6.7
3.6

6.5
3.5

6.6
2.0

6.4
1.2

6.3
0.4

6.8
-6.2

7.2
-7.7

8.6
-7.3

7.7
-9.9

7.5
-9.7

7.3
-9.8

7.2
-9.6

3.6
-8.0

4.1
-4.7

2.6
-6.9

3.7
-8.6

4.8
-8.2

4.8
-7.8

5.0
-7.5

Global Economic Prospects January 2013

Sub-Saharan Africa Annex

Seychelles
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Sierra Leone
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
South Africa
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Sudan
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Swaziland
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Tanzania
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Togo
GDP at market prices (% annual growth) b
Current account bal/GDP (%)
Uganda00-09a2010 2011

Est. Forecast
2012 2013
2014

2015

1.5
-14.1

6.7
5.0
-19.7 -21.0

3.3
-19.5

4.2
-19.1

3.9
-15.4

3.7
-12.1

9.0
-14.1

4.9
6.0
-34.2 -55.4

25.0
-15.6

11.1
-8.8

7.6
-7.5

7.6
-6.3

3.2
-3.0

2.9
-2.8

3.1
-3.4

2.4
-6.9

2.7
-6.4

3.2
-6.3

3.3
-5.9

5.9
-6.3

4.5
-0.5

5.0
2.9

3.0
3.5

3.2
3.0

3.3
2.6

5.0
2.2

2.1
-2.6

2.0
1.3
-10.4 -14.5

-2.0
-14.2

1.0
-12.2

1.9
-14.1

1.9
-15.7

6.2
-9.2

7.0
6.3
-11.9 -12.9

6.5
-16.2

6.8
-14.3

7.0
-12.8

7.0
-11.9

1.7
-9.2

3.7
-6.3

4.0
-8.9

4.4
-8.7

4.6
-8.8

4.6
-9.3

3.9
-6.5

GDP at market prices (% annual growth) b
6.8
5.9
6.7
3.4
6.2
6.9
7.3
Current account bal/GDP (%)-5.2 -10.8 -13.3 -11.5 -11.3-11.4 -10.7
ZambiaGDP at market prices (% annual growth) b
4.8
7.6
6.6
6.7
7.1
7.8
6.0
Current account bal/GDP (%)-10.9
5.7 -1.2
-3.9
-2.4
-2.6
-1.8
Zimbabwe
GDP at market prices (% annual growth) b
-5.9
9.0
9.3
5.0
6.0
5.5
5.0
Current account bal/GDP (%)-11.4 -13.4 -20.7 -19.5 -20.3-22.5 -24.0
World Bank forecasts are frequently updated based on new information and changing (global) circumstances.
Consequently, projections presented here may differ from those contained in other Bank documents, even if
basic assessments of countries’ prospects do not significantly differ at any given moment in time.
Liberia, Somalia, Sao Tome and Principe are not forecast owing to data limitations.
a. GDP growth rates over intervals are compound average; current account balance shares are simple averages
over the period.
b. GDP measured in constant 2005 U.S. dollars.

Source: World Bank.

168

www.worldbank.org/globaloutlook